§ 632-a. Personal service corporations and S corporations formed or
availed of to avoid or evade New York State income tax. (a) General. If
(1) substantially all of the services of a personal service corporation
or S corporation are performed for or on behalf of another corporation,
partnership, or other entity and (2) the effect of forming or availing
of such personal service corporation or S corporation is the avoidance
or evasion of New York income tax by reducing the income of, or in the
case of a nonresident, reducing the New York source income of, or
securing the benefit of any expense, deduction, credit, exclusion, or
other allowance for, any employee-owner which would not otherwise be
available, then the commissioner may allocate all income, deductions,
credits, exclusions, and other allowances between such personal service
corporation or S corporation (even if such personal service corporation
or S corporation is taxed under article nine-A of this chapter or is not
subject to tax in this state) and its employee-owners, provided such
allocation is necessary to prevent avoidance or evasion of New York
state income tax or to clearly reflect the source and the amount of the
income of the personal service corporation or S corporation or any of
its employee-owners.

(b) Definitions for purposes of this section. (1) The term "personal
service corporation" means a corporation whose principal activity is the
performance of personal services and such services are substantially
performed by the employee-owners of such corporation.

(2) The term "S corporation" means a corporation for which an election
under section 1362 of the internal revenue code is in effect for such
taxable year and whose principal activity is the performance of personal
services and such services are substantially performed by the
employee-owners of such corporation.

(3) The term "employee-owner" means any employee who owns, on any
given day during the taxable year, more than ten percent of the
outstanding stock of the personal service corporation or S corporation.
For purposes of the preceding sentence, the constructive ownership of
stock rules set forth in section 318 of the internal revenue code shall
apply, except that "5 percent" shall be substituted for "50 percent" in
section 318(a)(2)(C) of the internal revenue code.

(4) All related persons (within the meaning of section 144(a)(3) of
the internal revenue code) shall be treated as one entity.