Personal Holding Companies (Portfolio 797)

Description

Bloomberg Tax Portfolio, Personal Holding Companies, No. 797, considers all aspects of the personal holding company tax. In general terms, the tax is imposed on corporations which are more than 50% owned by five or fewer individuals (the ownership test) and which derive 60% or more of their income from personal holding company sources (the income test).

The ownership test is applied using attribution rules to determine the number of owners and the size of their interests. In applying the income test, the corporation’s gross income is computed and then is adjusted to arrive at “ordinary gross income.” A further adjustment to that figure leads to the corporation’s “adjusted ordinary gross income.” If “personal holding company income,” basically taxable income with certain upward and downward adjustments, is 60% or more of adjusted ordinary gross income, the income test is met. If the corporation satisfies the ownership test and the income test, it is classified as a personal holding company and it is taxed on its “undistributed personal holding company income.” Certain distributions (and deemed distributions) can reduce undistributed personal holding company income and, as a result, the tax.
The personal holding company tax can arise unexpectedly and may lead to serious consequences. However, an understanding of the personal holding company provisions and an awareness of their potential application will help to avoid their pitfalls.

This Portfolio: (1) analyzes the rules for determining whether a corporation is a personal holding company; (2) explains how the personal holding company tax is computed; and (3) demonstrates planning techniques which may prevent imposition of the tax.

Table of Contents

I. Introduction
II. General Pattern of Personal Holding Company Provisions
III. Corporations Excepted from Personal Holding Company Status
IV. Definition of a Personal Holding Company: The Income Test
V. Definition of a Personal Holding Company: The Stock Ownership Test
VI. Attribution of Ownership Under 544
VII. Corporations Filing Consolidated Returns
VIII. Return Requirement for Personal Holding Companies
IX. Computation of the Personal Holding Company Tax
X. Computing Undistributed Personal Holding Company Income
XI. Dividends Paid Deduction