Personal Holding Company (PHC)

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Personal Holding Company (PHC). Prevents closely held C corps from sheltering passive income from higher individual tax rates PHC: Stock ownership requirement 50% of value owned by 5 or fewer individuals Passive income requirement PHCI is at least 60% of AOGI.
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Personal Holding Company (PHC)
  • Prevents closely held C corps from sheltering passive income from higher individual tax rates
  • PHC:
  • Stock ownership requirement
  • 50% of value owned by 5 or fewer individuals
  • Passive income requirement
  • PHCI is at least 60% of AOGI
  • Stock Ownership Requirement (1 of 2)
  • Five or fewer shareholders who own
  •  50% of outstanding stock at any time during last 6 months of corporation’s tax yearStock Ownership Requirement(2 of 2)
  • §544 attribution rules apply
  • Similar to §318 attribution rules except:
  • Family attribution includes ALL ancestors and lineal descendents
  • Corp attribution for ALL shareholders
  • Attribution rules cannot be used to PREVENT a corp from being a PHC
  • Problem C:5-53a. PHC--Art is deemed to own all of Small's stock.b. PHC--Art plus Phil, Robert, and Sue (the three individuals are deemed to own the PRS Partnership stockholdings) are considered to own two-thirds of the Small stock.c. PHC--Becky Whitaker is deemed to own all the Small stock (20% directly, 20% from her husband Art, 15% indirectly from the Trust, and 45% constructively from her sisters). Passive Income Requirement(1 of 2)
  •  60% of corp’s AOGI for year is PHCI
  • See Fig. C5-1 for AOGI calculation
  • PHCI includes
  • Dividends, interest, annuity proceeds, royalties, distributions from estate, or trust, certain personal service contracts
  • Passive Income Requirement(2 of 2)
  • PHCI includes (continued)
  • Rents, unless corp earnings are predominantly from rental income
  • See Table C5-2 for tests to determine exclusions from PHCI
  • Exclusion For RentAdjusted income from rents (AIR) is excluded from PHCI if:AIR is at least 50% of AOGI andThe dividends-paid deduction equals or exceeds the amount by which nonrental PHCI exceeds 10% of OGI.Problem C:5-54Problem C:5-54Problem C:5-54 footnote dCalculating the PHC Tax (1 of 3)
  • Calculate undistributed personal holding company income (UPHCI)
  • See next slide for calculation of UPHCI
  • Apply 15% rate to determine tax
  • Highest tax rate on dividend income
  • Calculating the PHC TaxSee Figure C:5-2 (2 of 3) Taxable income+ Positive adjustments DRD, NOL, charitable contrib. c/o, leased prop. net loss, excess rent exp.- Negative adjustments Accrued US/foreign inc. taxes, excess NOL w/o DRD, charitable contrib., after-tax cap. gain- Dividends-paid deduction = UPHCICalculating the PHC Tax (3 of 3)
  • Avoiding PHC status with
  • Throwback dividends
  • Consent dividends
  • Dividend carryovers
  • Liquidating dividends
  • Deficiency dividends
  • See Topic Review C5-3
  • Problem C:5-57aProblem C:5-57bProblem C:5-57cCompliance and Procedural Considerations
  • Personal holding company tax
  • Schedule PH for Form 1120
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