The Internal Revenue Service (“IRS”) recently published a private letter ruling (“PLR”) that permits a practice management corporation to include two managed professional corporations as members of the management corporation’s affiliated group for purposes of filing a consolidated federal income tax return. This PLR could prove important for business corporations that provide healthcare management and administrative services to professional corporations and that effectively (but not technically) own such professional corporations.

Many states provide by law that a business corporation engaged in the provision of a professional service must be owned by one or more licensed professionals. As a result, a professional corporation cannot be the subsidiary of a parent entity that is not a professional corporation.

In the PLR request, a licensed professional was the sole shareholder of two professional corporations. A non-professional company performed all administrative and support services, including financial reporting, information systems support, and billing, on behalf of the professional corporations for a fee. The non-professional company also provided management services to the extent allowed under the applicable state law.

The shareholder of the two professional corporations entered into an agreement with the management company pursuant to which the shareholder served as the professional director of the professional corporations. The shareholder, the management company, and each professional corporation also entered into stock transfer restriction agreements. Under these agreements, the shareholder’s rights were substantially limited, and the management company effectively had the right to designate who would own the shares of the professional corporations in the event the shareholder no longer served as the professional director for the professional corporations.

Specifically, under the director agreement, the management company had the right to terminate the shareholder’s position as the professional director of the professional corporations. This, in turn, would trigger a transfer event under the stock transfer restriction agreement, requiring the shareholder to transfer all of the shareholder’s shares in the professional corporations to a designee of the management company. The IRS ruled that the two professional corporations were members of the affiliated group with the management company.

While a PLR may only be relied upon by the specific party requesting the ruling, other corporations with similar circumstances may find PLR 201451009 instructive. With proper planning and consideration of other relevant tax and state law issues, certain healthcare companies and service providers may be well-served to further consider this ruling.