                        T.C. Memo. 2000-335



                      UNITED STATES TAX COURT



        ALRON ENGINEERING & TESTING CORP., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8272-99.                   Filed November 1, 2000.


     Mark M. Camp, for petitioner.

     Mark J. Miller and Christa A. Gruber, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     GOLDBERG, Special Trial Judge:   Respondent determined

deficiencies in petitioner’s Federal income tax of $3,618 and

$3,976 for the taxable years ended June 30, 1995, and June 30,

1996, respectively.   Unless otherwise indicated, section

references are to the Internal Revenue Code in effect for the

years in issue.

     The sole issue in this case is whether petitioner is a
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qualified personal service corporation under section 448(d)(2),

and therefore subject to the flat 35-percent tax rate pursuant to

section 11(b)(2).

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.     At the time the petition

was filed, petitioner’s principal place of business was Menomonee

Falls, Wisconsin.

     Petitioner is a Wisconsin corporation licensed by the State

and engaged in the business of providing geotechnical testing and

engineering services.   Petitioner is described as a geotechnical

testing and engineering firm on the corporate annual reports

filed with the State of Wisconsin.     Petitioner also files, at

least biannually, a report with the Architects and Engineers

Registration.   During the taxable years in issue, petitioner

employed two engineers, Allan F. Huseth (Mr. Huseth) and Jeffrey

Smith (Mr. Smith), and approximately ten non-engineering

personnel, including technicians and clerical staff.     Mr. Huseth,

the president of petitioner and 100-percent owner of petitioner’s

stock during the years in issue, is a registered professional

engineer in the State of Wisconsin since 1971, with a bachelor of

science degree in civil engineering and a master of science

degree with a specialty in soil mechanics and highway
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engineering.   Mr. Smith holds a 4-year degree in civil

engineering and a master’s degree in soil mechanics.

     Technicians on petitioner’s staff were given a variety of

duties, including operating equipment, e.g., drilling, creation

of cylinders and other test samples, laboratory testing, and

field testing.   The educational background of petitioner’s non-

engineering staff ranged from employees with a 2-year degree1 in

civil engineering to a few with high school diplomas.     One

employee did not receive a high school diploma.   All of

petitioner’s employees worked full-time during the years in

issue.

     Petitioner’s geotechnical testing services consisted

primarily of physical tests of concrete and soil samples

conducted in either the field or laboratory.   Petitioner provided

necessary equipment (e.g., drill rigs), and laboratory

facilities, including a “moist curing room” where concrete

specimens were cured until the required “specification date”.

Operation of equipment out in the field or laboratory did not

require basic knowledge of mathematics or engineering principles

since it was not analytical in nature.   Training of petitioner’s

technical employees, or technicians, occurred on the job.



1
     A 2-year degree in civil engineering is not the equivalent
of an engineering degree required to perform professional
engineering services in Wisconsin. See Wis. Stat. sec. 443.04
(1999).
                                - 4 -

     Concrete testing consisted of primarily compressions tests

to check specifications and density of freshly poured concrete in

the field.   Tests were conducted on concrete core samples or 6 x

12 cylinders created by petitioner’s technicians or brought in by

third party contractors.

     Petitioner also tested soil samples for moisture contents,

density determinations, shear strengths, permeability tests,

proctor tests, and other tests.   Soil borings, and sometimes rock

core borings, were obtained to classify the type of soil or rock

substance.   To conduct a soil density test technicians in the

field used nuclear meters to determine the density of materials

for earthwork projects.    Training to read the meter was done on

the job in approximately 30 minutes.    Technicians handled all

aspects of obtaining samples, drilling, or laboratory testing.

     In both concrete and soil testing, information collected

from a test was given to clerical staff.    Upon request by a

client, an engineering analysis could be generated from the test

results.   Otherwise, the data was given to the client in a report

written by the clerical staff without analysis.    Only technical

personnel conducted and collected data from geotechnical tests.

It was not the function of the engineers to create or test the

cylinders or core samples.

     Petitioner also provided engineering services.    Engineering

services included offering recommendations on types of
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foundations or supporting structures, bridges, and buildings, or

pavement design from samples.    In an engineering analysis, a

professional engineer reviews, studies, and analyzes information

from field logs and laboratory data to recommend the type of

foundations of the structure or the best options available.

Analyses are based upon data collected by petitioner’s

technicians or provided by third party soil testing companies.

In order for petitioner to provide engineering services, the

client must request it.

     Engineering services were billed at a rate between $80 and

$110 per hour, depending on the precise service rendered.

Billing for geotechnical testing depended on the type of testing

requested, the parts required to create samples, and the hourly

rate for technicians, which was lower than the hourly rate for

engineers.

     Petitioner’s clientele may request geotechnical testing or

engineering analysis, or both.    For instance, other structural or

geotechnical engineering firms have hired petitioner for the sole

task of providing them with test samples and results from the

field or laboratory.   These clients conduct their own engineering

analysis of the data provided by petitioner’s test reports.

     Petitioner maintained its books and records to reflect the

type of service, whether engineering or geotechnical testing, by

using account numbers.    Every job billed to a client had an
                               - 6 -

associated account number and short narrative to distinguish the

type of service rendered and billed.    The accounts range from

5001 to 5010.   Accounts 5001 through 5006 and 5008 through 5010

relate to geotechnical services, including field and laboratory

technician services and field soil boring services.    Only

accounts 5006 and 5007 relate to engineering services, including

both office and field engineering services.

     During the taxable years ended June 30, 1995, and June 30,

1996, petitioner used the graduated tax rates under section

11(b)(1) to determine its corporate tax liability.    In a notice

of deficiency respondent determined that petitioner was a

qualified personal service corporation under section 448(d)(2),

thereby requiring a flat tax rate of 35 percent under section

11(b)(2).

                              OPINION

     Respondent contends that engineering and geotechnical

testing are both services within the field of engineering, and

therefore petitioner is a qualified personal service corporation

as defined in section 448(d)(2).

     Petitioner contends that it is not a qualified personal

service corporation because geotechnical testing is not in the

field of engineering.   Furthermore, petitioner argues that it did

not perform “substantially all” of its services within the field

of engineering as defined under section 448(d)(2).
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     Section 448(d)(2) defines a "qualified personal service

corporation" as 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 through 1 or more
     partnerships, S corporations, or qualified personal service
     corporations not described in paragraph (2) or (3) of
     subsection (a)) 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).

Under section 11(b)(2), the income of a personal service

corporation is taxed at a rate of 35 percent.

     To qualify as a personal service corporation, a corporation

must satisfy the function and ownership tests under the

regulations.   Sec. 1.448-1T(e)(3), (4) and (5), Temporary Income

Tax Regs., 52 Fed. Reg. 22768 (June 16, 1987), as amended by T.D.

8329, 56 Fed. Reg. 485 (Jan. 7, 1991), T.D. 8514, 58 Fed. Reg.

68299 (Dec. 27, 1993).   Since petitioner concedes that all of its

stock is owned by its employee, Mr. Huseth, the ownership test is
                               - 8 -

satisfied.   To satisfy the function test, substantially all of

the corporation’s activities must involve the performance of

services in the field of engineering.     See id.

     As a threshold matter, petitioner must provide services in

the field of engineering.   Although petitioner concedes that it

does provide engineering services which are clearly in the field

of engineering, petitioner contends that geotechnical testing is

not within the field of engineering.     We agree with petitioner.

Geotechnical testing does not require the same education,

training, and mastery as engineering.

     According to Wisconsin law, a professional engineer licensed

with the State must meet certain minimum education, experience,

and examining board requirements.2     This is not the case for

technicians who perform geotechnical testing services.     There are

no standard minimum requirements to provide geotechnical testing

services under the laws of Wisconsin.     According to Mr. Huseth’s



2
     The basic minimum requirements are as follows: (1) A
diploma or certificate from an engineering school or college
approved by the examining board of not less than 4 years together
with an additional 4 years of experience in engineering work; or
(2) a specific record of 8 or more years of experience in
engineering work indicating that the applicant is competent to be
placed in responsible charge of such work; or (3) a specific
record of 12 years or more of experience in engineering work
indicating that the applicant is competent to practice
engineering, or (4) a diploma or certificate from an engineering
school or college approved by the examining board of not less
than 4 years, together with an additional 8 years of experience
in engineering work, all satisfactory to the examining board.
Wis. Stat. sec. 443.04 (1999).
                                 - 9 -

testimony, technicians are trained on the job and do not require

a minimum education standard to operate equipment or gather test

data.   Equipment or laboratory training may be completed in as

long as a single day or in as little as a half hour.      Moreover,

technicians are not bound by State or board licensing or review.

     Petitioner’s geotechnical testing services are separate and

distinct from petitioner’s engineering services.      The essence of

engineering services is in the application of mathematical,

physical, and engineering sciences to services or projects, such

as consultation, investigation, evaluation, planning, design, and

review of structures and buildings.      Although geotechnical

testing data may be used in petitioner’s engineering analysis,

the data may be used for other purposes and by other parties as

well.   When petitioner provides an engineering analysis, the data

may be supplied by the client or petitioner.      In the alternative,

petitioner may supply data from geotechnical testing services

without rendering any professional engineering services.

Although we agree with respondent that engineering services could

not be completed without the data provided from geotechnical

testing, whether that information was furnished by petitioner or

another geotechnical testing firm, we are not persuaded to find

that sufficient reason to deem the means of providing data under

the umbrella of “engineering”.    In practice and principle the two
                              - 10 -

lines of services may function mutually exclusively.3

     Section 448(d)(2)(A) requires that “substantially all” of

petitioner’s activities must be devoted to the field of

engineering.   Under section 1.448-1T(e)(4)(i), “substantially

all” is defined as 95 percent or more of the employees’ time

devoted to the performance of services within the field of

engineering.   The temporary regulation further provides that for

purposes of determining whether the 95-percent rule is satisfied,

the performance of any activity incident to the actual

performance of engineering services is considered the performance

of services in that field.

     Respondent contends that geotechnical testing is “incident

to” the qualifying field of engineering.   The temporary

regulation states 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.   Sec. 1.448-1T(e)(4)(i), Temporary Income Tax

Regs., 52 Fed. Reg. 22768 (June 16, 1987), as amended by T.D.

8329, 56 Fed. Reg. 485 (Jan. 7, 1991), T.D. 8514, 58 Fed. Reg.

68299 (Dec. 27, 1993).   In this case, geotechnical testing of

soils and concrete is not within the field of engineering, nor is


3
     During his testimony, Mr. Huseth referred to three other
geotechnical testing companies in the area that did not employ
any engineers on their staffs.
                                - 11 -

it “incident to” engineering.    Petitioner’s geotechnical testing

services are not dependent upon petitioner’s ability to provide

engineering services.   It was not unusual for clients to request

petitioner’s geotechnical testing services exclusive of a

subsequent engineering analysis.    In the alternative, an

engineering analysis may be completed by data furnished by a

third party, not necessarily petitioner’s own geotechnical

testing department.   Specific services provided by petitioner

varied depending upon the unique request of the client.

Moreover, administrative and support services provided for

engineering analyses may be separated from the administrative and

support services provided for geotechnical testing services.

      Since we have decided that geotechnical testing is not in

the field of engineering, a qualifying service, then we must next

decide how much of petitioner’s time was spent in petitioner’s

engineering services.   According to the temporary regulation,

substantially all or 95 percent of petitioner’s employees’ time

must be devoted to rendering a qualifying service under section

448(d)(2).

     Petitioner proffered evidence demonstrating the overall

breakdown of testing and engineering services rendered during the

years in issue by dollar amounts reflected in invoices.      From the

invoices in the record, we find that petitioner’s engineering

services were billed between $80 and $110 per hour, depending on
                                - 12 -

the type of engineering service rendered.   Although the invoices

reflect a mix of work, both geotechnical and engineering

services, we can reasonably distinguish, by use of the account

numbers, the proportionate time spent in engineering and

geotechnical testing.   We find petitioner spent more than 5

percent of its time on geotechnical services.   Since geotechnical

testing is separate and distinct from the field of engineering,

petitioner does not meet the function test as required under

section 448(d)(2).   In our review and analysis of Exhibits 7

through 11,4 it is reasonable to conclude that 95 percent of

petitioner’s time was not devoted in the field of engineering or

incident to the field of engineering.

     We find petitioner is not a qualified personal service

corporation under section 448(d)(2), and therefore not subject to

the 35-percent flat tax rate.




4
     Exhibit 7 is a Record of Invoices Billed from June 30, 1994,
through Dec. 31, 1994.
     Exhibit 8 is a Record of Invoice Billed from Jan. 4, 1995,
through Dec. 31, 1995.
     Exhibit 9 is a Record of Invoice Billed from Jan. 4, 1996,
through July 17, 1996.
     Exhibit 10 is a sample of petitioner’s invoices dated
throughout the years in issue, showing the account numbers for
services rendered.
     Exhibit 11 is a breakdown of sales totals from July 1994
through June 1995, and also from July 1995 through June 1996.
This summary is based upon the account numbers petitioner
followed in bookkeeping. This exhibit also includes the job
descriptions associated with account numbers.
                        - 13 -

To reflect the foregoing,

                                  Decision will be entered

                             for petitioner.
