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F E D E R A L R E G IS T E R , N ovem ber 18, 1936
Title I , upon the undistributed adjusted n e t income of every personal holding company a surtax equal to the sum of the following:
1 8 per centum of the am ount thereof not in excess of $2,000; plus 2 18 per centum of the amount thereof in excess of $2,000
and not in excess of $100,000; plus 3 28 per centum of the amount thereof in excess of $100,000
and not in excess of $500,000; plus 4 38 per centum of the amount thereof In excess of $500,000
and not in excess of $1,000,000; plus 5 48 per centum of the am ount thereof in excess of $1,000,000.
b Definitions. As used in this title
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1 The term of personal holding company means any cor poration other than a corporation exempt from taxation under section 101, and other than a bank, as defined in section 104, and other than a life-insurance company or surety company lf_ _ A at least 80 per centum of its gross income for the tax able year is derived from royalties, dividends, interest, annuities, and except in the case of regular dealers in stock or securities gains from the sale of stock or securities, and B at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly, or indirectly, by or for not more than five individuals. For the purpose of de termining the ownership of stock in a personal holding com pany c stock owned, directly or indirectly, by a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries;
D an individual shall be considered as owning, to the exclusion of any other individual, the stock owned, directly or indirectly, by his family, and this rule shall be applied in such manner as to produce the smallest possible num ber of individuals owning, directly or indirectly, more than 50 per centum in value of the outstanding stock; and E the fam ily of an individual shall include only his brothers and sisters whether by the whole or half b lo o d , spouse, ancestors, and lineal descendants.
2 The term undistributed adjusted net income means the adjusted net income minus the sum of:
A 20 per centum of the excess of the adjusted net income over the amount of dividends received from personal holding companies which are allowable as a credit fo r the purposes of the tax imposed by section 13 or 204;
B Am ounts used or set aside to retire indebtedness incurred prior to January 1, 1934, if such amounts are reasonable with reference to the size and terms of such indebtedness; and C The am ount of the dividends paid credit provided in sec tion 27, computed w ithout the benefit of subsection b thereof relating to -the dividend carry-over.
3 The term adjusted net income means the net income minus the sum o f :
A Federal income, war-profits, and excess-profits taxes paid or accrued during the taxable year to the extent not allowed as a deduction by section 23, b u t not including the tax imposed by this section or a corresponding section of a prior income-tax law;
B Contributions or gifts, not otherwise allowed as a de duction, to or for the use of donees described in section 23 o
for the purposes therein specified, including, in the case o f a corporation organized prior to Ja n u ary . 1, 1936, to take over the assets and liabilities o f the estate of a decedent, amounts paid in liquidation of any liability of the corporation based on the liability of the decedent to make any such contribution or gift, to the extent such liability of the decedent existed prior to January 1, 1934; and C Losses from sales or exchanges of capital assets which are disallowed as a deduction by section 117 d .
4 The terms used in this section shall have the same meaning as when used in Title I.
c Administrative provisions. A ll provisions of law Including penalties applicable in respect of the taxes imposed by Title I of this Act, shall insofar as not inconsistent with this section, be applicable in respect o f the tax imposed by this section, except that the provisions of section 131 of that title shall not be applicable.
d Payment of surtax on pro rata shares. The tax imposed by this section shall not apply if 1_ all the shareholders of the corpo ration include a t the time of filing their returns in their gross income their entire pro rata shares, whether distributed or not, of the adjusted net income o f the corporation for such year, and 2
90 per centum or more of such adjusted net income is so included in the gross income of shareholders other than corporations. Any amount so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of earn in g s or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his pro rata share, be exempt from tax in the amount of the share so included.
e Improper accumulation of surplus. For surtax on corpora tions which accumulate surplus to avoid surtax on stockholders, see section 102.

A rt. 351-1. Surtax on personal holding companies. Section 351 of Title IA imposes in addition to the taxes imposed by Title I a graduated income tax or surtax upon corporations
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classified as personal holding companies. Corporations so classified are exempt from the surtax on corporations im properly accumulating surplus imposed by section 102 of Title I, but are not exempt from the other taxes imposed by that title. Unlike the surtax imposed by section 102, the surtax imposed by section 351 applies to all personal holding com panies defined as such in article 351-2 regardless of whether or not they were formed or availed of to accumulate earnings or profits fo r the purpose of avoiding surtax upon share holders.
A foreign corporation, whether resident or nonresident, which is classified as a personal holding company under sec tion 351 b 1 and article 351-2, is subject to the tax im posed by section 351 with respect to its income from sources within the United States. See section 119.
A rt. 351-2. Classification of a personal holding company.
A personal holding company is defined as any corporation including foreign as well as domestic corporations not other wise exem pt, first 80 percent or more of whose gross income fo r the taxable year was derived from royalties, dividends, interest, annuities, and gains from the sale of stock or securi ties; and, second, more than 50 percent in value of whose out standing stock was owned, directly or indirectly, at any time during the last half of the taxable year by or for not more than five individuals. The only corporations specifically exempt from this tax are as follows: 1 Corporations exempt from taxation under section 101 o f Title I; 2 banks and trust companies, as defined in section 104; 3 life insurance companies; and 4 surety companies.
I t is the nature of the gross income and the ownership of the outstanding stock which determine the classification as a personal holding company, and the several conditions with respect to both must be satisfied to bring a corporation within the classification. Gross income ijiust be determined for the entire taxable year and the ownership of the stock outstand ing must be determined according to its ownership at any time during the last half of the taxable year. Inasmuch as such circumstances can vary from year to year, a corporation may constitute a personal holding company fo r some years and not fo r other years. In that case, the surtax liability shall be determined under section 351 only fo r the years in which the corporation comes within the classification as a personal holding company.
The gross income for purposes of section 351 b 1 means 1 in the case of a domestic corporation its gross income as defined in sections 22, 204, and 207 o f Title I and 2 in the case of a foreign corporation, whether resident or nonresident, its gross income from sources within the United States as defined and described in secton 119. Gross income is not synonymous with gross receipts. For example, in the case of a sale or exchange of property, it includes only the excess of the amount realized therefrom over the adjusted basis pro vided for in section 113 b . It does not include gains which are not recognized under section 112 b . In the case of a corporation reporting on the installment basis, it includes only that portion of the gain returnable as income under sec tion 44. In the case of a manufacturing, merchandising, or mining business, gross income means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining gross income, subtractions shoud not be made for depreciation, depletion, selling expenses, or losses, or for items not ordi narily used in computing the cost of goods sold. Sales of capital assets as defined in sectiop 117 must be treated as sepa rate transactions and only those sales which individually resulted in profits shall be considered in determining the gains derived from such source. Gains from all transactions involving stock in trade, etc., are determined for the taxable year as a whole instead of separately.
From the standpoint of the nature of the gross income, a corporation comes within the definition of a personal hold ing company for any taxable year when 80 percent or more of its gross Income for such taxable year was derived from the following sources:
1 Royalties. The term royalties includes amounts re ceived for the use of or for the privilege of using patents, copyrights, secret processes and formulas, good will, trade