ADDITIONAL INCOME TAXES structively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for the purpose of again applying such paragraph in order to make another the constructive owner of such stock. (6) OPTION RULE IN LIEU OF FAMILY AND PARTNERSHIP RULE. - If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3). (b) CONERTIBmLE SECunrTiEs.-Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock- (1) For the purpose of the stock ownership requirement pro- vided in section 501 (a) (2), but only if the effect of the inclusion of all such securities is to make the corporation a personal holding company; (2) For the purpose of section 502 (e) (relating to personal serv- ice contracts), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such subsection as personal holding company income; and (3) For the purpose of section 502 (f) (relating to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includ- ible under such subsection as personal holding company income. The requirement in paragraphs (1), (2) and (3) that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also in- cluded. SEC. 504. UNDISTRIBUTED SUBCHAPTER A NET INCOME. For the purposes of this subchapter the term "undistributed sub- chapter A net income" means the subchapter A net income (as de- fined in section 505) minus- (a) The amount of the dividends paid credit provided in section 27 (a) without the benefit of paragraphs (3) and (4) thereof (com- puted without its reduction, under section 27 (b) (1), by the amount of the credit provided in section 26 (a), relating to interest on cer- tain obligations of the United States and Government corporations); but, in the computation of the dividends paid credit for the purposes of this subchapter, the amount allowed under subsection (c) of this section in the computation of the tax under this subchapter for any preceding taxable year shall be considered as a dividend paid in such preceding taxable year and not in the year of distribution; (b) Amounts used or irrevocably set aside to pay or to retire in- debtedness of any kind incurred prior to January 1, 1934, if such amounts are reasonable with reference to the size and terms of such indebtedness. (c) Dividends paid after the close of the taxable year and before the 15th day of the third month following the close of the taxable year, if claimed under this subsection in the return, but only to the extent to which such dividends are includible, for the purposes of chapter 1, in the computation of the basic surtax credit for the year of distribution; but the amount allowed under this subsection shall not exceed either: (1) The accumulated earnings and profits as of the close of the taxable year; or (2) The undistributed subchapter A net income for the taxable year computed without regard to this subsection; or 107
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