26 U.S.C. § 269A — Personal service corporations formed or availed of to avoid or evade income tax

(a) This rule applies when two things are both true. First, a "personal service corporation" performs nearly all of its services for one other corporation, partnership, or entity. Second, the main reason the corporation was formed, or is being used, is to avoid or evade federal income tax. This can happen in two ways. It can happen by lowering an "employee-owner's" income. It can also happen by giving that person a tax benefit they could not otherwise get, like a deduction, credit, or exclusion. If both things are true, the Secretary may act. The Secretary may reassign income, deductions, credits, exclusions, and other tax benefits. This reassignment happens between the corporation and its employee-owners. The Secretary can do this when it is necessary to stop tax avoidance or evasion. The Secretary can also do this to clearly show the true income of the corporation or its employee-owners. (b) A "personal service corporation" is a corporation whose main activity is performing personal services. Most of these services are done by its employee-owners. An "employee-owner" is any employee who owns more than 10 percent of the corporation's stock. This ownership is measured on any day of the tax year. Special stock-attribution rules apply when counting this ownership. One of those rules is applied using "5 percent" instead of "50 percent." This section does not further explain those attribution rules here. Finally, all "related persons," as defined in a separate section, are treated as a single entity for this section's purposes.

The record establishes that this section was added by Public Law 97-248, title II, section 250(a), enacted September 3, 1982, and appearing at 96 Stat. 528. The source credit further indicates a single subsequent amendment, made by Public Law 99-514, title XIII, section 1301(j)(4), enacted October 22, 1986, at 100 Stat. 2657. Beyond these two legislative actions, the source credit does not record any additional amendment history for this section. Public Law 97-248 is commonly known as the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). TEFRA is generally understood to have been a significant revenue and tax-compliance measure enacted in response to concerns about growing federal budget deficits and perceived abuses in the tax system during the early 1980s. Various provisions of TEFRA addressed tax shelters, corporate tax preferences, and mechanisms by which taxpayers could reduce their income tax liability through the use of corporate structures. Public Law 99-514, referenced in the 1986 amendment, is widely known as the Tax Reform Act of 1986, a broad overhaul of the federal income tax code. The record does not establish the specific legislative reasoning behind the particular allocation rule for personal service corporations set out in this section, nor does it document the precise concerns that prompted the 1986 amendment. Any more detailed account of Congress's specific intent in enacting or amending this provision would be speculative and is not supported by the materials provided.