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 year
Stock 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:5-53 a. 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 Rent Adjusted income from rents (AIR) is excluded from PHCI if: AIR is at least 50% of AOGI and The dividends-paid deduction equals or exceeds the amount by which nonrental PHCI exceeds 10% of OGI.
Calculating 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 = UPHCI
Calculating 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
Compliance and Procedural Considerations • Personal holding company tax • Schedule PH for Form 1120