PSC and S-CO.

I have a small Chinese Medicine clinic registered as an S-corporation. Recently I got a letter from IRS stating that there is a possibility that the clinic be taxed as a personal service company. I researched the IRS publication 542, and still feel confused and your help on this issue is deeply appreciated.

In Pub 542, there are two places defining personal service corporation (*Related persons*, p8 and *passive activity limits*, p10) where both require it to be not an S corporation. However, under the *Tax Rate Schedule*, it does not mention that it is not S-corporation (p10). In the tax rate schedule on the same page it does not mention anything about 1120S (which is the tax return for S-corporation), it only refers to Form 1120 and 1120-A.

My question is whether Pub 542 applies to C-corporation but not S-corporation and more importantly, whether the personal service company definition does not apply to S-corporation in all aspects, especially in the tax rate schedule as described in Pub 542.

Thank you very much for your help.