Tax Return Preparation and Bookkeeping Service Corporation Is PSC

Tax Prep C Corp is PSC

Rainbow Tax Service Inc is a corporation formed and operating in Nevada. It prepares income tax returns and some bookkeeping services. IRS took the position the corporation is engaged in the field of “accounting” as defined for purposes of a Personal Service Corporation (PSC) and therefore is subject to the flat 35% tax rate while the corporation argued it was not engaged in “accounting.”

Tax Court agreed with IRS on this issue. Here is some of the discussion.

The corporation agreed that a C corporation engaged in the field of “accounting” is a PSC, but stated the field of “accounting” is reserved for those with a CPA license. The corporation is not a public accounting firm and the employees do not provide services that require them to have a CPA license. The corporation did not provide those services reserved under Nevada law for CPAs. Therefore the corporation is not engaged in “accounting” and is not a PSC.

Tax Court argues the corporation’s definition of “accounting” was too restrictive. The Court also states there is a difference between “accounting” and “public accounting.” While “public accounting” generally requires a CPA license in Nevada, the “field of accounting” is not limited to “public accounting.” Black’s Law Dictionary 21 (8th ed. 2004) defines “accounting” as “the process of recording transactions in the financial records of a business and periodically extracting, sorting, and summarizing the recorded transactions to produce a set of financial records.” The Court stated tax return preparation fits this definition since it requires extracting information relating to financial transactions, analyzing that information, and then summarizing and reporting that information on a tax return.

The Court also refers to Regulation §1.448-1T(e)(5)(vii), Example 1(i) as stating for purposes of 448(d)(2), tax return preparation services are to be treated as accounting services. Further a defining characteristic of the Federal income tax system is the reporting of financial transactions within “annual accounting periods.” The process of determining in which annual period revenues and expenses belong is recognized as tax accounting.

Tax Court also cites Webster’s Third New International Dictionary, 1981, as defining bookkeeping as “a branch of accounting that deals with the systematic classification, recording, and summarizing of business and financial transactions in books of account.”

Rainbow Tax Service, Inc., 128 TC No. 5. The case can be appealed.

This case can be found at www.ustaxcourt.gov by clicking on Opinion Search and entering Rainbow as the keyword. We can also send you a pdf copy of the case upon request.

Need help with a Federal tax issue? David & Mary offer a fee based consulting services.

This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111) , , , and .

If someone would like to subscribe to our email list, have them send us an email with a subject line of SUBSCRIBE. If you would like to be removed from our email list, send us an email with a subject line of UNSUBSCRIBE.