Can you give me plain English definitions for the following: (1) a closely held corporation, (2) a personal holding company, and (3) a personal service corporation?

Sure, here are plain English definitions for the three types of corporations:

1. Closely Held Corporation:
   • A closely held corporation is a company where more than 50% of the value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals at any time during the last half of the tax year. It is not classified as a personal service corporation. This type of corporation is subject to additional limitations on the tax treatment of items such as passive activity losses, at-risk rules, and compensation paid to corporate officers.
2. Personal Holding Company:
   • A personal holding company is a corporation that meets two specific criteria:
     1. Stock Ownership Test: More than 50% of the value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals at any time during the last half of the tax year.
     2. Income Test: At least 60% of its adjusted ordinary gross income for the tax year comes from dividends, interest, rent, and royalties (including mineral, oil, and gas royalties). This type of corporation is often subject to special tax rules to prevent the deferral of income tax by accumulating earnings.
3. Personal Service Corporation:
   • A personal service corporation is a company where the principal activity is the performance of personal services, and these services are substantially performed by employee-owners. To qualify:
     1. The principal activity during the "testing period" (usually the prior tax year) must be performing personal services.
     2. More than 20% of the corporation's compensation cost for performing personal services must be for services performed by employee-owners.
     3. Employee-owners must own more than 10% of the fair market value of the corporation's outstanding stock on the last day of the testing period. Personal services include fields like accounting, law, health, engineering, and the performing arts.

Sources:
LTR 8705043
Publication 542 (1/2024)
PLR 9611003
§ 269A. Personal service corporations formed or availed of to avoid or evade income tax
§ 441. Period for computation of taxable income
§ 542. Definition of personal holding company