The method of computation of the undistributed foreign personal holding company income may be illustrated by the following example:
(a) The following facts exist with respect to the M Corporation, a foreign personal holding company, for the calendar year 1954:
(1) The gross income of the corporation as defined in section 555 amounts to $300,000, of which $85,000 represents its distributive share of the undistributed foreign personal holding company income of another foreign personal holding company in which it is a shareholder, $200,000 consists of dividends, $10,000 consists of fully taxable interest, and the remainder ($5,000) consists of rent received from the principal shareholder of the corporation for the use of property owned by the corporation.
(2) The expenses of the corporation amount to $85,000, of which $75,000 is allocable to the maintenance and operation of the property used by the principal shareholder and $10,000 consists of ordinary and necessary office expenses allowable as a deduction. The claim for deduction for the expenses of, and depreciation on, the rented property in excess of the rent received for its use is not established as provided in section 556(b)(5). The yearly depreciation on the rented property amounts to $30,000.
(3) Federal income tax withheld at the source on the income of the corporation from sources within the United States amounts to $59,125.
(4) No gain from the sale or exchange of stock or securities is realized during the taxable year, but losses in the amount of $10,000 are sustained from the sale of stock or securities which constitute capital assets. Such losses are not allowed as a deduction in any amount. See section 1211(a).
(5) Contributions, payment of which is made to or for the use of donees described in section 170(b)(1)(A) for the purposes therein specified, amount to $15,000, of which $5,000 is deductible in computing taxable income under section 63.
(6) Dividends paid by the corporation to its shareholders during the taxable year amount to $50,000.
(b) The taxable income of the corporation (including the distributive share of the undistributed foreign personal holding company income of the other foreign personal holding company) is $180,000, computed as follows (assuming for the purposes of this example only that the expenses of, and depreciation on, the rental property are deductible under sections 162 and 167):
Income (Section 61)Dividends................................................... $200,000Interest.................................................... 10,000Rent........................................................ 5,000
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Gross income as defined in section 61................... 215,000Add:
Distributive share of undistributed income of the other 85,000
foreign personal holding company (considered as a
dividend)................................................
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Gross income as defined in section 555................ 300,000
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Deductions (Section 161)Expenses allocable to operation of the rented property...... $75,000Depreciation of the rented property......................... 30,000Ordinary and necessary expenses (office).................... 10,000Contributions (within the 5-percent limitation specified in 5,000
section 170(b) (2).........................................
120,000
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Taxable income for purposes of computing undistributed 180,000
foreign personal holding company income................
(c) The undistributed foreign personal holding company income of the corporation is $160,875, computed as follows: Taxable income for purposes of computing undistributed $180,000
foreign personal holding company income....................
===========Add (see section 556(b)):
Contributions deductible in computing taxable income under 5,000
section 63...............................................
Excess property expenses and depreciation over amount of 100,000
rent received for use of property ($105,000-$5,000)......
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Total................................................. 105,000
===========Deduct (see section 556(b)):
Federal income taxes...................................... 59,125
Contributions (within the percentage limitations specified 15,000
in section 170(b)(1) (A) and (B), determined under the
rules provided in section 556(b)(2)).....................
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Total................................................. 74,125
===========Net additions under section 556(b).......................... 30,875
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Taxable income, as adjusted under section 556(b)...... 210,875Less: Deduction for dividends paid (see section 561)........ 50,000
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Undistributed foreign personal holding company income... 160,875
Deduction for Dividends Paid