Really confused by this PHC problem.
Zero Corp. is an investment company authorized to issue only common stock.
During the last half of 2017, Edwards owned 450 of the 1,000 outstanding shares of stock in Zero. Another 350 shares of stock outstanding were owned, 10 shares each, by 35 shareholders who are neither related to each other nor to Edwards.
Zero could be a personal holding company if the remaining 200 shares of common stock were owned by
A) An estate where Edwards is the beneficiary.
B) Edwards's brother-in-law.
C) A partnership where Edwards is not a partner.
D) Edwards's cousin.
You Answered Correctly!
Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. As such, the corporation will be subject a 15% penalty tax on undistributed personal holding company income. The stock ownership test is satisfied if, at some time during the corporation's tax year, 50% or more of the corporation's stock was directly or indirectly owned by five or fewer individuals.
An individual indirectly owns stock if it is owned by the individual's family or partner. Family includes the individual's brothers, sisters, spouse and lineal descendants and ancestors. An individual will not be considered to be the constructive owner of the stock owned by nephews, cousins, uncles, aunts, and any of his/hers spouses relatives. Constructive ownership also may exist if the individual is a partner in a partnership or the beneficiary of an estate that is a shareholder. The income test is satisfied if 60% or more of the corporation's adjusted ordinary gross income is personal holding company income.
With 450 shares, Edwards already directly owns 45% of Zero Corp.'s outstanding stock. If an estate where Edwards is the beneficiary owns the remainder of the corporation's 200 shares of stock, Edwards would directly or indirectly own 5% of the corporation. An ownership exceeding the 50% direct or indirect ownership percentage is needed to satisfy the stock ownership test.
Hence, Zero Corp. could be a personal holding company if the remaining 200 shares were owned by an estate where Edwards is the beneficiary. Each response given to this question satisfies the stock ownership test for a personal holding company because, in each response, five or fewer individuals would own more than 50% of the corporation's stock. However, this response is the best as it concentrates over 50% ownership under the control of one individual.
Two questions
1) I thought the tax was 20%? Is this a CPA EXCEL typo? Surprise surprise
2) How is this 5 or fewer individuals when 35 unrelated shareholders own 10 shares?
Please clarify if you can. This problem seems all over the place. I got it correct because I knew the direct ownership rules. This answer is all over the place though with the 15% rule and I am also VERY confused with the 35 individual shareholders who are unrelated. This far exceeds the 5 or fewer test. What am I missing? Is it because since 1 individual owns 50% or more being just Edward?
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