Problem:
DJ Jammer, a rapper/musician, travels around the country performing concerts on college campuses. He has two employees who make up his road crew. The crew sets up his equipment and sells DJ Jammer memorabilia (CDs, T-shirts, posters, etc.) during intermissions and after the concerts. For the last several years, Jammer has operated his business as Jammer Entertainment, Inc. (JEI). JEI, a C corporation with Jammer as the sole shareholder, has generated about 75% of its income from ticket sales and about 25% from memorabilia sales.
In January 2006, Jammer sets up a second corporation, Jammer Memorabilia, Inc. (JMI). The new corporation (JMI) handles all memorabilia sales, while JEI now handles only the concert arrangements and concert ticket sales. The two road crew employees continue to perform the same duties as before and continue to be paid by JEI. (JMI is billed for the salaries paid on its behalf.) Jammer spends about 80% of his time on JEI activities and the remainder on JMI. He set up JMI in order to sell the memorabilia business and concentrate on his career as an artist/performer.
Upon audit, the IRS advises DJ Jammer that the new arrangement causes JEI to be classified as a qualified personal service corporation. Write a 2- to 3-page memo to the file, evaluating the merits of the position taken by the IRS. Use the IRAC Tax memo format: Issue, Ruling, Analysis, and Conclusion.