Department of the Treasury

Internal Revenue Service

Instructions for
Schedule PH (Form 1120)
U.S. Personal Holding Company (PHC) Tax
Section references are to the Internal Revenue Code unless otherwise noted.

General Instructions income. See section 543(b)(2) for the ● Banks.

definition of adjusted ordinary gross ● Domestic building and loan
Purpose of Schedule income, and section 543(a) for the associations.
definition of PHC income. ● Life insurance companies.
This schedule is used to figure 2. At any time during the last half
personal holding company (PHC) ● Surety companies.
of the tax year, more than 50% in
tax. value of the corporation’s ● Foreign personal holding
outstanding stock is owned, directly companies (as defined in section
Who Must File or indirectly, by five or fewer 552).
A corporation that is a PHC must individuals. For purposes of this ● Certain lending or finance
attach this schedule to its income requirement, the following companies.
tax return. organizations are considered ● Foreign corporations that do not
To find out if a corporation is a individuals: a qualified pension, have income under section 543(a)(7),
PHC, complete Part I of Schedule profit-sharing, or stock bonus plan if, during the last half of the tax year,
PH and lines 1 through 5 of the described in section 401(a); a trust all of the corporation’s stock is
worksheet below. Then, complete that provides for the payment of owned by nonresident alien
Part II of Schedule PH and line 6 of supplemental unemployment individuals.
the worksheet. Generally, if line 6 of compensation under certain ● Certain small business investment
the worksheet is 60% or more and conditions (section 501(c)(17)); a companies operating under the
the stock ownership requirement private foundation (section 509(a)); Small Business Investment Act of
(decribed in 2 below) is met, the or a part of a trust permanently set 1958.
corporation must file Schedule PH aside or used exclusively for the ● Corporations under the jurisdiction
and pay the PHC tax. See purpose described in section 642(c). of the court in a Title 11 or similar
Exceptions below. See section 542(a)(2) for details. case.
A corporation is a PHC if both of Exceptions. The term “personal ● Passive foreign investment
the following apply: holding company” does not include companies.
the following corporations, even if
1. At least 60% of the the two requirements above are met: See section 542(c) for more
corporation’s adjusted ordinary gross information.
income for the tax year is PHC ● Tax-exempt corporations.

Worksheet For Figuring Ordinary Gross Income, Adjusted Ordinary Gross Income, and the 60% PHC Income Test
(See Worksheet Instructions on page 2.) (keep for your records)
1. Gross income. Non-life-insurance companies, see section 543(c). 1
2. Less: Gains from the sale or disposition of capital assets and section 1231(b) property 2 ( )
3. Ordinary gross income. Combine lines 1 and 2. (Foreign corporations, see instructions.) 3
4. Adjustments
a Adjustments described in section 543(b)(2)(A) a
b Adjustments described in section 543(b)(2)(B) b
c Interest income excluded under section 543(b)(2)(C) c
d Adjustments described in section 543(b)(2)(D) d
e Total adjustments. Add lines 4a through 4d 4e
5. Adjusted ordinary gross income. Subtract line 4e from line 3 5
6. Complete Part II of Schedule PH. Divide the amount on line 25, Part II, by the amount on line 5 above. Enter
the result as a percentage 6 %
If line 6 is less than 60%, the corporation is not a PHC. Do not file Schedule PH.
If line 6 is 60% or more and the stock ownership requirements of section 542(a) are met, the corporation is a PHC. Complete Part
III, line 26, and Part IV. File Schedule PH with the corporation’s income tax return.

Cat. No. 10826K

At-risk and passive activities.—A gas royalties (including production taxable income before the net
corporation that has an activity payments and overriding royalties) operating loss deduction and special
subject to the at-risk or passive and gross income from working deductions.
activity rules (or both) may have interests in an oil or gas well: If all of a foreign corporation’s
deductions and losses suspended depreciation, amortization, depletion, stock is owned during the last half
under those provisions. Deductions property and severance taxes, of the tax year by nonresident alien
and losses used in any of the interest, and rent. The total individuals (directly or indirectly),
computations for PHC tax should deductions allocable to royalties taxable income for section 545(a) is
not include suspended at-risk and may not exceed the gross income only income received under a
passive activity deductions and from the royalties, and the total contract for personal services as
losses. Any prior year deductions deductions allocable to working described in section 543(a)(7),
and losses allowed under the at-risk interests may not exceed the gross reduced by deductions attributable
and passive activity rules are treated income from the working interests. to that income, and adjusted as
as current year deductions and Line 4c.—Include the following provided in section 545(b) with
losses in the year they are allowed. interest on this line: (1) interest respect to that income.
Foreign corporations must file a received on a direct obligation of the Line 3—Expenses and
return.—If a foreign corporation that United States held for sale to depreciation.—If the corporation
is a PHC does not file Schedule PH customers in the ordinary course of earned rent or other compensation
as required, it will be charged a trade or business by a regular dealer for the use of, or right to use,
penalty. The penalty is 10% of the who is making a primary market in property and that rent or
corporation’s Federal income taxes the obligations and (2) interest on a compensation was less than the
(including the PHC tax) and is in condemnation award, a judgment, or total allowable expenses and
addition to any other penalties a tax refund. depreciation, complete Part V and
charged the corporation. See Line 4d.—Enter the total of the enter the excess on line 3.
section 6683. following deductions allocable to This adjustment must be made
gross income from compensation for unless the corporation can establish
Worksheet Instructions the use of, or the right to use, any that all three of the following apply:
Lines 1 through 3.—Ordinary gross tangible personal property 1. The rent or other compensation
income is gross income as defined manufactured or produced by the the corporation received was the
in section 61 and the related corporation, if during the tax year highest obtainable. If none was
regulations, computed without gains the corporation is engaged in received, it must be shown that
from the sale or disposition of substantial manufacturing or none was obtainable.
capital assets and without gains production of tangible personal
property of the same type: 2. The property was held in the
from the sale or other disposition of course of a business carried on for
property described in section depreciation and amortization of
property (other than tangible profit.
1231(b). Foreign corporations (if not
personal property that is not 3. There was a reasonable
exempt under section 542(c)(7))
customarily retained by any one expectation that the property’s
should only include gross income
lessee for more than 3 years), operation would result in a profit, or
subject to U.S. tax.
property taxes, interest, and rent. that the property was necessary to
Line 3.—If all of a foreign The total deductions allocable to the conduct the business.
corporation’s stock is owned during compensation may not exceed the Do not complete Part V if the
the last half of the tax year by gross income from the corporation meets the three
nonresident alien individuals (directly compensation. requirements above. Instead, attach
or indirectly), ordinary gross income
a statement reporting the
is reduced by all items of income
Specific Instructions deductions with the complete facts,
that would otherwise constitute PHC
circumstances, and arguments to
income, except for amounts
support them. The statement must
received under personal service Part I include the information required by
contracts and from their sale (Part II,
Additions Regulations section 1.545-2(h)(2).
line 23).
Line 4a.—Enter the total of the Line 1—Taxable income before net
following deductions allocable to operating loss deduction and Deductions
gross income from rents (not to special deductions.—Enter the Line 5—Federal and foreign
exceed the gross income from amount shown on Form 1120, line income, war profits, and excess
rents): depreciation and amortization 28, page 1. If the income on line 28 profits taxes.—Attach a schedule
of property (other than tangible was figured using section 443(b) showing the kind of tax, the tax
personal property not customarily (placing the income on an annual year, and the amount. Under section
retained by any one lessee for more basis), refigure it without using that 545(b)(1), the corporation can
than 3 years), property taxes, section. deduct Federal income taxes
interest, and rent. See section A foreign corporation must figure accrued during the tax year, but not
543(b)(3) for the definition of the line 1 by including only income the accumulated earnings tax under
term “rents.” derived from U.S. sources or section 531 or the PHC tax under
Line 4b.—Enter the total of the effectively connected with a U.S. section 541.
following deductions allocable to trade or business, reduced by The foreign tax credit is not
gross income from mineral, oil, and deductions allowable in determining allowed against PHC tax. A
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deduction is allowed, however, for 10% or less in value of the ordinary gross income (line 3 of the
income, war profits, and excess outstanding stock of a foreign worksheet).
profits taxes accrued (or considered corporation is owned (see section If either of these tests are not
paid under section 902(a) or 958(a)) during the last half of the tax met, enter rents (as defined in
960(a)(1)) during the tax year to year by U.S. persons, undistributed section 543(b)(3)) on line 18a. Enter
foreign countries and U.S. PHC income is determined by the amount from line 4a of the
possessions. A corporation is multiplying the undistributed PHC worksheet on line 18b and complete
allowed this deduction even if a income (determined without this line 18c.
credit for the taxes was claimed instruction) by a percentage in value Lines 19a through 19c—Adjusted
when figuring the corporation’s of the corporation’s outstanding income from mineral, oil, and gas
income tax. stock. This percentage is figured by royalties.—If all three of the
Line 6—Contributions.—Compute using the greatest percentage in following tests are met, mineral, oil,
the deduction using the limitations value of its outstanding stock owned and gas royalties are not PHC
under sections 170(b)(1)(A), (B), and by the U.S. persons on any one day income and these lines should not
(D) but without sections 170(b)(2) during the period. be completed:
and (d)(1). When computing the 1. The amount computed on line
limitations under section 170(b)(1), Part II 19c is at least 50% of adjusted
use taxable income computed with ordinary gross income (line 5 of the
the adjustments (other than the 10% Personal Holding Company
Income worksheet).
limitation) provided in sections
170(b)(2) and (d)(1) and without any 2. PHC income (computed without
Note: Use the worksheet on page 1
expenses and depreciation regard to line 19c, and by including
to figure ordinary gross income and
disallowed under section 545(b)(6). as PHC income, copyright royalties
adjusted ordinary gross income.
and the adjusted income from rents)
Line 7—Net operating loss.— Line 15b—Amounts excluded is not more than 10% of ordinary
Section 545(b)(4) provides that under section 543(a)(1)(A), gross income (line 3 of the
instead of the net operating loss 543(a)(1)(B), 543(a)(1)(D), or worksheet).
deduction provided in section 172, a 543(b)(2)(C).— Include the following
deduction is allowed for the net 3. The deductions allowable under
interest on this line:
operating loss (as defined in section section 162 (other than
● Interest constituting rent. compensation for personal services
172(c)) for the preceding tax year
● Interest on amounts set aside in a rendered by a shareholder and
figured without the deductions
reserve fund under section 511 or deductions specifically allowable
provided in Part VIII (except section
607 of the Merchant Marine Act of under other sections) are 15% or
248) of subchapter B.
1936. more of adjusted ordinary gross
Line 8—Net capital gain.—Net
● Interest received by a broker or income.
capital gain for a foreign corporation
dealer (within the meaning of section If any of these tests are not met,
is determined by taking into account
3(a)(4) or (5) of the Securities enter mineral, oil, and gas royalties
only gains and losses that are
Exchange Act of 1934) in connection (including production payments and
effectively connected with the
with (a) any securities or money overriding royalties) on line 19a.
conduct of a trade or business
market instruments held as property Enter the amount included on line
within the United States that are not
described in section 1221(1), 4b of the worksheet on line 19b and
exempt from tax under treaty.
(b) margin accounts, or (c) any complete line 19c.
Line 10.—Include in the total for line financing for a customer secured by
10 any deduction for amounts used Line 20—Copyright royalties.
securities or money market (Note: For royalties received in
or irrevocably set aside to pay or instruments.
retire qualified indebtedness under connection with the licensing of
● Interest included on line 4c of the computer software, see page 4.)—If
section 545(c) (as in effect before
worksheet. all three of the following tests are
November 5, 1990, i.e., before the
date of enactment of the Revenue Lines 18a through 18c—Adjusted met, copyright royalties are not PHC
Reconciliation Act of 1990). See income from rents.—If both of the income and should not be included
Regulations section 1.545-3. Write following tests are met, rents are not on line 20:
the amount and “Section 545(c)” on considered PHC income and these 1. The amount computed for line
the dotted line next to line 10. lines should not be completed: 20 (not including royalties received
Line 12—Dividends paid after the 1. The amount computed for line for the use of, or right to use,
end of the tax year.—The 18c is at least 50% of adjusted copyrights or interests in copyrights
corporation may elect to treat ordinary gross income (line 5 of the on works created in whole or in part
dividends (other than deficiency worksheet). by any shareholder) is at least 50%
dividends) paid after the end of the 2. The sum of Part VI, line 3, and of ordinary gross income (line 3 of
year and before the 16th day of the Part I, line 12, is at least equal to the worksheet).
third month following the end of the the amount, if any, that PHC income 2. PHC income is not more than
tax year, as paid during the tax year. (computed without regard to lines 10% of ordinary gross income (line 3
Enter these dividends on line 12 but 18c and 22 and by including as PHC of the worksheet). For this purpose,
not in Part VI. income, copyright royalties and the PHC income is computed:
Line 13—Undistributed personal adjusted income from mineral, oil, a. Without regard to copyright
holding company income of and gas royalties) exceeds 10% of royalties (other than royalties
certain foreign corporations.—If received for the use of, or right to
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use, copyrights or interests in 1. The corporation is engaged in This line applies only to a
copyrights on works created in the active business of developing, corporation with other PHC income
whole or in part by any shareholder manufacturing, or producing in excess of 10% of ordinary gross
owning more than 10% of the computer software. income (line 3 of the worksheet). For
corporation’s stock), 2. The royalties are at least 50% purposes of this limitation, other
b. Without regard to dividends of ordinary gross income (line 3 of PHC income is modified in
from any corporation which meets the worksheet). accordance with section 543(a)(6)(C).
Test 1 above and Test 3 below, and 3. The sum of the deductions Enter on line 22 amounts received
in which the corporation owns at allowable under sections 162, 174, as compensation for the use of or
least 50% of all stock (by vote and and 195 that are allocable to the right to use tangible property of the
value), and computer software business is at corporation by or for an individual
c. By including as PHC income least 25% of ordinary gross income who at any time during the tax year
the adjusted income from rents and (or the average of the deductions for owned, directly or indirectly, at least
the adjusted income from mineral, the 5 tax years ending with the 25% in value of the corporation’s
oil, and gas royalties. current tax year is at least 25% of outstanding stock.
3. The sum of the deductions the average ordinary gross income Line 23—Amounts received under
allocable to the royalties allowable for that period). personal service contracts and
under section 162 (other than 4. The sum of Part VI, line 3, and from their sale.—Enter amounts
deductions for compensation for Part I, line 12, is at least equal to received under a contract under
personal services rendered by the amount, if any, by which PHC which the corporation is to furnish
shareholders, deductions for income (as modified in accordance personal services if some person
royalties paid or accrued, and with section 543(d)(5)(B)) exceeds other than the corporation has the
deductions specifically allowable 10% of ordinary gross income. right to designate the individual who
under sections other than section is to perform the services (or if the
See section 543(d) for more individual who is to perform the
162) is at least 25% of the amount information.
by which ordinary gross income (line services is designated in the
Line 21—Produced film rents.— contract). Also include amounts
3 of the worksheet) exceeds the Produced film rents are not
sum of the royalties paid or accrued received from the sale or other
considered PHC income if the rents disposition of such a contract. This
and the depreciation allowable with constitute at least 50% of ordinary
respect to copyright royalties. line applies only if the individual who
gross income (line 3 of the has performed, is to perform, or
Royalties received in connection worksheet). See section 543(a)(5) for may be designated to perform such
with the licensing of computer the definition of produced film rents. services, owned at some time during
software.—Royalties received in Line 22—Compensation received the tax year 25% or more in value of
connection with the licensing of for the use of corporation property the corporation’s outstanding stock.
computer software are not by a 25% or more shareholder.—
considered PHC income if all four of
the following tests are met:

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