Part I

Complete Part I to see if the PSC meets the minimum distribution

requirement of section 280H(c). The PSC meets the requirement if, during the deferral period of the tax year, the applicable amounts paid or incurred for all employee-owners are equal to or greater than the smaller of:

• The amount determined under the preceding year test or

• The amount determined under the 3-year average test. Complete lines 1 through 4 to determine if the preceding year test applies to the PSC. If it does not, complete the rest of Part I to see if the 3-year average test applies. Line 1. Enter the applicable amount that was paid or incurred in the preceding tax year to any employee-owner of the PSC and that was otherwise deductible by the PSC on its preceding income tax return.

Example. PEK, an accrual basis personal service corporation with a tax year ending September 30, made a section 444 election for its tax year beginning October 1, 2010. On October 1, 2010, S, an employee of PEK, owned no stock of PEK; however, on March 31, 2011, S acquired 10 of the 200 outstanding shares of PEK stock. During the period October 1, 2010 to March 31, 2011, S earned $40,000 of compensation as an employee of PEK. During the period April 1, 2011, to September 30, 2011, S earned $60,000 of compensation as an employee-owner of PEK. The entire $100,000 compensation paid to S during PEK’s tax year ending September 30, 2011, was otherwise deductible by PEK and includible in S’s gross income. For its 2011 tax year, it is an applicable amount for PEK from the preceding tax year.

See Temporary Regulations section 1.280H-1T(c) for more information, including examples of the computation of the preceding-year test and the 3-year average test.