Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-67

1975-1 C.B. 169

Sec. 543

IRS Headnote

Personal holding company; professional service corporation. Income earned by a domestic professional service corporation, 80-percent owned by its sole physician-employee who specializes in a certain area of medicine, will not be considered from personal service contracts within the meaning of section 543(a)(7) of the Code in the absence of contracts between the corporation or the physician and the patients that the physician will personally perform the services or evidence that the services are so unique as to preclude substitution.

Full Text

Rev. Rul. 75-67

Advice has been requested whether, under the circumstances described below, a corporation will be considered to have received personal holding company income within the meaning of section 543(a)(7) of the Internal Revenue Code of 1954.

B, a doctor specializing in a certain area of medical services, owns 80 percent of the outstanding stock of L, a domestic professional service corporation. B is the only officer of L who is active in the production of income for L, and he is the only medical doctor presently employed by L. B performs medical services under an employment contract with L. L furnishes office quarters and equipment, and employs a receptionist to assist B. P, a patient, solicited the services of and was treated by B.

Section 543(a)(7) of the Code provides, in part, that the term personal holding company income includes amounts received under a contract whereby a corporation is to furnish personal services if some person other than the corporation has the right to designate, by name or description, the individual who is to perform the services, or if the individual who is to perform the services is designated, by name or description, in the contract.

In dealing with a professional service corporation providing medical services, an individual will customarily solicit and expect to receive the services of a particular physician, and he will usually be treated by the physician sought.

A physician-patient relationship arises from such a general agreement of treatment. Either party may terminate the relationship at will, although the physician must give the patient reasonable notice of his withdrawal and may not abandon the patient until a replacement, if necessary, can be obtained. C. Morris & A. Mortiz, Doctor and Patient and the Law 135 (5th ed. 1971). Moreover, if a physician who has entered into a general agreement of treatment is unable to treat the patient when his services are needed, he may provide a qualified and competent substitute physician to render the services. C. Morris & A. Moritz, supra, at 138, 374-75.

Thus, when an individual solicits, and expects, the services of a particular physician and that physician accepts the individual as a patient and treats him, the relationship of physician-patient established in this manner does not constitute a designation of the individual who is to perform the services under a contract for personal services within the meaning of section 543(a)(7) of the Code.

If, however, the physician or the professional service corporation contracts with the patient that the physician personally will perform particular services for the patient, and he has no right to substitute another physician to perform such services, there is a designation of that physician as the individual to perform services under a contract for personal services within the meaning of section 543(a)(7) of the Code.

The designation of a physician as an individual to perform services can be accomplished by either an oral or written contract. See Rev. Rul. 69-299, 1969-1 C.B. 165.

Moreover, if L agreed to perform the type of services that are so unique as to preclude substitution of another physician to perform such services, there is also a designation.

Accordingly, since in the instant case there is no indication that L has contracted that B will personally perform the services or that the services are so unique as to preclude substitution, it is held that income earned by L from providing medical service contracts will not be considered income from personal service contracts within the meaning of section 543(a)(7) of the Code.