§ 632-A — Personal service corporations and S corporations formed or availed of to avoid or evade New York State income tax

§ 632-a. Personal service corporations and S corporations formed or\navailed of to avoid or evade New York State income tax. (a) General. If\n(1) substantially all of the services of a personal service corporation\nor S corporation are performed for or on behalf of another corporation,\npartnership, or other entity and (2) the effect of forming or availing\nof such personal service corporation or S corporation is the avoidance\nor evasion of New York income tax by reducing the income of, or in the\ncase of a nonresident, reducing the New York source income of, or\nsecuring the benefit of any expense, deduction, credit, exclusion, or\nother allowance for, any employee-owner which would not otherwise be\navailable, then the commissioner may allocate all income, deductions,\ncredits, exclusions, and other allowances between such personal service\ncorporation or S corporation (even if such personal service corporation\nor S corporation is taxed under article nine-A of this chapter or is not\nsubject to tax in this state) and its employee-owners, provided such\nallocation is necessary to prevent avoidance or evasion of New York\nstate income tax or to clearly reflect the source and the amount of the\nincome of the personal service corporation or S corporation or any of\nits employee-owners.\n (b) Definitions for purposes of this section. (1) The term "personal\nservice corporation" means a corporation whose principal activity is the\nperformance of personal services and such services are substantially\nperformed by the employee-owners of such corporation.\n (2) The term "S corporation" means a corporation for which an election\nunder section 1362 of the internal revenue code is in effect for such\ntaxable year and whose principal activity is the performance of personal\nservices and such services are substantially performed by the\nemployee-owners of such corporation.\n (3) The term "employee-owner" means any employee who owns, on any\ngiven day during the taxable year, more than ten percent of the\noutstanding stock of the personal service corporation or S corporation.\nFor purposes of the preceding sentence, the constructive ownership of\nstock rules set forth in section 318 of the internal revenue code shall\napply, except that "5 percent" shall be substituted for "50 percent" in\nsection 318(a)(2)(C) of the internal revenue code.\n (4) All related persons (within the meaning of section 144(a)(3) of\nthe internal revenue code) shall be treated as one entity.\n