Question

5. Identify which of the following statements is true.

A) Daisy Corporation is owned by a father and his son. The corporation employs 5 individuals to provide public accounting services. Father and son make all of the work assignments for the professional employees. The professional fees earned by the corporation are personal holding company income.

B) Hakeem Corporation is owned by a mother and her two daughters. It reports $95,000 of rental income, $22,000 of depreciation, interest, and property taxes on the rental real estate, and $6,000 of dividend income. Hakeem Corporation is classified as a personal holding company.

C) The personal holding company tax is levied to prevent closely held corporations from sheltering passive income.

D) All of the above are false.

Answer 1

A Personal Holding Company (PHC) will be considered as PHC if it meets both Income Test and Stock ownership test. Income Test states that at least 60% of the corporation's adjusted ordinary gross income for the tax year is from certain dividends, interest, rent, royalties and Annuities. The Stock ownership test states that at any time during the last half of the year 5 or fewer individuals must directly or indirectly own more than 50% in value of the corporation;s outstanding stock.

Personal Holding Company Tax is levied on such Personal Holding Corporation as these corporations generally serve to shelter 'passive income'

In view of above:-

A) In the case of 'A' above, the income earned by 'Daisy Corporation' will not be classified as Personal Holding Company Income as Daisy Corporation is not fulfilling the 'Income Test' ie, Income is coming from Public Accounting Services (professional services) in place of passive income like Dividend, interest, rent, royalties and annuities. Hence the Statement is False.

B) In case of 'B' above, the income earned by 'Hakeem Corporation' will be classified as Personal Holding Company Income as Hakeem Corporation is satisfying the both the criteria ie Income Test (as more than 60% of Corporation's adjusted ordinary income is coming from rental income) and Stock Ownership Test (as 60% of corporation's outstanding stock is held by 5 or fewer individuals holding directly or indirectly more than 60%). Hence the statement is True.

c) The Statement is True as the Personal Holding Company Tax is levied on PHC's from sheltering 'passive income'

d) In the above given situation only option A is false.