Mullins Corporation Is Classified as a PHC for the Current

question 94

Essay

Mullins Corporation is classified as a PHC for the current year, reporting $263,000 of taxable income on its federal income tax return:
$\begin{array}{ll}\text { Operating profit } & \$ 150,000 \\\text { Long-term capital gain } & 20,000 \\\text { Short-term capital gain } & 20,000 \\\text { Dividends (from 25\%-owned domestic corporation) } & 200,000 \\\text { Interest } & \underline{150,000} \\\text { Gross income } & \$ 540,000 \\\text { Minus: general and administrative expenses } & (40,000)\\\text { Minus: salaries } & (30,000) \\\text { "Adjusted" taxable income } & \$ 470,000 \\\text { Minus: charitable contributions } & (47,000) \\\text { Taxable income before special deductions } & \$ 423,000 \\\text { Minus: dividends-received deduction } & \underline{(160,000} \\\text { Taxable income } & \$ 263,000\end{array}$
Actual charitable contributions made by Mullins Corporation were $75,000. What are the federal income tax due and the personal holding company (PHC) tax liability? Discuss the methods (if any) by which payment of the PHC tax can be avoided.

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Definitions:

Sunk Costs

Costs that have already been incurred and cannot be recovered or refunded.

Marginal Analysis

Marginal analysis evaluates the impact of a slight change in production or consumption, used to make decisions about allocating resources most efficiently.

Risk Aversion

The tendency of individuals or entities to prefer outcomes with less uncertainty, avoiding risks in decision-making.

Economic Payoff

The financial return or profit resulting from an investment or action.