Community Psychiatric Scraps Partnership Plan

Less than a month after announcing its intention to convert to a limited partnership, Community Psychiatric Centers said Wednesday that it has abandoned the plan because of shareholder opposition.

The Santa Ana-based corporation, which operates psychiatric hospitals and kidney dialysis centers throughout the United States and in the United Kingdom, had hoped the move to a limited partnership would remove its obligation to pay corporate income taxes.

Under a limited partnership, profits are distributed among the partners and taxed as the ordinary income of those individuals.

However, Community Psychiatric executives said J. P. Morgan & Co., the banking firm which holds 10% of the company’s stock as a pension fund administrator, opposed the conversion because it would have required some of the tax-exempt pension funds to pay some taxes.

Converting to a limited partnership has become an increasingly popular ploy among corporations looking to minimize their tax bills and maximize the amount of money they distribute to their owners, whether they are called shareholders or limited partners. But such moves have raised a few eyebrows among Internal Revenue Service officials, and some accountants have cautioned that the agency may soon crack down on conversions.

The key to the unraveling of the Community Psychiatric plan, said Chief Executive Robert Green, was J. P. Morgan’s opposition to the plan.

Despite their tax-exempt status, the pension funds would have been liable for taxes on partnership dividends, because they would have been considered operators of a business and liable for tax on “unrelated business income,” a Community Psychiatric spokesman explained. The tax provisions covering this area were designed to discourage pension funds from operating business.

Community Psychiatric officials said that because the company’s bylaws require two-thirds of the shares to approve the conversion, the prospects of a 10% block of stock opposing the move at the outset caused the company to back off.