From Randy Schwartzman, CPA, MST, Leader of the Northeast Transaction Advisory Services Tax Practice for BDO USA, LLP and Eric Mauner, CPA, Senior Tax Manager, BDO USA, LLP.
State Law Corporate Practice of Medicine
Many states have enacted “corporate practice of medicine” (CPOM) laws for medical groups, which are typically organized as professional corporations (PCs). These laws generally require a medical practice to be owned by doctors providing medical services to patients, or by doctors supervising other doctors providing such services. Each state has different laws regulating the extent to which direct or indirect owners of a medical practice must be the licensed professionals responsible for the quality of medical services provided to patients. This presents a challenge for medical professionals who would like to grow their practice through the use of funding from private equity, venture capitalists, or similar sources that are generally only willing to invest in the medical practice in exchange for an ownership interest.
A specialized ownership structure has traditionally been used to meet the demands of potential private equity investors while avoiding violations of state CPOM rules, mainly through the creation of, and investment directly in, a management service organization (MSO), which typically provides all the back office functions for the medical practice.
In a recent Private Letter Ruling (PLR 201451009, 12/19/2014), the IRS concluded based on the specific facts that it was permissible for PCs to file a federal consolidated return as subsidiaries of the MSO, even though the stock of the PCs was legally held by the appropriate medical professionals in accordance with state CPOM rules. However, meeting the criteria to file consolidated may result in disqualification of the use of the cash basis method of accounting, resulting in potential immediate taxation with respect to any net unrealized receivables.
Practitioners are hopeful that the IRS will release further guidance to remedy the current tax return filing uncertainty. While a consolidated return filing seems to be the correct result, the IRS should issue a firm set of guidelines, especially considering the increasing prevalence of these beneficial ownership arrangements and the increased focus of PE funds on medical groups.