Penalty Taxes for Corporations

Question 1

Describe the Personal Holding Company (PHC) ownership test.

Answer 1

Met if more than 50% of the value of the stock is owned directly or indirectly by five or fewer individuals in the last half of the year.

Question 2

What deductions should be made to taxable income for the purpose of determining a Personal Holding Company tax?

Answer 2

1. Accrued income tax;
2. Excess charitable contributions;
3. Net capital gain (after tax).

Question 3

List the corporations that are exempt from the Personal Holding Company tax.

Answer 3

1. Banks;
2. Insurance companies;
3. Finance companies.

Question 4

List the tests used to determine the Personal Holding Company status.

Answer 4

1. Income test; 60% or more is passive

2. Ownership test; 5 or less owners control 50% or more of the stock.

Question 5

Define “consent dividend.”

Answer 5

Not actually paid to shareholders; shareholders consent to be taxed as though a dividend (identified in the consent) was paid.

Question 6

Define “adjusted ordinary gross income (AOGI)”.

Answer 6

Gross income excluding capital and 1231 gains and reduced by expenses associated with the production of rent and royalty income.

Question 7

What dividends reduce the income of Personal Holding Companies?

Answer 7

Pro-rata dividends paid: 1.During the year;

2. By consent;
3. Within two and one-half months of year-end;
4. Deficiency dividends.

Question 8

What additions should be made to taxable income for the purpose of determining a Personal Holding Company tax?

Answer 8

1. Dividends received deduction;

2. Carryover for net operating losses from year prior to previous year.

Question 9

Define “deficiency dividend.”

Answer 9

dividend expressly declared to avoid the tax and is paid within 90 days of tax imposition (the finding of a deficiency due to the PHC tax).

Question 10

Describe the Personal Holding Company (PHC) income test.

Answer 10

Met if passive income constitutes 60% of adjusted ordinary gross income (AOGI).

Question 11

List the additions that should be made to taxable income for the purpose of determining the accumulated earnings penalty.

Answer 11

1. Dividends received deduction;

2. Net operating or capital loss carryovers.

Question 12

How is the accumulated earnings credit calculated?

Answer 12

The greater of: 1.The amount of the current earnings and profits needed for the “reasonable needs” of the business;
2.$250,000 less than the accumulated earnings and profits at the close of preceding year.

Question 13

List the reductions that should be made to taxable income for the purpose of determining the accumulated earnings penalty.

Answer 13

1. Accrued income taxes;
2. Excess charitable contributions;
3. Net capital loss;
4. Net capital gain after tax.

Question 14

Define “Personal Holding Company.”

Answer 14

A corporation that may be subject to the personal holding company tax.

Question 15

What does passive income include?

Answer 15

Includes dividends, interest, and sometimes, rents, royalties, and personal service contracts.