Rainbow Tax Service, Inc. - Page 5

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               In general, for Federal income tax purposes, corporations              
          are taxed at graduated income tax rates.  Sec. 11(b)(1).                    
          So-called qualified personal service corporations as defined in             
          section 448(d)(2), however, are taxed at a flat 35-percent income           
          tax rate.  Sec. 11(b)(2).                                                   
               A corporation is to be treated as a qualified personal                 
          service corporation (1) if 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” (hereafter covered                 
          services), sec. 448(d)(2)(A); sec. 1.448-1T(e)(4)(i), Temporary             
          Income Tax Regs., 52 Fed. Reg. 22768 (June 16, 1987) (the                   
          “function test”); and (2) if 95 percent of the corporation’s                
          stock is owned by, among others, individual employees performing            
          covered services for the corporation (or by the estate of a prior           
          employee of the corporation who performed covered services for              
          the corporation), sec. 448(d)(2)(B); sec. 1.448-1T(e)(5)(i),                
          Temporary Income Tax Regs., 52 Fed. Reg. 22770 (June 16, 1987)              
          (the “ownership test”).                                                     
               Substantially all of a corporation’s activities will be                
          treated as covered services only if in the aggregate the                    
          corporation’s employees spend 95 percent or more of their time in           

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Last modified: May 25, 2011