Anna, one of your firm’s clients, is a physician who owns and operates her practice through a professional service corporation (PSC). She sees opportunities to grow the PSC, allowing her to serve more patients and generate more profits. Anna, however, cannot invest more funds in her practice because she is still paying off her medical school loans. She also is concerned that this growth would require her to spend more time managing her practice’s business aspects and less time with patients. 

Anna was discussing her situation with a friend, whose medical practice is in the same city. He told Anna that she should look into a practice management company (PMCo). He explained that the PSC would continue to perform the medical activities, but the PMCo would charge the PSC a fee for overseeing the practice’s business aspects. The fee would be based on the practice’s profits. This structure would allow the PMCo to invest funds to grow the business and would satisfy a state law requiring all PSC shareholders to be physicians. He mentioned that, although Anna would remain as the legal owner of the PSC’s stock, the PMCo probably would prohibit her from using that ownership to exercise control over the PSC, thereby prohibiting her from selling the PSC’s stock without the PMCo’s consent and prohibiting the PSC from paying her a dividend without the PMCo’s consent. Anna wants to explore this opportunity and has asked a tax partner in your firm what the tax ramifications would be. The partner has asked you to determine whether Anna’s PSC and the PMCo would have to file a consolidated federal income tax return. Prepare a brief memo for the partner answering this question. A partial list of resources includes:

• IRC Sec. 1504
• Rev. Rul. 84-79
• PLR 201451009