I
112th CONGRESS
2d Session
H. R. 3840
IN THE HOUSE OF REPRESENTATIVES
January 31, 2012
Mr. Stark (for himself, Mr. Rangel, and Mr. Crowley) introduced the following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 and the Social Security Act to provide for employment tax treatment of professional service businesses.
Short title
This Act may be cited as the
Narrowing Exceptions for Withholding
Taxes Act of 2012
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Employment tax treatment of professional service businesses
In general
Section 1402 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:
Special rules for professional service businesses
Shareholders providing services to disqualified S corporations
In general
In the case of any disqualified S corporation, each shareholder of such disqualified S corporation who provides substantial services with respect to the professional service business referred to in subparagraph (C) shall take into account such shareholder’s pro rata share of all items of income or loss described in section 1366 which are attributable to such business in determining the shareholder’s net earnings from self-employment.
Treatment of family members
Except as otherwise provided by the Secretary, the shareholder’s pro rata share of items referred to in subparagraph (A) shall be increased by the pro rata share of such items of each member of such shareholder’s family (within the meaning of section 318(a)(1)) who does not provide substantial services with respect to such professional service business.
Disqualified S corporation
For purposes of this subsection, the term disqualified S corporation means—
any S corporation which is a partner in a partnership which is engaged in a professional service business if substantially all of the activities of such S corporation are performed in connection with such partnership, and
any other S corporation which is engaged in a professional service business if the principal asset of such business is the reputation and skill of 3 or fewer employees.
Partners
In the case of any partnership which is engaged in a professional service business, subsection (a)(13) shall not apply to any partner who provides substantial services with respect to such professional service business.
Professional service business
For purposes of this subsection, the term professional service business means any trade or business if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations which prevent the avoidance of the purposes of this subsection through tiered entities or otherwise.
Cross reference
For employment tax treatment of wages paid to shareholders of S corporations, see subtitle C.
.
Conforming amendment
Section 211 of the Social Security Act is amended by adding at the end the following new subsection:
Special rules for professional service businesses
Shareholders providing services to disqualified S corporations
In general
In the case of any disqualified S corporation, each shareholder of such disqualified S corporation who provides substantial services with respect to the professional service business referred to in subparagraph (C) shall take into account such shareholder’s pro rata share of all items of income or loss described in section 1366 of the Internal Revenue Code of 1986 which are attributable to such business in determining the shareholder’s net earnings from self-employment.
Treatment of family members
Except as otherwise provided by the Secretary of the Treasury, the shareholder’s pro rata share of items referred to in subparagraph (A) shall be increased by the pro rata share of such items of each member of such shareholder’s family (within the meaning of section 318(a)(1) of the Internal Revenue Code of 1986) who does not provide substantial services with respect to such professional service business.
Disqualified S corporation
For purposes of this subsection, the term disqualified S corporation means—
any S corporation which is a partner in a partnership which is engaged in a professional service business if substantially all of the activities of such S corporation are performed in connection with such partnership, and
any other S corporation which is engaged in a professional service business if the principal asset of such business is the reputation and skill of 3 or fewer employees.
Partners
In the case of any partnership which is engaged in a professional service business, subsection (a)(12) shall not apply to any partner who provides substantial services with respect to such professional service business.
Professional service business
For purposes of this subsection, the term professional service business means any trade or business if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.
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Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2011.