Which of the following statements regarding personal holding companies is correct?
A. The personal holding company tax may be avoided by dividend payments sufficient to reduce undistributed personal holding company income to zero.
B. One of the requirements for being a personal holding company is that during the last half of the tax year, five or fewer individuals own more than 80% of the company’s outstanding stock directly or indirectly.
C. One of the requirements for being a personal holding company is that the corporation receive at least 90% of its adjusted ordinary gross income as "personal holding company income" (e.g., dividends, interest, rents, royalties, and other passive income).
D. Personal holding companies are taxed at ordinary rates on taxable income plus 20% of personal holding company income.
Answer: A
This answer is correct. The personal holding company (PHC) tax may be avoided by dividend payments sufficient to reduce undistributed personal holding company income to zero. The dividends which may reduce undistributed PHC income include dividends paid during the taxable year, dividends paid within 2 1/2 months after the close of the year, dividend carryover, and consent dividends, which are hypothetical dividends treated as if paid on the last day of the corporation’s taxable year. A company may avoid PHC tax liability for a previous year by payment of a deficiency dividend within 90 days of a "determination" by the IRS that the corporation was a PHC for a previous year.