Professional corporations may join parent's consolidated group

Plain-English summary

A corporate group provided administrative and support services to two professional corporations operating under state laws that restricted their shares to licensed professionals. A licensed individual held legal title to all of the professional-corporation shares for a nominal amount. Detailed stock-transfer agreements barred that individual from transferring shares, declaring dividends, changing governing documents, or taking other major actions without the group's control, and required a transfer to a group-selected qualified holder after specified events. The parent represented that the arrangements were enforceable, beneficial ownership by the group's subsidiary was permitted, and distributions would be made only to the group. The IRS ruled that both professional corporations were members of the parent's affiliated group under § 1504(a) and could join its consolidated federal income tax return. The ruling did not address prior filed years or other tax consequences of the arrangements.

Ruling snapshot

• Question: Were the two professional corporations members of the parent's affiliated group despite state-law requirements that a licensed individual hold legal title to their shares?
• Outcome: Approved for membership in the affiliated group and consolidated return filing
• Key authorities: IRC §§ 1501, 1502, and 1504(a); Rev. Rul. 84-79

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201451009 Third Party Communication: None
Release Date: 12/19/2014 Date of Communication: Not Applicable
Index Number: 1504.00-00
Person To Contact:
-------------- ---------------------, ID No. ------------------
---------------------------------- Telephone Number:
------------------------------------ ----------------------
------------------------------------------ Refer Reply To:
----------------------------------- CC:CORP:B05
PLR-110218-14
Date:
September 09, 2014

Legend

Parent = ------------------------------------
--------------------------------
------------------------

LLC 1 = ----------------------------
-------------------------------------------------
----------------------------

LLC 2 = ---------------------------------------------------
-------------------------------------------------
----------------------------

Sub = ---------------------------------
--------------------------------
------------------------

PC 1 = ------------------------------------------------
------------------------------------------------
------------------------

PC 2 = -----------------------------------------------------
----------------------------------------------------
------------------------

State A = --------------

State B = ------------
PLR-110218-14 2

State C = ----------------

Shareholder = ---------------------------

Profession = ----------------------------------------------------------------------------------------------------------------
------

Professional = ----------------------------------------------------------------------------------------------------------------

Code A = ----------------------------------------------------------------------------------------------------------------
----------

Code B = ----------------------------------------------------------------------------------------------------------------
----------

Code C = ----------------------------------------------------------------------------------------------------------------

Code D = ----------------------------------------------------------------------------------------------------------------
--------

First Stock = ----------------------------------------------------------------------------------------------------------------
Transfer ----------------------------------------------------------------------------------------------------------------
Restriction
Agreement
----------------------------------------------------------------------------------------------------------------
Second = ----------------------------------------------------------------------------------------------------------------
Stock --------------------
Transfer
Restriction
Agreement

Director = ----------------------------------------------------------------------------------------------------------------
Agreement -------------------------------------

Professional = -----------------------
Director

a = ----

b = ----

c = --

d = --
PLR-110218-14 3

e = --

f = ---------

g = ----------------

Dear ----------:

   This letter responds to your March 11, 2014 request, submitted by your

authorized representatives, 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.

  The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by penalties of perjury statements
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for ruling, it is subject to verification on examination.

                                       FACTS

   Parent, a State A corporation, is the common parent of an affiliated group of

corporations that files a consolidated federal income tax return on a calendar year basis
(the “Parent Group”). Parent wholly owns LLC 1, and LLC 1 wholly owns LLC 2; both
LLC 1 and LLC 2 are State A limited liability companies that are disregarded as entities
separate from Parent for U.S. federal tax purposes. LLC 2 wholly owns Sub, a State A
corporation and member of the Parent Group.

   PC 1 is a State B professional corporation, and is subject to State B’s Code A

and Code B. PC 2 is a State C professional corporation, and is subject to State C’s
Code C and Code D. PC 1 and PC 2 (collectively, the “PCs” and individually, a “PC”)
are engaged in Profession. Code B and Code D provide that PC 1 and PC 2,
respectively, may only engage in Profession through one or more Professionals. Under
Code B and Code D, the shares of corporations engaged in Profession generally may
only be issued to, held by, or transferred to Professionals. Shareholder is a Professional
and is authorized to engage in Profession in State B and in State C.

   The PCs conduct the aspects of their respective businesses that constitute

engagement in Profession. Under the terms of support services agreements among
Sub, on the one hand, and PC 1 or PC 2, on the other, which each have a term of a
years (each, a “Support Services Agreement”), Sub performs all administrative and
support services, including financial reporting, billing, and information systems support,
on behalf of the PCs in exchange for a fee. Sub also manages the PCs, to the extent
such management does not constitute engagement in Profession.
PLR-110218-14 4

   Shareholder and Sub are parties to the Director Agreement. Pursuant to the

provisions of the Director Agreement, Shareholder serves as Professional Director for
the PCs, and oversees and coordinates Sub’s business objectives for the PCs. Sub has
the right to terminate the Director Agreement without cause or penalty upon e day’s
notice to Shareholder. The termination of the Director Agreement is a Transfer Event
under each of the Stock Transfer Restriction Agreements.

   Shareholder paid $b (a nominal amount) to acquire, and holds, legal title to all of

the issued and outstanding shares of the PCs. Sub, Shareholder and PC 1 have
entered into the First Stock Transfer Restriction Agreement with respect to PC 1 and
Sub, Shareholder and PC 2 have entered into the Second Stock Transfer Restriction
Agreement with respect to PC 2, respectively (collectively, the "Stock Transfer
Restriction Agreements”).

    Pursuant to the provisions of Article c of the bylaws of PC 1, the shares of PC 1

are certificated, and the share certificates are required to be endorsed with a legend, in
bold print, noting (inter alia) that the shares of stock represented by the certificate are
subject to the First Stock Transfer Restriction Agreement. Pursuant to the provisions of
Article c of the bylaws of PC 2, the shares of PC 2 are certificated, and share
certificates are required to conspicuously note any restriction on the transfer of the
shares to which PC 2 is a party, to the extent the restriction was in effect upon the
issuance of the shares. The Stock Transfer Restriction Agreements require all share
certificates of the respective PCs to bear a legend, noting (inter alia) that the shares
underlying the certificate are subject to the Stock Transfer Restriction Agreements. The
stock certificates for the issued and outstanding shares of stock in the PCs are issued in
the name of Shareholder, and bear the required legends.

    The bylaws of each of the PCs prohibit the transfer of stock in the respective PC,

other than in accordance with the relevant Stock Transfer Restriction Agreement, and
provide that any person who transfers, holds, or purports to exercise any rights or
privileges with respect to any shares of stock in the respective PC in violation of the
rights, restrictions, or provisions of the bylaws shall not have the right to vote, receive
dividends, or enjoy or exercise any right or privilege as a holder of shares of stock in the
PC.

    The Stock Transfer Restriction Agreements prohibit Shareholder from

transferring or disposing of any shares of stock in the respective PCs, except as
provided in the Stock Transfer Restriction Agreements. The Stock Transfer Restriction
Agreements also prohibit Shareholder from having a PC make a dividend or other
distribution with respect to its stock or issue additional equity interests or rights to
acquire additional equity interests, and require Shareholder to take all steps necessary
to prevent the PCs from taking any such action. Furthermore, Shareholder is not
permitted to consent to a liquidation or dissolution of a PC without the prior consent of
Sub.
PLR-110218-14 5

    The Stock Transfer Restriction Agreements mandate that upon the occurrence of

certain events (each a “Transfer Event”), Shareholder must transfer, or will be deemed
to transfer, all of the shares of the relevant PC to a person or entity identified by Sub
(the “Designated Transferee”). Any Designated Transferee will be a Professional or
entity permitted under Code B or Code D, as applicable, to directly hold the stock of the
relevant PC. A Transfer Event with respect to a PC includes, but is not limited to: (i) the
transfer or attempt to transfer any shares of stock in the PC to a person other than a
Designated Transferee; (ii) Shareholder ceasing to be a Professional Director for the
PC; (iii) the termination, with or without cause, of the PC’s Support Services Agreement;
(iv) the filing of any petition for or other document causing or intended to cause judicial,
administrative, voluntary, or involuntary dissolution of the PC; (v) Shareholder, either as
a shareholder or director, voting to issue more of the PC’s stock to any person; (vi)
Shareholder, either as a shareholder or director, voting to amend or otherwise
attempting to amend the PC’s articles of incorporation or bylaws; (vii) Shareholder,
either as a shareholder or director, voting to declare a dividend on the PC’s shares; (viii)
Shareholder ceasing to be a director on the corporate board of the PC; (ix) Shareholder,
either as a shareholder or director, voting to engage in or enter into any transaction
providing for the sale, mortgage, lease, or other disposition of all or substantially all of
the PC’s property and assets or voting to adopt a plan of dissolution and/or distribution
of the assets of the PC or voting to adopt a plan of merger involving the PC; (x)
Shareholder breaching a covenant set forth in Article d of the relevant Stock Transfer
Restriction Agreement for the PC; (xi) Shareholder breaching any agreement between
Shareholder and Sub; and (xii) Shareholder’s notification to Sub that Shareholder
desires to transfer all of the stock in a PC.

     In the event Sub decides to terminate PC 1’s or PC 2’s existence, Sub intends to

carry out (or to cause to be carried out) the following steps to effect the termination: (i)
Sub will effect a Transfer Event by terminating the Director Agreement, resulting in
Shareholder ceasing to be Professional Director; (ii) upon the creation of the Transfer
Event and pursuant to the Stock Transfer Restriction Agreement, Shareholder will
transfer, or be deemed to transfer, all of the shares of stock in the relevant PC to Sub in
exchange for the nominal amount (i.e., $b) that Shareholder initially paid to acquire legal
title to the PC shares; and (iii) the relevant PC will be liquidated or merged into Sub, and
all of its assets will be transferred to Sub. Under section f of Code B, if PC 1 were at any
time to cease having a Professional as a shareholder, PC 1 could operate as a
corporation for profit organized under Code A for the sole purpose of liquidation. Under
section g of Code D, PC 2 could merge with a domestic or foreign professional or
business corporation, provided that all of the shareholders of the disappearing and
surviving corporations are qualified to be shareholders of the surviving corporation.

                              REPRESENTATIONS

   Parent makes the following representations:

PLR-110218-14 6

(a) The PCs have never declared nor paid any dividends, nor made other
distributions, to any shareholder.

(b) The PCs do not intend to declare or pay any dividends, or make any other
distributions, to any shareholder, except for distributions to Sub or other
members of the Parent Group.

(c) In the event the PC 1 shares or the PC 2 shares are transferred to a Designated
Transferee pursuant to a Stock Transfer Restriction Agreement, such Designated
Transferee will be required to execute a new stock transfer restriction agreement
having terms substantially similar to the existing Stock Transfer Restriction
Agreement.

(d) The legal arrangements created by the Stock Transfer Restriction Agreements
are valid and legally enforceable under applicable law.

(e) Applicable law does not prohibit the beneficial ownership of stock in PC 1 by
Sub.

(f) Applicable law does not prohibit the beneficial ownership of stock in PC 2 by
Sub.

(g) Neither PC 1 nor PC 2 is (1) a section 501 tax-exempt corporation, (2) an
insurance company subject to tax under section 801, (3) a foreign corporation,
(4) a corporation that has an election in effect under section 936, (5) a regulated
investment company, (6) a real estate investment trust, (7) a domestic
international sales corporation under section 992, or (8) an S corporation.

                                     RULING

    Based on the facts and information submitted and the representations made, we

rule that both PC 1 and PC 2 are members of the affiliated group (within the meaning of
section 1504(a)(1)) of which Parent is the common parent, and will be permitted to join
in the filing of a consolidated federal income tax return (within the meaning of sections
1501 and 1502 and the regulations thereunder) with the Parent Group. Section 1504(a);
Rev. Rul. 84-79, 1984-1 C.B. 190.

                                    CAVEATS

   We express no opinion about the tax treatment of the arrangements under other

provisions of the Code or regulations, or the tax treatment of any conditions existing at
the time of, or effects resulting from, the arrangements that are not specifically covered
by the above ruling. Furthermore, no opinion is expressed concerning the treatment of
any arrangements in taxable years for which income tax returns have already been
filed.
PLR-110218-14 7

                          PROCEDURAL STATEMENTS

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

   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.

                                   Sincerely,


                                   _Maury Passman___________
                                   Maury Passman
                                   Chief, Branch 4
                                   Office of Associate Chief Counsel
                                   (Corporate)