Tax File Memorandum
Mary Robinson licensed surveyor of Silver Corporation
Relevant Facts
Silver Corporation, a calendar year C corporation, is solely owned by Mary Robinson. Silver Corporation is a surveying company that has been in business since its incorporation in 2012. Mary, the only employee, is a licensed surveyor. However, she is not a licensed engineer. Silver Corporation meets the requirements for a Personal Service Corporation. Silver Corporation’s 2012 and 2013 tax returns were audited by the IRS. The IRS assessed tax deficiencies stemming from its conclusion that the corporation was a personal service corporation that is subjected to the flat rate of 35%. Mary believes that the IRS’s determination is incorrect.
Specific Issues
Is Silver Corporation a personal service corporation? If yes, why the flat tax rate of 35% applied?
Conclusions
Silver Corporation is classified as a personal service corporation. The two requirements a corporation meets to be a personal service corporation are a function test and ownership test as determined in Robertson Strong & Apgar Architects, TC Summary Opinion 2007-48 and Sec. 448(d)(2)(A) and (B). Mary Robinson is the only employee and the licensed surveyor; she performs 100% of the service. Mary is the sole owner and owns all the stock in the company. As a result, Silver Corporation meets function and ownership test and it is taxable at flat 35% rate.
Support
In addition, “a corporation will not be treated as a personal service corporation unless more than 10% of the stock in that corporation is held by employee-owners”, as modified by Code Sec . 441 (i )(2 )(A ) and Code Sec . 441(i)(2)(B). Silver Corporation is 100% owned by Mary Robinson, and she owns all of the stock according to her previous tax returns. Therefore, needless to say, Silver Corporation has satisfied the requirements for a Personal Service Corporation.
Under Reg § 1.448-1T(e)(4)(i), considerably all the activities of a corporation are involved “in the presentation of services in any succeeding field only if 95% is dedicated to the performance of services” in the particular area. In Silver’s state of incorporation, land surveying is performed by Mary Robinson, and she is not a licensed engineer. According to the situation Silver Corporation has, it would have meant that 100% of services performed by employees of Silver Corporation were qualified services and that the company was a personal service corporation.
If Silver Corporation was an engineering services corporation and Mary Robinson was a licensed engineer, Silver Corporation could have avoided personal service corporation status by virtue of geotechnical testing services consisting of physical tests of concrete and soil samples performed by non-engineering personnel as determined in Alron Engineering & Testing Corp, RIA TC Memo ¶2000-335, 80 CCH TCM 603.
Action to be taken
Silver Corporation used the graduated tax rates under section 11(b)(1) to determine its corporate tax liability and understated its tax liability; Silver Corporation has to correct the error using 35% flat rate under section 11(b)(2).
Preparer
