RSM has submitted to the Treasury Department and the Internal Revenue Service (the IRS) comments and requests for formal guidance regarding ‘friendly doctor’ transactions and ownership of property for federal income tax purposes.
Friendly doctor transactions, widely prevalent in the United States, involve professional practice businesses – such as medical, dental or legal practice businesses – which are associated with professional practice business entities. In many jurisdictions, statutes require that the equity of these professional practice entities be owned by a licensed practicing professional. The friendly doctor transactions typically provide benefits and burdens of ownership in the professional practice to a beneficial owner, a party other than the legal entity’s nominal equity holder (the ‘friendly doctor’).
For federal income tax purposes, the beneficial owner, rather than the nominal equity holder, should typically be treated as the owner of the practice entity’s equity. Various tax ramifications stem from this treatment.
The IRS has recently stated that it seeks comments regarding this friendly doctor ownership issue.
Our comments (1) discuss relevant case law and other rulings, (2) highlight practical concerns relating to various areas of tax law caused by the current lack of clarity on this subject and (3) explain why hinging the tax treatment of friendly doctor transactions on legal enforceability of contracts is flawed and could have detrimental ramifications.