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OPINION
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