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.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Qualified Personal Service 
Corporations Clarification Act of 2001''.

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 period 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 corporation 
                        who performed the services referred 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 corporation 
                        who performed the services referred to in 
                        subparagraph (A) and who are holding such stock 
                        by reason of their current or former employment 
                        with any controlled entity (as defined in 
                        paragraph (4)(B)).''
    (b) Other Modifications.--Paragraph (4) of section 448(d) of such 
Code is amended to read as follows:
            ``(4) Special rules for paragraph (2).--
                    ``(A) In general.--For purposes of paragraph (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 paragraph (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 taxpayer 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 percent 
                        (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 percent 
                        of the capital interest or profits interest 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 taxable 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 employees of 
                        unaffiliated controlled entities. The preceding 
                        sentence shall not apply to employees described 
                        in clause (v) or (vi) of paragraph (2)(B).
                            ``(ii) Employee-owned corporation.--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 regard to this 
                        subparagraph) of such corporation.
                            ``(iii) Unaffiliated controlled entity.--
                        For purposes of clause (i), the term 
                        `unaffiliated controlled entity' means, with 
                        respect to an employee-owned corporation--
                                    ``(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 employee-owned 
                                corporation, and
                                    ``(II) any partnership at least 50 
                                percent of the capital interest or 
                                profits interest in which is owned 
                                (directly or indirectly as determined 
                                under section 318) by members of such 
                                affiliated group.
                        Such term shall not include any corporation 
                        which is permitted to file a consolidated 
                        return with such affiliated group.
                    ``(E) Engineering defined.--For purposes of 
                paragraph (2), the term `engineering' includes--
                            ``(i) professional services or activities 
                        of an engineering nature, as defined by State 
                        law, if applicable, which are required to be 
                        performed or approved by a person licensed, 
                        registered, or certified to provide such 
                        services;
                            ``(ii) professional services or activities 
                        of an engineering nature that are associated 
                        with research, planning, development, design, 
                        construction, repair, or alteration of real 
                        property; and
                            ``(iii) such other professional services or 
                        activities of an engineering nature, or 
                        incidental services, which members of the 
                        engineering profession (and individuals in 
                        their employ) may logically or justifiably 
                        perform, including studies, investigations, 
                        surveying, mapping, tests, evaluations, 
                        consultations, comprehensive planning, program 
                        management, conceptual design, plans and 
                        specifications, value engineering, construction 
                        phase services, design-build, design-build-
                        finance, design-build-operate-maintain, design-
                        build-finance-operate-maintain, soils 
                        engineering, drawing reviews, preparation of 
                        operating and maintenance manuals, and other 
                        related services.
                Professional services and activities referred to in 
                clause (i), (ii), or (iii) shall be considered 
                engineering without regard to the procurement method, 
                delivery method, owner, or service recipient.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

Summary: Qualified Personal Service Corporations Clarification Act of 2001 - Amends the Internal Revenue Code to modify the criteria for determining whether a corporation is a qualified personal service corporation. Includes within the definition of qualified personal service corporation a qualifying corporation substantially all of whose stock is held by certain former employees (thus permitting such corporation to use the cash method of accounting).