CHAPTER 6—PENALTY TAXES ON CORPORATE
ACCUMULATIONS Key
1. Corporations are required to compute and pay the accumulated earnings tax by the due date of the tax return.
2. The accumulated earnings tax is paid instead of the regular corporate tax plus the alternative minimum
3. In calculating accumulated taxable income, both the accumulated earnings credit and dividends-paid
deduction are subtracted from adjusted taxable income.
4. 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.
5. The dividends-paid deduction for accumulated earnings tax purposes consists solely of dividends paid during
the tax year and dividends paid within 2 1/2 months of the close of the tax year (“throwback dividends”).
6. 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.
7. The Bardahl formula may be used to determine whether actual working capital exceeds required working
capital for purposes of the accumulated earnings tax.
8. 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.
9. 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.
10. To be a personal holding company, the corporation must have been formed or availed of for the purpose of
avoiding tax on the shareholders.
11. The dividends-paid deduction for personal holding company tax and accumulated earnings tax is computed
the same way.
12. Any corporation that has accumulated taxable income is subject to the accumulated earnings tax.
13. Accumulations of earnings for working capital constitutes a reasonable business need.
14. A corporation whose only source of income is rental income will not be subject to the personal holding
company penalty tax.
15. 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.
16. 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.
17. A corporation need not worry about the personal holding company penalty, since a deficiency dividend will
eliminate all amounts due the government.
18. If an attorney incorporates her practice, all amounts received for legal services will be personal holding
company income.
19. 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.
20. Court decisions have found the reasonable possibility of business reversals to be justification for not
imposing the accumulation of earnings penalty tax.
21. Which one of the following is not used as a method of avoiding double taxation?
22. In computing the accumulated earnings tax, it is necessary to compute “adjusted taxable income.” Which
one of the following is not added to taxable income to arrive at adjusted taxable income?
23. In calculating adjusted taxable income for accumulated earnings tax purposes, which one of the following is
not subtracted from taxable income?
24. B Corporation, a retail shoe store, operates on a calendar year and has paid no dividends for three years.
Using the following information, calculate the accumulated earnings credit for B Corporation:
Estimated reasonable needs for the current year
$200,000
Prior accumulations
100,000
Net capital gain
15,000
Taxes attributed to capital gain
5,100
25. B Corporation, a service company, operates on a calendar year and has paid no dividends for three years.
What would its accumulated earnings credit be?
Estimated reasonable needs for the current year
$200,000
Prior accumulations
100,000
Net capital gain
15,000
Taxes attributed to capital gain
5,100
26. Which one of the following is not part of the dividends-paid deduction for accumulated earnings tax
purposes?
27. The minimum credit in calculating the accumulated earnings credit for a corporation that is not a service
company and which has $375,000 in prior accumulations is
28. Section 533, Accumulated Earnings Tax, provides that a corporation is deemed to have been formed or
availed of for the purpose of avoiding tax on shareholders if
29. Which one of the following is not always exempt from the accumulated earnings tax?
30. In which case did the Supreme Court hold that the penalty tax could apply in situations when the primary
reason for accumulations was not tax avoidance?
31. Which one of the following is not normally considered a reasonable need for retaining income?
32. Section 537(a)(1) of the Internal Revenue Code states that accumulations for reasonable business needs
include “reasonably anticipated needs” of the business. Which of the following is true regarding “reasonably
anticipated needs” for accumulations?
33. Which one of the following ratios is not calculated for use in the Bardahl formula?
34. Which of the following is not considered an operating expense for purposes of the Bardahl formula?
35. Which one of the following is not exempt from the personal holding company tax?
36. A personal holding company will always meet the ownership test if more than _____ percent of the value of
the corporation’s outstanding shares of stock are owned by five or fewer persons at any time during the last half
of the tax year.
37. To determine stock ownership by attribution for purposes of the personal holding company tax, stock is
attributed from which of the following?
38. G Corporation, which has $15,000 in passive income, will need to have an adjusted ordinary gross income
(AOGI) of greater than what amount in order to “fail” the personal holding company income test?
39. All of the following guidelines regarding stock attribution as it relates to the personal holding company
ownership test are true except:
40. Which of the following is subtracted from gross income to arrive at ordinary gross income (OGI)?
41. Use the following information about Q Corporation, an apartment rental company with three shareholders.
Interest income
Gross rental income
Depreciation, property taxes, and interest expense related to rental income
Maintenance and utilities related to rental income
Dividends paid during the current year
What is the adjusted ordinary gross income for Q Corporation?
42. Use the following information about Q Corporation, an apartment rental company with three shareholders.
Interest income
$15,000
Gross rental income
30,000
Depreciation, property taxes, and interest expense related to rental income
18,000
Maintenance and utilities related to rental income
4,000
Dividends paid during the current year
7,000
What is Q Corporation’s adjusted income from rents?
43. Which of the following is not usually considered personal holding company income?
44. G Corporation has $75,000 gross rental income. Expenditures related to the rental income include $10,000
depreciation, $2,000 property taxes, and $8,000 repairs. Adjusted income from rents is
45. The amount of rental income that, unless the relief measure applies, would be treated as personal holding
company income for a corporation whose primary business activity is the collection of rents from rental
property is known as
46. Nonrental personal holding company income always includes
47. To determine whether adjusted income from rents is to be added to personal holding company income, two
specific tests must be performed. Adjusted income from rents is not added to personal holding company income
if both tests are met. The tests are known as the “50 percent test” and the “10 percent test.” What information is
used in performing the “50 percent test,” in addition to adjusted income from rents?
48. To determine whether adjusted income from rents is to be added to personal holding company income, two
specific tests must be performed. Adjusted income from rents is not added to personal holding company income
if both tests are met. The tests are known as the “50 percent test” and the “10 percent test.” What information is
used in performing the “10 percent test”?
49. The personal holding company tax rate for the current year is
50. F Corporation, a personal holding company, has $200,000 of adjusted taxable income before the dividends-
paid deduction. F paid $60,000 of dividends during the current tax year. What is the maximum amount of
“throwback” dividends (paid within 2 1/2 months from F’s tax year-end) that F can elect to include in the prior
year’s dividends-paid deduction?
51. P Corporation is a PHC. It has undistributed PHC income of $100,000 before subtracting dividends. During
the tax year, it paid dividends of $30,000 to shareholders. It paid another $30,000 during the 2 1/2 months
following the end of the tax year. The amount of undistributed personal holding company income is
52. Y Corporation has determined that it must pay personal holding company tax for its 2011 calendar tax
year.Y Corporation has $600,000 in adjusted taxable income, has paid dividends of $30,000 in 2011, and has
paid $10,000 in dividends by March 15, 2012. What is Y Corporation’s personal holding company tax?
53. In which case did the court rule that the amount of required working capital, determined by the Bardahl
formula, could be increased by 75 percent because of the possibility of increased labor and other operating costs
due to inflation?
54. In which case did the court find that documentation is necessary to avoid the accumulated earnings tax
where a corporation asserts that its working capital accumulations were for a legitimate business need?
55. To “fail” the passive income test and thereby avoid personal holding company status, a corporation can do
any of the following except