Accumulated Earnings and Personal Holding Company Taxes
1. The accumulated earnings tax may be imposed on the same corporation every taxable year.
2. The accumulated earnings credit is the lesser of $250,000 or accumulated earnings at the end of the previous year.
3. Net Section 1231 gains in excess of net short-term capital losses may be subject to the accumulated earnings tax.
4. Paying dividends every year does not guarantee that the accumulated earnings tax will not be imposed.
5. Tax-free municipal bond interest is disregarded when computing accumulated taxable income.
6. The personal holding company tax may be imposed on a corporation which has previously been subject to the accumulated earnings tax.
7. A corporation with 37 shareholders may be a personal holding company.
8. Capital gains have no impact on the 60 percent test.
9. Once the taxable year is ended, the personal holding company tax, if any, cannot be avoided.
10. Interest income is excluded from personal holding company income if paid on assets which are an integral part of the business.
11. The accumulated earnings credit is equal to the following:
a. $250,000 plus the reasonable needs of the business
b. The greater of (1) the excess of $250,000 over accumulated earnings last year, or (2) the reasonable needs of the business this year, less last year’s accumulated earnings
c. The greater of $250,000 or the reasonable needs of the business
d. $250,000, less last year’s accumulated earnings, plus funds demonstrably needed in the business in the future
12. Which of the following does not qualify as accumulations for a reasonable need of a business?
a. Accumulations for potential product liability
b. Liquid funds kept in anticipation of a death tax redemption from a retired shareholder’s estate
c. Marketable securities to be sold to raise the down payment on a new plant
d. Tax-exempt municipal bonds purchased to reduce corporate taxes on its investment portfolio
13. To arrive at the accumulated taxable income, which of the following items does not represent a positive adjustment?
a. Dividends received deduction
b. Net operating loss deduction
c. Capital losses in excess of capital gains
d. Capital loss carryovers
14. The following statements are all true, except:
a. To arrive at accumulated taxable income, the excess of net long-term capital gains over net short-term capital losses, if any, less the tax attributable thereto, is subtracted.
b. Since capital losses reduce earnings and profits even though they have to be carried back or forward, a carryback against capital gains in a prior year will increase the tax base.
c. Capital losses in excess of capital gains for a given year reduce accumulated taxable income for such year, even though the excess is carried forward in search of capital gain.
d. Capital losses carried to a taxable year and offset against a net Section 1231 gain will increase accumulated taxable income only if it is a carryover, not if it is a carryback, since the latter would change the tax base retroactively.
15. The following statements about the use of consent dividends to reduce the accumulated earnings tax are all true, except:
a. No cash or property is transferred by the corporation to the shareholders.
b. The consent dividend reduces earnings and profits of the corporation, is includible in the shareholders’ gross income, and is added to the shareholders’ bases in their stock.
c. The consent dividend approach leaves the shareholders in the same position as if they had received a cash dividend, paid the tax, and reinvested the net amount in the corporation.
d. The corporation has no gross income from the constructive contribution to capital, but will simply debit retained earnings and credit paid-in capital.
16. Sunset Animal Clinic, Inc. had $220,000 in accumulated earnings last year. This year it has $100,000 of taxable income, paid $20,000 in taxes, and can demonstrate $210,000 of business needs. The accumulated earnings tax, if assessed, would be:
a. None
b. $12,000
c. $14,000
d. $28,000
17. The accumulated earnings tax does not apply to any of the following, except:
a. Personal holding companies
b. Publicly held corporations
c. S corporations
d. Newly formed corporations
18. The adjusted ordinary gross income includes none of the following items, except:
a. Short-term capital gains
b. Section 1231 gains
c. Net royalty income
d. Long-term capital gains
19. Personal service income may constitute personal holding company income if certain conditions exist, including the following, except:
a. The renderer of services owns at least 25 percent of the value of the stock at any time during the taxable year.
b. The person in question is highly paid and is a shareholder-employee.
c. Someone outside the corporation may decide who is to render the service.
d. Five or fewer individuals own more than half the value of the stock at any time during the last half of the taxable year.
20. The following statements about consent dividends are all false, except:
a. The consent dividend election is made by the corporation.
b. The shareholder’s stock basis is increased by the after-tax amount of the consent dividend included in gross income.
c. A consent dividend may be paid in cash or property, including an IOU signed by the corporation.
d. The consent dividend procedure may be used to negate the accumulated earnings tax one year and the personal holding company tax another year by the same corporation’s shareholders.
21. The existence of the personal holding company tax most likely has had the following effects, except:
a. Fewer incorporations have taken place.
b. Significantly higher tax revenues have been collected by the U.S. Treasury.
c. More dividends have been declared.
d. More work has been generated by accountants.
22. The following are similarities between the PHC tax and the accumulated earnings tax, except:
a. A dividend paid deduction may be available for a deficiency dividend.
b. Both taxes encourage the payment of dividends.
c. The same flat tax rate is applied to the tax base.
d. Neither tax is imposed directly on the shareholders.
23. Which of the following assets does not measure a corporation’s ability to pay a dividend?
a. Cash.
b. Fair market value of marketable securities.
c. Basis of accounts receivable.
d. Fair market value of minority interest in a subsidiary corporation.
24. In what year can the corporation be subject to the accumulated earnings tax?
a. The year the corporation is formed.
b. A year with no taxable income.
c. A year it pays dividends in excess of earnings.
d. Both a and b.
25. Which of the following businesses is subject to the personal holding company tax?
a. Small investment companies.
b. Not-for-profit university.
c. Sole proprietorship dealing in stocks.
d. C corporation.
26. What is the primary goal of the personal holding company tax?
a. Force dividends to be paid.
b. Provide more revenue.
c. Avoid the capital gains tax.
d. Lower the effective tax rates on businesses.