Delta Corporation is being reorganized as an investment company because its retained earnings have been used for passive investments. The company is owned by three shareholders, and more than 60% of its income is personal holding company income. George, the president of Delta believes that personal holding company status is not detrimental because the company has paid dividends to its shareholders for several years and therefore should not be liable for any penalty tax. Delta reports the following results for the current year:
Taxable income.................................................$50,000
Federal income tax liability..................................7,500
Dividends paid.......................................................6,000
Dividends-received deduction...........................80,000
a. Do you agree or disagree with George? Explain.
b. What is Delta’s personal holding company tax liability, if any, for the current year?
c. How could Delta avoid liability for the personal holding company tax?