Section 541: A Trap for the Unwary Investment Partnership

This article originally appeared in the May 2025 issue of The Tax Adviser.

Section 541 imposes a 20% tax on the undistributed personal holding company income of a personal holding company. Initially enacted in 1934, the tax was intended to discourage individuals from using closely held corporations as tax shelters for investment income. However, given that current long–term capital gains rates are less than the corporate tax rate, the problem Section 541 was intended to address no longer exists. 

Nevertheless, Section 541 remains a part of the Code and therefore must be confronted where it may apply, including in the case of investment partnerships that may unwarily become subject to the regime.

BDO’s Jesse Hooker provides details in the full article in The Tax Adviser.