Internal Revenue Service
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 Rev. Rul. 77-31

1977-1 C.B. 409

Section 7701

IRS Headnote

Professional service organization; tax classification. A professional service organization formed and operated under the Professional Service Corporation Act of a state listed in Rev. Rul. 70-101 is considered a corporation for Federal income tax purposes and the detailed criteria in the regulations under section 7701 of the Code need not be applied to determine its classification.

Full Text

Rev. Rul. 77-31

Advice has been requested whether the criteria for classification of organizations contained in the Procedure and Administration Regulations under section 7701 of the Internal Revenue Code of 1954 must be applied to the professional service organization described below.

In 1970, an individual organized a professional service organization under the Professional Service Corporation Act of a state listed in Rev. Rul. 70-101, 1970-1 C.B. 278. Since it formation the individual has been the sole shareholder and the principal officer and operator of the organization. The organization has at all times been operated in accordance with all requirements of the state's laws relating to the operation of professional service organizations and the practice of the profession for which the organization was formed.

Section 7701(a)(3) of the Code provides that the term "corporation" includes associations, joint stock companies, and insurance companies. The regulations under section 7701 provide certain criteria whereby the characteristics of organizations are analyzed and evaluated to determine whether the organization is an association taxable as a corporation, a partnership, or a trust.

Rev. Rul. 70-101, 1970-1 C.B. 278 (as amplified and modified by Rev. Rul. 70-455, 1970-2 C.B. 297; Rev. Rul. 72-468, 1972-2 C.B. 647; Rev. Rul. 73-596, 1973-2 C.B. 424; and Rev. Rul. 74-439, 1974-2 C.B. 405) provides that a professional service organization that is organized and operated under the statutes of the states listed therein will be treated as a corporation except in those instances in which it is illegal, as a matter of state law, for the professional service organization claiming corporate status to engage in the practice of the particular profession for which it is organized.

Rev. Rul. 70-101 also provides that a professional service organization must be both organized and operated as a corporation to be classified as such. See Jerome J. Roubik v. Commissioner, 53 T.C. 365 (1969).

Revenue Ruling 70-101, as amplified and modified, is dispositive of the question of whether the classification criteria in the regulations under section 7701 of the Code must be applied to professional service organizations formed and operated under the statutes of the states listed. That Revenue Ruling provides that such organizations are considered corporations for Federal income tax purposes provided it is legal, as a matter of state law, for the professional service organization claiming corporate status to engage in the practice of the particular profession that they are organized to engage in.

Accordingly, in the instant case, since the professional service organization is organized and operated as a corporation, it is considered a corporation for Federal income tax purposes. Therefore, the detailed classification criteria in the regulations under section 7701 of the Code need not be applied to determine its classification.