128 T.C. No. 5

UNITED STATES TAX COURT

RAINBOW TAX SERVICE, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7738-05. Filed March 8, 2007.

Petitioner employed individuals to provide tax

return preparation and bookkeeping services. 

Petitioner calculated its tax liability for

petitioner’s tax years ending June 30, 2002 and 2003,

using the graduated corporate income tax rates set

forth in sec. 11(b)(1), I.R.C. 

Held: Petitioner’s tax return preparation and

bookkeeping services constitute accounting services for

purposes of sec. 448(d)(2), I.R.C., and petitioner is

therefore subject to the sec. 11(b)(2), I.R.C., flat

35-percent tax rate applicable to qualified personal

service corporations.

Donna Joyner-Rodgers (an officer), for petitioner.

Derek W. Kaczmarek, for respondent.
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SWIFT, Judge: Respondent determined deficiencies of $11,903

and $5,003, respectively, in petitioner’s Federal income taxes

for petitioner’s tax years ending June 30, 2002 and 2003.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

The issue for decision is whether petitioner’s tax return

preparation and bookkeeping services are to be treated as

accounting services. If so, petitioner will be treated as a

qualified personal service corporation under section 448(d)(2)

and will be subject to the flat 35-percent tax rate set forth in

section 11(b)(2).

FINDINGS OF FACT

Most of the facts have been stipulated and are so found.

At the time the petition was filed, petitioner’s principal

place of business was located in Las Vegas, Nevada.

In 1978, Steve Rodgers (Rodgers) incorporated petitioner as

a Nevada corporation, and until his death in 2002 Rodgers owned

all of petitioner’s stock. Petitioner’s business consisted of

providing tax return preparation and bookkeeping services, which

services Rodgers and other individuals provided as petitioner’s

employees. 

Over the years, Rodgers, on petitioner’s behalf, increased

the number of petitioner’s clients and the number of employees to

perform for petitioner’s clients tax return preparation and
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bookkeeping services, and eventually petitioner opened two

additional offices in the Las Vegas area. 

After Rodgers’ death in 2002, Rodgers’ wife, Donna JoynerRodgers (Joyner-Rodgers), succeeded Rodgers as petitioner’s

president and assumed management of petitioner and of

petitioner’s three offices. Also, after Rodgers’ death

petitioner’s stock was owned by Rodgers’ estate, and then in

2004, petitioner’s stock was transferred from Rodgers’ estate to

Joyner-Rodgers. 

In addition to her administrative and managerial

responsibilities relating to petitioner, Joyner-Rodgers, as an

employee of petitioner, also provides to petitioner’s clients tax

return preparation services. 

During the years in issue, petitioner’s tax return

preparation services generally consisted of the preparation of

clients’ Federal and State individual, corporate, partnership,

gift, and estate tax returns. Petitioner’s bookkeeping services

generally consisted of the preparation, from client records, of

profit and loss statements and various other reports and forms

relating to client Federal payroll taxes, State unemployment

taxes, and sales taxes.

Petitioner is not a public accounting firm, and petitioner’s

employees do not perform services that require petitioner’s

employees to obtain Certified Public Accountant (C.P.A.)
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1 For the years in issue, the flat 35-percent tax rate set

forth in sec. 11(b)(2) equals the highest marginal corporate tax

rate set forth in sec. 11(b)(1).

licenses. Neither Rodgers nor Joyner-Rodgers ever held C.P.A.

licenses.

For the years in issue, petitioner’s employees (including

Rodgers and Joyner-Rodgers) spent all of their work-related time

performing for petitioner’s clients tax return preparation and

bookkeeping services and related administrative and support

services.

On each of petitioner’s timely filed corporate Federal

income tax returns, petitioner’s income tax liability was

calculated using the section 11(b)(1) graduated income tax rates

applicable to corporations. 

On April 14, 2005, respondent issued to petitioner a notice

of deficiency in which respondent determined that petitioner’s

tax return preparation and bookkeeping services constituted

accounting services and therefore that petitioner, for the years

in issue, should be treated as a qualified personal service

corporation subject to the flat 35-percent tax rate set forth in

section 11(b)(2). The amounts of the deficiencies herein

represent the increase in petitioner’s Federal income taxes as a

result of applying the flat 35-percent tax rate.1
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OPINION

In general, for Federal income tax purposes, corporations

are taxed at graduated income tax rates. Sec. 11(b)(1). 

So-called qualified personal service corporations as defined in

section 448(d)(2), however, are taxed at a flat 35-percent income

tax rate. Sec. 11(b)(2).

A corporation is to be treated as a qualified personal

service corporation (1) if 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” (hereafter covered

services), sec. 448(d)(2)(A); sec. 1.448-1T(e)(4)(i), Temporary

Income Tax Regs., 52 Fed. Reg. 22768 (June 16, 1987) (the

“function test”); and (2) if 95 percent of the corporation’s

stock is owned by, among others, individual employees performing

covered services for the corporation (or by the estate of a prior

employee of the corporation who performed covered services for

the corporation), sec. 448(d)(2)(B); sec. 1.448-1T(e)(5)(i),

Temporary Income Tax Regs., 52 Fed. Reg. 22770 (June 16, 1987)

(the “ownership test”). 

Substantially all of a corporation’s activities will be

treated as covered services only if in the aggregate the

corporation’s employees spend 95 percent or more of their time in
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2 In Ron Lykins, Inc. v. Commissioner, T.C. Memo. 2006-35,

the parties did not dispute that tax return preparation services

constituted accounting services. 

performing covered services. Sec. 1.448-1T(e)(4)(i), Temporary

Income Tax Regs., supra. In calculating the amount of employee

time spent performing covered services, administrative and

support services incident to covered services are treated as

covered services. Id.

Section 448(d)(2), the regulations thereunder, and court

opinions generally do not define accounting services.2 However,

in section 1.448-1T(e)(5)(vii), Example 1(i), Temporary Income

Tax Regs., 52 Fed. Reg. 22770 (June 16, 1987), the preparation of

tax returns and audit and financial statements are treated as

accounting services:

X, a corporation, is engaged in the business

of providing accounting services to its

clients. These services consist of the

preparation of audit and financial statements

and the preparation of tax returns. For

purposes of section 448, such services

consist of the performance of services in the

field of accounting. * * *

Petitioner concedes that, if tax return preparation and

bookkeeping services constitute accounting services, by virtue of

Rodgers’ and Rodgers’ estate’s ownership of petitioner’s stock,

the above ownership test has been satisfied.
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Petitioner, however, argues that, for purposes of section

448(d)(2)(A), tax return preparation and bookkeeping services do

not constitute accounting services, that petitioner therefore

does not meet the above function test, and that petitioner should

not be treated as a qualified personal service corporation.

 Petitioner argues that under Nevada law, accounting

services can be performed only by C.P.A.s, and that because

petitioner is not a C.P.A. firm, does not employ C.P.A.s, and

does not perform services which are restricted under Nevada law

to C.P.A.s, petitioner should not be treated as performing

accounting services.

In essence, petitioner would treat only those services which

require a C.P.A. license as accounting services and would treat

other tax return preparation and bookkeeping services as

nonaccounting services.

We disagree with petitioner’s overly restrictive definition

of accounting services. 

Petitioner fails to appreciate the distinction between

“public accounting” and “accounting”. Public accounting, which

generally consists of the preparation and/or audit of financial

statements, and generally requires a C.P.A. license, represents a

branch of accounting, not the entire realm of accounting. See

Weygandt, et al., Accounting Principles, 6-9 (3d ed. 1993).
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Further, section 448(d)(2) requires only that the services

be in the “field of accounting” and is not limited to public

accounting. Historically, tax return preparation and bookkeeping

services are regarded as within the field of accounting. 

Accounting has been defined as:

the process of recording transactions in the

financial records of a business and

periodically extracting, sorting, and

summarizing the recorded transactions to

produce a set of financial records. * * * 

[Blacks’s Law Dictionary 21 (8th ed. 2004).]

Tax return preparation, which requires extracting

information relating to financial transactions, analyzing that

information, and then summarizing and reporting that information

on a tax return, fits within the above general definition of

accounting.

Also, as discussed above, section 1.448-1T(e)(5)(vii),

Example 1(i), Temporary Income Tax Regs., supra, indicates that,

for purposes of section 448(d)(2), tax return preparation

services are to be treated as accounting services.

 We note that under Nevada statutory law “public accounting”

includes “the preparation of tax returns”. Nev. Rev. Stat. Ann.

sec. 628.023 (Lexis Nexis 2004). 

We note further that a defining characteristic of our

Federal income tax system is the reporting of financial
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3 Historians generally consider Luca Pacioli (1445-1514 or

1517) to be “The Father of Accounting” for first documenting in

his work Summa de Arithmetica, Geometria, Proportioni et

Proportionalita (Venice 1494), the process of double entry

bookkeeping.

transactions within “annual accounting periods”. Sec. 441(c). 

Tax professionals and the Internal Revenue Code itself generally

regard the process of determining in which annual accounting

period revenues and expenditures are to be recognized as tax

accounting. See generally secs. 441 through 483. 

A significant aspect of petitioner’s tax return preparation

services consists of assisting clients in properly recognizing

and reporting revenue and expenditures in the appropriate tax

year or, in other words, performing tax accounting services.

We conclude that petitioner’s tax return preparation

services, for purposes of section 448(d)(2), constitute services

within the field of accounting. 

Bookkeeping, which section 448 and the regulations

thereunder do not address, has been defined elsewhere as:

a branch of accounting that deals with the

systematic classification, recording, and

summarizing of business and financial

transactions in books of account. * * * 

[Webster’s Third New International Dictionary

(1981).]

Not only does bookkeeping constitute a “branch” of

accounting, but our system of double entry bookkeeping undergirds

modern financial accounting.3
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We sustain respondent’s determination that tax return

preparation and bookkeeping services constitute and are to be

treated as services in the field of accounting. Substantially

all of petitioner’s employees’ activities involve the performance

of services in the field of accounting. Accordingly, for the 2

years in issue, petitioner is to be treated as a qualified

personal service corporation taxed at the flat 35-percent rate

set forth in section 11(b)(2).

To reflect the foregoing,

Decision will be entered

for respondent.