The AVMA House of Delegates will toil over tax troubles at its annual session July 20 and 21 with Resolution 2, a position statement on Internal Revenue Service treatment of tax status of subchapter C corporations, submitted by the AVMA Council on Veterinary Service and the California VMA.
It states "that the American Veterinary Medical Association pursue obtaining a Technical Advice Memorandum (TAM) from the Internal Revenue Service, Washington office, stating that if 5% of a veterinary practice comprises nonprofessional sales, including but not limited to boarding, grooming, and retail sales of pet products and pet food, that the veterinary practice be permitted to maintain its "C" corporation tax filing status."
As stated in the background of the resolution, in 1997 the IRS initiated an aggressive, nationwide audit program in which veterinary hospitals operating as subchapter C corporations were arbitrarily reclassified as personal service corporations, or subchapter S corporations. Subchapter S corporations are precluded from using the graduated lower tax rates available to other corporations. The reason for this change was to subject former C corporations to a flat 35 percent tax rate as opposed to the lower graduated tax rates normally applicable to C corporations, which begin at 15 percent.
In 1991 the AVMA anticipated potential problems with this change and tried to resolve them, but the IRS was not responsive. To avoid being audited, hundreds of practices in 1991 were advised by tax consultants that, because the "five percent function test" (which requires that substantially all of the employees' time be spent performing services in qualifying fields of health and several other enumerated fields) was not clearly defined, they should reclassify their subchapter C corporation practices to personal service corporations, or subchapter S corporations, and pay the higher tax rate.
To further solidify its interpretation of the tax code, the IRS issued a revenue ruling in 1991 stating that boarding and grooming are professional services. Nothing was said in the ruling about retail and pet food products. Many veterinary practices have over-the-counter sales alone that exceed 10 percent of gross practice income.
The resolution's background also states that in January 1998, a questionnaire was mailed to 439 California corporations. Of the 222 responses, 87 said they held subchapter C corporation status. Because California represents a cross-section of 10 percent of the AVMA membership, it can be assumed that 19.81 percent of the corporations in the United States retain C corporation status and would be favorably affected by a technical advice memorandum ruling from the IRS on this issue.