Health Firm May Convert to a Limited Partnership

Community Psychiatric Centers said Wednesday that it will seek to eliminate its corporate taxes by converting from a corporation to a limited partnership.

If the Santa Ana-based operator of psychiatric hospitals and kidney dialysis centers can complete the switch by its target date of Dec. 31, it will join a growing number of corporations using limited partnerships to avoid taxes.

Under the scheme, each share of Community Psychiatric would be exchanged for one unit of the new partnership. Company officials said they are planning to apply for permission to list the units on the New York Stock Exchange, where the stock is now traded.

However, said Robert Green, Community Psychiatric’s chairman and chief executive, the switch would entirely eliminate the company’s 45% tax rate.

Limited partnerships operate under a different set of tax laws.

Lower Individual Tax Rates

“The fact that the limited partnership will not be required to pay corporate income taxes, coupled with lower rates of taxation applicable to individual investors under the new tax law, (the conversion) affords us a unique opportunity to bring additional value to our shareholders,” Green said.

Currently, Community Psychiatric pays an annual dividend of 32 cents a share. However, if the deal can be completed this year, investors would receive $2.40 a share in pass-through earnings, he said.

Analysts, including Steve Reid of Los Angeles-based Wedbush, Noble, Cooke, suggest that other health-care companies may follow Community Psychiatric’s lead in making the switch to limited partnerships, especially those companies with high corporate tax rates.

Although limited partnerships have “always been a popular means to eliminate a double tax,” the Internal Revenue Service increasingly is viewing the conversions with a jaundiced eye, said Richard Carpe, a partner with the Costa Mesa office of Laventhol & Horwath.

Many of the limited partnerships are little more than a legal fiction, their units being as liquid and marketable as shares of stock when traded on an exchange, Carpe said.

‘Quasi Corporations’

The danger, Carpe said, is that the IRS may eventually crack down on the “quasi corporations,” possibly forcing them to pay back taxes as corporations. “That could come back to bite Community Psychiatric Centers,” he said.

Approved unanimously by Community Psychiatric’s board, the conversion to a limited partnership will still require a two-thirds vote of the company’s shareholders. A vote on the plan, which also requires the consent of the Securities and Exchange Commission, is expected by mid-December, the company said.

Because becoming a limited partnership “is not practical” under the proposed tax reform plan, Community Psychiatric officials said they will not pursue the conversion if it cannot be completed by Dec. 31.

Community Psychiatric shares hit a new 12-month high of $39.875 a share on Wednesday before sliding to close at $35.25 a share, off $2.625 for the day. Volume was a heavy 1.24 million shares. Analysts attributed Wednesday’s drop to institutional profit taking following the stock’s dramatic $5.125 climb to $37.875 a share on Tuesday.