I 
109TH CONGRESS 
1ST SESSION H. R. 2647 
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 
MAY 26, 2005 
Mr. NUSSLE 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. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Qualified Personal 
Service Corporations Clarification Act of 2005’’.
SEC. 2. MODIFICATIONS TO DETERMINATION OF WHETHER 
CORPORATION IS A QUALIFIED PERSONAL 
SERVICE CORPORATION. 
(a) STOCK HELD BY CERTAIN FORMER EMPLOYEES 
TAKEN INTO ACCOUNT.—Subparagraph (B) of section 
448(d)(2) of the Internal Revenue Code of 1986 (defining 
qualified personal service corporation) is amended by 
striking ‘‘or’’ at the end of clause (iii), by striking the pe-
riod at the end of clause (iv) and inserting a comma, and 
by inserting after clause (iv) the following new clauses: 
‘‘(v) former employees of such cor-
poration who performed the services re-
ferred to in subparagraph (A) and who are 
holding such stock by reason of their 
former employment with such corporation, 
or 
‘‘(vi) former employees of such cor-
poration who performed the services re-
ferred to in subparagraph (A) and who are 
holding such stock by reason of their cur-
rent or former employment with any con-
trolled entity (as defined in paragraph 
(4)(B)).’’. 
(b) OTHER MODIFICATIONS.—Paragraph (4) of sec-
tion 448(d) of such Code is amended to read as follows: 
‘‘(4) SPECIAL RULES FOR PARAGRAPH (2).—
‘‘(A) IN GENERAL.—For purposes of para-
graph (2)— 
‘‘(i) community property laws shall be 
disregarded, 
‘‘(ii) stock held by a plan described in 
section 401(a) which is exempt from tax 
under section 501(a) shall be treated as 
held by an employee described in para-
graph (2)(B)(i), and 
‘‘(iii) at the election of the common 
parent of an affiliated group (within the 
meaning of section 1504(a)), all members 
of such group may be treated as 1 tax-
payer for purposes of paragraph (2)(B) if 
80 percent or more of the activities of such 
group involve the performance of services 
in the fields described in paragraph (2)(A). 
‘‘(B) CONTROLLED ENTITY.—For purposes 
of paragraph (2)(B)(vi), the term ‘controlled 
entity’ means, with respect to a corporation— 
‘‘(i) any corporation at least 50 per-
cent (by value) of the outstanding stock of 
which is owned (directly or indirectly as 
determined under section 318) by such 
corporation, and
‘‘(ii) any partnership at least 50 per-
cent of the capital interest or profits inter-
est in which is owned (directly or indirectly 
as determined under section 318) by such 
corporation. 
‘‘(C) NEW CORPORATIONS.—A corporation 
shall be treated as a qualified personal service 
corporation for each taxable year preceding the 
first taxable year for which the corporation has 
gross receipts if the corporation is a qualified 
personal service corporation for such first tax-
able year. 
‘‘(D) CERTAIN
STOCK
NOT
TAKEN
INTO 
ACCOUNT.— 
‘‘(i) IN GENERAL.—The determination 
of whether an employee-owned corporation 
is a qualified personal service corporation 
shall be made without regard to stock in 
such corporation which is held by employ-
ees of unaffiliated controlled entities. The 
preceding sentence shall not apply to em-
ployees described in clause (v) or (vi) of 
paragraph (2)(B). 
‘‘(ii) 
EMPLOYEE-OWNED
CORPORA-
TION.—For purposes of clause (i), the
term ‘employee-owned corporation’ means 
any corporation at least 50 percent of the 
value of the outstanding stock of which is 
owned (directly or indirectly) by employees 
described in paragraph (2)(B) (without re-
gard to this subparagraph) of such cor-
poration. 
‘‘(iii) 
UNAFFILIATED
CONTROLLED 
ENTITY.—For purposes of clause (i), the 
term ‘unaffiliated controlled entity’ means, 
with respect to an employee-owned cor-
poration— 
‘‘(I) any corporation at least 50 
percent (by value) of the outstanding 
stock of which is owned (directly or 
indirectly as determined under section 
318) by members of an affiliated 
group (within the meaning of section 
1504(a)) which includes such em-
ployee-owned corporation, and 
‘‘(II) any partnership at least 50 
percent of the capital interest or prof-
its interest in which is owned (directly 
or indirectly as determined under sec-