To be classified as a personal holding company, a corporation must meet the following two tests for the tax year in question:
1. Five or fewer individuals must own more than 50 percent of the value of the outstanding stock, actually or constructively, at any time during the second half of the taxable year.
2. At least 60 percent of the corporation’s adjusted ordinary gross income for the tax year must be personal holding company income.
It is possible for a corporation to meet these tests one tax year and not the other tax year. It is important to understand that meeting the definition of a personal holding company does not mean that any additional tax is due. If a corporation meets the definition of a personal holding company, it simply means a tax could be imposed.
The personal holding company tax is based on undistributed personal holding company income. In the event a corporation distributes all of its earnings, both the personal holding company tax and the accumulated earnings tax would be irrelevant.
The following types of corporation are exempt from being treated as a personal holding company:
1. Tax exempt corporations
2. Banks and domestic building and loan associations
3. Life insurance companies
4. Surety companies
5. Foreign corporations
6. Certain lending and finance companies
7. Certain small business investment companies operating under the Small Business Investment Act of 1958
8. Corporations subject to the jurisdiction of a bankruptcy court that is currently in bankruptcy.
It is important to note that an S corporation is not exempt from being considered a personal holding company but is exempt from the personal holding company tax because of its flow through features.