Alpha Medical, Inc. v. Commissioner
| Citation | 74 T.C.M. 893 |
| Decision Date | 14 October 1997 |
| Docket Number | Docket No. 22802-94. |
| Parties | Alpha Medical, Inc., f.k.a. Alpha Medical Management, Inc. v. Commissioner. |
| Court | United States Tax Court |
John P. Konvalinka and Thomas E. Smith, Chattanooga, Tenn., for the petitioner. Bonnie L. Cameron, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency in petitioner's 1990 Federal income tax of $1,376,520, and a penalty under section 66621 of $275,304.
The issues for decision are: (1) Whether an amount paid by petitioner to William T. Rogers (Rogers) as compensation during taxable year 1990 is reasonable within the meaning of section 162(a)(1). We find the amount paid was not reasonable to the extent set out below. (2) Whether petitioner is liable for the accuracy-related penalty under section 6662(d) for substantially understating its income for the year in issue.2 We find it is.
Some of the facts have been stipulated. The stipulated facts and attached exhibits are incorporated herein by this reference.
Alpha Medical Management, Inc., also known as Alpha Medical, Inc. (hereinafter petitioner), is a medical management corporation duly formed and organized under the laws of Tennessee. At the time the petition was filed, its principal place of business was in Chattanooga, Tennessee. Rogers incorporated petitioner in 1982, with an initial capital contribution of $1,000. He has not made any additional capital contributions to petitioner. Petitioner began operations on January 1, 1986. By 1990, petitioner had 60 employees.
Petitioner provides medical management services to home health care agencies and hospitals with home health care departments. Home health care agencies are subject to State licensing requirements and requirements known as Certificate of Need. The services petitioner provides to its clients are tailored to meet each client's individual needs and to assist each client in complying with the various licensing requirements, Certificate of Need requirements, and the various Medicare and Medicaid regulations. In most instances, petitioner's services include the management of four categories of operations: (i) Reimbursement, (ii) accounting, (iii) accounts receivable, billing, and computer operation, and (iv) clinical/operational/consulting.
Petitioner's entire operation is located in one office in Chattanooga, Tennessee. Petitioner's clients' locations grew from 1 in 1986 to 60 in 1992 in Tennessee, Kentucky, Arkansas, and Florida. In 1990, petitioner managed 43 locations.
Since petitioner began operations in 1986, Rogers has been its president, sole director, and sole shareholder. Rogers worked 12 hours a day and was available at all times of the day by telephone or pager. During and prior to 1990, Rogers made all decisions that affected petitioner's mid- and long-range plans, and Rogers handled any problems that arose with petitioner's clients or employees. Rogers did not routinely deal with petitioner's day-to-day operations or with the day-to-day care of patients. Until sometime in 1990 or 1991, Rogers negotiated each contract petitioner made with its clients.
Rogers has a bachelor of science in biology from Tennessee Technological University and a doctorate in pharmacy from the University of Tennessee. He has more than 25 years of experience in the health care field. Rogers was the founder of a successful, local drugstore chain with seven stores which he sold in 1986. Rogers also began a durable medical equipment business which he sold to a publicly traded company in 1984. When Rogers sold the durable medical equipment business, he was offered a million-dollar-plus salary to manage National Medical Equipment California Home Health Care Division. Rogers turned down that job offer because he did not want to move to California.
Petitioner is divided into two divisions: The financial division and the clinical and operations division. The financial division provides a complete array of accounting services for petitioner's clients, including the review of each client's expenditures to insure that they are reimbursable by Medicare. Rayburn H. Tankersly (Tankersly), a certified public accountant, has been petitioner's senior vice president of finance and chief financial officer in charge of the financial division since October 1988, when he began working for petitioner. Tankersly has been in the medical accounting field since 1969. Tankersly was hired, in part, to help Rogers make technical decisions dealing with Medicare regulations. Tankersly provides strategic focus for petitioner's financial division. He assists in strategic planning for clients, develops and maintains client relationships, provides financial guidelines to clients, and ensures proper staffing for the financial division. Tankersly worked 10 to 12 hours a day in 1990.
Tim Stees (Stees), a certified public accountant, has been petitioner's vice president of finance since late 1989. Stees coordinates tax return preparation, participates in strategic planning for petitioner and its clients, and develops and maintains client relationships. During 1990, Stees was the controller, in addition to being responsible for supervising various functions of the payroll and accounts payable departments.
Petitioner's reimbursement and information systems departments are part of petitioner's financial division. From 1987 to 1990, Libby Walker (Walker) was petitioner's director of reimbursement. Walker dealt with the Commerce Clearing House (CCH) guides, the Health Insurance Manual-11 (HIM-11), all the Government rules, and Medicare regulations.
The operations division provides surveys, advice, and evaluations for petitioner's clients and develops the operational and clinical products that are delivered to clients. Rebecca Worley (Worley), a registered nurse, has been petitioner's senior vice president of operations and chief operations officer since petitioner's inception in 1986. Worley provides strategic focus for petitioner's operations division. She (1) decides the direction and timing of client selection and development, (2) translates Rogers' management vision into operational plans, (3) is responsible for marketing services and petitioner's development, (4) ensures proper staffing levels and training programs, (5) guides clients regarding the direction and actions of their companies, and at one time, (6) oversaw and assisted in the development of petitioner's clinical information system. From 1986 through 1990, Worley worked 10 to 12 hours a day for petitioner. Worley directs the nurses petitioner employs.
Donna Stapleton (Stapleton), a registered nurse, is petitioner's vice president of operations. Stapleton earned a Certification in Nursing Administration in 1985 from the American Nursing Association. She is responsible for the operational and clinical oversight of the field staff, acts as a liaison with State and Federal fiscal intermediaries regarding regulatory issues, provides evaluations and advice to clients, and handles personnel management, development, and recruitment.
Currently, petitioner has three senior consultants with nursing backgrounds in its operations division. Each senior consultant, along with Stapleton, supervises a team of two to four nurses. Before the senior consultants were hired sometime after 1990, these duties were performed under Rogers' guidance.
From 1986 to 1988, petitioner's management tasks were performed by Rogers and Worley. In late 1988, Tankersly joined, and in late 1989, Stees joined petitioner's management team. Rogers, Tankersly, and Worley knew petitioner's business; Rogers had the reputation that brought the clients in and finalized the contracts. Sometime in 1990 or 1991, a salesman began working for petitioner out of Nashville. Rogers recruited petitioner's executive and management staff.
Rogers, Tankersly, and Worley attended State and national home care association meetings, entertained and recruited clients, visited exhibit halls to see what vendors were offering, and shared the information they obtained with each other. In 1990, petitioner's board of directors included: Rogers, president/CEO; Tankersly, vice president/CFO; and Worley, executive vice president/secretary.
Petitioner provides its clients with a team of employees who have advanced skills and knowledge in dealing with Medicare and Medicaid regulations. The team conducts a mock survey to determine whether the clients are in compliance with State licensing, Federal conditions of participation, and the rules of other accrediting bodies and recommends ways to comply or improve. Rogers developed the parameters for the mock survey team and, together with Worley, developed the product line for the mock survey. The mock survey replicates the annual inspection required by State and Federal regulatory authorities, and as a result of the mock survey, petitioner's clients have exceptional records with respect to their inspections.
Petitioner has policy manuals that discuss petitioner's products and explain how services are to be provided to its clients. The policy manuals are periodically revised. By 1989, petitioner had 8 policy manuals, and by 1992 petitioner had 11 policy manuals. Rogers helped develop most, if not all, of petitioner's policy manuals.
During 1989 and 1990, there was a nursing shortage. Rogers worked with an advertising firm to develop a recruitment plan to help petitioner's clients recruit adequate staffs. Rogers developed the per-visit method of compensation for nurses and recommended its use to petitioner's clients, which increased the availability of nurses.
Rogers also suggested developing the...
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