Professional corporations: to be or not to be a member of a consolidated group.

• Author: Shallenberger, Jay R.

Many independent professional medical and dental practices are incorporated under state law as professional corporations (PCs). Generally, these state laws require that PCs issue shares only to individuals who are duly licensed or otherwise legally authorized to render the same type of professional services as those for which the PC was organized. Thus, entities other than individuals (corporations, partnerships, etc.) are not authorized by law to own such stock.

Overview

Frequently, a licensed individual practitioner (employee) legally owning PC stock enters into a contractual agreement with a management company engaged in the business of providing administrative, financial, marketing and other non-healthcare personnel, facilities and equipment to independent professional medical practices. Typically, these agreements severely restrict the employee's rights as a stockholder. For example, the agreement may require the employee to vote the stock of the PC and elect the board of directors in accordance with the management company's recommendation. In addition, the employee may not be entitled to any dividends or capital appreciation on the PC's stock, nor be liable if it declines in value. Further, the agreement may provide the management company with the option to purchase the employee's PC stock (at any time) through another licensed individual under its employment for the initial nominal capital originally contributed by the employee for the PC stock.

If the management company holding all these important rights is itself a corporation that joins in a consolidated Federal income tax return, does the PC thus become a member of that group?

Code and Case Law

Sec. 1504 provides two general requirements for filing a consolidated return. First, each corporation seeking to file must be classified as an "includible" corporation as defined by exclusion under Sec. 1504(b). A PC is not among the per se nonincludible corporations listed in Sec. 1504(b), so the analysis moves to the second requirement.

To be part of an affiliated group, the stock of each includible corporation must meet certain ownership tests. Sec. 1504(a) defines an affiliated group as one or more chains of includible corporations connected through stock ownership with a common parent that is an includible corporation, but only if said parent directly owns stock meeting the requirements of Sec. 1504(a)(2) in at least one of the other includible corporations, and stock meeting those...