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

Summary

The Secretary may reassign all income and tax items between a personal service corporation and its employee-owners when two things are true: almost all the company’s services are done for one other business or entity, and the main reason the company was set up was to avoid or evade Federal income tax for an employee-owner by reducing that person’s taxable income or getting tax benefits they otherwise would not have. Personal service corporation: a company whose main work is personal services done mostly by its employee-owners. Employee-owner: an employee who owns more than 10 percent of the company’s stock at any time in the year (ownership rules in section 318 apply, but with “5 percent” substituted for “50 percent”). Related persons: people or groups treated as one entity under the tax code.