Question

Because of its quality​ investments, Carolina Corporation has always generated​ 30% to​ 40% of its gross income from passive sources. In the current​ year, Carolina sold a block of stock in a company it acquired several years ago. As a result of the​ sale, the corporation realized a substantial​ long-term capital gain that will increase this​ year's investment income from​ 40% to​ 70% of gross income. Explain to​ Carolina's president why she should or should not be worried about the personal holding company tax.

Answer 1

Carolina's president should be worried that her company could be considered a personal holding company​ (PHC), since the stock ownership requirement is met. The company must compute its adjusted ordinary gross income​ (AOGI). As AOGI excludes any capital gains and Sec. 1231​ gains, Carolina can avoid being a PHC even if it recognizes a large capital gain this year if its other investment income that is PHC income does not exceed​ 60% of AOGI.

Step-by-step explanation:

A personal holding company (PHC) is a C corporation in which more than 50% of the value of its outstanding stock is owned (directly or indirectly) by five or fewer individuals and which receives at least 60% of its adjusted ordinary gross income from passive sources. Meaning that this year's investment income should be less than 60% of gross income or Carolina Corporation will be considered a personal holding company (PHC).