The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5285

March 30, 1978

PROFESSIONAL SERVICE CORPORATIONS:

Placing shares in an employee stock ownership trust

TRUSTS AND TRUSTEES:

Placing shares in an employee stock ownership trust

Where all participants and all trustees of an employee stock ownership trust are duly licensed professional employees of the professional corporation, an employee stock ownership trust may hold stock of a professional corporation.

The Honorable William B. Fitzgerald

State Senator

The Capitol Building

Lansing, Michigan 48909

You have requested my opinion regarding Michigan's Professional Service Corporation Act, 1962 PA 192, as amended; MCLA 450.221 et seq; MSA 21.315(1) et seq. Specifically you ask:

Do the provisions of the Michigan Professional Service Corporation Act permit the holding of stock of a Professional Corporation, as defined in the Act, by an Employee Stock Ownership Trust ('ESOT') which has been qualified as an employee plan under Internal Revenue Code Section 401, where the trustee of such ESOT is an individual (or individuals) who is a duly licensed professional and who is also an employee-stockholder of the employer Professional Corporation?

An ESOT is a deferred compensation program designed to be qualified pursuant to section 401, subsection (a) of the Internal Revenue Code, 26 USC 401, to take advantage of certain tax benefits. Its use by Michigan professional service corporations is not expressly provided for by statute. As stated in OAG, 1967-1968, No 4623, p 237, 240 (April 29, 1968):

'The professional service corporation act was enacted with a legislative intention to enable licensed professional persons within this state to gain the benefits allowed to corporations under the federal income tax law.'

The Professional Service Corporation Act, 1962 PA 192, supra, however, prohibits ownership of capital stock by any individual who is neither licensed nor legally authorized to perform the professional services for which the corporation was incorporated. Thus, 1962 PA 192, supra, Sec. 2(b) defines a professional corporation as follows:

"Professional corporation' means a corporation which is organized under this act for the sole and specific purpose of rendering professional service and which has as its shareholders only individuals who themselves are duly licensed or otherwise legally authorized within this state to render the same professional service as the corporation, or the personal representatives or estates of such individuals as provided in section 10.'

(emphasis added)

1962 PA 192, supra, Sec. 8 further states:

'No corporation organized under the provisions of this act may issue any of its capital stock to anyone other than an individual who is duly licensed or otherwise legally authorized to render the same specific professional services as those for which the corporation was incorporated.'

This principle also appears in 1962 PA 192 supra, Sec. 10, which provides:

'No shares of a corporation organized under this act shall be sold or transferred except to an individual who is eligible to be a shareholder of such corporation or to the personal representative or estate of a deceased or legally incompetent shareholder.'

The purpose of requiring shareholders of a professional service corporation to be members of the profession is to assure the public that the shareholders who participate in decisions concerning the rendering of professional services are licensed members of that profession. OAG, 1977-1978, No 5190, p ___ (May 17, 1977). The ESOT in question is a retirement plan established by the employer professional service corporation for the benefit of its employees.

OAG, 1977-1978, No 5190, supra, held that a professional who owns shares of stock in a professional service corporation may transfer his shares to himself as sole trustee of a revocable living trust of which he is the sole beneficiary. In the instant case the trustee is likewise a licensed professional employee of the corporation establishing the ESOT.

Therefore, it is my opinion that when all of the participants of the ESOT and all of the trustees (or their successors) are duly licensed professional employees of the employer, an employee stock ownership trust may hold stock of a professional corporation.

Frank J. Kelley

Attorney General