Last month, the Internal Revenue Service (IRS) issued a private letter ruling providing a tax benefit to hospitals that own physician practices. The ruling should be of particular interest to hospitals with physician practices in states that have strong corporate practice of medicine statutes.
It's no secret that hospitals across the country are acquiring physician practices at an ever-increasing rate. In some states, notably California, corporate practice of medicine statutes forbid anyone other than a licensed physician from owning shares in a professional medical corporation. That legal constraint doesn't necessarily prevent hospitals from effectively — as distinguished from technically — owning physician practices, but doing so requires some complicated legal maneuvering. That was the case with the unnamed corporation that sought and received private letter ruling number 201451009, released by the IRS on December 19, 2014.
The bottom line of the ruling is that under certain circumstances a physician practice may be included in a consolidated federal tax return even though a parent owns the practice in practical terms rather than according to technical legal principles. The value of consolidation lies in the fact that many practices lose money, especially in the early years after acquisition. Under the ruling, the consolidated group may apply those losses to reduce the consolidated group's taxable income.
Facts
The ruling was requested by the parent corporation of an affiliated group of corporations that files a consolidated federal income tax return. The parent wholly owns Limited Liability Company 1, which owns Limited Liability Company 2. And the latter entity owns a subsidiary corporation. All these entities are domiciled in State A.
States B and C have corporate practice of medicine statutes. In those states, shares in a professional corporation may be held only by licensed physicians. Two professional corporations — one in each state — conduct medical practices in those two states. A physician (the shareholder) licensed in both states is the sole shareholder of the two professional corporations.
Each professional corporation has a support agreement with the State A subsidiary mentioned above, under which the subsidiary provides all administrative and support services and, to the extent allowable under state law, manages the professional corporations.
The shareholder and the subsidiary have executed a Director Agreement under which the shareholder is professional director for the professional corporations and coordinates the subsidiary's business objectives for them. The subsidiary may terminate the agreement without cause or penalty. Each professional corporation is subject to a stock transfer restriction agreement that effectively prevents transfer of any shares to anyone other than a designee of the subsidiary. Nor may the shareholder exercise any of the typical rights of ownership, such as declaring a dividend or other distribution or consenting to liquidation or transfer.
Ruling
The IRS ruled that the two professional corporations are members of the affiliated group, within the meaning of Internal Revenue Code section 1504(a)(1), of which the parent is the common parent. The two professional corporations may join in the filing of a consolidated return, within the meaning of Code sections 1501 and 1502, with the group.
IRS Analysis
This is a trick heading. There is no analysis whatever! The letter merely recites the facts as represented in the ruling request and then, without discussion or comment, states the ruling set out in the preceding paragraph.
Caveat
As with all private letter rulings, technically only the requestor of the ruling may rely on it. Nevertheless, insofar as the ruling expresses the position of the IRS, there is no reason to believe that the IRS would rule differently if another taxpayer's situation presented the same fact pattern.
