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.

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.

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).

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