I have a question on PHC on the line 18 Rental Income exemption ; 99% of Income is from rent , 1% from interest , but no dividends were paid out by the Corp . So test 1 is clearly met since over 50% of AGI is rental income . However I am not sure I am interepreting the wording for test 2 correctly - " Test 2 . The sum of taxable distributions ( Part VI , line 3 ) and the deduction for dividends paid after the end of the tax year ( Part I , line 12 ) is at least equal to : 1 . The excess , if any , of PHC income , over , 2 . 10% of ordinary gross income . " So I meet this because only 1% of ordinary gross income is interest which is less than 10% , the rest being rental income ? Is this a correct interpretation or should have at least some dividends been paid , at least as much as interest earned ?