COMPUTERIZED BILLING FIRM IS NOT IN THE ACCOUNTING BUSINESS; LOWER MINIMUM ACCUMULATED EARNINGS CREDIT DOES NOT APPLY.

UIL Number(s) 0535.02-00

                                             Date: March 31, 1989

1. Whether the taxpayer is required to use the calendar year as its taxable year by reason of its being a personal service corporation? Section 441(i) of the Code.

2. Whether the taxpayer is subjected to the lower accumulated earnings credit of $150,000, rather than $250,000, by reason of its being a corporation, the principal function of which is the performance of services in the field of accounting? Section 535(c)(2)(B) of the Internal Revenue Code.

FACTS

The information furnished indicates that the taxpayer's principle business is the processing of computerized billings, i.e. the filing of insurance claims and the billing of patients for individual doctors and hospitals. This includes maintaining the accounts receivable balances for individual patients of the doctors and hospitals to the point that the phones listed for account information of these doctors and hospitals are the phones at the taxpayer's address. The taxpayer picks up the clients' daysheets of those patients who did not pay their bill at the time the services were rendered by the clients. The daysheets are copies of the original information sheets prepared by the patients at the clients' office. The taxpayer keypunches this information into their computer. Statements are generated and mailed to the patients of the clients, generally every 30 days until the bill is paid by the clients' patients. The clients keep ledger cards on each patient. The ledger cards reflect payments received and outstanding balances as posted by the clients. The ledger cards are picked up once a week by the taxpayer. A monthly report is prepared by the taxpayer for its clients. The monthly report is a print out of all their clients' patients with their outstanding balances which coincide with the clients' ledger cards. All copies of billing information are returned to the clients' offices. When the patient or their insurance company pays the client's fee, the client receives the payment at its office or a post office box. The next time the taxpayer picks up information from the client, the client's records will reflect whether the amount was paid so that the taxpayer can remove it from the balance the taxpayer reflects owed to the client. This balance has already been reflected by the client on its records. The cost of the services to the doctors and hospitals from the taxpayer was based upon the outstanding account receivable balance as determined by the taxpayer.

Based on the business activities, the District Director contends that the taxpayer is performing service in the field of accounting.

LAW AND ANALYSIS

Section 441(i) of the Internal Revenue Code provides that the taxable year of any personal service corporation shall be the calendar year, unless the corporation establishes, to the satisfaction of the Secretary, a business purpose for having a different period for its taxable year.

Section 441(i)(2) of the Internal Revenue Code states that for purposes of this subsection, the term "personal service corporation" has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied (A) by substituting "any" "for more than 10 percent", and (B) by substituting "any" for "50 percent or more in value" in section 318(a)(2)(C).

Section 1.441-4T(d)(1) of the Temporary Income Tax Regulations states for the purposes of this section, a taxpayer is a personal service corporation for a taxable year only if (i) the taxpayer is a C corporation (as defined in section 1361(a) (2)) for the taxable year; (ii) The principal activity of the taxpayer during the testing period for the taxable year is the performance of personal services; (iii) During the testing period for the taxable year, such services are substantially performed by employee-owners; and (iv) Employee- owners, as defined in paragraph (h) of this section, own (as determined under the attribution rules of section 318, except that "any" shall be substituted for "50 percent" in section 315(a)(2)(C)) more than 10 percent of the fair market value of the outstanding stock in the taxpayer on the last day of the testing period for the taxable year.

Section 1.441-4T(e)(1) of the Temporary Income Tax Regulations states for purposes of this section, any activity of the taxpayer described in section 448(d)(2)(A) or the regulations thereunder will be treated as the performance of personal services. Therefore, any activity of the taxpayer that involves the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting (as such fields are defined in the regulations interpreting section 448) will be treated as the performance of personal services for purposes of this section.

Section 1.441-4T(e)(2) of the Temporary Income Tax Regulations states for purposes of this section, any activity of the taxpayer not described in section 448(d)(2)(A) or the regulations thereunder will not be treated as the performance of personal services.

Section 448(d)(2) of the Internal Revenue Code states the term "qualified personal service corporation" means any corporation (A) substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and (B) substantially all of the stock of which (by value) is held directly or indirectly by (i) employees performing services for such corporation in connection with the activities involving a field referred to in subparagraph (A), (ii) retired employees who had performed such services for such corporation, (iii) the estate of any individual described in clause (i) or (ii), or (iv) any other person who acquired such stock by reason of the death of an individual described in clause (i) or (ii) (but only for the 2-year period beginning on the date of the death of such individual).

Section 1.448-1T(e)(5)(vii), example, (1) of the Temporary Income Tax Regulations illustrates services performed in the field of accounting as defined in section 448(d)(2) of the Code as follows:

(i) X, a C corporation, is engaged in the business of providing accounting services to its clients. These services consist of the preparation of audit and financial statements and the preparation of tax returns. For purposes of section 448, such services consist of the performing of services in the field of accounting. In addition, for purposes of section 448, the supervision of employees directly preparing the statements and returns, and the performance of all administrative and support services incident to such activities (including secretarial, janitorial, purchasing, personnel, security, and payroll services) are the performance of services in the field of accounting.

The taxpayer's service does not consist of the preparation of audit and financial statements or the preparation of tax returns nor does the taxpayer perform bookkeeping services for its clients, except to the extent necessary to process the computerized billings and to maintain accounts receivable balances in the computer. Therefore, the taxpayer is not in the business of providing accounting services within the meaning of section 1.448- 1T(e)(5)(vii), example (1), of the regulations and, thus, is not a personal service corporation within the meaning of sections 441(i)(2) and 448(d)(2)(A) of the Code and the regulations thereunder. Accordingly, the taxpayer is not required to change its taxable year to the calendar year.

Sections 531 and 532 of the Code impose an accumulated earnings tax on the accumulated taxable income of every corporation, except those corporations listed in section 532(b), formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation by permitting earnings and profits to accumulate instead of being divided or distributed.

Section 535(a) of the Code defines the term accumulated taxable income as the taxable income, adjusted in the manner provided in section 535(b), minus the sum of the dividends paid deduction (as defined in section 561) and the accumulated earnings credit (as defined in section 535(c)).

Section 535(c)(1) of the Code provides that for purposes of section 535(a), in the case of a corporation other than a mere holding or investment company the accumulated earnings credit is (A) an amount equal to such part of the earnings and profits for the taxable year as are retained for the reasonable needs of the business, minus (B) the deduction allowed by section 535(b)(6) (relating to net capital gains and the taxes attributable to such net capital gain). For purposes of this paragraph, the amount of the earnings and profits for the taxable year that are retained is the amount by which the earnings and profits for the taxable year exceed the dividends paid deduction (as defined in section 561).

Section 535(c)(2)(A) of the Code provides that the credit allowable under section 535(c)(1) shall in no case be less than the amount by which $250,000 exceeds the accumulated earnings and profits of the corporation at the close of the preceding calendar year. However, section 535(c)(2)(B) provides that in the case of a corporation, the principal function of which is the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, subparagraph (A) shall be applied by substituting "$150,000" for "$250,000".

Inasmuch as the terms listed in section 535(d)(2)(B) of the Code are identical to those listed in section 448(d)(2)(A) in defining the term "qualified personal service corporation", above, we think that it is appropriate to adopt the definition in the regulations interpreting section 448(d)(2)(A) to section 535(b)(2)(B). Since we have determined that under section 1.448-1T(e)(5)(vii) of the regulations that the taxpayer is not in the business of providing accounting services for purposes of sections 441(i)(2) and 448(d)(2)(A) of the Code the taxpayer is not in such business for purposes of section 535(b)(2)(B) and is, therefore, not subject to the lower minimum accumulated earnings credit.

CONCLUSION

We, therefore, conclude as follows:

1. The taxpayer is not required to use the calendar year as its taxable year by reason of its being a personal service corporation under section 441(i)(2) of the Code.

2. The taxpayer is not performing accounting services and, therefore, will not be subjected to the lower accumulated earnings credit of $150,000 under section 535(c)(2)(B) of the Code.

A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Code provides that this memorandum may not be used or cited as precedent.