Support for corporate structure under state corporate practice of medicine rules.

• Author: Mauner, Eric

In Letter Ruling 201451009, the IRS concluded that two professional corporations (PCs) could file a consolidated return with another corporation, even though licensed professionals, not one of the members of the consolidated return group, were the actual legal owners of these PCs' stock, as required by state law.

Defining Affiliated Groups

Sec. 1501 provides that an affiliated group of corporations is permitted to file a consolidated federal corporate income tax return. Sec. 1504 defines the term "affiliated group." With certain exceptions not relevant here, an affiliated group consists of one or more chains of includible corporations if the common parent directly owns the requisite percentage of stock of at least one other corporation, and if stock in each other corporation (other than the common parent) meeting the requisite percentage is owned by other members of the group. The requisite stock ownership percentage is at least 80% of the total voting power and at least 80% of the total value of the stock of the includible corporation.

While these requirements would appear to be contrary to the conclusion reached by the IRS in the letter ruling, specific arrangements in place between the owners of the PCs and the deemed parent corporation or subsidiaries within the consolidated return group established one of the corporations in the group as the beneficial owner of the PC, rather than the licensed professionals charged with holding legal tide to the PC's stock.

State Law Corporate Practice of Medicine

Many states have enacted laws for medical groups, commonly referred to as corporate practice of medicine or CPOM laws. These rules generally require a medical practice to be owned by the doctors providing medical services to patients, or by doctors supervising other doctors providing medical services to patients. The purpose of this requirement is to ensure that the ultimate legal responsibility for any risk of loss resulting from medical malpractice falls on the doctors directly or indirectly responsible for the medical treatment provided to patients.

Since these laws were established at the state level, each state has created different laws that regulate the extent to which direct or indirect owners of a medical practice must be the licensed professionals responsible for the quality of medical services provided to patients.

Some states strictly prohibit non-licensed professionals from direct or indirect ownership of PCs. This presents a challenge to medical professionals who would like to grow their practice through the use of funding from private equity, venture capitalists, or similar sources that are generally only willing to invest in the medical practice in exchange for an ownership interest.

A specialized ownership structure has traditionally been used to meet the demands of a potential private-equity investor while avoiding violations of state CPOM rules. The medical practice is generally bifurcated between two business fines: (1) medical services provided to patients by doctors, nurses, and other licensed...