CLAIM-STAKING BUSINESS IS NOT PERSONAL SERVICE CORPORATION.

UIL Number(s) 0448.04-01

                                             Date: May 5, 1992

Whether a taxpayer engaged in the business of claim staking is a qualified personal service corporation under section 448(d)(2) of the Internal Revenue Code, and therefore required to use the 34 percent corporate income tax rate pursuant to section 11(b)(2) of the Code.

FACTS:

The taxpayer is engaged in the business of providing claim staking and land surveying services to its clients. Specifically, in the fiscal year ending b, 72 percent of the taxpayer's business was dedicated to providing claim staking services, and 28 percent was dedicated to providing land surveying services. In the fiscal year ending c, 77 percent of the taxpayer's business was dedicated to providing claim staking services, and 23 percent was dedicated to providing land surveying services.

The land surveying performed by the taxpayer is performed as an independent and separate service from the claim staking. Furthermore, the taxpayer does not provide any engineering services to its clientele. The taxpayer is a d state corporation and conducts most of its claim staking on public lands such as the national forests or lands managed by the Bureau of Land Management. Claim staking is primarily performed on lands located in Nevada, Montana, Idaho, and Colorado.

Claim staking primarily consists of covering an area with monuments that entitle the taxpayer's client to certain mineral rights within that claim or block of claims. Prior to the actual staking of a claim, the client hires an outside party to determine whether the land is eligible for staking. The outside party also develops the specifications for the placement of the monuments. The client then submits to the taxpayer a map of the area to be staked. The taxpayer orders the necessary equipment, coordinates the travel arrangements, and prepares the crew for departure. The taxpayer is responsible for furnishing all labor, equipment, materials, temporary facilities, and utilities that are necessary to stake the claim.

In staking each claim, the taxpayer uses markers, which were set by government surveyors, as a guide to determine the additional control points from which to set the monuments. Generally, the laws of Nevada, Montana, Idaho, and Colorado require that each claim be marked with a monument as evidence that a claim exists. The crew members frequently use 4" x 4" x 4' posts or 4"x4' plastic pipes as monuments. In some instances, blazed trees, marked with an axe, are also used as monuments.

The actual staking is performed by a "claim crew," which usually consists of 3 or 4 people. One crew member, the "line runner," determines the direction that the crew will take by using a compass. The "head chainman" then takes the front end of a 300 ft. long chain, makes corrections for slopes, and marks where the monuments will be set. The "rear chainman" and/or the "postpacker" stops the head chainman, packs the monuments, digs the holes, and sets the monuments. The stakers generally set monuments every 1500 feet in one direction and every 600 feet in the perpendicular direction. The stakers put in anywhere from 30 to 100 monuments a day, depending on the line and the type of terrain. The stakers continue this process until a grid is set for the claim.

Once the staking is complete, the taxpayer usually processes the related paperwork. This entails mapping the claim, and recording the claim with the appropriate governmental agencies. If the client wants the claim perfected, the exact coordinates must be determined by more extensive surveying techniques. The taxpayer contracts out the "perfection" of the claim to a different company.

The taxpayer's stock is owned by three shareholders, who are also employees of the corporation. One of the shareholders is a professional engineer and another is a registered land surveyor. All of the shareholders primarily act as project superintendents and crew members. In addition to the shareholders, the taxpayer employs a registered land surveyor, who primarily handles all of the taxpayer's land surveying work. The taxpayer also employs six full-time crew members, one to two part-time crew members, and a secretary.

APPLICABLE LAW:

Section 448(d)(2) of the Code defines the term "qualified personal service corporation" as any corporation: (A) substantially all of the activities of which involve the performance of services within the field 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, (ii) retired employees, (iii) the estate of an employee, or (iv) any other party who acquired the stock as a result of the death of an employee.

Section 11(b)(2) of the Code provides that the amount of tax imposed on the taxable income of a qualified personal service corporation (as defined in section 448(d)(2)) shall be equal to 34 percent of the taxable income.

Section 1.448-1T(e)(3) of the Temporary Income Tax Regulations provides that the term qualified personal service corporation means any corporation that meets (i) the function test of paragraph (e)(4) of this section, and (ii) the ownership test of paragraph (e)(5) of this section.

Section 1.448-1T(e)(4)(i)(C) of the temporary regulations provides that a corporation meets the function test if substantially all of the corporation's activities for a taxable year involve the performance of services in one or more of the eight enumerated fields, including the field of engineering, which encompasses surveying and mapping.

Section 1.448-1T(e)(4)(i) of the temporary regulations provides that substantially all of the activities of a corporation are involved in the performance of services in any qualifying field, such as engineering, if 95 percent or more of the time spent by employees of the corporation, serving in their capacity as such, is devoted to the performance of services in a qualifying field. For purposes of determining whether this 95 percent rule is satisfied, the performance of any activity incident to the actual performance of services in a qualifying field is considered the performance of services in that field.

Section 1.448-1T(e)(4)(i) of the temporary regulations further provides that activities incident to the performance of services in a qualifying field include the supervision of employees engaged in directly providing services to clients, and the performance of administrative and support services incident to such activities.

Section 1.448-1T(e)(5)(i) of the temporary regulations provides that a corporation meets the ownership test, if at all times during the taxable year, substantially all of the corporation's stock, by value, is held, directly or indirectly, by (i) employees, (ii) retired employees, (iii) the estate of an employee, or (iv) any other party who acquired the stock as a result of the death of an employee. For purposes of this paragraph (e)(5), the term "substantially all" means an amount equal to or greater than 95 percent.

RATIONALE:

The taxpayer contends that it is not a qualified personal service corporation as defined in section 448(d)(2) of the Code because it does not perform services within the "field of engineering" as defined in section 448(d)(2)(A). Furthermore, the taxpayer contends that because substantially all of its services are not performed by employee-owners as defined in section 269A(b)(2) /1/, substantially all of the taxpayer's stock is not held directly by employees as defined in section 448(d)(2)(B).

In contrast, the examining agent contends that the provision of claim staking services is "incident to" the provision of surveying services, and thus is within the field of engineering as defined in section 448(d)(2)(A) of the Code. The examining agent also contends that substantially all of the taxpayer's stock is held directly by employees as defined in section 448(d)(2)(B).

In order to be considered a qualified personal service corporation under section 448(d)(2) of the Code, section 1.448- 1T(e)(3) of the temporary regulations provides that a taxpayer must met two tests, the "function test" as set forth in paragraph (e)(4) of section 1.448-1T, and the "ownership test" of paragraph (e)(5) of section 1.448-1T. In the case at hand, the taxpayer argues that it is not a qualified personal service corporation because it has not met the elements of the function test, nor has it met the elements of the ownership test.

The first test, the "function test," requires that substantially all of the corporation's activities must be devoted to the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. See section 1.448- 1T(e)(4)(i) of the temporary regulations. In order to meet the function test, the taxpayer must meet two criteria.

First, the taxpayer must provide services within the field of engineering. Section 1.448-1T(e)(4)(i)(C) of the temporary regulations includes surveying and mapping in the field of engineering. Thus, the taxpayer's provision of land surveying services is within the field of engineering. However, the provision of claim staking is not within the field of engineering. Claim staking is not similar to engineering in terms of the required education, training, expertise, and the very nature of engineering services.

For example, to practice engineering in Nevada, Montana, Idaho, and Colorado an engineer must be licensed. In order to become licensed, an engineer must be a graduate of a board-certified curriculum and obtain active experience through a training program. Upon completing the educational and training requirements, an engineer must also pass an examination given by the states' board of engineers. ²

In contrast, the performance of claim staking in Nevada, Montana, Idaho, and Colorado does not require a license. For instance, Nevada state law specifically provides that, "any person who is a citizen of the United States," may stake a claim to mineral rights. See Nev. Rev. Stat. section 517.010. A claim will be valid provided all the procedural requirements for declaring the claim are satisfied. Similarly, federal law does not require a party staking the claim to be licensed. Claim staking may be performed by anyone, and will be valid under federal law provided certain procedural requirements are satisfied. See 30 U.S.C. sec. 22, 28 (1991).

Furthermore, claim staking services and engineering services do not employ similar levels of expertise. For instance, in establishing the rights to a mineral claim, some states require that a map of the claim be submitted to an office of public record. Nevada state law specifically states that the locator of a claim need not employ a professional surveyor or engineer to prepare a map of the claim. Rather, the map should be prepared in accordance with the locator's "abilities." See Nev. Rev. Stat. section 517.040 (1991). In contrast, Nevada, Montana, Idaho, and Colorado require all maps submitted to an office of public record by an engineer or surveyor to be accompanied by a seal certifying that the map was prepared by a licensed engineer or surveyor. Thus, Nevada, Montana, Idaho, and Colorado do not hold claim stakers to the same standard of expertise as an engineer or surveyor.

The very nature of engineering services is the application of mathematical, physical, and engineering sciences to services or creative work, such as surveying, consultation, investigation, evaluation, planning, design, and review of construction, public or private utilities, structures, buildings, machines, equipment, or projects. In contrast, the provision of claim staking consists of physically covering an area with monuments using a map prepared by a third party. The taxpayer places the monuments in the manner that an outside party has already predetermined. Thus, the nature of claim staking is not similar to engineering.

The examining agent contends that the provision of claim staking is "incidental to" the provision of surveying services, and consequently is within the field of engineering. Section 1.448- 1T(e)(4)(i) of the temporary regulations provides that the performance of any activity incident to the actual performance of services in a qualifying field is considered the performance of services in that field.

The regulations do not provide a definition of an activity "incident to" a qualifying field. However, the regulations provide that activities incident to the performance of services in a qualifying field include the supervision of employees engaged in directly providing services to clients, and the performance of administrative and support services incident to such activities. The supervision of employees and the performance of administrative and support services are often likely to occur as a result of activities in a qualifying field.

While there may be instances where claim staking is "incident to" surveying, under the facts of this case, claim staking is not "incident to" surveying. In this case the claim staking is performed as a separate and distinct service. The claim staking is not dependent upon the taxpayer's provision of land surveying services. Thus, in the case at hand, the provision of claim staking services is not "incident to" the provision of surveying services.

Furthermore, the taxpayer does not meet the second criteria of the function test. This criteria requires that substantially all of the taxpayer's activities must be devoted to the field of engineering. Specifically, section 1.448-1T(e)(4)(i) of the temporary regulations provides that substantially all of the activities of a corporation are devoted to the field of engineering, if 95 percent or more of the employees' time is devoted to the performance of services within the field of engineering.

Under the facts of this case, claim staking is not within the field of engineering, nor is it "incidental to" the provision of surveying services. However, the taxpayer's provision of surveying services is within the field of engineering. Because less than 30 percent of the employees' time is devoted to the surveying services, 95 percent of the taxpayer's employees duties are not directly related to the performance of services within the field of engineering. ³ Thus, the taxpayer has not met the requirements of the function test. Because the taxpayer has not met the function test, it is unnecessary to determine whether the taxpayer has met the ownership test.

CONCLUSION:

A taxpayer engaged in the business of claim staking is not a qualified personal service corporation under section 448(d)(2) of the Code. Consequently, the taxpayer is not required to use the 34 percent corporate income tax rate pursuant to section 11(b)(2).

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

² Similarly, to practice surveying in Nevada, Montana, Idaho, and Colorado, a surveyor must be licensed. In order to become licensed, a surveyor must undergo education, training, and testing procedures similar to an engineer. The provision of mapping services, or cartography, also requires specific education and training. Cartography is the application of mathematical, geographical, and physical sciences to the design and construction of maps, and it is often performed within the federal government. Employment as a cartographer requires at least a bachelor's degree in cartography or a major that was supplemented by courses in cartography. Office of Personnel Management Handbook, 76 (1990).

³ The taxpayer represents that in its fiscal year ending b, 72 percent of its employees' duties were directly related to the provision of claim staking services and 28 percent were directly related to the provision of land surveying services. Also, in its fiscal year ending c, 77 percent of its employees duties were directly related to the provision of claim staking services and 23 percent were directly related to the provision of land surveying services.