II 

109TH CONGRESS 

1ST SESSION S. 1782 

To amend the Internal Revenue Code of 1986 to clarify that qualified personal 

service corporations may continue to use the cash method of accounting, 

and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 28, 2005 

Mr. BROWNBACK introduced the following bill; which was read twice and 

referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to clarify 

that qualified personal service corporations may continue 

to use the cash method of accounting, and for other 

purposes. 

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 ‘‘Qualified Personal 

5 Service Corporations Clarification Act of 2005’’. 
2 

•S 1782 IS

1 SEC. 2. MODIFICATIONS TO DETERMINATION OF WHETHER 

2 CORPORATION IS A QUALIFIED PERSONAL 

3 SERVICE CORPORATION. 

4 (a) STOCK HELD BY CERTAIN FORMER EMPLOYEES

5 TAKEN INTO ACCOUNT.—Subparagraph (B) of section 

6 448(d)(2) of the Internal Revenue Code of 1986 (defining 

7 qualified personal service corporation) is amended by 

8 striking ‘‘or’’ at the end of clause (iii), by striking the pe9 riod at the end of clause (iv) and inserting a comma, and 

10 by inserting after clause (iv) the following new clauses: 

11 ‘‘(v) former employees of such cor12 poration who performed the services re13 ferred to in subparagraph (A) and who are 

14 holding such stock by reason of their 

15 former employment with such corporation, 

16 or 

17 ‘‘(vi) former employees of such cor18 poration who performed the services re19 ferred to in subparagraph (A) and who are 

20 holding such stock by reason of their cur21 rent or former employment with any con22 trolled entity (as defined in paragraph 

23 (4)(B)).’’. 

24 (b) OTHER MODIFICATIONS.—Paragraph (4) of sec25 tion 448(d) of such Code is amended to read as follows: 

26 ‘‘(4) SPECIAL RULES FOR PARAGRAPH (2).— 
3 

•S 1782 IS

1 ‘‘(A) IN GENERAL.—For purposes of para2 graph (2)— 

3 ‘‘(i) community property laws shall be 

4 disregarded, 

5 ‘‘(ii) stock held by a plan described in 

6 section 401(a) which is exempt from tax 

7 under section 501(a) shall be treated as 

8 held by an employee described in para9 graph (2)(B)(i), and 

10 ‘‘(iii) at the election of the common 

11 parent of an affiliated group (within the 

12 meaning of section 1504(a)), all members 

13 of such group may be treated as 1 tax14 payer for purposes of paragraph (2)(B) if 

15 80 percent or more of the activities of such 

16 group involve the performance of services 

17 in the fields described in paragraph (2)(A). 

18 ‘‘(B) CONTROLLED ENTITY.—For purposes 

19 of paragraph (2)(B)(vi), the term ‘controlled 

20 entity’ means, with respect to a corporation— 

21 ‘‘(i) any corporation at least 50 per22 cent (by value) of the outstanding stock of 

23 which is owned (directly or indirectly as 

24 determined under section 318) by such 

25 corporation, and 
4 

•S 1782 IS

1 ‘‘(ii) any partnership at least 50 per2 cent of the capital interest or profits inter3 est in which is owned (directly or indirectly 

4 as determined under section 318) by such 

5 corporation. 

6 ‘‘(C) NEW CORPORATIONS.—A corporation 

7 shall be treated as a qualified personal service 

8 corporation for each taxable year preceding the 

9 first taxable year for which the corporation has 

10 gross receipts if the corporation is a qualified 

11 personal service corporation for such first tax12 able year. 

13 ‘‘(D) CERTAIN STOCK NOT TAKEN INTO

14 ACCOUNT.— 

15 ‘‘(i) IN GENERAL.—The determination 

16 of whether an employee-owned corporation 

17 is a qualified personal service corporation 

18 shall be made without regard to stock in 

19 such corporation which is held by employ20 ees of unaffiliated controlled entities. The 

21 preceding sentence shall not apply to em22 ployees described in clause (v) or (vi) of 

23 paragraph (2)(B). 

24 ‘‘(ii) EMPLOYEE-OWNED CORPORA25 TION.—For purposes of clause (i), the 
5 

•S 1782 IS

1 term ‘employee-owned corporation’ means 

2 any corporation at least 50 percent of the 

3 value of the outstanding stock of which is 

4 owned (directly or indirectly) by employees 

5 described in paragraph (2)(B) (without re6 gard to this subparagraph) of such cor7 poration. 

8 ‘‘(iii) UNAFFILIATED CONTROLLED

9 ENTITY.—For purposes of clause (i), the 

10 term ‘unaffiliated controlled entity’ means, 

11 with respect to an employee-owned cor12 poration— 

13 ‘‘(I) any corporation at least 50 

14 percent (by value) of the outstanding 

15 stock of which is owned (directly or 

16 indirectly as determined under section 

17 318) by members of an affiliated 

18 group (within the meaning of section 

19 1504(a)) which includes such em20 ployee-owned corporation, and 

21 ‘‘(II) any partnership at least 50 

22 percent of the capital interest or prof23 its interest in which is owned (directly 

24 or indirectly as determined under sec-
6 

•S 1782 IS

1 tion 318) by members of such affili2 ated group. 

3 Such term shall not include any corpora4 tion which is permitted to file a consoli5 dated return with such affiliated group. 

6 ‘‘(E) CERTAIN SERVICES DEFINED.—For 

7 purposes of paragraph (2), the terms ‘engineer8 ing’ and ‘architecture’ include— 

9 ‘‘(i) the performance of professional 

10 services described in section 1102(2) of 

11 title 40, United States Code, and 

12 ‘‘(ii) design-build and its various op13 tions, including financing, owning, and op14 eration.’’. 

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

16 this section shall apply to taxable years ending after the 

17 date of the enactment of this Act. 

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