A new Internal Revenue Service ruling could mean significant tax savings for investor-owned hospitals and management companies that operate physician practices in states with laws that bar the corporate practice of medicine.
Many states have laws that allow only licensed physicians to employ individual physicians in the practice of medicine. The idea is to keep nonmedical practitioners from exercising undue influence over doctors' clinical judgments. But as hospitals and other entities increasingly have acquired physician practices in recent years, they've had to perform some legal gymnastics.
Essentially, they've been acting like owners without actually being able to include the practices as subsidiaries on their tax returns. That means they couldn't use any of a practice's losses to offset taxes on other income, said Kelvin Ault, a partner at PricewaterhouseCoopers in Nashville who represents the organization that sought the ruling, which he declined to identify.
But the IRS private-letter ruling, which was published in the Federal Register on Dec. 19 (PDF), allows Ault's client organization to consolidate its operations when filing federal taxes despite a state corporate practice of medicine law. The IRS private-letter ruling did not name the organization.
Ault said under the ruling, profits also would be combined with those of a company's subsidiaries and subject to taxes. The ruling does not apply to not-for-profit healthcare organizations because they are tax-exempt.
“The IRS has said, 'If you have effective control over them, you can consolidate them and should consolidate them,' ” said Angela Humphreys, a partner at Bass, Berry and Sims in Nashville who also represents the organization that sought the ruling.
While the IRS ruling formally applies only to the organization she represents, it's common for similar organizations to use such rulings as guidance on what may be done in the future, Humphreys said.
Ault said “they'll take a look at this ruling and say, 'Hey, there's an opportunity here that we believe applies to our situation.' Those companies can then decide whether they just want to start filing tax returns or pursue their own ruling.”
The ruling could be significant in states where corporate practice of medicine laws still are vigorously enforced, said Peter Pavarini, co-leader of the Squire Patton Boggs Healthcare Practice Group and president of the American Health Lawyers Association. Though the laws are technically on the books of many states, only about a dozen states still actively enforce them. California, New Jersey and Texas are states that aggressively interpret such laws, he said.
The new IRS private-letter ruling is “a big deal if you're in one of those states,” he added.
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