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The personal service income of corporations owned by
its employees is taxed to the employee-owners at the
individual graduated rates as it is paid out as salary.
The committee believes that it is inappropriate to
allow the retained earnings to be taxed at the lower
corporate graduated rates.
H. Rept. 100-391 (II), U.S.C.C.A.N. 2313-712 (1987).
Section 448(d)(2) defines QPSCs as corporations
(A) 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 * * * by--
(i) employees performing services for such
corporation * * *
(Emphasis added).
This definition sets up two tests--an ownership test and a
function test. Deciding whether Lykins Inc. meets the ownership
test is easy. A regulation defines “substantially all” of a
corporation’s stock to mean “an amount equal to or greater than
95 percent.” Sec. 1.448-1T(e)(4)(i) and (ii), Temporary Income
Tax Regs., 52 Fed. Reg. 22768, 22770 (June 16, 1987), Lykins is
the sole shareholder of Lykins Inc., and he is an employee
because he performs more than a de minimis amount of accounting
services for the firm, sec. 1.448-1T(e)(5)(i) and (ii), Temporary
Income Tax Regs., 52 Fed. Reg. 22770 (June 16, 1987), so Lykins
Inc. passes.
A second regulation--the key one for this case--tells us
that “substantially all” of a firm’s functions are in one or
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Last modified: May 25, 2011