Definition of Personal Holding Company (PHC)

a corporation: (1) that derives more than 60% of its gross income, after certain adjustments, from investment sources such as dividends, interests, rents, royalties, and so on, and from certain personal service contracts; and (2) of which more than 50% of the stock is owned by five or fewer individuals. Such a corporation has at times been described as an "incorporated pocketbook." A penalty tax of 15% is applicable in addition to the corporate tax. This penalty tax is applied to the corporate taxable income, less distributions to shareholders, income taxes, and certain other adjustments. Because of its severity, the personal holding company tax operates as a barrier against the use of a closely held corporation for the avoidance of personal taxes on investment and personal service income.