§269A Personal Service Corporations Formed or Availed of to Avoid or Evade Income Tax

Summary

A special anti-abuse rule targets personal service corporations set up mainly to dodge federal income tax. It applies when nearly all of the corporation's services go to one other corporation, partnership, or entity, and the main purpose of forming or using the corporation is to avoid or evade tax by cutting income or creating tax benefits for an employee-owner that would not otherwise exist. A personal service corporation is one whose main activity is personal services performed mostly by employee-owners. An employee-owner is an employee who owns more than 10 percent of the stock on any day of the year, counting certain related-party ownership, and related persons are treated as one entity.