CPA Regulation (REG) : Personal Holding Company Tax

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Personal Holding Company Tax

Carrick Corp. met the stock ownership requirements of a personal holding company. What sources of income must Carrick consider to determine if the income requirements for a personal holding company have been met?

I.  Interest earned on tax-exempt obligations
II. Dividends received from an unrelated domestic corporation

Possible Answers:

Both I and II

I only

Neither I or II

II only

Correct answer:

II only

Explanation:

For personal holding companies (PHCs), income requirements only apply to rent, taxable interest, royalties, and/or dividends. Since interest on tax-exempt obligations is nontaxable, this would not apply to the income requirements. 

Example Question #2 : Personal Holding Company Tax

Answer Corp. has two common stockholders. Answer derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Answer is a:

Possible Answers:

Corporation subject to tax only on income not distributed to stockholders.

Regulated investment company.

Personal holding company.

Corporation subject to the accumulated earnings tax.

Correct answer:

Personal holding company.

Explanation:

Personal holding companies (PHCs) are defined as being more than 50% owned by five or fewer individuals, and having 60% of AGI consisting of: rent, taxable interest, royalties, and/or dividends.

Example Question #3 : Personal Holding Company Tax

Sleigh Corp. is a calendar year domestic personal holding company. Which deduction(s) must Sleigh make from Year 17 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?

I.  Federal income taxes
II. Net long-term capital gain (less related federal income taxes)

Possible Answers:

Neither I or II

Both I and II

II only

I only

Correct answer:

Both I and II

Explanation:

To assess the 20% tax on undistributed net income, taxable income must first be reduced by federal income taxes and net long-term capital gains to determine the personal holding company income prior to the dividend paid deduction. 

Example Question #4 : Personal Holding Company Tax

The personal holding company income test requires the company’s income for a given taxable year to be at least:

Possible Answers:

80% of ordinary gross income

60% of adjusted ordinary gross income

30% of undistributed personal holding company income

50% of taxable income

Correct answer:

60% of adjusted ordinary gross income

Explanation:

There are two criteria in determining whether a company is a personal holding company 1) more than 50% of the stock must be owned by 5 or fewer individuals and 2) at least 60% of the adjusted ordinary gross income must consist of certain investment income. The stock ownership test is 50% and income test is 60%.

Example Question #5 : Personal Holding Company Tax

ABC Corp has 2 common stockholders. ABC derives all of its income from investments in stocks and securities, and it regularly distributed 51% of its taxable income as dividends to its stockholders. ABC is a:

Possible Answers:

Regulated investment company

Corp subject to the accumulated earnings tax

Personal holding company

Corp subject to tax only on income not distributed to shareholders

Correct answer:

Personal holding company

Explanation:

Personal holding company status applies if a corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year and if at least 60% of adjusted ordinary gross income for the tax year is personal holding company income.

Example Question #6 : Personal Holding Company Tax

In order for an S Corp to have a valid election, the decision must be agreed upon by _____.

Possible Answers:

50% of shareholders in writing

One shareholder

Majority shareholders

All shareholders in writing 

Correct answer:

All shareholders in writing 

Explanation:

When dealing with a Subchapter S corporation, the election is only valid when agreed upon by all shareholders of the organization in writing.

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