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years 2002 and 2003, petitioner indicated that its sole
officers, Lawrence Apgar and James S. Oliver, owned 70.5 percent
and 29.5 percent, respectively, of all of the outstanding common
stock of the corporation. Petitioner acquired outstanding
shares of its stock sometime in 2002. According to the Schedule
L, Balance Sheets per Books, of Form 1120 filed for taxable year
2002, petitioner’s cost of treasury stock was $40,666 at the
beginning of 2002 and was $53,999 at the end of 2002. When
these acquired shares were added to the shares already held by
petitioner as treasury stock, the total number of shares was
172. Petitioner’s cost of treasury stock on its Schedule L of
Form 1120 for 2003 was the same for the beginning and end of
that year, $53,999.
Discussion
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). The term “qualified personal
service corporation” is defined in section 448(d)(2). A
corporation will be considered a qualified personal services
corporation if it meets two tests: a function test and an
ownership test. Sec. 448(d)(2)(A) and (B). Section
448(d)(2)(A) defines the function test as where “substantially
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