804 / How are corporations that are classified as professional corporations and associations taxed?

Organizations of physicians, lawyers, and other professional people organized under state professional corporation or association acts are generally treated as corporations for tax purposes.¹ However, to be treated as a corporation, a professional service organization must be both organized and operated as a corporation.² Although professional corporations are generally treated as corporations for tax purposes, they are not generally taxed the same as regular C corporations. See Q 812.Note that if a professional corporation has elected S corporation status, the shareholders will be treated as S corporation shareholders.

Although a professional corporation is recognized as a taxable entity separate and apart from the professional individual or individuals who form it, the IRS may under some circumstances reallocate income, deductions, credits, exclusions, or other allowances between the corporation and its owners in order to prevent evasion or avoidance of tax or to properly reflect the income of the parties. Under IRC Section 482, such reallocation may be made only where the individual owner operates a second business distinct from the business of the professional corporation; reallocation may not be made where the individual works exclusively for the professional corporation.³ However, note that the IRS has stated that it will not follow the Foglesong decision to the extent that it held that the two business requirement of IRC Section 482 is not satisfied where a controlling shareholder works exclusively for the controlled corporation.⁴ A professional corporation may also be subject to the special rules applicable to “personal service corporations,” see Q 812.

---

1.  Rev. Rul. 77-31, 1977-1 CB 409.

2.  Roubik v. Commissioner, 53 TC 365 (1969).

3.  Foglesong v. Commissioner, 691 F. 2d 848, 82-2 USTC ¶ 9650 (7th Cir. 1982).