PLR 1024001: IRS recognized affiliation with a nonprofit medical corporation

Plain-English summary

A parent corporation’s subsidiary acquired the sole membership interest in a taxable nonprofit medical corporation. State law left professional medical decisions to the nonprofit’s physician board, while the subsidiary controlled other business matters and was entitled to the liquidation proceeds. The IRS ruled that the subsidiary’s ownership satisfied the affiliation requirements under § 1504(a), so the medical corporation could join the parent’s consolidated group effective on the specified date. The ruling did not address other tax consequences of the transaction.

Ruling snapshot

• Question: Does the subsidiary’s ownership of the medical corporation satisfy the affiliated-group requirements?
• Outcome: Approved
• Key authorities: IRC §§ 1502, 1504, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201024001 Third Party Communication: None
Release Date: 6/18/2010 Date of Communication: Not Applicable
Index Number: 1504.00-00
Person To Contact:
------------------------ -----------------------, ID No. -------------
-------------------------- Telephone Number:
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--------------------------------------- Refer Reply To:
---------------------------- CC:CORP:B04
PLR-100352-10
Date:
March 04, 2010

Legend:

Parent = ----------------------------------------------------
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PRS = ----------------------------------------------------
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Sub 1 = ----------------------------------------------------
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Sub 2 = ----------------------------------------------------
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Sub 3 = ----------------------------------------------------
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State A = --------

Date 1 = -----------
PLR-100352-10 2

Date 2 = ----------------

x = ----

y = --

Code X = ----------------------------------------------------
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Code Y = ----------------------------------------------------
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Dear -----------

This letter responds to your December 30, 2009 request for a ruling under section
1504(a) of the Internal Revenue Code. The information provided in that letter and in
later correspondence is summarized below.

                                          Facts

Parent is a for-profit corporation and the common parent of an affiliated group of
corporations that files a consolidated federal income tax return on the basis of a Date 1
fiscal year (the “Parent Group”). Parent indirectly owns all of the stock of Sub 1, which
joins in the filing of the Parent Group consolidated return. Sub 1 owns x percent of
PRS. The remaining y percent of PRS is owned by Sub 2, an indirect subsidiary of
Parent that is not included in the Parent Group. Prior to Date 2, PRS owned the sole
membership interest in Sub 3, a State A non-profit, non-stock membership corporation
that is taxable for both federal and State A income tax purposes. Sub 3 operates a
medical services business and employs physicians who deliver services that are part of
the overall business of the Parent Group.

Effective Date 2, PRS assigned to Sub 1 its sole ownership of Sub 3’s single
membership interest, thereby making Sub 1 the sole member of Sub 3. Also effective
Date 2, the Sub 3 articles of incorporation were amended to eliminate an existing
prohibition on liquidating distributions being made to Sub 3’s sole member, and as
PLR-100352-10 3

amended, all liquidating distributions must be made to its member, Sub 1. The
amendment was reviewed and approved by State A authorities governing non-profits as
conforming to Code X.

As a non-profit, medical services membership corporation, Sub 3 is also governed by
Code Y, which precludes Sub 1 from having control over decisions relating to the
professional practice of medicine (e.g., termination or retention of physicians,
credentialing, quality assurance, utilization review, peer review, and the practice of
medicine). The board of directors of Sub 3, which must be comprised of physicians,
has control over such decisions, while Sub 1 has direct control over all other aspects of
Sub 3’s business affairs.

                                Representations

The taxpayer has made the following representations:

(a) Sub 3 has only a single class of outstanding equity, and Sub 1 is the only
person with a legal or beneficial interest in that equity.

(b) As the sole member of Sub 3, Sub 1 has sole voting power to elect Sub 3’s
directors (subject to the approval of a majority of the existing directors), to
remove Sub 3’s directors (including without cause), to unilaterally determine
Sub 3’s operating budget, to unilaterally appoint Sub 3’s officers, and to
unilaterally control Sub 3’s decision to completely liquidate.

(c) The only Sub 3 equity voting matter that Sub 1 does not solely control is Sub
3’s decision relating to the professional practice of medicine, with Sub 3’s
board of directors having exclusive control over this matter.

(d) As the sole member of Sub 3, Sub 1 has sole entitlement to unrestricted legal
and beneficial ownership of all the liquidation proceeds of Sub 3.

(e) The only Sub 3 equity value matter that Sub 1 does not control is entitlement
to Sub 3 dividends, with Sub 3 precluded under State A law from paying any
such dividends but not restricted from accumulating its earnings for
distribution to Sub 1 on complete liquidation.

                                     Rulings

Based on the facts and information submitted and the representations made, we rule
that effective as of Date 2, Sub 1’s ownership of the Sub 3 equity satisfies the
requirements for these two corporations to be affiliated with each other, and therefore
Sub 3 is included in the Parent Group (§1504(a) and §1.1502-75(a)(1)).
PLR-100352-10 4

                                      Caveats

We express no opinion about the tax treatment of the transaction under other provisions
of the Code and regulations or about the tax treatment of any conditions existing at the
time of, or effects resulting from, the transaction that are not specifically covered by the
above ruling.

                              Procedural Statements

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                    Sincerely,


                                    __________________
                                    Lewis K Brickates
                                    Chief, Branch 4
                                    Office of Associate Chief Counsel (Corporate)

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