Ron Lykins, Inc. - Page 4

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          (QPSC).  The Commissioner later conceded that Lykins Inc. was not           
          a QPSC in 1999, but stood firm in his belief that it became one             
          in 2000.  Trial was held in Ohio, where Lykins Inc. has always              
          had its principal place of business.                                        
                                     Discussion                                       
               The Code’s various definitions of personal services                    
          corporations date back to a time when the top tax rate for                  
          individual income was much higher than the rate for corporations.           
          This gave professionals an incentive to incorporate their                   
          practices to win the benefits available both to employees1 or               
          corporations.2  Identifying certain personal services                       
          corporations as “qualified professional services corporations,”             
          and taxing them at a flat rate of 35 percent, see sec. 11(b)(2),3           
          was Congress’s way to reduce the incentive for professionals to             
          shelter part of their income in a corporate form with a lower               
          marginal rate.  As the House Ways and Means Committee explained:            


               1 As employees of a corporation, professionals could avail             
          themselves of group term life insurance, medical reimbursement              
          plans, death benefits, and a more generous retirement plan than             
          if they remained self-employed.  See Phillips, et al., “Origins             
          of Tax Law:  The History of the Personal Service Corporation”, 40           
          Wash. & Lee L. Rev. 433, 434-435 (1983); see also Chickasaw                 
          Ambulance Serv. Inc. v. United States, 1999 WL 33656862 (N.D.               
          Iowa).                                                                      
               2 See sec. 469(a)(1)-(2), which prevent personal service               
          corporations from deducting passive activity losses on the same             
          terms as other corporations.                                                
               3 Unless otherwise stated, section references are to the               
          Internal Revenue Code and regulations as amended and in effect              
          for 2000.                                                                   




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