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During 2002, petitioner was owned 100 percent by architects
licensed to practice in the State of California. Petitioner
timely filed a Form 1120, U.S. Corporation Income Tax Return, for
2002, identifying its business activity as architecture.
Petitioner reported gross receipts of $2,728,291, cost of goods
sold of $850,006, total income of $1,857,382, total deductions of
$1,819,853, taxable income of $37,529, and total tax of $5,629.
To calculate the total tax, petitioner used the graduated tax
rates generally applicable to corporations, as provided in
section 11(b)(1).
On November 18, 2004, respondent issued petitioner a notice
of deficiency stating:
It is determined that for the taxable year shown below
[2002], CALPO HOM & DONG ARCHITECTS INC is a Personal
Service Corporation that is subject to a special flat
income tax rate of 35%.
The corporation is a qualified Personal Service
Corporation because substantially all of the
corporation’s activities involve the performance of
services in the fields of health, law, engineering,
architecture, accounting, actuarial science, the
performing arts, or consulting, and substantially all
of the stock of the corporation is held by employees
performing services for the corporation, retired
employees, employees’ or retired employees’ estates or
persons acquiring stock by reason of an employees’
death.
Using the flat 35-percent tax rate applicable to qualified
personal service corporations under section 11(b)(2), respondent
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