I 

112TH CONGRESS 

2D SESSION H. R. 3840 

To amend the Internal Revenue Code of 1986 and the Social Security Act 

to provide for employment tax treatment of professional service businesses. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 31, 2012 

Mr. STARK (for himself, Mr. RANGEL, and Mr. CROWLEY) introduced the 

following bill; which was referred to the Committee on Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 and the Social 

Security Act to provide for employment tax treatment 

of professional service businesses. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Narrowing Exceptions 

5 for Withholding Taxes Act of 2012’’. 

6 SEC. 2. EMPLOYMENT TAX TREATMENT OF PROFESSIONAL 

7 SERVICE BUSINESSES. 

8 (a) IN GENERAL.—Section 1402 of the Internal Rev9 enue Code of 1986 is amended by adding at the end the 

10 following new subsection: 


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1 ‘‘(m) SPECIAL RULES FOR PROFESSIONAL SERVICE

2 BUSINESSES.— 

3 ‘‘(1) SHAREHOLDERS PROVIDING SERVICES TO

4 DISQUALIFIED S CORPORATIONS.— 

5 ‘‘(A) IN GENERAL.—In the case of any dis6 qualified S corporation, each shareholder of 

7 such disqualified S corporation who provides 

8 substantial services with respect to the profes9 sional service business referred to in subpara10 graph (C) shall take into account such share11 holder’s pro rata share of all items of income or 

12 loss described in section 1366 which are attrib13 utable to such business in determining the 

14 shareholder’s net earnings from self-employ15 ment. 

16 ‘‘(B) TREATMENT OF FAMILY MEMBERS.— 

17 Except as otherwise provided by the Secretary, 

18 the shareholder’s pro rata share of items re19 ferred to in subparagraph (A) shall be increased 

20 by the pro rata share of such items of each 

21 member of such shareholder’s family (within 

22 the meaning of section 318(a)(1)) who does not 

23 provide substantial services with respect to such 

24 professional service business. 


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1 ‘‘(C) DISQUALIFIED S CORPORATION.—For 

2 purposes of this subsection, the term ‘disquali3 fied S corporation’ means— 

4 ‘‘(i) any S corporation which is a 

5 partner in a partnership which is engaged 

6 in a professional service business if sub7 stantially all of the activities of such S cor8 poration are performed in connection with 

9 such partnership, and 

10 ‘‘(ii) any other S corporation which is 

11 engaged in a professional service business 

12 if the principal asset of such business is 

13 the reputation and skill of 3 or fewer em14 ployees. 

15 ‘‘(2) PARTNERS.—In the case of any partner16 ship which is engaged in a professional service busi17 ness, subsection (a)(13) shall not apply to any part18 ner who provides substantial services with respect to 

19 such professional service business. 

20 ‘‘(3) PROFESSIONAL SERVICE BUSINESS.—For 

21 purposes of this subsection, the term ‘professional 

22 service business’ means any trade or business if sub23 stantially all of the activities of such trade or busi24 ness involve providing services in the fields of health, 

25 law, lobbying, engineering, architecture, accounting, 


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1 actuarial science, performing arts, consulting, ath2 letics, investment advice or management, or broker3 age services. 

4 ‘‘(4) REGULATIONS.—The Secretary shall pre5 scribe such regulations as may be necessary or ap6 propriate to carry out the purposes of this sub7 section, including regulations which prevent the 

8 avoidance of the purposes of this subsection through 

9 tiered entities or otherwise. 

10 ‘‘(5) CROSS REFERENCE.—For employment tax 

11 treatment of wages paid to shareholders of S cor12 porations, see subtitle C.’’. 

13 (b) CONFORMING AMENDMENT.—Section 211 of the 

14 Social Security Act is amended by adding at the end the 

15 following new subsection: 

16 ‘‘(l) SPECIAL RULES FOR PROFESSIONAL SERVICE

17 BUSINESSES.— 

18 ‘‘(1) SHAREHOLDERS PROVIDING SERVICES TO

19 DISQUALIFIED S CORPORATIONS.— 

20 ‘‘(A) IN GENERAL.—In the case of any dis21 qualified S corporation, each shareholder of 

22 such disqualified S corporation who provides 

23 substantial services with respect to the profes24 sional service business referred to in subpara25 graph (C) shall take into account such shareVerDate Mar 15 2010 03:57 Feb 01, 2012 Jkt 019200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H3840.IH H3840

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1 holder’s pro rata share of all items of income or 

2 loss described in section 1366 of the Internal 

3 Revenue Code of 1986 which are attributable to 

4 such business in determining the shareholder’s 

5 net earnings from self-employment. 

6 ‘‘(B) TREATMENT OF FAMILY MEMBERS.— 

7 Except as otherwise provided by the Secretary 

8 of the Treasury, the shareholder’s pro rata 

9 share of items referred to in subparagraph (A) 

10 shall be increased by the pro rata share of such 

11 items of each member of such shareholder’s 

12 family (within the meaning of section 318(a)(1) 

13 of the Internal Revenue Code of 1986) who 

14 does not provide substantial services with re15 spect to such professional service business. 

16 ‘‘(C) DISQUALIFIED S CORPORATION.—For 

17 purposes of this subsection, the term ‘disquali18 fied S corporation’ means— 

19 ‘‘(i) any S corporation which is a 

20 partner in a partnership which is engaged 

21 in a professional service business if sub22 stantially all of the activities of such S cor23 poration are performed in connection with 

24 such partnership, and 


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1 ‘‘(ii) any other S corporation which is 

2 engaged in a professional service business 

3 if the principal asset of such business is 

4 the reputation and skill of 3 or fewer em5 ployees. 

6 ‘‘(2) PARTNERS.—In the case of any partner7 ship which is engaged in a professional service busi8 ness, subsection (a)(12) shall not apply to any part9 ner who provides substantial services with respect to 

10 such professional service business. 

11 ‘‘(3) PROFESSIONAL SERVICE BUSINESS.—For 

12 purposes of this subsection, the term ‘professional 

13 service business’ means any trade or business if sub14 stantially all of the activities of such trade or busi15 ness involve providing services in the fields of health, 

16 law, lobbying, engineering, architecture, accounting, 

17 actuarial science, performing arts, consulting, ath18 letics, investment advice or management, or broker19 age services.’’. 

20 (c) EFFECTIVE DATE.—The amendments made by 

21 this section shall apply to taxable years beginning after 

22 December 31, 2011. 

Æ 


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