Goldsmith v. United States, 52-75.

• Decision Date: 15 November 1978
• Docket Number: No. 52-75.,52-75.
• Citation: 586 F.2d 810
• Parties: Douglas M. GOLDSMITH and Joan Goldsmith v. The UNITED STATES.
• Court: U.S. Claims Court

586 F.2d 810

Douglas M. GOLDSMITH and Joan Goldsmith v. The UNITED STATES.

No. 52-75.

United States Court of Claims.

November 15, 1978.

COPYRIGHT MATERIAL OMITTED

Arthur M. Hoffeins, Detroit, Mich., attorney of record, for plaintiff.

Bruce W. Reynolds, Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant. Theodore D. Peyser, Jr., Washington, D.C., of counsel.

Before FRIEDMAN, Chief Judge, and KUNZIG and BENNETT, Judges.

OPINION

PER CURIAM:

This case comes before the court on plaintiffs' motion, filed May 30, 1978, requesting that the court adopt, as the basis for its judgment in this case, the recommended decision of Trial Judge David Schwartz, filed March 21, 1978, pursuant to Rule 134(h), defendant having filed no notice of intention to except thereto and the time for so filing pursuant to the Rules of the court having expired. Upon consideration thereof, without oral argument, since the court agrees with the trial judge's recommended decision, as hereinafter set forth^*, it hereby grants plaintiff's motion and affirms and adopts the decision as the basis for its judgment in this case. Therefore, it is concluded as a matter of law that plaintiffs are entitled to recover and judgment is entered for plaintiffs with determination of the amount of recovery to be made in further proceedings pursuant to Rule 131(c).

OPINION OF TRIAL JUDGE

SCHWARTZ, Trial Judge:

This is a suit for refund of income taxes assessed by the Commissioner for the years 1969 and 1970. The taxpayer (the plaintiff husband and wife will be considered as one) has since 1960 been the fulltime anesthesiologist at the Youngstown Osteopathic Hospital in Youngstown, Ohio. The issue is whether sums withheld from his compensation in 1969 and 1970, under a deferred compensation agreement made in 1969, were nevertheless taxable as income to him in those years, either as constructively received or on the ground of economic benefit conferred. It is here held that the entire amount withheld was not constructively received, but that certain insurance features of the agreement are taxable as conferring on the taxpayer a present economic benefit able to be valued.

The parties have waived trial and agreed to disposition on the basis of joint exhibits and depositions of the taxpayer and two officers of the hospital, its executive director and the accounting supervisor. The facts are substantially undisputed.

According to his employment agreement with the hospital, executed in 1966, Dr. Goldsmith held the positions of Anesthesiology Director, with responsibility for the anesthesiology staff, and Director of Inhalation Therapy. Inhalation therapy is used in the treatment of respiratory problems. The employment agreement provides for a duration of 1 year, termination by either party on 3 months notice, and automatic renewal on a failure to terminate.

Except for occasional courtesy service in other hospitals to replace an absent anesthesiologist, Dr. Goldsmith worked exclusively at the hospital. Such an on-going exclusive relationship with a single hospital is common with anesthesiologists. Indeed, it is not practical for an anesthesiologist to practice in another manner; the exclusive relationship excludes the possibility that the anesthesiologist might be called away from the patients in the hospital.

The agreement with the hospital provides that Dr. Goldsmith is to procure his own professional liability insurance and that the hospital is not to control or direct his work. In practice the hospital exercises no such control. Such assistants as he needs, including occasional "courtesy" anesthesiologists, are recruited by him, with the approval of the hospital, and are paid directly by him.

By the agreement the hospital undertook to furnish the space, secretarial, billing and other services necessary for the performance of Dr. Goldsmith's services, and to pay him a compensation of 90 percent of his billings, in monthly installments. Billings were determined in the following manner. As each service was furnished a patient, Dr. Goldsmith, for himself, his assistants and "courtesy" anesthesiologists, would provide the hospital with the amount of the fee to be charged, and the hospital would bill the patient or his insurer on Dr. Goldsmith's billhead. Checks payable to Dr. Goldsmith came to the hospital, were endorsed by it and deposited in its account. At monthly intervals the hospital would pay Dr. Goldsmith 90 percent of "payable" billings. Payable billings were gross billings less reductions at Dr. Goldsmith's direction in the case of patients who pleaded inability to pay the full amount and less the amounts of bills not paid by public agencies and for which recourse to the patient was not permitted. The 10 percent of billings not paid to Dr. Goldsmith were intended to cover payable bills actually not collected, that is, bad debts; these were absorbed by the hospital from its 10 percent share.

There were other medical specialists at the hospital—in radiology, pathology and surgery—who had on-going relationships with the hospital. None, however, had such compensation-billing arrangements as the foregoing.

In 1969, after discussions with the hospital's executive director and an agent of the Continental Assurance Company, Dr. Goldsmith requested that the hospital establish a deferred compensation plan on his behalf. Accordingly, the hospital board on February 1, 1969, by resolution authorized a "Deferred Compensation and Income Continuation Agreement" with "certain valued personnel" who would make a written request for such an agreement, authorize an adjustment in the payment of their fees, and give written instructions for payment of monies in the event of death before retirement. An agreement entitled "Deferred Compensation and Income Continuation Agreement" was thereafter executed between the taxpayer and the hospital, on March 10, 1969. Dr. Goldsmith was the only member of the hospital's staff with whom such an agreement was made.

The agreement opened with an undertaking by Dr. Goldsmith to continue his status as independent contractor with the hospital until retirement age of 65. In return the hospital agreed to provide these benefits: Retirement benefits were payable beginning June 6, 1996, 27 years distant, when Dr. Goldsmith would reach 65, if his association with the hospital continued until that time. He could then elect to receive either $19,484 yearly for 10 years, his beneficiary to replace him if he died before the expiration of the 10 years; or $13,724.76 yearly for life, his beneficiary nevertheless to replace him, on his death, for a total of 10 years following his retirement.

Severance benefits were to be payable, at retirement and for 10 years, if he left the hospital's employ for reasons other than retirement, death or total disability; the amounts would rise with the number of years of employment under the agreement. For instance, the annual benefit would be $633 yearly, on severance after one year of employment, $1,714 if after 2 years, $4,688 if 5 years, $9,182 if 10 years and $19,404 (almost the full amount of the annuity for 10 years, on retirement) if 27 years.

The agreement further provided for a death benefit to Dr. Goldsmith's children should he die before retirement while still employed, in amounts increasing with his years of employment under the agreement: $157,603 on death in the first year of the agreement, $158,576 in the second year, $162,631 in the fifth year, $174,730 in the 10th year and $257,696 in the 27th year. Payment of the benefit would be made at the rate of $9.39 for each $1,000 of benefit; for death in the first year the benefit would be 120 monthly payments of $1,479.89. An additional benefit of $156,916.80, payable in 120 monthly installments of $1,307.64, was provided in the event the death were accidental. Further, in the event of total and permanent disability before age 60, while still at work, Dr. Goldsmith's rights to the benefits under the agreement would continue as if he remained actively at work.

Finally, it was provided that the hospital should have "no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations" under the agreement. Dr. Goldsmith was to "be and remain simply a creditor of the Hospital in the same manner as any other creditor having a general claim for unpaid compensation" when benefits became payable. The hospital reserved "the absolute right at its sole and exclusive discretion either to fund * * * or to refrain from funding" its obligations under the agreement. If it chose to fund the obligations with life insurance or annuity contracts, or both, it reserved "the absolute right, in its sole discretion, to terminate such life insurance or annuity contract or contracts * * * at any time * * *." "At no time" should Dr. Goldsmith "be deemed to have any right, title, or interest in or to any specified asset or assets of the Hospital, including * * * any life insurance or annuity contract."

Remarkably there is no statement in the deferred compensation agreement that these very substantial amounts are not additional compensation, or that they are in lieu of any particular amount of compensation hitherto payable. In fact, however, it was well understood by both Dr. Goldsmith and the hospital that the benefits under the agreement would be in lieu of $450 of the monthly sum—90 percent of billings—payable to Dr. Goldsmith under his basic employment agreement with the hospital, and henceforth to be deducted from his monthly 90 percent share of billings. Indeed, it is agreed that by selecting the amount of the annuity (and presumably the other benefits) he would receive, Dr. Goldsmith determined the amount—the $450 monthly necessary to pay the premium on a policy for such benefits—to be deducted from his regular compensation.

The deferred compensation agreement was terminable by either party...