Internal Revenue Service
Revenue Ruling
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smRev. Rul. 60-34
1960-1 C.B. 203
Sec. 541
IRS Headnote
A Netherlands corporation, which meets both requirements of the personal holding company definition contained in section 542(a) of the Internal Revenue Code of 1954 and which fails to meet either of the exception requirements contained in section 542(c)(10) of the Code, is classifiable as a personal holding company. Since the Netherlands Income Tax Convention does not specifically exempt undistributed income, such corporation is, therefore, subject to the tax prescribed in section 541 of the Code. It is entitled to a deduction for dividends paid during the taxable year within the meaning of section 561(a) of the Code to the extent that it distributed dividends to stockholders.
Even though the corporation's Federal income tax on dividends received from sources within the United States is fully satisfied at the source, it must file Form 1120NB together with Schedule PH (Form 1120). Willful failure to file a timely income tax return on the part of the corporation will result in its being deprived of the benefits of section 547 of the Code relating to the deduction for deficiency dividends. Failure by the corporation to file Schedule PH (Form 1120) or to furnish the information required thereon with respect to income and stock ownership will permit the assessment of personal holding company tax at any time within six years after the return for such year had been filed.
Full Text
Rev. Rul. 60-34
Advice has been requested with respect to the Federal income tax consequences of a corporation formed under the laws of the Netherlands, the majority of whose stock is owned by five individuals who are neither citizens nor residents of the United States, and which invests its capital exclusively in stocks and bonds issued by domestic corporations.
A corporation was formed under the laws of the Netherlands. More than fifty percent in value of its outstanding stock is owned by five individuals who are neither citizens nor residents of the United States. The capital of the corporation is invested in stocks and bonds issued by domestic corporations. Therefore, its entire income consists of dividends and interest from such sources within the United States. The tax on the income so derived is fully satisfied at the source. The corporation is not engaged in a trade or business in the United States.
The specific questions presented by the taxpayer in this case are as follows:
(1) Is the taxpayer classifiable as a personal holding company within the meaning of section 542(a) of the Internal Revenue Code of 1954?
(2) If the corporation is so classified, may it eliminate its liability for tax either by making actual dividend distributions or by following the consent dividends procedure?
(3) What is the possible effect upon the taxpayer if it fails to file corporation income tax returns and/or personal holding company schedules?
Section 542(a) of the Code defines a `personal holding company' as any corporation, other than a corporation described in section 542(c) thereof, if 80 percent or more of its gross income for the taxable year is personal holding company income as defined in section 543 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. For the purpose of this definition, it is immaterial whether the individual stockholders are citizens, resident aliens, or nonresident aliens, or whether the corporation is a domestic or a foreign corporation. However, as provided in section 542(c)(10) of the Code, the term `personal holding company' does not include a foreign corporation if its gross income from sources within the United States for the three-year period ending with the close of its taxable year is less than 50 percent of its total gross income from all sources and all of its stock outstanding during the last half of the taxable year is owned by nonresident alien individuals, whether directly or indirectly through other foreign corporations.
Accordingly, a foreign corporation, which meets both requirements of the personal holding company definition and fails to meet either of the exception requirements referred to above, is a personal holding company unless specifically exempted under a treaty provision with the country concerned.
Article VII of the United States-Netherlands Income Tax Convention, T.D. 5778, C.B. 1950-1, 92, provides, in part, that the rate of United States tax on dividends derived from a United States corporation by a resident or corporation of the Netherlands not engaged in trade or business in the United States through a permanent establishment shall not exceed 15 percent. Article VIII(1) of the convention provides that interest, other than interest from mortgages secured by real property, derived from sources within the United States by a resident or corporation of the Netherlands not engaged in trade or business in the United States through a permanent establishment, shall be exempt from United States tax. However, the tax imposed by section 541 of the Code is upon undistributed profits and not upon dividends or interest. Article XIII of the convention, which had originally granted an exemption with respect to undistributed earnings, profits, income, or surplus to Netherlands corporations, was deleted from the convention.
In this connection, the Senate Report of the Committee on Foreign Relations, covering various tax conventions, states that Article XVI of the Convention with Ireland (similar to Article XIII of the Netherlands Convention) was stricken on the ground that it would give Irish corporations doing business in the United States a competitive advantage over domestic corporations. See Senate Executive Report No. 1, 82d Congress, at page 20.
In enacting the personal-holding-company provisions, Congress made it clear that the tax was being levied upon the holding company without any necessity for proving a purpose to avoid surtaxes. See Senate Report No. 558, 73d Cong., C.B. 1939-1 (Part 2), 197.
In A. G. Fides v. Commissioner , 137 Fed.(2d) 731, certiorari denied, 320 U.S. 797, the taxpayer, a foreign corporation, contended that it did not come within the evil which section 351 of the Revenue Act of 1936 (comparable to section 541 of the 1954 Code) sought to prevent, that is, the so-called `incorporated pocketbook,' since the taxpayer's distributions of dividends to its alien stockholders would not be subject to tax by the United States. The taxpayer in the Fides case also argued that the term `any corporation' referred to in section 351(b) of the Revenue Act of 1936 (section 542(a) of the 1954 Code) must be construed to mean `any corporation whose stockholders would be subject to surtax on distributed corporation earnings.' The court rejected both of these contentions.
The taxpayer in the instant case is classifiable as a personal holding company within the meaning of section 542(a) of the Code and is subject to the tax prescribed in section 541 of the Code. The deduction for dividends paid under section 561(a) of the Code includes dividends paid during the taxable year and consent dividends determined under section 565 of the Code. It would, therefore, be entitled to a deduction for dividends paid during the taxable year under section 561(a) of the Code to the extent that it distributes dividends, either actually or by consent, to its shareholders. In order for a distribution to be allowed as a dividend-paid deduction, the recipient of the distribution need not itself be taxable upon the amount of the distribution thus received. It is only necessary that the amount of the distribution be taxable in character so that it is subject to tax if the recipient is taxable on such dividend. See, generally, I.T. 4099, C.B. 1952-2, 117.
Section 6012(a)(5) of the Code provides in part that, subject to such conditions, limitations, and exceptions and under such regulations as may be prescribed by the Secretary of the Treasury or his delegate, foreign corporations subject to the tax imposed by section 881 of the Code may be exempted from the requirement of making returns. However, section 6011(a) of the Code provides that, when required by regulations prescribed by the Secretary or his delegate, any person made liable for any tax imposed by this title, or for the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary or his delegate. A portion of the last paragraph of the `Return and Tax Requirements,' attached to Form 1120NB, Nonresident Foreign Corporation Income Tax Return, reads as follows:
If the corporation is not a foreign personal holding company within the meaning of section 552 but is a personal holding company within the meaning of section 542, Schedule 1120PH must be attached to the corporation's return.
Thus, although its Federal income tax on dividends received from sources within the United States is fully satisfied at the source, it will be necessary for the taxpayer to file Form 1120NB in any year in which it is classifiable as a personal holding company, together with Schedule PH (Form 1120), Computation of U.S. Personal Holding Company Tax.
Section 547(g) of the Code provides that no deficiency dividend deduction shall be allowed if the determination contains a finding that any part of the deficiency is due to fraud with intent to evade tax, or to wilful failure to file an income tax return within the time prescribed by law or prescribed by the Secretary of the Treasury or his delegate in pursuance of law. Section 1.545-1(b) of the Income Tax Regulations provides in part that for purposes of the imposition of the personal holding company tax on a foreign corporation, resident or nonresident, which files no return, the undistributed personal holding company income shall be computed on the basis of the gross income from sources within the United States without allowance of any deductions.
Under section 6501(f) of the Code, if a corporation which is a personal holding company fails to file with its return under chapter 1 a schedule setting forth certain specified information, the personal holding company tax for such year may be assessed at any time within six years after the return for such year was filed. Thus, failure to file Schedule PH (Form 1120) or to furnish the information required thereon with respect to income and stock ownership will permit the assessment of the personal holding company tax at any time within six years after the return for such year had been filed.