Tax Court takes broad view of personal service business

A recent decision by the U.S. Tax Court shed more light on how the court views a qualified personal service corporation. The court found that land surveying should be included in the field of engineering for purposes of the flat 35 percent income tax rate imposed on personal service corporations. The decision follows one in 2007 where the same court declined to limit services performed in the field of accounting to those requiring state licensure. The court considered that the field of accounting historically included tax return preparation and bookkeeping services.

Personal service corporation

Under Code Sec. 448 and its regulations, a qualified personal service corporation (PSC) is a corporation that satisfies a function test and an ownership test. The function test requires that 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. PSC status requires PSC income to be taxed at the highest 35 percent corporate tax rate, without the benefit of the lower marginal corporate tax brackets.

Land surveying

The taxpayer in this case did business as a land surveyor. It did not provide any services that state law required to be performed only by a licensed engineer.

In the Tax Court, the taxpayer argued that its land surveying activities were outside the field of engineering because engineering and land surveying were separately licensed and administered under state law. The two activities were governed by separate statutes and boards. Additionally, surveyors and engineers had to successfully complete different examinations.

Common definition

The court found that whether a service is performed in one of the fields under Code Sec. 448 is to be decided by all relevant indicia. These include the text of the statute, its legislative history and regulations, application of the normal meaning of the terms, and examination of services historically regarded as within the qualifying field.

The court found that the common definition of engineering is the science by which the properties of matter and the sources of energy in nature are made useful to man in structures, machines and products. Civil engineering is a branch of engineering concerned primarily with public works (as land surveying, the building of highways, bridges, waterways, or harbors) but also embracing private enterprises (as railroad and airport building, private building construction, and farm drainage). Under this definition, land surveying is within the ordinary meaning of engineering, the court found.

The court further found that Congress intended surveying and mapping to be treated as services performed in the field of engineering for purposes of the function test. The conference agreement to the final bill explained that the function test is met if substantially all the activities of the corporation are the performance of services in the field of health, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting.

Kraatz & Craig Surveying Inc., 134 TC No. 8