"JHaydenEA" <jhaydenea[at]aol.com> wrote:

- quote -

Thank you all for the replies. I fell into the trap of
reacting instead of researching,which is easy to do when its
personal. My answer was actually in by question.

"1. 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,"

The vast majority of my services are related to tax
preparation but not substantially all my services. I am
also a Registered Representative involved in IRAs and mutual
funds. I find this area takes more time than I make money,
but the Regs mention time and not money.

However I will still follow the advice and return to being a
corporation without a profit to be safe. The majority of
my profit was on charitable contributions. So I guess I will
have to be less generous. Somehow I do not believe that was
the original intent of the law.

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Harlan Lunsford wrote:

- quote -

Generally PSCs don't actually pay that tax--rather, the
corporations generally bonus out the earnings (that was what
Congress intended to force <grin> ).

Back in 1986 when this issue first arose, the key reason why
such entities may have remained C corporations would have
been for medical insurance deductions and/or medical
reimbursement plans. Today only the latter really applies in
a practical sense. But the BIG tax and the position of the
IRS regarding receivables may "trap" some of those old C
corporations as C corporations even if they don't have a
medical reimbursement plan.

Now, as a practical matter, there may not be a huge negative
to being a C corporation in light of the Radtke cases on
compensation vs. S corporation distributions *and* the
Martin Ice Cream case in terms of the issue of gain on the
sale of goodwill if the practice is sold.

--
Ed Zollars, CPA
Phoenix, Arizona

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MTW wrote:
- quote -


And no more whisky for you at happy hour, either.

ChEAr$,
Harlan Lunsford

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Nan Eklund wrote:

- quote -

And ya'll have been paying that 39.x % all these years?
Until last year, that is.

ChEAr$,
Harlan Lunsford, EA n LA,
dba as an S corp.

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Nan Eklund wrote:

- quote -

I think it's also important to note, as you do in your first
paragraph, that the proper title for the imposition of the
flat, high corporate rate is *personal* service corporation,
not *professional* service corporation. I think some people
get confused because you'll hear it referred to in passing
as applying to PC's (professional corporations)--but this
both not necessarily the case *AND* not exclusively what it
applies to.

So whether or not what the original poster does or I do is a
"professional" service isn't the issue--rather, it's whether
it is a personal service, that is the practice of
accounting.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote:
- quote -

Ed Zollars, CPA wrote:

- quote -

Letter Ruling 8927006, 03/31/1989. There taxpayer's
principal business was doing billing, for doctors and
hospitals. This included maintaining the accounts receivable
balances for individual patients. The taxpayer keypunched
billing data into their computer, and generated and mailed
statements to the patients of the clients. The balances
were tracked and a monthly report was prepared by the
taxpayer for its clients with a print out of all their
clients' patients with their outstanding balances. In that
case, the IRS held that it was not a PSC, but what was
interesting was the discussion of what constitutes
"accounting."

The IRS stated "The taxpayer's service does not consist of
the preparation of audit and financial statements or the
preparation of tax returns nor does the taxpayer perform
bookkeeping services for its clients, except to the extent
necessary to process the computerized billings and to
maintain accounts receivable balances in the computer.
Therefore, the taxpayer is not in the business of providing
accounting services within the meaning of section 1.448-
1T(e)(5)(vii), example (1), of the regulations and, thus, is
not a personal service corporation within the meaning of
sections 441(i)(2) and 448(d)(2)(A) of the Code and the
regulations thereunder."

The discussion hinged on the services of bookkeeping,
financial statements, audits, or tax return preparation.
There was no distinction between services provided by CPA's
other other non-CPA accountants, and the implication was
that any one of those services would have been adequate to
cause PSC status.

Thus. if the corporation's business is doing tax returns
*and* substantially all of the stock is owned by persons
that provide services to the tax return preparation
business, then it would be a PSC.

Brian Bivona, CPA

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- quote -

Or do business as an S-Corp.

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My partner and I, both EAs, have been a personal services
corporation for 20 years. Always checked the box on the
1120.

Personally I'd feel insulted to think we were a
"nonprofessional service".

Nan, EA in Los Angeles

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James Ries EA wrote:

- quote -

Yes, that often seems to be the case. <g
MTW

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James Ries EA wrote:

- quote -

Unfortunately, the regulations disagree with you. Temporary
Regulation 1.448-1T(e)(5)(vii) Example 1 starts out with the following:

"X, a Corporation, is engaged in the business of providing
accounting services to its clients. These services consist of the
preparation of audit and financial statements and the preparation of
tax returns. For purposes of section 448, such services consist of
the performance of services in the field of accounting. In addition,
for purposes of section 448, the supervision of employees directly
preparing the statements and returns, and the performance of all
administrative and support services incident to such activities
(including secretarial, janitorial, purchasing, personnel, security,
and payroll services) are the performance of services in the field
of accounting."

As well, most state accountancy statutes (the ones that regulate
CPAs) define tax services as performing services in the practice of
public accounting. Finally, Congress seems to have decided there
was a link when they granted CPAs (who clearly would seem to be
licensed to handle accounting, whatever that may be) the right to
practice before the IRS based solely upon being licensed as a CPA.

--
Ed Zollars, CPA
Phoenix, Arizona

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- quote -


I don't think so! The regs are very specific. You are a professional services
corp and should have been paying 35% tax or taking all of the profits out of
the corp each year.

You can read the regs and come up with the same answer.

Bruce Raskin, CPA
Small Business and Individual Tax and Accounting Services

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James Ries EA wrote:

- quote -

The code (section 269A(b)(1)) defines a personal service
corporation this way:

"The term 'personal service corporation' means a corporation
the principal activity of which is the performance of
personal services and such services are substantially
performed by employee-owners."

There is no requirement that the corporation provide
"professional" services, even though it's those corporations
that they are primarily aimed at.

In other words, it appears that you're out of luck.

Stu

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IRS News Release:

"The Internal Revenue Service recently began contacting corporations that do
not appear to have used the applicable personal service
corporation tax rate in computing their 2002 and 2003 tax
liability. The taxable income of "qualified personal service
corporations" is subject to a flat tax rate of 35 percent
instead of the graduated rates available to most
corporations.

A corporation is a qualified personal service corporation if
it meets both of the following tests:

`1. 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,
and

`2. At least 95 percent of the corporation's stock is owned by employees
performing services for the corporation, retired employees, the estates of
employees, or other persons acquiring stock in the corporation by reason of
the death of employees.

Personal service corporations that receive a letter and
Revenue Agent Report will have 30 days to either agree or
disagree with the proposed tax increase. The tax increase
will be the difference between the flat 35 percent rate and
the tax shown on the original return.

Taxpayers who do not agree may appeal the determination by
providing a written statement that they do not agree, the
reasons for disagreement, and the law or other authority
that supports their position. Detailed guidance on the
examination process and appeal rights is included with the
letter. "

I am a Tax Preparation Corporation. Since I already received
a "warning letter," (We think you may be a personal service
corporation,if so amend, if not ignore) I am feeling I may
receive a follow up letter. When we incorporated the attorny
and I felt it was not a professional service corporation as
in law, engineering, accounting, medical. But tax
preparation was a "nonprofessional service" like beauty
shops, pet grooming and repairmen. Do we have basis on
claiming we are not a personal service corporation other
than our opinion

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