Could a home health agency partnership subtract income from patient services as personal service income?

Plain-English summary

The home health agency partnership could subtract compensation earned from the described patient services as personal service income. Its nurses, aides, therapists, and medical social workers provided services to homebound patients.

Section 203(d)(2)(H) incorporated the former federal personal-service-income definition and allowed the greater of personal service income or a reasonable allowance for compensation for partners' services. That definition covered compensation for services actually rendered and professional fees even when assistants performed some or all work, provided patients or clients looked to the taxpayer as responsible.

IDOR said the agency's patient-service compensation qualified. Interest, dividend income, and other revenue that was not personal service income remained outside the subtraction.

What this means for you

Separate service compensation from investment and other nonservice income. If capital also materially produces income, determine the reasonable compensation component rather than treating every dollar of partnership profit as personal service income.

Common questions

Q: Did employing nurses, aides, and therapists prevent the subtraction?
A: No. The cited rules allowed professional fees when assistants performed services if patients looked to the taxpayer as responsible.

Q: Could the agency subtract interest or dividends?
A: No. IDOR limited the subtraction to qualifying personal service income.

Citations and references

• 35 ILCS 5/203(d)(2)(H)
• Former IRC §§ 1348(b)(1), 911(b)
• Treas. Reg. §§ 1.911-2(b)(3), 1.1348-3(a)(2)

Subject

Partnerships

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100023.pdf

Original ruling text

IT 10-0023-GIL 10/14/2010 PARTNERSHIPS
General Information Letter: Explanation of the subtraction allowed to partnerships for
“personal service income” as defined in IRC Section 1348(b)(1), as in effect on
December 31, 1991.
October 14, 2010
Dear:
This is in response to your letter dated September 20, 2010 in which you request a letter ruling. The
nature of your request and the information provided requires that we respond with a General
Information Letter (GIL). A GIL is designed to provide general information, is not a statement of
Department policy and is not binding on the Department. See 2 Ill. Adm. Code § 1200.120(b) and (c).
Your letter states:
We are a Medicare certified Home Health Agency providing services to home bound patients.
Our services include visiting nurses, certified nurses aides, physical, occupational and speech
therapists, and medical social workers.
Line 26 of 2009 Form IL-1065 provides for a deduction from income for “personal service
income.” We seek a ruling to determine if our business meets the definition of “personal
service income.”
Since our business provides a “personal service” to our patients are we entitled to claim our
taxable income as a deduction on this line thus negating any tax liability?
We have no audit or litigation pending with the department.

RULING
Section 203(d)(2)(H) of the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/203(d)(2)(H)) allows a
partnership to deduct:
Any income of the partnership which constitutes personal service income as defined in Section
1348(b)(1) of the Internal Revenue Code (as in effect December 31, 1981) or a reasonable
allowance for compensation paid or accrued for services rendered by partners to the
partnership, whichever is greater.
Section 1348 of the Internal Revenue Code, as in effect on December 31, 1981, provided that the tax
rate on personal service income may not exceed 50%. That section stated that “personal service
income” means:
Any income which is earned income within the meaning of section 401(c)(2)(C) or section
911(b) or which is an amount received as a pension or annuity which arises from an
employer-employee relationship or from tax-deductible contributions to a retirement plan.
Section 911(b) of the Internal Revenue Code (as in effect on December 31, 1981) provided:
For purposes of this section, the term “earned income” means wages, salaries, or professional

IT 10-0023-GIL
October 14, 2010
Page 2
fees, and other amounts received as compensation for personal services actually rendered,
but does not include that part of the compensation derived by the taxpayer for personal
services rendered by him to a corporation which represents a distribution of earnings and
profits rather than a reasonable allowance as compensation for services actually rendered. In
the case of a taxpayer engaged in a trade or business in which both personal services and
capital are material income-producing factors, under regulations prescribed by the Secretary, a
reasonable allowance as compensation for the personal services rendered by the taxpayer,
not in excess of 30 percent of his share of the net profits of such trade or business, shall be
considered earned income.
Section 1348(b)(1)(A) provided that:
For purposes of this subparagraph, section 911(b) shall be applied without regard to the
phrase, “not in excess of 30 percent of his share of net profits of such trade or business”.
Therefore, if capital is a material income-producing factor, “personal service income” is defined in
Section 1348 as a “reasonable allowance for compensation for services rendered,” without regard to
the 30% limitation.
Treasury Regulation § 1.911-2(b)(3) expanded on the statutory definition by stating that:
Earned income includes all fees received by a taxpayer engaged in a professional occupation
(such as a doctor or lawyer) in the performance of professional activities. Professional fees
constitute earned income even though the taxpayer employs assistants to perform part or all of
the services rendered, provided the taxpayer’s patients or clients look to the taxpayer as the
person responsible for the services.
Treasury Regulation § 1.1348-3(a)(2) continues:
The entire amount received as professional fees shall be treated as earned income if the
taxpayer is engaged in a professional occupation, such as a doctor, dentist, lawyer, architect,
or accountant, even though he employs assistants to perform part or all of the services,
provided that the patients or clients are those of the taxpayer and look to the taxpayer as the
person responsible for the services performed.
In this case, based on the facts stated in your letter, compensation for services provided by the
Agency to home bound patients would constitute “earned income” under former IRC Section 911(b),
and thus “personal service income” under repealed Section 1348. Accordingly, Agency would be
allowed a subtraction modification under IITA Section 203(d)(2)(H). Other income earned by Agency
that is not personal service income, such as interest or dividend income, may not be subtracted under
IITA Section 203(d)(2)(H).
As stated above, this is a GIL. A GIL does not constitute a statement of policy that applies, interprets
or prescribes the tax laws, and it is not binding on the Department. If you wish to obtain a PLR which
will bind the Department, please submit a request conforming to the requirements of 2 Ill. Adm. Code
§ 1200.110(b).

IT 10-0023-GIL
October 14, 2010
Page 3
Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)