PHC tax and sec. 382.

• Author: Bakale, Anthony
• Position: Personal holding companies

The personal holding company (PHC) tax is a punitive tax imposed on certain closely held corporations that retain excess PHC income. In calculating the tax, a corporation is afforded a deduction against its PHC income for a net operating loss (NOL) incurred in the preceding tax year. Sec. 382 limits the ability of taxpayers to "traffic" in NOL deductions by limiting the deductibility of a carry forward amount in any period after the loss corporation undergoes a defined ownership change. The question arises as to whether Sec. 382 would also limit the ability to use a PHC deduction for the prior-year loss.

Sec. 545(b) (4) provides that, in computing undistributed PHC income (UPHCI) for any year, the NOL deduction provided in Sec. 172 shall not be allowed, but there shall be allowed as a deduction the NOL (as defined in Sec. 172(c)) for the preceding tax year, completed without reference to the dividend-received deductions. Sec. 382(a) limits the corporation's ability to reduce its taxable income by pre-change losses. Sec. 382(d) defines pre-change losses as any NOL carryforward and any NOL incurred in the year prior to the change. Accordingly, it would appear that, under Sec. 545(b)(4), the NOL of the preceding year (as contrasted with the NOL carryforward or NOL of the current year) can reduce UPHCI, unlimited by the restrictions on the use of NOLs under Sec. 382. In addition to the fact that the loss deduction under the PHC rules does not appear to fit within the definition of pre-change losses under Sec. 382, Sec. 382(a) appears to limit its application only to the calculation of "taxable income" of the loss corporation...