                   T.C. Summary Opinion 2007-48




                      UNITED STATES TAX COURT



     ROBERTSON STRONG & APGAR ARCHITECTS, PC, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12504-05S.            Filed March 26, 2007.


     Lawrence Apgar (an officer), for petitioner.

     John Janusz, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   Pursuant to section

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion should not be treated as precedent

for any other case.   Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code in effect for

the years in issue, and all Rule references are to the Tax Court
                                     - 2 -

Rules of Practice and Procedure.

       Respondent determined deficiencies in petitioner’s Federal

income taxes for taxable years 2002 and 2003 in the amounts of

$10,021.60 and $11,841.60, respectively.        The issue for decision

is whether petitioner was a personal service corporation in the

tax years in question and accordingly subject to a special flat

tax rate of 35 percent.

                                Background

       This case was submitted fully stipulated pursuant to Rule

122.       The stipulation of facts and the attached exhibits are

incorporated herein by reference.        At the time the petition was

filed, petitioner’s place of business was in Syracuse, New York.

        Petitioner filed a Form 1120, U.S. Corporation Income Tax

Return, for the taxable years 2002 and 2003.

        At all times during 2002 and 2003, petitioner was

incorporated under the laws of New York.        Petitioner’s shares at

the end of both of the years at issue were held as follows:

                    Lawrence Apgar      122 shares

                    James Oliver         50 shares

                    Treasury shares     172 shares

        On Schedule E1 of the Form 1120, however, filed for taxable


       1
       Schedule E, Compensation of Officers, of Form 1120
requires the corporation to provide certain information,
including the names of officers, and the percentage of
corporation stock owned by each officer.
                               - 3 -

years 2002 and 2003, petitioner indicated that its sole

officers, Lawrence Apgar and James S. Oliver, owned 70.5 percent

and 29.5 percent, respectively, of all of the outstanding common

stock of the corporation.    Petitioner acquired outstanding

shares of its stock sometime in 2002.     According to the Schedule

L, Balance Sheets per Books, of Form 1120 filed for taxable year

2002, petitioner’s cost of treasury stock was $40,666 at the

beginning of 2002 and was $53,999 at the end of 2002.     When

these acquired shares were added to the shares already held by

petitioner as treasury stock, the total number of shares was

172.    Petitioner’s cost of treasury stock on its Schedule L of

Form 1120 for 2003 was the same for the beginning and end of

that year, $53,999.

                             Discussion

       In general, for Federal income tax purposes, corporations

are taxed at graduated income tax rates.     Sec. 11(b)(1).

So-called qualified personal service corporations as defined in

section 448(d)(2), however, are taxed at a flat 35-percent

income tax rate.    Sec. 11(b)(2).   The term “qualified personal

service corporation” is defined in section 448(d)(2).     A

corporation will be considered a qualified personal services

corporation if it meets two tests: a function test and an

ownership test.    Sec. 448(d)(2)(A) and (B).   Section

448(d)(2)(A) defines the function test as where “substantially
                               - 4 -

all of the activities of which involve the performance of

services in the fields of * * * architecture.”   In this case,

petitioner and respondent agree that petitioner’s business

satisfies the function test.   With regard to the ownership test,

respondent contends that petitioner also satisfies the ownership

test; petitioner disagrees.

     Section 448(d)(2)(B) defines the ownership test as where:

          (B) substantially all of the stock of which (by
     value) is held directly * * * by–

               (i) employees performing services for
          such corporation in connection with the
          activities involving a field referred to in
          subparagraph (A)

     In interpreting the ownership test of section 448(d)(2)(B),

section 1.448-1T(e)(5)(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), and T.D. 8514, 58 Fed. Reg. 68299 (Dec.

27, 1993), further provides:

          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–

               (A) Employees performing services for
          such corporation in connection with
          activities involving a field referred to in
          paragraph (e)(4) of this section,

          *      *      *       *      *     *      *

          For purposes of this paragraph (e)(5), the term
     “substantially all” means an amount equal to or
     greater than 95 percent.
                                    - 5 -

      Petitioner argues that the treasury shares should be taken

into consideration when applying the percentage ownership test

as set forth in section 448(d)(2)(B) and section 1.448-

1T(e)(5)(i), Temporary Income Tax Regs., supra.          Under

petitioner’s argument, percentage of ownership would be as

follows:

                   Lawrence Apgar      35.5 percent

                   James Oliver        14.5 percent

                   Treasury shares          50 percent

      Petitioner maintains that although the treasury shares were

not outstanding shares, they nonetheless had a “contra value”2

of $53,999 at the end of its 2002 and 2003 taxable years.

Accordingly, says petitioner, due to this “value”, the shares

should be considered as held by “by value” pursuant to section

44(d)(2)(B) and therefore included when applying the ownership

test as described in section 1.448-1T(e)(5)(i), Temporary Income

Tax Regs., supra.

         Petitioner’s rationale may be summarized as follows:

First, petitioner argues that it should not be bound for


     2
       We are unclear as to petitioner’s use of the term contra
value. Petitioner appears to concede that although the treasury
shares are not outstanding equity per se to the corporation, that
they nonetheless have a value (contra value), based on what
petitioner paid to its shareholders upon acquisition of the
shares. We believe that petitioner may be mistakenly
interchanging its concept of contra equity with the term contra
equity account.
                             - 6 -

purposes of determining ownership under section 448(d)(2)(B) by

the shares listed on Schedule E of Form 1120, as that Form only

solicits information regarding the ownership of stock by

officers of the corporation in relationship to each other and

not the corporation’s full stock-ownership profile.    Second,

petitioner argues that its treasury shares should be

characterized as “by value” pursuant to section 1.448-

1T(e)(5)(i), Temporary Income Tax Regs., supra, because under

New York law, the shares were acquired and retained by the

corporation, and the amount that they were acquired for

($53,999) establishes a present value to the corporation.    We

disagree.

     Petitioner’s argument that it did not include treasury

shares on Schedule E of the Form 1120 because Schedule E only

asks for shares held by corporation officers “in relation to one

another” is incorrect and meritless.   While Schedule E does

solicit information with respect to the shares held by officers,

it clearly asks in sections (d) and (e) for the percentage of

total corporation stock owned by each officer.    The corporation

is asked to provide the percentage of the total stock owned by

the officers and not, as petitioner argues, the percentages of

stock each owns in relationship to the other.    Accordingly,

petitioner correctly indicated on its Forms 1120 for 2002 and

2003 that Mr. Apgar and Mr. Oliver together owned 100 percent of
                               - 7 -

the corporation’s outstanding stock.    If petitioner intended the

treasury shares to be included in the total shares of

corporation stock listed on Schedule E, then it would have

listed the percentages owned by Mr. Apgar and Mr. Oliver

accordingly.    For example, petitioner alleges that the total

number of common stock shares was 344, with Mr. Apgar holding

122 shares, Mr. Oliver holding 50 shares, and each then owning

35.5 percent and 14.5 percent of the total shares, respectively.

Petitioner, however, did not indicate these ownership

percentages on its Schedule E for either 2002 or 2003.

       Petitioner next argues that it indicated the percentages of

each officer’s stock ownership in relation to the other because

the directions attached to Schedule E require that it list “the

deductible part of each officer’s compensation”.    This argument,

however, has no relationship to the percentage of stock owned by

the officers but rather deals exclusively with the total

compensation of officers as indicated on Schedule E, section

(f).    Accordingly, we cannot conclude that there is merit in any

of petitioner’s arguments with respect to its completed

Schedules E.

       Petitioner next argues that the 172 shares of treasury

stock should be factored into the ownership test as described in

section 448(d)(2)(B) and section 1.448-1T(e)(5)(i), Temporary

Income Tax Regs., 52 Fed. Reg. 22766 (June 16, 1987), as the
                              - 8 -

shares held a ‘contra value’ to petitioner in both tax years of

$53,999.   We disagree.

      New York Business Corporation Law sec. 102(a)(14) (McKinney

2003) defines treasury shares as: “shares which have been

issued, have been subsequently acquired, and are retained

uncancelled by the corporation.   Treasury shares are issued

shares, but not outstanding shares, and are not assets.”

      Petitioner argues that even though it purchased the

acquired shares, and the shares remain uncanceled, they

nonetheless have a ‘contra value’, and, while not assets, the

shares are still held “by value” in accordance with section

448(d)(2)(B) and section 1.448-1T(e)(5)(i), Temporary Income Tax

Regs., supra.   We disagree with petitioner’s creative

characterization of its treasury shares.

      Treasury stock, while held by a corporation, has no value.

Christie v. Fifth Madison Corp., 211 N.Y.S.2d 787, 796 (App.

Div. 1961).   Treasury stock has no value because it carries no

voting rights, rights to dividends, or rights to distributions.

Id.   Treasury shares are actually a legal fiction and a figure

of speech only used to explain the rights and rules that apply

upon their reissue.   Id. at 796. Treasury stock, therefore, is

not an “asset” of the corporation.    Its only value is what

petitioner might receive in consideration for its reissuance.

In this case, when petitioner acquired its stock, the stock
                              - 9 -

could be reissued for consideration (i.e., cash), and the cash

would increase its assets and the reissued shares would be

reflected in an increase in its shareholder equity.

     Most importantly, contrary to petitioner’s assertion, the

acquisition of treasury stock is actually a contraction of

corporate capital.   Specifically, in this case, when petitioner

reacquired shares in 2002, the total cost of its treasury stock

was $53,999.   On the Schedule L balance sheets for 2002 and

2003, petitioner correctly subtracted $53,999 from its retained

earnings.   This calculation was done because when stock is

reacquired by a corporation there is a necessary and

corresponding reduction in retained earnings and shareholder

equity.   The treasury stock is held in a contra equity account,

so named because it reduces total shareholder equity in the

corporation.   Only a subsequent resale of treasury stock would

result in an expansion of shareholder equity.   It follows then

that because treasury stock has no value if and until it is

resold, that it is not held “by value” per section 448(d)(2)(B).

     In this case, the only stock which was held “by value” is

the stock owned by Mr. Apgar and Mr. Oliver.    Because Mr. Apgar

and Mr. Oliver are petitioner’s employees, and as they together

hold 100 percent of petitioner’s stock, petitioner meets the

ownership test defined in section 1.448-1T(e)(5)(i), Temporary

Income Tax Regs., supra.
                              - 10 -

     Finally, we note that because New York corporation law

provides that petitioner, a professional service corporation

engaged in architectural services, may issue shares only to

individuals who are licensed architects in New York State, we

suspect that the treasury shares at the heart of this case were

reacquired by petitioner from Mr. Apgar and Mr. Oliver for the

purpose of circumventing the ownership test of section

448(d)(2)(B) and hence, avoiding application of the 35-percent

flat tax.   N.Y. Bus. Corp. Law sec. 1507 (McKinney 2003).

Accordingly, we sustain respondent’s determination.


                                         Decision will be entered

                                    for respondent.
