In PLR 202607011, released in February 2026, the IRS ruled that a management service agreement (MSA) arrangement between a Professional Corporation (PC) owned by a professional and a management service organization (MSO) can result in the transfer of ownership in the PC to the MSO for tax purposes, despite the professional’s retention of legal title.
Introduction to the issue
In most industries, when a buyer looks to acquire a target business, the buyer purchases the target stock or assets outright. However, in the case of professional practices such as medicine, state law often limits ownership of the practice (often licensed as a ‘PC’) to licensed practicing professionals. Since the buyer cannot legally own the business under applicable state rules, the PC and an MSO entity owned by the buyer often enter into a management agreement or MSA to achieve the desired economics. Under many of the MSA arrangements, while the professionals retain legal title to the PC, economic benefit and control are transferred to the MSO. This arrangement is often called the ‘friendly PC’ arrangement (in the context of medical practices, ‘friendly doctor’ arrangement).
As discussed previously in our articles, Who really owns that medical or professional practice? (which discusses PLR 201451009) and IRS reaffirms "friendly doctor" transaction can transfer tax ownership (which discusses PLR 202049002), the IRS has ruled on numerous occasions that mere retention of legal title to property does not represent ownership for tax purposes. The owner of a PC’s stock for tax purposes can be different than the owner of the stock for state law purposes. Ownership in the stock of a PC does not depend on legal title, but instead on whether the benefits and burdens of ownership have been transferred to the MSO (tax ownership).
Although these IRS rulings involved taxpayers who sought to consolidate for federal income tax purposes, the election to consolidate is often optional (unless the MSO already serves as the parent or as a member of a consolidated group). Ownership considerations, however, extend beyond the question of consolidation. The decision not to consolidate a PC with an MSO does not indicate that the PC is not owned by the MSO for tax purposes. Consolidation neither creates nor dissolves tax ownership.
Friendly PC arrangements and section 1202
In recent years, section 1202 (the qualified small business stock (QSBS) tax provision) has garnered increased attention (especially since its benefits were expanded in the One Big Beautiful Bill Act (OBBBA) on July 4, 2025). Can an MSO in a friendly PC arrangement issue qualifying QSBS? Do the disqualifying activities of the PC (those, for example, in the fields of health, accounting or law) disqualify the MSO from issuing QSBS?
Some tax advisors suggest that an MSO can qualify to issue QSBS. This suggestion appears highly questionable, chiefly because of two factors: (1) ownership and (2) activity.
Section 1202(e)(5) states that, in determining whether a parent corporation’s assets and activities disqualify its stock from qualifying as QSBS, assets and activities of corporations whose stock is more than 50% owned by the parent corporation (measured by voting power or value) are included. (And section 1202(d)(3)(A) requires including assets of all corporations belonging to the same ‘parent-subsidiary controlled group’ that are more than 50% owned by the parent for purposes of the gross assets test.) Accordingly, a subsidiary corporation’s activities can disqualify its parent from issuing QSBS even in a situation where that subsidiary is unable to consolidate with the parent (as consolidation has an 80% threshold). Additionally, consolidation is in some cases elective, and in other cases, is unavailable (for example, where the subsidiary is foreign). It follows that the mere absence of consolidation between an MSO and PC does not support a conclusion that the MSO’s stock can qualify as QSBS.
When considering activity, as well (even if an MSO were to lack tax ownership over a PC), does the MSO’s management business qualify to enable it to issue QSBS? Does the MSO earn arm’s-length fees for management and administration services? Or do MSAs and related arrangements provide it with non-qualifying income by sweeping out the PC’s net income and enabling it to control all the PC’s non-medical management decisions (including control over cash receipts, dividend restrictions and replacement of friendly doctor owners)? Furthermore, when the MSO-PC structure is ultimately sold (thereby generating the capital gain that section 1202 would exclude) the (often very substantial) purchase price paid by the buyer is generally paid solely to the owners of the MSO; the friendly PCs remain owned by the same friendly doctor or the buyer replaces the PCs’ owners with a new friendly doctor for a de minimis amount of consideration. This indicates that the PCs are essentially subsidiaries of the MSO and the overall value of the MSO-PC structure is in the MSO.
These IRS rulings indicate that MSO-PC arrangements often cause the MSO to have tax ownership in the PC. In the case of each of these PLRs, the taxpayer sought a ruling to file a consolidated return. The existence of these rulings does not imply that tax ownership is absent without a ruling, as in these cases the taxpayers desired assurance that they may consolidate. As noted above, an entity sometimes does not consolidate even when beneficially owned. Where an MSO holds tax ownership in a PC but chooses not to consolidate with it (whether permitted or not), the PC remains a subsidiary of the MSO. Since health activities are disqualifying activities for purposes of section 1202—our article, Section 1202 tax benefit: Defining “health” services, explores this subject—in the typical case the MSO’s stock likely does not qualify as QSBS.
The 2026 ruling
PLR 202607011 involved the following facts: Parent and Sub were the parent and member of a consolidated group. Sub, acting as an MSO, provided administrative and support services to two PCs under management agreements (entitled Support Services Agreements). Although the shareholders of the PCs maintained legal title to the shares, the management agreements granted Sub both control over and economic benefit in the PCs.
Aside from the management agreement, the parties entered into other agreements. The shareholders of each PC entered into consulting arrangements with the Parent and Sub, which were terminable by the Parent or Sub at any time. The shareholders of each PC also executed an Acknowledgement of Stock Restrictions, which acknowledged various transfer restrictions contained in the respective PC’s bylaws. Those documents:
- Prohibited the shareholders from selling or transferring the shares of the PC other than under very specific instructions,
- Required the shareholders to sell all their shares in their PC to a designated person, for a nominal amount, upon the occurrence of certain transfer events, and
- Defined a transfer event to include, among other events, the termination for any reason of a shareholder’s engagement as an independent contractor with the Parent or Sub.
After listing further facts and taxpayer representations, PLR 202607011 concludes that the PCs were beneficially owned by Sub and therefore must be included as members of the Parent-Sub consolidated group.
Notably, both of the states in which the PCs were situated restrict ownership of shares in PCs to licensed professionals, such as physicians. Unlike in the case of previous IRS rulings, however, the 2026 ruling does not include a taxpayer representation that state law permits the transfer of beneficial ownership. This indicates that the IRS recognizes, consistent with its longstanding approach in areas outside friendly doctor arrangements, that federal tax law takes precedence over state law ownership restrictions. This emphasizes the IRS’ focus on the substance of ownership for federal tax purposes rather than the formalities dictated by state law.
RSM US observations
- The conclusion reached in this PLR is grounded in longstanding tax law principles, which underscore that the determination of ownership for tax purposes relies on the specific facts and circumstances rather than simply the legal title to the property. This approach aligns with decades of case law and administrative guidance, emphasizing that federal income tax treatment hinges on which party bears the benefits and burdens of ownership. Legal title is just one factor among many; state law restrictions or regulatory prohibitions do not necessarily control the outcome.
- In 2022, RSM submitted to the Treasury Department and the IRS comments and requests for guidance regarding friendly doctors transactions and beneficial ownership. That letter explains that for federal income tax purposes, in the typical friendly doctor structure, the MSO should often be treated as the owner of the PC’s equity. That letter further explains that federal tax law often diverges from state law in these cases. The letter emphasizes that the tax treatment of friendly doctor transactions should not hinge on legal (non-tax state-law) enforceability of the relevant contracts.
- As noted above, in PLR 202607011, the IRS appears to acknowledge that consolidation for tax purposes does not hinge on the enforceability of the relevant contracts under state law. While prior PLRs issued by the IRS (the 2014 and 2020 rulings) included, among the representations listed, a representation that the legal arrangements were legally valid and enforceable and/or that applicable state law did not prohibit the MSO from beneficially owning the PC stock, PLR 202607011 does not include any such representations.
- With regard to whether an MSO in an MSO-PC structure qualifies for section 1202 treatment, as underscored by PLR 202607011, it is essential to carefully examine economic ownership, as tax ownership concentrates on the substance of the arrangements and the practical realities (and not mere formal legal title).
