Category: Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Facts Taxpayer (TP), a C corporation, is currently under examination by the IRS. The returns in question are for the tax years ended 1/31/88 and 1/31/89. TP is in the consulting engineering business. TP's stock is owned 100% by two individuals who provide engineering services for TP on a full-time basis. TP has approximately 3 other employees also engaged on a full-time basis in providing engineering services. IRS contends that TP should be treated as a personal service corporation under §448. Accordingly, the IRS claims that under IRC §11, TP should not get the benefit of graduated corporate tax rates. IRS has cited Regulation § 1.448-1T. You have pointed out that there was a law change in 1988 which may be relevant. Issue What support exists to sustain the taxpayer's position that graduated tax rates should be available for the years in question? Findings Research revealed no such support. It appears that TP does not have a supportable position. Discussion IRC §11(b)(2) provides that the benefits of graduated corporate tax rates shall be denied to a "qualified personal service corporation" as defined in §448(d)(2). Under §448(d)(2) as currently written, a "qualified personal service corporation" is any corporation... A. substantially all of the activities of which involve performance of services in the fields of (among other things) engineering and consulting; and B. substantially all the stock of such corporation is owned by employees performing services for the corporation in connection with the activities described above. Regulation Section 1.448-1T provides that the term "substantially all" as used in connection with the activities performed by the corporation, means 95% or more of the corporation's activities. Under these rules, it appears clear that TP is not entitled to graduated rates. We reviewed the legislative history of the definition of "qualified personal service corporation" under §448(d)(2) and found the following. 1. The statute was enacted as part of the 1986 Tax Reform Act. The statute as originally enacted is substantively the same as it is today. On its face, it appears that TP has exactly the same problem under the statute as originally enacted as it does under the statute as it currently stands. 2. IRC §448 was amended by the Tax and Miscellaneous Revenue Act of 1988 (TAMRA). The amendments dealt with a refinement to the related party rules. Such amendment does not appear relevant to TP's facts. 3. No matter what changes were enacted in 1988, they were made retroactively effective as if they had been enacted as part of the 1986 Act. 4. There have been no other amendments to §448(d)(2). Based on our research it appears that TP's position is not supportable. |
