2003 HTML Instructions for Schedule PH (Form 1120)(FY),

This is archived information that pertains only to the 2003 Tax Year. If you
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Table of Contents

A Change To Note

Effective January 1, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 decreased the tax rate applicable to undistributed personal holding company (PHC) income from 38.6% to 15%. Because of the change to this rate, PHCs with a tax year beginning in 2002 and ending in 2003 must prorate their PHC tax under section 15. The amount of PHC income attributable to 2002 is taxed at a rate of 38.6%; the amount of PHC income attributable to 2003 is taxed at a rate of 15%.

Purpose of Schedule

Corporations use this schedule to figure the PHC tax.

Who Must File

A corporation that is a PHC must file Schedule PH by attaching it to the corporation's income tax return.

Personal Holding Company

Generally, a corporation is a PHC if it meets both of the following requirements (also, see Important under Specific Instructions).

PHC Income Test. At least 60% of the corporation's adjusted ordinary gross income for the tax year is PHC income. See section 543(b)(2) for the definition of adjusted ordinary gross income and section 543(a) for the definition of PHC income.
Stock Ownership Requirement. At any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is owned, directly or indirectly, by five or fewer individuals. See section 542(a)(2) for details.

For purposes of this requirement, the following organizations are considered individuals:
- A qualified pension, profit-sharing, and stock bonus plan described in section 401(a).
- A trust that provides for the payment of supplemental unemployment compensation under certain conditions (section 501(c)(17)).
- A private foundation (section 509(a)).
- A part of a trust permanently set aside or used exclusively for the purpose described in section 642(c).

Exceptions. The term “personal holding company” does not include the following corporations, even if the two requirements above are met.

Tax-exempt corporations.
Banks, domestic building and loan associations, and certain lending or finance companies.
Life insurance and surety companies.
Certain small business investment companies operating under the Small Business Investment Act of 1958.
Corporations under the jurisdiction of the court in a title 11 or similar case.
Foreign personal holding companies (as defined in section 552).
Foreign corporations that do not have income under section 543(a)(7), if, during the last half of the tax year, all of the corporation's stock is owned by nonresident alien individuals.
Passive foreign investment companies (as defined in section 1297).

See section 542(c) for more information.

At-risk, passive activities, and earnings stripping rules. A corporation that has an activity subject to the at-risk or passive activity rules or interest expense subject to the earnings stripping rules (or both) may have deductions and losses suspended or limited under these rules. As a result, do not use deductions and losses limited or suspended in any of the PHC computations. Treat any prior year deductions and losses allowed under the at-risk, passive activity, and earnings stripping rules as current year deductions and losses.

Foreign corporations. If a foreign corporation that is a PHC does not file Schedule PH as required, it may be penalized, unless it can show that the failure to file was due to reasonable cause. The penalty is 10% of the corporation's Federal income taxes (including the PHC tax) and is in addition to any other penalties charged the corporation. See section 6683.

General Instructions