Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 59-69

1959-1 C.B. 142

IRS Headnote

A small business investment company operating under the provisions of the Small Business Investment Act of 1958 is subject to personal holding company tax under section 541 of the Internal Revenue Code of 1954, if at least 80 percent of its gross income for the taxable year is personal holding company income as defined in section 543 of the Code, such as interest and dividends from debentures and stock acquired pursuant to the Small Business Investment Act of 1958, and if at any time during the last half of the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.

Full Text

Rev. Rul. 59-69 /1/

Advice has been requested whether a small business investment company operating under the provisions of the Small Business Investment Act of 1958, 72 Stat. 689, is subject to the provisions of sections 541 through 547 of the Internal Revenue Code of 1954, pertaining to personal holding companies, if at least 80 percent of its gross income for the taxable year is personal holding company income as defined in section 543 of the Code, such as interest and dividends from debentures and stock acquired from small business concerns under the provisions of the Small Business Investment Act of 1958.

The purpose of the Small Business Investment Act of 1958 is to establish a program to stimulate and supplement the flow of private equity capital and long-term loans to small business concerns. The Act provides for the operation of small business investment companies organized to provide such capital through the purchase of debenture bonds convertible into the stock of the borrowing corporation. Thus, much of the income of a small business investment company will consist of interest and dividends.

Section 541 of the Code, in general, imposes a personal holding company tax on the undistributed personal holding company income of any corporation 80 percent of the income of which consists of personal holding company income, as defined in section 543 of the Code, if at any time during the last half of the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. Among the types of income which are defined by section 543 of the Code as personal holding company income are dividends and interest.

Three specific provisions dealing with small business investment companies were added to the Internal Revenue Code of 1954 by the Technical Amendments Act of 1958, 72 Stat. 1606. One of two new sections, section 1242, provides, in effect, that investors in the stock of small business investment companies shall be allowed an ordinary loss deduction, rather than a capital loss, on losses from the worthlessness or sale of such stock. A small business investment company is allowed, under the provisions of the second new section, section 1243 of the Code, an ordinary loss deduction, rather than a capital loss deduction, on losses sustained through the worthlessness of sale of convertible debenture, or stock converted therefrom, acquired on the lending of equity and long-term capital to small business. The third feature relating to these companies is embodied in amended section 243 of the Code, which allows such a company a deduction for 100 percent of the dividends received from a taxable domestic corporation, other than dividends on preferred stock of a public utility company for which deduction under section 244 of the Code is allowable, instead of the 85 percent deduction generally allowed corporate taxpayers.

A small business investment company, like all corporations, may be subject to the provisions of section 541 of the Code, unless it is specifically excluded from those provisions. Since none of the additions and changes to the Code, relating to small business investment companies, made by the Technical Amendments Act of 1958 specifically excluded such companies from the personal holding company tax, they are subject to that tax if they are otherwise within the provisions of sections 541 through 547 of the Code.

Accordingly, it is held that a small business investment company is subject to the personal holding company tax under section 541 of the Code, if at least 80 percent of its gross income for the taxable year is personal holding company income as defined in section 543 of the Code, such as interest and dividends from debentures and stock acquired in small business concerns under the provisions of the Small Business Investment Act of 1958, and if at any time during the last half of the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.

/1/ Based on Technical Information Releases 99 and 110, dated October 2, 1958, and November 21, 1958, respectively.