Personal Holding Companies, written by Richard C. Fung, Esq., of Ernst & Young LLP, of an earlier version by Robert J. Foley, Esq., of State Street Bank and Trust Company, considers all aspects of the personal holding company tax. In general terms, the tax is imposed on corporations that are more than 50% owned by five or fewer individuals (the ownership test) and that derive 60% or more of their income from personal holding company sources (the income test). 

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 helps practitioners anticipate and avoid complications by analyzing the rules for determining whether a corporation is a personal holding company, explaining how the personal holding company tax is computed, and demonstrating specific planning techniques that may prevent imposition of the tax. 

Additional specific topics covered in this Portfolio include 

• the general pattern of personal holding company provisions, the definition of personal holding company as well as the income and stock ownership tests 
• adjustments to mineral, oil, and gas income; deductions allocable to royalties and working interests; interest income exclusions; and Personal Holding Company Income (PHCI) 
• definition of “Adjusted Ordinary Gross Income” and a discussion of income from rents 
• lending or finance companies and a review of the 60% and 20% tests 
• corporations filing consolidated returns, exceptions—including ineligible affiliated groups, and testing for ineligible groups 
• dividends paid after close of taxable year, dividend carryovers, and consent dividends 

Personal Holding Companies allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Detailed Analysis

I. Introduction

II. General Pattern of Personal Holding Company Provisions

A. Definition of “Personal Holding Company”

1. The Income Test

2. The Stock Ownership Test

B. Treatment of a Personal Holding Company in General

III. Corporations Excepted from Personal Holding Company Status

Introductory Material

A. Tax-Exempt Corporations

B. Banks

C. Life Insurance Companies

D. Surety Companies

E. Foreign Corporations

F. Lending or Finance Companies

1. 60% Test

2. 20% Test

3. Business-Expense Test

4. Limitation on Loans to Shareholders

5. Relationship Between 542(c)(6) and 542(c)(2)

G. Small Business Investment Companies

H. Corporations in Title 11 or Similar Cases

I. S Corporations

J. Pre-2005 Exceptions for Foreign Personal Holding Companies and Passive Foreign Investment Companies

IV. Definition of a Personal Holding Company: The Income Test

A. In General

B. Gross Income

1. In General

2. Manufacturing, Merchandising, and Mining Businesses

3. Farming

4. Service Businesses

a. In General

b. Absence of a Profit Motive

c. Reimbursed Expenses

5. Installment Sales

6. Partnerships

7. Insurance Companies Other Than Life Insurance Companies

8. Foreign Corporations

C. Definition of “Ordinary Gross Income”

1. In General

2. Section 1231 Gains

3. Sections 1245 and 1250 Gains

D. Definition of “Adjusted Ordinary Gross Income”

1. Adjustments to Gross Income from Rents

a. Income from Rents

b. Adjustments in General

c. Exception for Depreciation on Certain Tangible Personal Property

d. Deductions Allocable to Rents

e. Interest on Loans Not Used to Purchase Property

2. Adjustments to Mineral, Oil, and Gas Income

a. In General

b. Deductions Allocable to Royalties and Working Interests

3. Interest Income Exclusions

E. Personal Holding Company Income (PHCI)

1. Dividends, Etc.

a. Dividends

b. Interest

(1) In General

(2) Interest Excluded from the Interest Category

(3) Items That May Be Treated as Interest Although Not Characterized as Interest by Parties

(4) Imputed Interest

c. Royalties (Other Than Mineral, Oil, Gas, or Copyright Royalties)

(1) General Definition

(2) Royalties Compared with Joint Venture Income

(3) Royalties Compared with Capital Gains

(4) Royalties on Computer Software

d. Annuities

2. Rents

a. Items Constituting Rent

(1) Rents Contrasted with Royalties

(2) Compensation for Use of Tangible Personal Property Manufactured by Taxpayer

(3) Interest on Sale of Real Property

(4) Delay Rentals

(5) Joint Operating Agreements

(6) Expenses of Lessor and Improvements

b. Test for Treating Rent as Personal Holding Company Income (PHCI)

(1) Fifty Percent Test

(2) Ten Percent Test

(a) In General

(b) Distributions of Other Personal Holding Company Income

3. Mineral, Oil, and Gas Royalties

a. Items Constituting Mineral, Oil, and Gas Royalties

b. Tests for Treating Mineral, Oil, and Gas Royalties as Personal Holding Company Income

(1) Fifty Percent Test

(2) Ten Percent Test

(3) Fifteen Percent Test

4. Copyright Royalties

a. Fifty Percent Test

b. Ten Percent Test

c. Twenty-Five Percent Test

5. Produced Film Rents

6. Rents from 25% Shareholders

a. In General

b. What Constitutes Use by an Individual

c. Compensation for Use of Property

d. Ten Percent Test

7. Personal Service Contracts

8. Estates and Trusts

F. The Sixty Percent Test

V. Definition of a Personal Holding Company: The Stock Ownership Test

A. In General

B. Stock Ownership as a Factor of Personal Holding Company Income

1. Personal Services Contracts

2. Use of Corporate Property

3. Royalties as Personal Holding Company Income

C. Valuation of Stock

D. Amount of Stock Outstanding

E. Period of Ownership

F. Direct or Indirect Ownership

VI. Attribution of Ownership Under 544

A. Situations in Which Attribution Rules Apply

B. Stock Held by a Corporation, Partnership, Estate or Trust

1. In General

2. Constructive Ownership of Trust or Estate Assets

C. Constructive Ownership by Reason of Family and Partnership Ownership

1. Family Attribution

2. Attribution Between Partners

D. Convertible Securities

1. General

2. Securities Convertible at Different Times

E. Constructive Ownership by Reason of Options

1. In General

2. Period of Constructive Ownership

F. Attribution Rules Apply Only Against Taxpayer

G. Reattribution

1. Situations in Which There Will Be Reattribution

2. Situations in Which There Will Not Be Reattribution

a. Family or Partner Attribution

b. Convertible Securities

H. Option Rule in Lieu of Family and Partner Rule Where Both Are Applicable

VII. Corporations Filing Consolidated Returns

A. In General

B. Exceptions

1. Ineligible Affiliated Groups

a. Test for Ineligible Groups

b. Dividends Received by a Common Parent

2. Excluded Corporations

C. Consolidated Income for Personal Holding Company Purposes

1. In General

2. Certain Dividend Income Received from a Nonincludible Life Insurance Company

3. Treatment of Dividends Received by Members of an Affiliated Group

D. Effect of Determining Personal Holding Company Liability on a Consolidated Basis

E. Importance of Planning

VIII. Return Requirement for Personal Holding Companies

IX. Computation of the Personal Holding Company Tax

X. Computing Undistributed Personal Holding Company Income

A. Taxable Income

B. Adjustments Under 545(b)

1. Taxes

2. Charitable Contributions

3. Dividends Received Deduction

4. Net Operating Loss

5. Net Capital Gain

6. Certain Expenses and Depreciation

C. Adjustments Under 545(c)

D. Adjustments Under Pre-1990 545(c)

XI. Dividends Paid Deduction

A. In General

B. Definition of Dividend

1. In General

2. Formal Declaration

3. Dividends in Kind

4. Distributions in Liquidation

a. General Comments

b. Distributions to Corporate Distributees

c. Distributions to Noncorporate Distributees

d. Interrelation with 543(a)(2)

e. Liquidating Distribution Constituting Step in Reorganization

C. Preferential (Disproportionate) Dividends

D. Tax-Free Distributions

E. Distributions by Member of an Affiliated Group

F. Dividends Paid After Close of Taxable Year

G. Dividend Carryover

H. Consent Dividends

1. General Purpose

2. Consent Procedure

3. Effect of Consent

4. Definition of Consent Stock

5. Limitation on Consent Dividends

a. Preferential Dividends

b. Section 316 Limitation

6. Nonresident Aliens and Foreign Corporations

I. Deficiency Dividends

1. In General

2. Need for Determination

3. Payment of Deficiency Dividend

4. Claim for Deduction

5. Effect on Dividends Paid Deduction

6. Interest, Additional Amounts, or Penalties

7. Credit or Refund

8. Limitation on Assessment and Collection

9. Stay of Collection

10. Liquidated Corporation

11. Successor Corporation

Working Papers

Table of Worksheets

Worksheet 1 Revenue Act of 1964, P.L. 88–272, 88th Cong., 2d Sess. (1964), Excerpts Section 225-Personal Holding Companies

Worksheet 2 Foreign Investors Tax Act of 1966, P.L. 89–809, 89th Cong., 2d Sess. (1966), Excerpts Act Section 104(b), Amending Code 882 Act Section 104(h), Amending Code 542, 543, and 545 Senate Report on Foreign Investor Tax Act of 1966

Worksheet 3 Foreign Investors Tax Act of 1966, P.L. 89–809, 89th Cong., 2d Sess. (1966), Excerpts Act Section 206, Amending Code 543 Senate and Conference Committee Reports on Section 206

Worksheet 4 Tax Reform Act of 1976 P.L. 94–455, 94th Cong., 2d Sess. (1976) Excerpts Act Sec. 2106, Amending Code 543 Senate Report on the Tax Reform Act of 1976 General Explanation of the Tax Reform Act of 1976

Worksheet 5 Tax Equity and Fiscal Responsibility Act of 1982 P.L. 97–248, 97th Cong., 2d Sess. (1982) Excerpts Act Section 293, Amending Code 542 House Report on Tax Equity and Fiscal Responsibility Act of 1982

Worksheet 6 EXAMPLE Computation of Undistributed Personal Holding Company Income (UPHCI)

Worksheet 7 Statement by Personal Holding Company Claiming Rental Expenses in Excess of Rental Income (Regs. 1.545–2(h)(2))

Worksheet 8 Corporate Designation of Distribution in Complete Liquidation as Dividend (Regs. 1.316–1(b)(5))

Bibliography

OFFICIAL

Statutes:

Primary:

Secondary:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

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