(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
(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
(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.
(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).
(3) Related persons All related persons (within the meaning of section
144 (a)(3)) shall be treated as 1 entity.
