(a) General rule If—
(1) substantially all of the services of a personal service corporation are performed for (or on behalf of) 1 other corporation, partnership, or other entity, and
“Substantially” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
(2) the principal purpose for forming, or availing of, such personal service corporation is the avoidance or evasion of Federal income tax by reducing the income of, or securing the benefit of any expense, deduction, credit, exclusion, or other allowance for, any employee-owner which would not otherwise be available,
then the Secretary may allocate all income, deductions, credits, exclusions, and other allowances between such personal service corporation and its employee-owners, if such allocation is necessary to prevent avoidance or evasion of Federal income tax or clearly to reflect the income of the personal service corporation or any of its employee-owners.
(b) Definitions For purposes of this section—
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(1) Personal service corporation The term “personal service corporation” means a corporation the principal activity of which is the performance of personal services and such services are substantially performed by employee-owners.
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(2) Employee-owner The term “employee-owner” means any employee who owns, on any day during the taxable year, more than 10 percent of the outstanding stock of the personal service corporation. For purposes of the preceding sentence, section 318 shall apply, except that “5 percent” shall be substituted for “50 percent” in section 318(a)(2)(C).
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(3) Related persons All related persons (within the meaning of section 144(a)(3)) shall be treated as 1 entity.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514 substituted “section 144(a)(3)” for “section 103(b)(6)(C)”.