CHAPTER3 SUPPLEMENTAL-LECTURE2.doc - (STILL EFFECTIVE AFTER III PERSONAL HOLDING COMPANY PENALTY TAX(SECTION 541 DESIGNED TO FORCE CORPORATIONS TO PAY

CHAPTER3 SUPPLEMENTAL-LECTURE2.doc - (STILL EFFECTIVE AFTER...

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(STILL EFFECTIVE AFTER DECEMBER 31, 2017) III. PERSONAL HOLDING COMPANY PENALTY TAX (SECTION 541) DESIGNED TO FORCE CORPORATIONS TO PAY DIVIDENDS (MAKE DISTRIBUTIONS) (DOES NOT APPLY TO LIMITED LIABILITY COMPANIES) THIS TAX (PENALTY) IS IN ADDITION TO THE CORPORATE REGULAR INCOME TAX AND THE ALTERNATIVE MINIMUM TAX INTERNAL REVENUE SERVICE CANNOT IMPOSE BOTH THE PERSONAL HOLDING COMPANY (PHC) TAX ( PENALTY ) AND THE ACCUMULATED EARNINGS PENALTY TAX IN THE SAME TAX YEAR. IF BOTH THE PERSONAL HOLDING COMPANY (PHC) TAX AND THE ACCUMULATED EARNINGS TAX APPLY TO A CORPORATION IN THE SAME YEAR, ONLY THE PERSONAL HOLDING COMPANY TAX IS IMPOSED YEARLY DETERMINATION – CORPORATION MAY BE A PHC ONE TAX YEAR AND NOT A PHC THE NEXT TAX YEAR
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EXEMPT CORPORATIONS (1) TAX-EXEMPT ORGANIZATIONS (2) BANKS (3) LIFE INSURANCE COMPANIES PHC TAX IS LOOKING FOR CORPORATIONS THAT SHELTER INCOME (IE. HOLDING COMPANIES) AND NOT CORPORATIONS ENGAGED IN A VALUABLE BUSINESS FUNCTION (1) DEFINITION OF PERSONAL HOLDING COMPANY TWO (2) TESTS (1) 50% TEST MORE THAN 50% OF THE VALUE (FMV) OF ALL OF THE OUTSTANDING STOCK OF CORPORATION IS OWNED BY FIVE (5) OR FEWER INDIVIDUALS AT ANY TIME DURING THE LAST SIX (6) MONTHS OF THE TAX YEAR STOCK ATTRIBUTION RULES APPLY (SECTION 544 – INCLUDES SPOUSE, CHILDREN, GRANDCHILDREN AND PARENTS PLUS BROTHERS AND SISTERS AND GRANDPARENTS)
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NINE (9) OR FEWER SHAREHOLDERS (EQUAL OR UNEQUAL; RELATED OR UNRELATED) ALWAYS PASS THE 50% TEST TEN (10) UNEQUAL SHAREHOLDERS (RELATED OR UNRELATED) ALWAYS PASS THE 50% TEST TEN (10) EQUAL RELATED SHAREHOLDERS ALWAYS PASS THE 50% TEST TEN (10) EQUAL UNRELATED SHAREHOLDERS NEVER PASS THE 50% TEST AND (2) 60% TEST 60% OR MORE OF CORPORATIONS’ ADJUSTED ORDINARY GROSS INCOME CONSISTS OF TAXABLE PASSIVE TYPE INCOME – PHC INCOME
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(1) DIVIDENDS 3 (2) INTEREST 4 (3) ROYALTIES 5 (4) ANNUITIES 6 (5) RENTS (MANY EXCEPTIONS 7 FOR RENTS) ETC., ETC. CALCULATION OF PHC TAX TAXABLE INCOME PLUS : (1) DIVIDENDS RECEIVED DEDUCTION (2) NOL (AT LEAST 2 YEARS BACK) 8 (3) EXCESS EXPENSES OVER 9 INCOME ON NON-BUSINESS 10 PROPERTY MINUS : (1) CORPORATE FEDERAL INCOME TAX (REGULAR AND AMT) (2) EXCESS CHARITABLE CONTRIBUTIONS (IE. 10% EXCESS) (3) NET LONG-TERM CAPITAL GAIN (NET OF CAPITAL LOSSES AND
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NET OF TAX) MINUS : DIVIDENDS PAID (CASH AND PROPERTY DIVIDENDS (IE. TAXABLE DIVIDENDS) BUT NOT NON-TAXABLE STOCK DIVIDENDS) (1) PAID DURING THE TAX YEAR (2) PAID WITHIN 2 1/2 MONTHS AFTER THE END OF THE TAX YEAR (TREATED AS IF PAID IN THE PREVIOUS YEAR (THUS, ACCUMULATED EARNINGS AND PROFITS (AE&P) IS REDUCED)) (3) CONSENT DIVIDENDS (TREATED AS CAPITAL CONTRIBUTION; THUS, ADD TO SHAREHOLDER’S BASIS IN STOCK) (4) DIVIDEND CARRYOVER (5) DEFICIENCY DIVIDEND = UNDISTRIBUTED PHC INCOME X 20% = PHC TAX OBJECTIVE IS TO GET BACK TO
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CORPORATION’S DIVIDEND PAYING
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