Avoiding IRS Designations of: “Personal Service”, “Personal Holding” and “Controlled Group”

The tax advantages of properly operated Nevada corporate shelters may be secondary to the benefits of liability protection, asset protection and privacy but they are worth discussing all the same, especially since many tax professionals don’t seem to “get it”.

The IRS will tag a corporation as a “Personal Holding Company” and assess a surcharge of 39.6% on undistributed earnings in cases where more than 60% of the corporation’s income is derived from “passive” sources such as dividends, interest and rental income. The IRS applies a designation of “Personal Services Corporation”, assessing all income at a flat rate of 35%, in cases where a C corporation is engaged in the performance of personal services (e.g. consulting-type work) and where such services are performed by employee-owners.  Yet another IRS designation is that of “Controlled Group”, based on complicated rules for determining allowable cross-ownership of corporations, whereby the IRS seeks to lump all of the income into a single, consolidated return—resulting in the highest possible tax rate, of course.

Each of these designations is based on the corporation’s OWNERSHIP.  How very fortunate, then, that ownership of Nevada corporations is statutorily permitted to be very PRIVATE:  It is not a matter of public record, only of the protected (by NRS 78.257) internal records of the corporation.

To be considered a “Personal Holding Company” a corporation must be owned by five or fewer stockholders. It is totally permissible for a corporation to earn 100% of its income from passive sources, as long as it is owned by six or more stockholders.  It is similarly easy to avoid the designation of “Personal Services Corporation”: Don’t own the stock! “Controlled Group” status is also very easily avoided with Nevada corporations:  Simply ensure that no entity owns 80% or more of any other entity and that in brother-sister corporate relationships there are six or more stockholders. As no liability is attached to stock ownership, surely you could find a trustworthy friend or six who wouldn’t mind holding stock in the corporation? If not, give us a call—we know of hundreds of corporations in similar circumstances.

With regard to “Controlled Group” status, the IRS has from time to time invoked Section 482 of the Infernal Revenue Code, which lumps together income from corporations if they APPEAR to act out of a unity of interest.  To our knowledge, however, even this blanketing regulation is relatively easily overcome, as long as the corporations act in their own, separate, well-documented self-interest.