I

107TH CONGRESS

1ST SESSION H. R. 1317

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 HOUSE OF REPRESENTATIVES

MARCH 29, 2001

Mr. NUSSLE (for himself and Mr. HERGER) introduced the following bill;

which was referred to the Committee on Ways and Means

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 2001’’.
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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).—
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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
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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
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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

12 corporation—

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-
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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) ENGINEERING DEFINED.—For pur7 poses of paragraph (2), the term ‘engineering’

8 includes—

9 ‘‘(i) professional services or activities

10 of an engineering nature, as defined by

11 State law, if applicable, which are required

12 to be performed or approved by a person

13 licensed, registered, or certified to provide

14 such services;

15 ‘‘(ii) professional services or activities

16 of an engineering nature that are associ17 ated with research, planning, development,

18 design, construction, repair, or alteration

19 of real property; and

20 ‘‘(iii) such other professional services

21 or activities of an engineering nature, or

22 incidental services, which members of the

23 engineering profession (and individuals in

24 their employ) may logically or justifiably

25 perform, including studies, investigations,
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1 surveying, mapping, tests, evaluations, con2 sultations, comprehensive planning, pro3 gram management, conceptual design,

4 plans and specifications, value engineering,

5 construction phase services, design-build,

6 design-build-finance, design-build-operate7 maintain, design-build-finance-operate8 maintain, soils engineering, drawing re9 views, preparation of operating and main10 tenance manuals, and other related serv11 ices.

12 Professional services and activities referred to

13 in clause (i), (ii), or (iii) shall be considered en14 gineering without regard to the procurement

15 method, delivery method, owner, or service re16 cipient.’’

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

18 this section shall apply to taxable years ending after the

19 date of the enactment of this Act.

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