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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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