IRS Private Letter Ruling Addressing Captive Professional Corporations Could Result in Significant 'Consolidated' Tax Savings

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By John R.  Washlick, Esq.

Buchanan Ingersoll & Rooney PC

On December 19, 2014, the IRS published PLR 201451009 favorably ruling that a for-profit management company could include its captive professional corporation as a member of its consolidated group for purposes of filing a consolidated tax return for federal income tax purposes, despite the fact that the PC shareholder is a physician. The ruling is significant for any investor-owned hospital, professional management company, or even a non-profit, charitable hospital that utilizes a so-called "captive" professional corporation to engage in physician practice acquisitions or physician employment in states that ban the corporate practice of medicine and otherwise prevents these same organizations to engage in such activities or employ physicians directly.

PLR 201451009 involves a Parent corporation and its Sub, both of which would not be eligible to employ physicians directly under the corporate practice of medicine prohibition of the States (A&B) involved (the IRS does not identify State A or State B). Under the PLR, the Sub retained the power to designate the physician shareholder of the PC in the event the current physician shareholder was to be removed. In consequence, the IRS concluded that the Sub was the "beneficial owner" of the PC and therefore permitted the PC to be included as part of the affiliated group, within the meaning of §1504(a)(1), and permitted the PC to join in Parent's consolidated federal income tax return.

Although the ruling is binding only between the IRS and the taxpayer requesting the ruling, PLR 201451009 may be authoritative in analogous tax situations. Indeed, the facts recited are not atypical of most captive PC arrangements. Furthermore, it is not unusual for many captive PCs to incur significant losses over time with no or little likelihood of realizing any profits or gains to offset any carryover loss benefits. As such, this ruling can potentially lead to significant federal income tax savings if losses incurred at the captive PC have otherwise been trapped at the PC corporate level that now can be used to absorb gains and profits from other members of the consolidated group.

While the ruling does not apply to tax-exempt captive PCs (i.e., because they are "tax-exempt"), to the extent those same tax-exempt captive PCs regularly incur losses, careful consideration should be given before jumping to convert an exempt PC to non-exempt just to be able to join a consolidated group within the same health system. For example, some states may require Attorney General or court review and approval of the conversion.  Also, the tax-exempt PC may be realizing significant tax benefits in other ways that outweigh the potential consolidate return tax savings, such as, local real estate tax abatements, access to exempt bond financing, and tax exempt "shared services" available for activities among other affiliated nonprofits within a health system.

Finally, parties need to refer to state law to make sure the arrangement does not otherwise run afoul of local laws and regulations.

For more information, in the Tax Management Portfolios, see White, 754 T.M., Consolidated Returns — Elections and Filing,  and in Tax Practice Series, see ¶5310, Consolidated Returns.

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