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)

Certain services defined

For purposes of paragraph (2), the terms engineering and architecture include— (i)the performance of professional services described in section 1102(2) of title 40, United States Code, and (ii)design-build and its various options, including financing, owning, and operation.

(c)

Effective date

The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.