Question 1

A corporation need not worry about the personal holding company penalty, since a deficiency dividend will eliminate all amounts due the government.

Accepted Answer

A deficiency dividend is a distribution made by a corporation to its shareholders that is less than the required amount to avoid the personal holding company penalty. It does not eliminate all amounts due to the government, but rather incurs a penalty tax which is added to the regular income tax liability of the corporation. Therefore, a corporation should be concerned about avoiding the personal holding company penalty through proper planning and distributions.

Question 2

For purposes of the personal holding company provisions, gross income minus capital gains, § 1231 gains and depreciation, property taxes, interest expense, and rents paid related to gross rental income equal ordinary gross income.

Accepted Answer

For purposes of the personal holding company provisions, ordinary gross income is calculated by taking gross income and subtracting specific exclusions such as dividends received, interest on certain obligations, and rents and royalties from real property, among others. Capital gains, § 1231 gains, depreciation, property taxes, interest expense, and rents paid are not directly subtracted from gross income to arrive at ordinary gross income.

Question 3

Corporations are required to compute and pay the accumulated earnings tax by the due date of the tax return.

Accepted Answer

Corporations are not required to compute and pay the accumulated earnings tax by the due date of their tax return. The accumulated earnings tax is assessed by the IRS during an audit if they determine the corporation has retained earnings beyond reasonable business needs with the intent of avoiding shareholder taxes.

Question 4

To be a personal holding company, the corporation must have been formed or availed of for the purpose of avoiding tax on the shareholders.

Accepted Answer

A corporation is classified as a personal holding company based on its income and ownership structure, not necessarily on the intent to avoid taxes. The classification is primarily determined by specific income and shareholder tests outlined in tax regulations.

Question 5

A corporation whose only source of income is rental income will not be subject to the personal holding company penalty tax.

Accepted Answer

The personal holding company penalty tax is typically imposed on corporations whose income consists mainly of passive sources such as dividend income, interest income, and royalties. Although rental income can also be considered passive income, it is not specifically listed as a source of income that triggers the personal holding company penalty tax. Therefore, a corporation that only earns rental income should not be subject to this tax.

Question 6

In calculating accumulated taxable income, both the accumulated earnings credit and dividends-paid deduction are subtracted from adjusted taxable income.

Accepted Answer

The accumulated earnings credit and dividends-paid deduction are both deductions from adjusted taxable income when calculating accumulated taxable income.

Question 7

Court decisions have found the reasonable possibility of business reversals to be justification for not imposing the accumulation of earnings penalty tax.

Accepted Answer

This is a true statement. Courts have recognized that there are legitimate reasons for businesses to accumulate earnings to prepare for potential business reversals. Therefore, if a business can demonstrate that there was a reasonable possibility of a business reversal and that its accumulation of earnings was related to that possibility, it may avoid the accumulation of earnings penalty tax.

Question 8

If a corporation does not have a reasonable business need, it may not accumulate income in excess of $250,000 without the imposition of the accumulated earnings tax.

Accepted Answer

The answer of If a corporation does not have a...

Question 9

The dividends-paid deduction for personal holding company tax and accumulated earnings tax is computed the same way.

Accepted Answer

The dividends-paid deduction for personal holding company (PHC) tax is computed based on dividends actually paid during the tax year, while the accumulated earnings tax (AET) calculation allows for dividends paid after the close of the tax year but before the tax return is filed, if declared to be payable to shareholders as of a date in the tax year.

Question 10

For personal holding company tax purposes, a corporation meets the income requirement if 60 percent or more of the corporation's adjusted ordinary gross income is personal holding company income.

Accepted Answer

This statement is true. The Internal Revenue Service (IRS) defines personal holding company income as income earned from passive activities such as dividends, interest, rent, royalties, and annuities. If a corporation derives 60 percent or more of its adjusted ordinary gross income from these sources, it is considered a personal holding company for tax purposes and may be subject to additional taxes.

Question 11

The IRS generally determines actual working capital based on current market value whenever there is a significant difference between historical cost and current market value.

Accepted Answer

The statement accurately reflects the IRS's approach to determining actual working capital in cases where there is a substantial difference between historical cost and current market value.

Question 12

Accumulations of earnings for working capital constitutes a reasonable business need.

Accepted Answer

Accumulating earnings for working capital is a common business practice to ensure that a company has enough funds to meet its short-term obligations and invest in growth opportunities.

Question 13

The Bardahl formula may be used to determine whether actual working capital exceeds required working capital for purposes of the accumulated earnings tax.

Accepted Answer

The Bardahl formula is a method used by the IRS and courts to determine a corporation's necessary working capital for operations, helping to assess if excess earnings are being retained for the purpose of avoiding income tax through the accumulated earnings tax.

Question 14

A corporation's "adjusted income from rents" will not be added to personal holding company income (PHCI) if the total of dividends paid, consent dividends, and throwback dividends is less than the amount by which nonrental PHCI exceeds 10 percent of ordinary gross income.

Accepted Answer

The "adjusted income from rents" is considered part of PHCI unless it meets specific exceptions, such as being derived from a property leased at arm's length and constituting at least 50% of the adjusted ordinary gross income. The comparison of dividends paid and the excess of nonrental PHCI over 10% of ordinary gross income does not directly determine whether adjusted income from rents is added to PHCI.

Question 15

Any corporation that has accumulated taxable income is subject to the accumulated earnings tax.

Accepted Answer

Not all corporations with accumulated taxable income are subject to the accumulated earnings tax. This tax is specifically aimed at corporations that retain earnings beyond reasonable business needs, often to avoid shareholder taxes on dividends.

Question 16

The dividends-paid deduction for accumulated earnings tax purposes consists solely of dividends paid during the tax year and dividends paid within 2^½ months of the close of the tax year ("throwback dividends").

Accepted Answer

The answer of The dividends-paid deduction for accumulated earnings tax...

Question 17

The accumulated earnings tax is paid instead of the regular corporate tax plus the alternative minimum tax.

Accepted Answer

The accumulated earnings tax is a penalty tax imposed on corporations that retain earnings beyond a reasonable level, in addition to the regular corporate income tax, not instead of it.

Question 18

One way to reduce a corporation's exposure to the accumulated earnings tax is for the corporation to invest in additional assets related to reasonable business needs.

Accepted Answer

Investing in additional assets related to reasonable business needs can qualify as a reasonable business purpose exception and reduce a corporation's exposure to the accumulated earnings tax.

Question 19

The accumulated earnings credit for a manufacturing company is the smaller of (a) retention for reasonable business needs minus net capital gains, or (b) $250,000 minus previous accumulations.

Accepted Answer

The accumulated earnings credit is not defined by the smaller of those two options. It is generally a tax credit designed to prevent corporations from avoiding income tax through accumulating earnings instead of distributing them as dividends, but the specific calculation does not match the options provided.

Question 20

If an attorney incorporates her practice, all amounts received for legal services will be personal holding company income.

Accepted Answer

Incorporating a legal practice means that the income received for legal services is no longer personal income, but rather business income. Therefore, it would not be considered personal holding company income.

Quiz 6: Penalty Taxes on Corporate Accumulations