Question

In: Accounting

Wonka Incorporated, is a C corporation that operates and operates on a calendar year. The sole...

Wonka Incorporated, is a C corporation that operates and operates on a calendar year. The sole shareholder of the corporation is Willy Wonka. Wonka’s only business since its incorporation in 2015 has been land-surveying services. In Wonka’s state of incorporation, only a licensed surveyor can perform land surveying. Willy, Wonka’s only employee, is a licensed surveyor but he is not a licensed engineer. Upon audit of Wonka’s 2015 and 2016 tax returns, the IRS assessed tax deficiencies stemming from its conclusion that the corporation was a personal service corporation subject to the flat tax rate of 35%. Willy believes that the IRS’s determination is incorrect, and he has asked you for advice on how to proceed. Evaluate the IRS’s position regarding the treatment of Wonka Corporation as a personal service corporation, and prepare a memo for the client files describing the results of your research.

Solutions

Expert Solution

A corporation will be considered as a personal service corporation if the below conditions are fulfilled.
1- The business of the corporation is substantially performed by the owner of the business.
The business can be in any of the fields - health, law, engineering(Including surveying), architecture, accounting, actuarial science, performing arts, or consulting
If the owner of the business performs the majority of the business tasks than this first condition is met.
2- The stock of the corporation in value is held by an individual for a minimum percentage of 95%.
This majority of share can be directly or indirectly held by the
A. A retired employee who has performed the services mentioned in point 1.
B. An employee who is currently performing the services
C. Any estate of employee or retiree

Hence in the case of Wonka, IRS held that the corporation should be taxed as Personal services corporation as both of the above conditions are met.
1 all shares are with the Wily wonks
2 A substantial part of services is performed by Willy Wonka.

Hence this C corporation has to be taxed at a rate of 35%. IRS considers such corporations as PSC as such corporations are generally made to take the tax benefits that are allowed to the corporations only. Hence IRS has created this special category of PSC to keep a check on such corporations.

Memo

Dear Willy Wonka,

We have analyzed your corporation position and legal structure and we also reached the findings that IRS findings are correct and your corporation will be taxed at 35%
In your case, your C corporation meets all the conditions that are enough to access any corporation as PSC.
Since more than 95% of shares of the company are with you and you perform the substantial work of business by yourself hence the corporation is PSC.


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