Rev. Rul. 77-96

Advice has been requested whether the benefits payable under the qualified retirement plan of a professional corporation are excludable from the value of a decedent's gross estate under section 2039(c) of the Internal Revenue Code of 1954.

The decedent's professional medical practice was incorporated and operated as a professional service corporation under the professional corporation statute of State X and was recognized as such under Rev. Rul. 70-101, 1970-1 C.B. 278. The decedent and the decedent's spouse, who was also a licensed physician, owned all of the outstanding shares of the professional corporation.

The decedent was an employee of the corporation and at death in 1977 was a participant in the corporation's Employees' Retirement Plan that qualified under section 401(a) of the Code at that time. The decedent's total compensation, including contributions to the Plan, was reasonable in amount and did not constitute a distribution of corporate earnings. Under the retirement plan, monthly payments of a fixed amount would be made to the decedent from the date of retirement until the decedent's death. A certain amount would also be paid each month to the decedent's surviving spouse from the date of decedent's death until the death of the spouse.

Section 2039(a) and (b) of the Code provides that a decedent's gross estate includes the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent, under certain contracts or agreements, to the extent that the value of the annuity or other payment is attributable to contributions made by the decedent or decedent's employer. However, section 2039(c), as amended by the Tax Reform Act of 1976, provides in part:

Notwithstanding the provisions of this section or of any provision of law, there shall be excluded from the gross estate the value of an annuity or other payment [other than a lump sum distribution] receivable by any beneficiary (other than the executor) under--

(1) An employees' trust (or under a contract purchased by an employees' trust) forming part of a pension, stock bonus, or profit-sharing plan which, at the time of the decedent's separation from employment (whether by death or otherwise), or at the time of termination of the plan if earlier, met the requirements of section 401(a). * * *

Section 2039(c) further provides that, if the amounts payable after the death of the decedent are attributable to any extent to contributions made by the decedent, no exclusion is allowable for the proportionate value of such payments.

Rev. Rul. 70-101, 1970-1 C.B. 278, holds that certain organizations of doctors, lawyers and other professional people organized and operated as corporations under state professional associations acts will be treated as corporations for tax purposes. The recognition of professional associations as corporations permits professionals, as employees of the corporation, to participate in qualified pension, profit-sharing, and stock bonus plans under section 401(a) of the Code. In addition to the rights and benefits accruing under plans meeting the requirements of section 401(a), the professional, as an employee, is entitled to the section 2039(c) exclusion with respect to survivorship benefits attributable to employer contributions.

An organization formed and operated under the professional corporation statute of State X and recognized as such under the cited Revenue Ruling is treated as a corporation for tax purposes under section 7701(a)(3) of the Code.

Since, in the instant case, the decedent was an employee of a professional service organization, formed and operated under a state statute and recognized by the Internal Revenue Service as a corporation, the value of the decedent's surviving spouse's annuity payments receivable under the qualified plan, which are attributable to contributions of the employer, is excludable from the value of the decedent's gross estate under section 2039(c) of the Code.