IRS rules two professional corporations can join consolidated group

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In a private letter ruling (PLR 201451009) released in December 2014, the IRS ruled two professional corporations owned by an individual could join a consolidated group of corporations.

The taxpayer was a parent-subsidiary consolidated group. An individual held legal title to two brother-sister professional corporations. The subsidiary and individual entered into several agreements that effectively provided that the individual could take no corporate voting governance actions, and in the event of noncompliance or certain other actions, the individual had to transfer legal title to another subsidiary-designated individual.

Additionally, in the event of a liquidation, the individual was deemed to first transfer ownership of the professional corporation to the subsidiary for nominal consideration, followed by the liquidation or merger of the professional corporation with and into the subsidiary.

For a corporation to join a consolidated group, it must be an eligible corporation and one or more members of the group must own it at least 80% by vote and value. In this case, the professional corporations were represented to be eligible and represented that they had not paid and would not pay dividends. Thus, the question was whether the restrictive agreements effectively transferred voting and value ownership to the subsidiary of the taxpayer.

Rev. Rul. 84-79 and several letter rulings since then have stood for the proposition that mere legal title is not dispositive and the analysis turns on the ability to effect corporate voting and the recipient in the case of dividends or liquidation proceeds. In those previous situations, there were affirmative voting arrangements whereby the voting power was placed in the hands of people other than members of the consolidated group, but those people were appointed by and removable by the consolidated group.  

The instant ruling appears to expand the previously discussed line of rulings by permitting consolidation when the arrangements are more in the nature of negative arrangements that strip the people of voting rights.


Andy Cordonnier
+1 202 521 1502

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