Personal Holding-Company Tax Law and Legal Definition

Personal holding-company tax refers to a federal tax levied on undistributed personal holding-company income. It is levied upon adjusted taxable income minus deductions for dividends paid. The personal holding company tax is designed as a penalty for those who seek to incorporate their pocketbook to avoid surtaxes.

The Internal Revenue Code provides for the imposition of Personal holding-company tax. “In addition to other taxes imposed, there is hereby imposed for each taxable year on the undistributed personal holding company income of every personal holding company, a personal holding company tax equal to fifteen percent of the undistributed personal holding company income.” [26 USCS § 541].

The object of the personal holding company tax is to force corporations which are personal holding companies to pay in each tax year dividends at least equal to the corporation's undistributed personal holding company income, i.e., its adjusted taxable income less dividends paid to shareholders of the corporation. It ensures that taxpayers cannot escape personal taxes by accumulating income at the corporate level. [Dothan Coca-Cola Bottling Co. v. United States, 561 F. Supp. 1261, 1264-1265 (D. Ala. 1982)].