131 T.C. 8 (T.C. 2008), 17530-06, Bergquist v. Commissioner of Internal Revenue

Docket Nº:17530-06, 17535-06, 17537-06, 17541-06, 17545-06, 17549-06
Citation:131 T.C. 8, 131 T.C. No. 2
Opinion Judge:SWIFT, Judge :
Judge Panel:Swift, Stephen J.
Case Date:July 22, 2008
Court:United States Tax Court

Page 8

131 T.C. 8 (T.C. 2008)

131 T.C. No. 2




Nos. 17530-06, 17535-06, 17537-06, 17541-06, 17545-06, 17549-06

United States Tax Court

July 22, 2008

Swift, Stephen J.


SWIFT, Judge :

Respondent determined deficiencies in petitioners' Federal income taxes and accuracy-related penalties as follows:

Petitioner Year Deficiency Sec. 6662
Kendrick 2001 $ 26,668 $ 10,667
2002 25,208 10,083
2003 6,662 2,640
Shangraw 2001 31,464 12,586
2002 23,400 9,360
Robinson 2001 25,703 10,281
2002 27,535 11,014
2003 6,289 2,516
Fenton 2001 19,603 7,841
2002 21,061 8,424
2003 14,174 5,670
Kingston 2001 61,024 24,410
2002 5,910 2,364
Gunn 2001 19,043 7,617
2002 4,710 942
2003 9,269 3,708

Page 9 The primary issue for decision in these consolidated cases is the fair market value of stock in a medical professional service corporation that was donated to a charitable professional service corporation. These cases were consolidated for purposes of trial, briefing, and opinion. On the stock valuation issue, the parties in 20 related but nonconsolidated cases also pending before the Court have stipulated to be bound by the final decisions rendered herein. The parties in the 20 related nonconsolidated cases have stipulated to be bound by the final decisions herein on the penalties only if our holding on the penalties is the same for all consolidated petitioners. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are so found. At the time the petitions were filed, petitioners resided in Oregon. Petitioners Angela Kendrick, Robert Shangraw, Stephen Robinson, Lynn Fenton, and Harry Kingston are medical doctors, each with a specialty in anesthesiology and each licensed to practice medicine in Oregon. Petitioner John Gunn (Gunn) is a certified public accountant. Hereinafter, all references to petitioners and/or to any of the above surnames are to the specific petitioners named in this paragraph, not to their respective spouses with whom they filed joint Federal income tax returns for the years in issue. Also, generally references to petitioners are to the petitioners who are medical doctors, not to Gunn. From 1994 to 2001 petitioners practiced medicine as employees of and as stockholders in University Anesthesiologists, P.C. (UA), a medical professional service corporation specializing in anesthesiology. [2] From 1994 to 2001 Gunn was the chief executive officer of and a stockholder in UA. Through UA, petitioners provided medical services to patients of the Oregon Health & Science University Hospital (OHSU), a public teaching and research hospital in Portland, Page 10 Oregon. UA was the exclusive provider of anesthesiology medical services to all OHSU hospitals and clinics. Petitioners also took on significant teaching duties as members of OHSU's teaching faculty in the OHSU medical school's Department of Anesthesiology. Petitioners were employed by UA on month-to-month contracts. UA employment contracts with petitioners did not include noncompete or nonsolicitation clauses and provided for immediate termination if an anesthesiologist was terminated from his or her OHSU medical school faculty position. Before the donation of the stock that is in issue in these cases, petitioners and Gunn each held 100 shares of UA's voting common stock which they purchased in 1994 at $ 1 per share. In addition to UA, approximately 30 other medical practice specialty groups (e.g., OBGYNs, cardiologists, radiologists, and orthopedic surgeons) were affiliated with OHSU through separate medical professional service corporations in a manner similar to that of UA in which the medical doctors provided specialty medical services to OHSU hospitals and clinics and also took on teaching duties as members of the OHSU medical school teaching faculty. Consistent with the typical management of medical professional service corporations, at the end of each year UA generally paid bonuses, salaries, and prepaid expenses that offset reported income. UA never declared or paid cash dividends to its stockholders. UA's only significant booked asset was its accounts receivable. In the late 1990s and after careful consideration and discussion, because of perceived risks and management concerns associated with the many separate medical practice specialty groups that were providing (through their respective professional service corporations) medical services to OHSU hospitals and clinics, OHSU's executive management concluded that the consolidation into a single medical practice group, controlled and managed by a single professional service corporation which in turn would be under OHSU's direct management and administration, would be required of all the different medical practice specialty groups that wished to continue to be affiliated with OHSU (hereinafter sometimes referred to simply as the consolidation). Page 11 Under the consolidation, medical doctors practicing at OHSU hospitals and clinics, including petitioners, were to leave their separate medical practice specialty groups and their medical professional service corporations and were to become employees of a newly formed single consolidated medical practice group operating and providing medical services through a newly formed tax-exempt professional services corporation. In the late 1990s the OHSU Business Operations Steering Committee, of which Gunn was a member, was formed to assist in the planning and implementation of the consolidation. In 1998 OHSU management formed the OHSU Medical Group (OHSUMG) as a section 501(c)(3) tax-exempt professional service corporation to serve as the single consolidated medical group into which all of the then-extant 30 different medical practice specialty groups whose doctors were affiliated with OHSU would be consolidated. An initial target date for consolidation into OHSUMG of the medical practice specialty groups was set for January 1, 2001, but for reasons not clear in the record the target date was rescheduled for July 1, 2001. Initially it was intended that OHSUMG would offer to all of the medical doctors to be employed by OHSUMG a governmental pension plan, exempt from ERISA requirements, with flexibility and various contribution and retirement options for the medical doctors. In an effort to provide such a plan, OHSUMG management requested a private letter ruling from respondent under which OHSUMG would be treated as a governmental instrumentality and the OHSUMG proposed pension plan would be treated as an ERISA-exempt governmental plan within the meaning of section 414(d). OHSUMG management and attorneys were optimistic that respondent would issue a favorable private letter ruling with regard to the pension plan. As a contingency, however, in case OHSUMG did not receive from respondent a favorable tax ruling, OHSUMG management began developing an ERISA-compliant, nongovernmental pension plan. Robinson, as a member of OHSUMG's pension committee, presented to the committee several viable ERISA-compliant plans and took part in strategizing how to " sell" an ERISA-compliant plan to the doctors. Although some doctors preferred a governmental plan, in general petitioners and the other UA anesthesiologists Page 12 appeared not to have a preference and were concerned only that OHSUMG have some form of a pension plan in place by the date of the consolidation. In early 1999 Gunn attended a conference sponsored by the Medical Group Management Association. During a roundtable discussion at the conference, Gunn learned that for Federal income tax purposes some doctors throughout the country apparently were claiming substantial charitable contribution deductions relating to donations to academic-affiliated institutions of stock in their medical professional service corporations. Upon returning from the conference and in view of the planned consolidation, Gunn discussed with UA's attorney, UA's accountant, and OHSUMG's C.E.O. the possible tax benefits and other ramifications if, as a step associated with the consolidation, petitioners and the other UA anesthesiologists were to donate their UA stock to OHSUMG and to claim charitable contribution deductions with regard thereto. On June 7, 1999, UA held a stockholders meeting at which the potential tax benefits of donating UA stock to OHSUMG were described as offering a " huge [tax] windfall" of " 150K" to each UA stockholder. On February 27, 2001, the chairman of the OHSU Department of Anesthesiology and the president of UA sent an e-mail message to the...

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