Bell v. Commissioner
| Decision Date | 16 November 1982 |
| Docket Number | 5010-76,5007-76,5019-76.,Docket No. 4979-76 |
| Citation | 1982 TC Memo 660,45 TCM (CCH) 97 |
| Parties | William H. Bell, III and Margaret A. Bell, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Charles E. Elrod, Jr., 2500 Peachtree Center, Cain Tower, NE, Atlanta, Ga., for the petitioners. Vallie C. Brooks, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal income taxes against the individual and corporate petitioners as follows:
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Taxable
Docket No. Year Deficiency
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William H. Bell, III, and 4979-76 1971 $28,027.21
Margaret A. Bell 1972 27,655.22
Dwight M. Plott and 5007-76 1971 26,992.43
Harriett R. Plott 1972 33,634.79
Frank P. Haws and 5010-76 1971 34,617.82
Linda B. Haws 1972 38,418.93
North Alabama 5019-76 1971 24,311.64
Neurological, P.A. 1972 21,651.28
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These cases have been consolidated for trial, briefs, and opinion. The parties have settled most of the adjustments made in notices of deficiency. The issues remaining for decision are as follows:
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions in the instant cases were filed, petitioners William H. Bell, III (hereinafter sometimes referred to as "Bell"), and Margaret A. Bell, husband and wife, resided in Huntsville, Alabama; petitioners Dwight M. Plott (hereinafter sometimes referred to as "Plott") and Harriett R. Plott, husband and wife, resided in Huntsville, Alabama; petitioner Frank P. Haws (hereinafter sometimes referred to as "Haws") resided in Huntsville, Alabama, and petitioner Linda B. Haws resided in Jackson, Tennessee (Haws and Linda B. Haws were husband and wife when their 1971 and 1972 income tax returns were filed); and petitioner North Alabama Neurological, P.A. (hereinafter sometimes referred to as "North Alabama"), a corporation, had its principal office in Huntsville, Alabama.
North Alabama is a professional association incorporated by Bell, Plott, and Haws under Alabama law on January 2, 1969, to engage in the practice of neurosurgery and neurology.
From January 2, 1969, through the years in issue, Bell, Plott, and Haws were equal owners of all of North Alabama's voting stock3 and were employed by North Alabama as physicians.4
Before North Alabama was incorporated, Bell and Haws were engaged in the practice of medicine as partners specializing in neurosurgery. At that time, Plott, who occupied an office adjoining that of Bell and Haws (located at 401 Lowell Drive, in Huntsville), was engaged in the practice of medicine as a sole proprietor specializing in neurology. North Alabama took over these offices.
Neurosurgery is the surgical subspecialty concerned with the treatment of diseases of the brain, skull, spinal cord, spinal structures, and peripheral nerves. Neurology is the branch of medicine concerned with the diagnosis and treatment of conditions of the nervous system, especially chronic problems, such as multiple sclerosis and epilepsy. A neurologist may be distinguished from a neurosurgeon in that a neurologist treats the medical problems of the nervous system, while neurosurgeon treats the surgical problems.
Bell, Plott, and Haws were consulting neurologists and neurosurgeons. Consulting neurologists and neurosurgeons do not maintain regular patients. Rather, patients are referred to them from other physicians. The consulting neurologist or neurosurgeon will diagnose and begin treatment of such a patient and then return the patient to the referring physician.
X-rays of a patient's body are considered a necessary diagnostic tool by physicians who consult in the area of neurosurgery and neurology. In the majority of cases, a patient referred to a consulting neurosurgeon or a neurologist needs an X-ray of sufficient quality to allow the neurosurgeon or neurologist to properly evaluate the cause of the pain which the patient usually suffered. In some cases, the patient when referred to the neurosurgeon or neurologist brings along a suitable X-ray, but in the majority of cases the patient needs to have an X-ray made before the initial examination by the neurologist or neurosurgeon.
Bell, Haws, and Plott regularly used the Huntsville Clinic to have X-rays made, until North Alabama was incorporated. North Alabama then regularly used the Huntsville Clinic to have X-rays made, until about March 5, 1969, when Services was incorporated. Most of the other physicians renting space at 401 Lowell Drive also used the Huntsville Clinic. When an X-ray was needed, a patient of North Alabama or of one of these other physicians was sent across the street to the Huntsville Clinic, signed in, and was X-rayed by one of the Huntsville Clinic's X-ray technicians. After the X-ray was taken and developed, the patient carried the X-ray back to the physician's office. If the X-ray was not adequate, then the patient would have to make a second trip to the Huntsville Clinic for another X-ray. The distance from North Alabama's offices to the Huntsville Clinic's X-ray department was about 200-225 feet.
The Hunstville Clinic did not provide the professional services connected with reading X-rays.
The X-ray technicians at the Huntsville Clinic kept a log of X-rays and prepared an X-ray request slip for each patient X-rayed. At the end of each day, these slips were sent to the Huntsville Clinic's office. The Huntsville Clinic prepared an invoice for each nonmember physician (such as those at North Alabama) at the end of each month listing the patient's name, type of X-ray, the fee for the particular X-ray, as listed in the Huntsville Clinic fee schedule, and the total of such fees reduced by a discount. Members of the Huntsville Clinic received a discount of 70 percent and nonmembers (such as North Alabama) received a 40-percent discount. North Alabama paid the Huntsville Clinic this discounted fee listed on the invoice regardless of the amount that North Alabama collected from its patient.
During the years in issue, the Huntsville Clinic continued to provide X-ray services to nonmember physicians, seven or eight of whom had offices in the same building as North Alabama. The Huntsville Clinic also continued to bill nonmembers at a 40-percent discount.
Another X-ray facility in the Huntsville area, Radiology Associates, did not provide a discount and charged physicians the full fee during the same time period. The fees charged by Radiology Associates included an amount for the professional services of its radiologist for reading the X-rays.
The X-ray equipment used by the Huntsville Clinic during 1969 through 1972 was purchased in 1964; it might have cost as much as an additional 20 percent to purchase similar equipment in 1969.
The arrangement for X-ray services with the Huntsville Clinic was disruptive to North Alabama's practice because of backups experienced by the Huntsville Clinic's X-ray facilities which in turn caused delays in the return of patients to North Alabama's offices and created scheduling difficulties for North Alabama. The arrangement also was inconvenient for North Alabama's patients because sometimes they had to endure adverse weather conditions to go to the Huntsville Clinic as well as long delays once they reached the Huntsville Clinic. In addition, it was difficult for some patients, having arrived at North Alabama's offices in wheelchairs or by ambulance, to cross the street in order to go to the Huntsville Clinic for their X-rays.
In order to alleviate these problems, Bell, Plott, and Haws decided to set up an X-ray facility in North Alabama's offices. Bell wanted his father — and Plott and Haws wanted their respective children — to share in the income from the X-ray facility. Bell, Plott, and Haws were advised by North Alabama's attorney and accountant that conducting the X-ray business in a separate corporation would be advantageous from a tax standpoint and would serve to limit any liability arising from such activities. Accordingly, they decided to organize a new corporation to provide on-site X-ray services for North Alabama.
Services was incorporated by Bell, Plott, and Haws under Alabama law on March 5, 1969, to own and operate "the business of an x-ray laboratory". A corporation permit which authorized Services to do business in Alabama, and which noted that Services was conducting an X-ray laboratory business, was issued by the State of Alabama for each of the years 1969 through 1973.
Early in 1969, X-ray equipment with a total cost of $19,928 was purchased under Haws' name.5 The proceeds of...
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