STU8

Question 1

Describe a personal holding company.

Answer 1

A corporation is a personal holding company if at least 60% of its adjusted ordinary gross income for the year is personal holding company income and if, at any time during the last half of the taxable year, more than 50% of the value of its outstanding stock is owned by not more than five individuals. Personal holding company income includes income received from stocks and securities.

Question 2

Describe how a personal holding company is taxed.

Answer 2

The personal holding company tax is imposed by Sec. 541 on undistributed income of a personal holding company. A personal holding company is a corporation that is more than 50% owned by five or fewer shareholders anytime during the last half of the tax year and that has at least 60% of its income as personal holding company income. Under Sec. 543(a), personal holding company income is generally passive income such as dividends, interest, and royalties. Personal services income is generally not included in the definition of personal holding company income. Note that personal services income is included in the personal holding company income definition only if earned by a 25%-or-more shareholder from a personal service contract, and either some person other than the corporation has the right to designate the individual who is to perform the services or the individual who is to perform the services is designated by name or description in the contract.

Question 3

What items are properly reported by the corporation in determining alternative minimum taxable income but are not adjusted to determine adjusted current earnings?

Answer 3

Adjustments that apply in determining adjusted current earnings include life insurance proceeds received by the corporation on the death of a corporate officer,

organizational expenditures that were amortized under Sec. 248, and tax-exempt interest from a local government bond that is not a private activity bond and is not issued in 2009 or 2010.

Long-term capital gains are not included as an adjustment in determining adjusted current earnings. If the interest were earned from a private activity bond, it would be included in alternative minimum taxable income as a tax preference item, and no adjustment would be needed.

Question 4

What is the real reason behind the accumulated earnings tax?

Answer 4

The accumulated earnings tax (AET) is imposed only on a corporation that, for the purpose of avoiding income tax at the shareholder level, allows earnings and profits to accumulate instead of being distributed. The AET will be imposed regardless of the number of shareholders, provided the corporation does not qualify as a personal holding company.

Question 5

Adjustments to AMTI to compute ACE include the following:

Answer 5

• Organizational expenditures amortized and deducted (Sec. 248) are added.
• The 70% dividends received deduction attributable to < 20%-owned corporations is added.
• Life insurance proceeds on a corporate officer are added.
• Installment method on nondealer sales is disregarded unless interest is paid.
• LIFO recapture must be recorded for the excess of FIFO inventory valuation over LIFO inventory valuation.
• Depreciation is computed using the alternative depreciation system method.