Community Psychiatric Centers said Friday that it is reactivating its plan to convert from a corporation to a limited partnership, after the company's largest shareholder dropped its opposition to the scheme.
The conversion, which would allow the Santa Ana-based company to eliminate its 45% corporate tax rate, was shelved just last week after J.P. Morgan & Co., which holds 10% of Community Psychiatric's stock, said it would vote against the move. Morgan said the move would actually raise taxes for some of its clients who hold shares in the company.
However, this changed Wednesday when Morgan told Community Psychiatric that it had found a way around the dilemma. Morgan said it would form a holding company for its stock, said Robert Green, chairman of Community Psychiatric.
Under a limited partnership, profits are distributed to the partners and are taxed as ordinary income, which will enjoy a lower rate under the new tax law. Once the conversion is complete, the partners will receive $2.40 a share pass-through earnings each year, compared to the current annual dividend of 32 cents a share.
Despite the fact that conversion would mean more money for shareholders, New York-based Morgan had opposed the plan because several tax-exempt pension funds it administers would be forced to pay taxes on their earnings. Federal law exempts certain funds from taxes on stock earnings and dividends but provides no exemption for "unrelated business income," including proceeds from limited partnerships.
Although Community Psychiatric technically would no longer be a public company, its common stock would be replaced one to one with units of the new partnership. The company has applied for permission to list the units on the New York Stock Exchange, where its stock is currently traded.
Because Community Psychiatric's charter requires a two-thirds vote of the shareholders for the conversion to become effective, Morgan's approval is important to the scheme, which is expected to come before the shareholders by the end of December, the company's target for enacting the change.
"We still have to get a two-thirds vote, but we feel confident that we will get approval," Green said, adding that Morgan's support should "provide some leverage" for the conversion.
Morgan officials could not be reached Friday, but Randall Huyser, an analyst with San Francisco-based Montgomery Securities, said the new Morgan holding company will be owned by the tax-exempt funds themselves.
No Tax on Dividends
Although the holding company will pay taxes on its stake in Community Psychiatric, the pension funds which will own shares of the new entity will not be taxed on their earnings and dividends.
Currently, about 50% of Community Psychiatric's outstanding common shares are held by institutions. Because many potentially face the same problems as Morgan did, Huyser expects that other holders will follow Morgan's lead.