Under section
11(b)(1), qualified personal service corporations as defined in section 448(d)(2) are taxed at a flat
35-percent income tax rate. Sec.
11(b)(2).
A qualified personal service corporation is any corporation
that satisfies a function test and an ownership test.
A qualified personal service corporation is any corporation
that satisfies a function test and an ownership test. Sec. 448(d)(2). Petitioner argues that it is
not a qualified personal service corporation because it does not meet the
function test. 3 [pg. 170]
The function test requires that substantially all of the
corporation's activities involve the performance of services in the fields of
“health, law, engineering, architecture, accounting, actuarial science,
performing arts, or consulting” (qualifying field). Sec. 448(d)(2)(A). Section 1.448-1T(e)(4)(i), Temporary Income
Tax Regs., 52 Fed. Reg. 22768 (June 16, 1987) (sometimes the temporary
regulation), provides:
(4) Function test.—(i) In general.—A corporation meets the
function test if substantially all the corporation's activities for a taxable
year involve the performance of services in one or more of the following
fields—
(A) Health,
(B) Law,
(C) Engineering (including surveying and mapping),
(D) Architecture,
(E) Accounting,
(F) Actuarial science,
(G) Performing arts, or
(H) Consulting.
Substantially all of the activities of a corporation are
involved in the performance of services in any field described in the preceding
sentence (a qualifying field), only if 95 percent or more of the time spent by
employees of the corporation, serving in their capacity as such, is devoted to
the performance of services in a qualifying field. For purposes of determining
whether this 95 percent test is satisfied, the performance of any activity
incident to the actual performance of services in a qualifying field is
considered the performance of services in that field. Activities incident to
the performance of services in a qualifying field include the supervision of
employees engaged in directly providing services to clients, and the
performance of administrative and support services incident to such activities.
II. Positions of the Parties
Section 448(d)(2)
defines the term “qualified personal service corporation” to mean:
SEC. 448(d).
Definitions and Special Rules.—For purposes of this section—
***
(2) Qualified personal service corporation.—The term
“qualified personal service corporation” means any corporation—
(A) substantially all of the activities of which involve the
performance of services in the fields of health, law, engineering, architec[pg.
193] ture, accounting, actuarial science, performing arts, or consulting, and
(B) substantially all of the stock of which (by value) is
held directly (or indirectly through 1 or more partnerships, S corporations, or
qualified personal service corporations not described in paragraph (2) or (3)
of subsection (a)) by—
(i) employees performing services for such corporation in
connection with the activities involving a field referred to in subparagraph
(A),
Section
1.448-1T(e)(3), Temporary Income Tax Regs., 52 Fed. Reg. 22768 (June 16, 1987),
provides in pertinent part:
(3) Meaning of qualified personal service corporation. For
purposes of this section, the term “qualified personal service corporation”
means any corporation that meets—
(i) The function test of paragraph (e)(4) of this section,
and
(ii) The ownership test of paragraph (e)(5) of this section.
Section
1.448-1T(e)(4), Temporary Income Tax Regs., supra, provides in pertinent part
that the function test is met “if 95 percent or more of the time spent by
employees of the corporation, serving in their capacity as such, is devoted to
the performance of services” in, inter alia, consulting. Section 1.448-1T(e)(5)(i)(A), Temporary
Income Tax Regs., 52 Fed. Reg. 22770 (June 16, 1987), provides in pertinent
part that a corporation “meets the ownership test, if at all times during the
taxable year, substantially all the corporation's stock, by value, is held,
directly or indirectly, by” employees who perform services for the corporation
in connection with activities involving the performance of services in, inter
alia, consulting.
We have found that Ms. Dursky, the only stockholder of DKD
and the only employee of DKD who performed consulting services for it, spent
approximately 2,000 hours during the year 2003 and approximately 2,200 hours
during each of the years 2004 and 2005 working for DKD in its IT consulting
business. We have also found that during each of the years 2003, 2004, and 2005
Ms. Dursky spent approximately 800 hours operating DKD's cattery activity. 57
On the record before us, we find that during each of the
years 2003, 2004, and 2005 Ms. Dursky did not spend 95 percent or more of her
time while working for DKD performing consulting services for it. On that
record, we further find that for each of the years at issue DKD is not a
qualified personal service corporation, as defined in section 448(d)(2), that is subject to the
35-percent tax rate prescribed in
section 11(b)(2).
-----------------------
§ 448 Limitation on use of cash method of accounting.
(a) General rule.
Except as otherwise provided in this section, in the case of
a—
(1) C corporation,
(2) partnership which
has a C corporation as a partner, or
(3) tax shelter,
taxable income shall not be computed under the cash receipts
and disbursements method of accounting.
(b) WG&L
Treatises Exceptions.
(1) WG&L Treatises Farming business.
Paragraphs (1) and (2) of subsection (a) shall not apply to
any farming business.
(2) Qualified
personal service corporations.
Paragraphs (1) and (2) of subsection (a) shall not apply to
a qualified personal service corporation, and such a corporation shall be
treated as an individual for purposes of determining whether paragraph (2) of
subsection (a) applies to any partnership.
(3) Entities with
gross receipts of not more than $5,000,000.
Paragraphs (1) and (2) of subsection (a) shall not apply to
any corporation or partnership for any taxable year if, for all prior taxable
years beginning after December 31, 1985, such entity (or any predecessor) met
the $5,000,000 gross receipts test of subsection (c) .
(c) WG&L
Treatises $5,000,000 gross receipts test.
For purposes of this section —
(1) In general.
A corporation or partnership meets the $5,000,000 gross
receipts test of this subsection for any prior taxable year if the average
annual gross receipts of such entity for the 3-taxable-year period ending with
such prior taxable year does not exceed $5,000,000.
(2) Aggregation
rules.
All persons treated as a single employer under subsection
(a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be
treated as one person for purposes of paragraph (1) .
(3) Special rules.
For purposes of this subsection —
(A) Not in existence for entire 3-year period. If the entity
was not in existence for the entire 3-year period referred to in paragraph (1)
, such paragraph shall be applied on the basis of the period during which such
entity (or trade or business) was in existence.
(B) Short taxable
years. Gross receipts for any taxable year of less than 12 months shall be annualized
by multiplying the gross receipts for the short period by 12 and dividing the
result by the number of months in the short period.
(C) Gross receipts.
Gross receipts for any taxable year shall be reduced by returns and allowances
made during such year.
(D) Treatment of
predecessors. Any reference in this subsection to an entity shall include a
reference to any predecessor of such entity.
(d) Definitions and
special rules.
For purposes of this section —
(1) WG&L Treatises Farming business.
(A) In general. The term “farming business” means the trade
or business of farming (within the meaning of section 263A(e)(4) ).
(B) Timber and
ornamental trees. The term “farming business” includes the raising, harvesting,
or growing of trees to which section 263A(c)(5) applies.
(2) WG&L
Treatises Qualified personal service corporation.
The term “qualified personal service corporation” means any
corporation—
(A) WG&L Treatises substantially all of the activities
of which involve the performance of services in the fields of health, law,
engineering, architecture, accounting, actuarial science, performing arts, or
consulting, and
(B) substantially all
of the stock of which (by value) is held directly (or indirectly through 1 or
more partnerships, S corporations, or qualified personal service corporations
not described in paragraph (2) or (3) of subsection (a) ) by —
(i) employees performing services for such corporation in
connection with the activities involving a field referred to in subparagraph
(A) ,
(ii) retired
employees who had performed such services for such corporation,
(iii) the estate of
any individual described in clause (i) or (ii) , or
(iv) any other person
who acquired such stock by reason of the death of an individual described in
clause (i) or (ii) (but only for the 2-year period beginning on the date of the
death of such individual).
To the extent provided in regulations which shall be
prescribed by the Secretary, indirect holdings through a trust shall be taken
into account under subparagraph (B) .
(3) WG&L
Treatises Tax shelter defined.
The term “tax shelter” has the meaning given such term by
section 461(i)(3) (determined after application of paragraph (4) thereof ). An
S corporation shall not be treated as a tax shelter for purposes of this
section merely by reason of being required to file a notice of exemption from
registration with a State agency described in section 461(i)(3)(A) , but only
if there is a requirement applicable to all corporations offering securities
for sale in the State that to be exempt from such registration the corporation
must file such a notice.
(4) Special rules for
application of paragraph (2) .
For purposes of paragraph (2) —
(A) community property laws shall be disregarded,
(B) stock held by a
plan described in section 401(a) which is exempt from tax under section 501(a)
shall be treated as held by an employee described in paragraph (2)(B)(i) , and
(C) at the election
of the common parent of an affiliated group (within the meaning of section
1504(a) ), all members of such group may be treated as 1 taxpayer for purposes
of paragraph (2)(B) if 90 percent or more of the activities of such group
involve the performance of services in the same field described in paragraph
(2)(A) .
(5) Special rule for
certain services.
(A) In general. In the case of any person using an accrual
method of accounting with respect to amounts to be received for the performance
of services by such person, such person shall not be required to accrue any
portion of such amounts which (on the basis of such person's experience) will
not be collected if—
(i) New Law Analysis such services are in fields referred to
in paragraph (2)(A) , or
(ii) New Law Analysis
such person meets the gross receipts test of subsection (c) for all prior
taxable years.
(B) New Law Analysis
Exception. This paragraph shall not apply to any amount if interest is required
to be paid on such amount or there is any penalty for failure to timely pay
such amount.
(C) New Law Analysis
Regulations. The Secretary shall prescribe regulations to permit taxpayers to
determine amounts referred to in subparagraph (A) using computations or
formulas which, based on experience, accurately reflect the amount of income
that will not be collected by such person. A taxpayer may adopt, or request
consent of the Secretary to change to, a computation or formula that clearly
reflects the taxpayer's experience. A request under the preceding sentence
shall be approved if such computation or formula clearly reflects the
taxpayer's experience.
(6) Treatment of
certain trusts subject to tax on unrelated business income.
For purposes of this section , a trust subject to tax under
section 511(b) shall be treated as a C corporation with respect to its
activities constituting an unrelated trade or business.
(7) Coordination with
section 481 .
In the case of any taxpayer required by this section to
change its method of accounting for any taxable year—
(A) such change shall be treated as initiated by the
taxpayer,
(B) such change shall
be treated as made with the consent of the Secretary, and
(C) the period for
taking into account the adjustments under section 481 by reason of such change—
(i) except as provided in clause (ii) , shall not exceed 4
years, and
(ii) in the case of a
hospital, shall be 10 years.
(8) Use of related
parties, etc.
The Secretary shall prescribe such regulations as may be
necessary to prevent the use of related parties, pass-thru entities, or
intermediaries to avoid the application of this section.
eg §1.448-1T. Limitation on the use of the cash receipts and
disbursements method of accounting (temporary).
Caution: The Treasury has not yet amended Reg § 1.448-1T to
reflect changes made by P.L. 100-647
Effective: June 5,
2005.
(a) Limitation on accounting method.
(1) In general. This section prescribes regulations under
section 448 relating to the limitation on the use of the cash receipts and
disbursements method of accounting (the cash method) by certain taxpayers.
(2) Limitation rule. Except as otherwise provided in this
section, the computation of taxable income using the cash method is prohibited
in the case of a—
(i) C corporation,
(ii) Partnership with a C corporation as a partner, or
(iii) Tax shelter.
A partnership is described in paragraph (a)(2)(ii) of this
section, if the partnership has a C corporation as a partner at any time during
the partnership's taxable year beginning after December 31, 1986.
(3) Meaning of C corporation. For purposes of this section,
the term “C corporation” includes any corporation that is not an S corporation.
For example, a regulated investment company (as defined in section 851) or a
real estate investment trust (as defined in section 856) is a C corporation for
purposes of this section. In addition, a trust subject to tax under section
511(b) shall be treated, for purposes of this section, as a C corporation, but
only with respect to the portion of its activities that constitute an unrelated
trade or business. Similarly, for purposes of this section, a corporation that
is exempt from federal income taxes under section 501(a) shall be treated as a
C corporation only with respect to the portion of its activities that
constitute an unrelated trade or business. Moreover, for purposes of
determining whether a partnership has a C corporation as a partner, any
partnership described in paragraph (a)(2)(ii) of this section is treated as a C
corporation. Thus, if partnership ABC has a partner that is a partnership with
a C corporation, then, for purposes of this section, partnership ABC is treated
as a partnership with a C corporation partner.
(4) Treatment of a combination of methods. For purposes of
this section, the use of a method of accounting that records some, but not all,
items on the cash method shall be considered the use of the cash method. Thus,
a C corporation that uses a combination of accounting methods including the use
of the cash method is subject to this section.
(b) Tax shelter defined.
(1) In general. For purposes of this section, the term “tax
shelter” means any—
(i) Enterprise (other than a C corporation) if at any time
(including taxable years beginning before January 1, 1987) interests in such
enterprise have been offered for sale in any offering required to be registered
with any federal or state agency having the authority to regulate the offering
of securities for sale,
(ii) Syndicate (within the meaning of paragraph (b)(3) of
this section), or
(iii) Tax shelter within the meaning of section 6662(d)(2)(C).
(2) Requirement of registration. For purposes of paragraph
(b)(1)(i) of this section, an offering is required to be registered with a
federal or state agency if, under the applicable federal or state law, failure
to register the offering would result in a violation of the applicable federal
or state law (regardless of whether the offering is in fact registered). In
addition, an offering is required to be registered with a federal or state
agency if, under the applicable federal or state law, failure to file a notice
of exemption from registration would result in a violation of the applicable
federal or state law (regardless of whether the notice is in fact filed).
(3) WG&L Treatises Meaning of syndicate. For purposes of
paragraph (b)(1)(ii) of this section, the term “syndicate” means a partnership
or other entity (other than a C corporation) if more than 35 percent of the
losses of such entity during the taxable year (for taxable years beginning
after December 31, 1986) are allocated to limited partners or limited
entrepreneurs. For purposes of this paragraph (b)(3), the term “limited
entrepreneur” has the same meaning given such term in section 464(e)(2). In
addition, in determining whether an interest in a partnership is held by a
limited partner, or an interest in an entity or enterprise is held by a limited
entrepreneur, section 464(c)(2) shall apply in the case of the trade or
business of farming (as defined in paragraph (d)(2) of this section), and
section 1256(e)(3)(C) shall apply in any other case. Moreover, for purposes of
this paragraph (b)(3), the losses of a partnership, entity, or enterprise (the
enterprise) means the excess of the deductions allowable to the enterprise over
the amount of income recognized by such enterprise under the enterprise's
method of accounting used for federal income tax purposes (determined without
regard to this section). For this purpose, gains or losses from the sale of
capital assets or section 1221(2) assets are not taken into account.
(4) Presumed tax avoidance. For purposes of paragraph
(b)(1)(iii) of this section, marketed arrangements in which persons carrying on
farming activities using the services of a common managerial or administrative
service will be presumed to have the principal purpose of tax avoidance if such
persons use borrowed funds to prepay a substantial portion of their farming
expenses (e.g., payment for farm supplies that will not be used or consumed
until a taxable year subsequent to the taxable year of payment).
(5) Taxable year tax shelter must change accounting method.
A partnership, entity, or enterprise that is a tax shelter must change from the
cash method for the later of (i) the first taxable year beginning after
December 31, 1986, or (ii) the taxable year that such partnership, entity, or
enterprise becomes a tax shelter.
(c) Effect of section 448 on other provisions. Nothing in
section 448 shall have any effect on the application of any other provision of
law that would otherwise limit the use of the cash method, and no inference shall
be drawn from section 448 with respect to the application of any such
provision. For example, nothing in section 448 affects the requirement of
section 447 that certain corporations must use an accrual method of accounting
in computing taxable income from farming, or the requirement of §1.446-1(c)(2)
that an accrual method be used with regard to purchases and sales of inventory.
Similarly, nothing in section 448 affects the authority of the Commissioner
under section 446(b) to require the use of an accounting method that clearly
reflects income, or the requirement under section 446(e) that a taxpayer secure
the consent of the Commissioner before changing its method of accounting. For
example, a taxpayer using the cash method may be required to change to an
accrual method of accounting under section 446(b) because such method clearly
reflects that taxpayer's income, even though the taxpayer is not prohibited by
section 448 from using the cash method. Similarly, a taxpayer using an accrual
method of accounting that is not prohibited by section 448 from using the cash
method may not change to the cash method unless the taxpayer secures the
consent of the Commissioner under section 446(e), and, in the opinion of the
Commissioner, the use of the cash method clearly reflects that taxpayer's
income under section 446(b).
(d) Exception for farming business.
(1) In general. Except in the case of a tax shelter, this
section shall not apply to any farming business. A taxpayer engaged in a
farming business and a separate nonfarming business is not prohibited by this
section from using the cash method with respect to the farming business, even
though the taxpayer may be prohibited by this section from using the cash
method with respect to the nonfarming business.
(2) Meaning of farming business. For purposes of paragraph
(d) of this section, the term “farming business” means—
(i) The trade or business of farming as defined in section
263A(e)(4) (including the operation of a nursery or sod farm, or the raising or
harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees),
or
(ii) The raising, harvesting, or growing of trees described
in section 263A(c)(5) (relating to trees raised, harvested, or grown by the
taxpayer other than trees described in paragraph (d)(2)(i) of this section).
Thus, for purposes of this section, the term “farming
business” includes the raising of timber. For purposes of this section, the
term “farming business” does not include the processing of commodities or
products beyond those activities normally incident to the growing, raising or
harvesting of such products. For example, assume that a C corporation taxpayer
is in the business of growing and harvesting wheat and other grains. The
taxpayer processes the harvested grains to produce breads, cereals, and similar
food products which it sells to customers in the course of its business.
Although the taxpayer is in the farming business with respect to the growing
and harvesting of grain, the taxpayer is not in the farming business with
respect to the processing of such grains to produce food products which the
taxpayer sells to customers. Similarly, assume that a taxpayer is in the
business of raising poultry or other livestock. The taxpayer uses the livestock
in a meat processing operation in which the livestock are slaughtered,
processed, and packaged or canned for sale to customers. Although the taxpayer
is in the farming business with respect to the raising of livestock, the
taxpayer is not in the farming business with respect to the meat processing
operation. However, under this section the term “farming business” does include
processing activities which are normally incident to the growing, raising or
harvesting of agricultural products. For example, assume a taxpayer is in the
business of growing fruits and vegetables. When the fruits and vegetables are
ready to be harvested, the taxpayer picks, washes, inspects, and packages the
fruits and vegetables for sale. Such activities are normally incident to the
raising of these crops by farmers. The taxpayer will be considered to be in the
business of farming with respect to the growing of fruits and vegetables, and
the processing activities incident to the harvest.
(e) Exception for qualified personal service corporation.
(1) In general. Except in the case of a tax shelter, this
section does not apply to a qualified personal service corporation.
(2) Certain treatment for qualified personal service
corporation. For purposes of paragraph (a)(2)(ii) of this section (relating to
whether a partnership has a C corporation as a partner), a qualified personal
service corporation shall be treated as an individual.
(3) Meaning of qualified personal service corporation. For
purposes of this section, the term “qualified personal service corporation”
means any corporation that meets—
(i) The function test paragraph (e)(4) of this section, and
(ii) The ownership test of paragraph (e)(5) of this section.
(4) Function test.
(i) In general. A corporation meets the function test if
substantially all the corporation's activities for a taxable year involve the
performance of services in one or more of the following fields—
(A) Health,
(B) Law,
(C) Engineering (including surveying and mapping),
(D) Architecture,
(E) Accounting,
(F) Actuarial science,
(G) Performing arts, or
(H) Consulting.
Substantially all of the activities of a corporation are
involved in the performance of services in any field described in the preceding
sentence (a qualifying field), only if 95 percent or more of the time spent by
employees of the corporation, serving in their capacity as such, is devoted to
the performance of services in a qualifying field. For purposes of determining
whether this 95 percent test is satisfied, the performance of any activity
incident to the actual performance of services in a qualifying field is
considered the performance of services in that field. Activities incident to
the performance of services in a qualifying field include the supervision of
employees engaged in directly providing services to clients, and the
performance of administrative and support services incident to such activities.
(ii) Meaning of services performed in the field of health.
For purposes of paragraph (e)(4)(i)(A) of this section, the performance of
services in the field of health means the provision of medical services by
physicians, nurses, dentists, and other similar healthcare professionals. The
performance of services in the field of health does not include the provision
of services not directly related to a medical field, even though the services
may purportedly relate to the health of the service recipient. For example, the
performance of services in the field of health does not include the operation
of health clubs or health spas that provide physical exercise or conditioning
to their customers.
(iii) Meaning of services performed in the field of
performing arts. For purposes of paragraph (e)(4)(i)(G) of this section, the
performance of services in the field of the performing arts means the provision
of services by actors, actresses, singers, musicians, entertainers, and similar
artists in their capacity as such. The performance of services in the field of
the performing arts does not include the provision of services by persons who
themselves are not performing artists (e.g. , persons who may manage or promote
such artists, and other persons in a trade or business that relates to the
performing arts). Similarly, the performance of services in the field of the
performing arts does not include the provision of services by persons who
broadcast or otherwise disseminate the performances of such artists to members
of the public (e.g., employees of a radio station that broadcasts the
performances of musicians and singers). Finally, the performance of services in
the field of the performing arts does not include the provision of services by
athletes.
(iv) Meaning of services performed in the field of
consulting.
(A) In general. For purposes of paragraph (e)(4)(i)(H) of
this section, the performance of services in the field of consulting means the
provision of advice and counsel. The performance of services in the field of
consulting does not include the performance of services other than advice and
counsel, such as sales or brokerage services, or economically similar services.
For purposes of the preceding sentence, the determination of whether a person's
services are sales or brokerage services, or economically similar services,
shall be based on all the facts and circumstances of that person's business.
Such facts and circumstances include, for example, the manner in which the
taxpayer is compensated for the services provided (e.g., whether the
compensation for the services is contingent upon the consummation of the
transaction that the services were intended to effect).
(B) Examples. The following examples illustrate the
provisions of paragraph (e)(4)(iv)(A) of this section. The examples do not
address all types of services that may or may not qualify as consulting. The
determination of whether activities not specifically addressed in the examples
qualify as consulting shall be made by comparing the service activities in
question to the types of service activities discussed in the examples. With
respect to a corporation which performs services which qualify as consulting
under this section, and other services which do not qualify as consulting, see
paragraph (e)(4)(i) of this section which requires that substantially all of
the corporation's activities involve the performance of services in a
qualifying field.
Example (1). A taxpayer is in the business of providing economic
analyses and forecasts of business prospects for its clients. Based on these
analyses and forecasts, the taxpayer advises its clients on their business
activities. For example, the taxpayer may analyze the economic conditions and
outlook for a particular industry which a client is considering entering. The
taxpayer will then make recommendations and advise the client on the prospects
of entering the industry, as well as on other matters regarding the client's
activities in such industry. The taxpayer provides similar services to other
clients, involving, for example, economic analyses and evaluations of business
prospects in different areas of the United States or in other countries, or
economic analyses of overall economic trends and the provision of advice based
on these analyses and evaluations. The taxpayer is considered to be engaged in
the performance of services in the field of consulting.
Example (2). A taxpayer is in the business of providing
services that consist of determining a client's electronic data processing
needs. The taxpayer will study and examine the client's business, focusing on
the types of data and information relevant to the client and the needs of the
client's employees for access to this information. The taxpayer will then make
recommendations regarding the design and implementation of data processing
systems intended to meet the needs of the client. The taxpayer does not,
however, provide the client with additional computer programming services
distinct from the recommendations made by the taxpayer with respect to the
design and implementation of the client's data processing systems. The taxpayer
is considered to be engaged in the performance of services in the field of
consulting.
Example (3). A taxpayer is in the business of providing
services that consist of determining a client's management and business
structure needs. The taxpayer will study the client's organization, including,
for example, the departments assigned to perform specific functions, lines of
authority in the managerial hierarchy, personnel hiring, job responsibility,
and personnel evaluations and compensation. Based on the study, the taxpayer
will then advise the client on changes in the client's management and business
structure, including, for example, the restructuring of the client's
departmental systems or its lines of managerial authority. The taxpayer is
considered to be engaged in the performance of services in the field of
consulting.
Example (4). A taxpayer is in the business of providing
financial planning services. The taxpayer will study a particular client's
financial situation, including, for example, the client's present income,
savings and investments, and anticipated future economic and financial needs.
Based on this study, the taxpayer will then assist the client in making
decisions and plans regarding the client's financial activities. Such financial
planning includes the design of a personal budget to assist the client in
monitoring the client's financial situation, the adoption of investment
strategies tailored to the client's needs, and other similar services. The
taxpayer is considered to be engaged in the performance of services in the
field of consulting.
Example (5). A taxpayer is in the business of executing
transactions for customers involving various types of securities or commodities
generally traded through organized exchanges or other similar networks. The
taxpayer provides its clients with economic analyses and forecasts of
conditions in various industries and businesses. Based on these analyses, the
taxpayer makes recommendations regarding transactions in securities and
commodities. Clients place orders with the taxpayer to trade securities or
commodities based on the taxpayer's recommendations. The taxpayer's
compensation for its services is typically based on the trade orders. The
taxpayer is not considered to be engaged in the performance of services in the
field of consulting. The taxpayer is engaged in brokerage services. Relevant to
this determination is the fact that the compensation of the taxpayer for its
services is contingent upon the consummation of the transaction the services
were intended to effect (i.e., the execution of trade orders for its clients).
Example (6). A taxpayer is in the business of studying a
client's needs regarding its data processing facilities and making
recommendations to the client regarding the design and implementation of data
processing systems. The client will then order computers and other data
processing equipment through the taxpayer based on the taxpayer's
recommendations. The taxpayer's compensation for its services is typically
based on the equipment orders made by the clients. The taxpayer is not
considered to be engaged in the performance of services in the field of
consulting. The taxpayer is engaged in the performance of sales services.
Relevant to this determination is the fact that the compensation of the
taxpayer for its services it contingent upon the consummation of the
transaction the services were intended to effect (i.e., the execution of
equipment orders for its clients).
Example (7). A taxpayer is in the business of assisting
businesses in meeting their personnel requirements by referring job applicants
to employers with hiring needs in a particular area. The taxpayer may be
informed by potential employers of their need for job applicants, or,
alternatively, the taxpayer may become aware of the client's personnel requirements
after the taxpayer studies and examines the client's management and business
structure. The taxpayer's compensation for its services is typically based on
the job applicants, referred by the taxpayer to the clients, who accept
employment positions with the clients. The taxpayer is not considered to be
engaged in the performance of services in the field of consulting. The taxpayer
is involved in the performance of services economically similar to brokerage
services. Relevant to this determination is the fact that the compensation of
the taxpayer for its services is contingent upon the consummation of the
transaction the services were intended to effect (i.e., the hiring of a job
applicant by the client).
Example (8). The facts are the same as in example (7),
except that the taxpayer's clients are individuals who use the services of the
taxpayer to obtain employment positions. The taxpayer is typically compensated
by its clients who obtain employment as a result of the taxpayer's services.
For the reasons set forth in example (7), the taxpayer is not considered to be
engaged in the performance of services in the field of consulting.
Example (9). A taxpayer is in the business of assisting
clients in placing advertisements for their goods and services. The taxpayer
analyzes the conditions and trends in the client's particular industry, and
then makes recommendations to the client regarding the types of advertisements
which should be placed by the client and the various types of advertising media
(e.g., radio, television, magazines, etc.) which should be used by the client.
The client will then purchase, through the taxpayer, advertisements in various
media based on the taxpayer's recommendations. The taxpayer's compensation for
its services is typically based on the particular orders for advertisements
which the client makes. The taxpayer is not considered to be engaged in the
performance of services in the field of consulting. The taxpayer is engaged in
the performance of services economically similar to brokerage services.
Relevant to this determination is the fact that the compensation of the
taxpayer for its services is contingent upon the consummation of the
transaction the services were intended to effect (i.e., the placing of
advertisements by clients).
Example (10). A taxpayer is in the business of selling
insurance (including life and casualty insurance), annuities, and other similar
insurance products to various individual and business clients. The taxpayer
will study the particular client's financial situation, including, for example,
the client's present income, savings and investments, business and personal
insurance risks, and anticipated future economic and financial needs. Based on
this study, the taxpayer will then make recommendations to the client regarding
the desirability of various insurance products. The client will then purchase
these various insurance products through the taxpayer. The taxpayer's
compensation for its services is typically based on the purchases made by the
clients. The taxpayer is not considered to be engaged in the performance of
services in the field of consulting. The taxpayer is engaged in the performance
of brokerage or sales services. Relevant to this determination is the fact that
the compensation of the taxpayer for its services is contingent upon the
consummation of the transaction the services were intended to effect (i.e., the
purchase of insurance products by its clients).
(5) Ownership test.
(i) In general. A corporation meets the ownership test, if
at all times during the taxable year, substantially all the corporation's
stock, by value, is held, directly or indirectly, by—
(A) Employees performing services for such corporation in
connection with activities involving a field referred to in paragraph (e)(4) of
this section,
(B) Retired employees who had performed such services for
such corporation,
(C) The estate of any individual described in paragraph
(e)(5)(i)(A) or (B) of this section, or
(D) Any other person who acquired such stock by reason of
the death of an individual described in paragraph (e)(5)(i)(A) or (B) of this
section, but only for the 2-year period beginning on the date of the death of
such individual.
For purposes of this paragraph (e)(5) of this section, the
term “substantially all” means an amount equal to or greater than 95 percent.
(ii) Definition of employee. For purposes of the ownership
test of this paragraph (e)(5) of this section, a person shall not be considered
an employee of a corporation unless the services performed by that person for
such corporation, based on the facts and circumstances, are more than de
minimis. In addition, a person who is an employee of a corporation shall not be
treated as an employee of another corporation merely by reason of the employer
corporation and the other corporation being members of the same affiliated
group or otherwise related.
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