Keller v. Comm'r of Internal Revenue
| Decision Date | 29 October 1981 |
| Docket Number | Docket No. 7128-79. |
| Citation | 77 T.C. 1014 |
| Parties | DANIEL F. KELLER and MARILYN F. KELLER, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, a pathologist, organized and operated a so-called one-man professional service corporation under the Oklahoma Professional Corporation Act. The corporation adopted, among other things, a defined benefit pension plan and a medical reimbursement plan. Petitioner and the corporation entered into an agreement for petitioner's services at the time of the organization of the corporation. Held: Applying sec. 482, I.R.C. 1954, to the facts of this case, petitioner's total compensation (salary, pension plan contributions, and medical benefits) from the corporation was essentially equivalent to that which he would have continued to receive absent the organization of the corporation, and, therefore, essentially equivalent to what petitioner would have bargained for in an arm's-length transaction with an unrelated party. Therefore, the Commissioner's attempt to allocate 100 percent of the corporation's income to petitioner under sec. 482 was arbitrary and excessive. However, certain amounts which petitioner earned directly from another corporation in 1974, but which were turned over to the professional service corporation, are taxable directly to petitioner. Richard G. Taft, Philip D. Hart, and John N. Schaefer, for the petitioners.
Patrick E. McGinnis, for the respondent.
Respondent determined deficiencies in petitioners' income tax for the years 1974 and 1975 in the respective amounts of $25,375.46 and $34,195.77. The issue for decision is whether income attributable to petitioner Daniel F. Keller's medical practice is taxable to him instead of his wholly owned professional corporation.
Some of the facts have been stipulated. The stipulation and the exhibits attached thereto are incorporated herein by reference.
At the time the petition in this case was filed, petitioners resided in Oklahoma City, Okla.
Petitioner Daniel F. Keller (petitioner) is a licensed physician whose medical practice is limited to the specialty of pathology. He is certified by the American Board of Pathology in both clinical and anatomical pathology.
Generally, a pathologist acts as a consultant to a patient's primary treating physician. A pathologist prepares written reports which set forth findings resulting from an examination of a patient's tissue, blood, or other specimens. Since the pathologist normally functions as a consultant to the treating physician, patient contact is minimal. To the extent that the duties of a pathologist entail patient contact, it is usually in the role of consultant and not as the treating physician. Many pathologists practice in hospital settings where they are able to utilize the hospital's laboratory facilities and the services of its medical technicians in preparing specimens for examination.
Petitioner practiced pathology both in a hospital and in an independent medical laboratory. In the early part of his career, he served on the medical staff of Presbyterian Hospital in Oklahoma City, Okla. In 1968, he relinquished his staff position with the hospital and became associated with Medical Arts Laboratory (MAL), a partnership composed of several physicians engaged in the practice of pathology. Petitioner became a partner in MAL in 1969 or 1970.
MAL renders pathology services to many hospitals and physicians throughout the State of Oklahoma. MAL receives its laboratory and technical support from Medical Arts Laboratory, Inc. (MAL, Inc.), a corporation organized under the Oklahoma Business Corporation Act. Neither MAL nor its partners individually own any medical supplies or laboratory equipment, or employ any medical or technical personnel. MAL compensates MAL, Inc., for the laboratory and technical services it provides to MAL. The partners of MAL render quality-control supervisory services to MAL, Inc., and are compensated accordingly.
All of the MAL partners were shareholders and directors of MAL, Inc., during the years in issue. MAL, Inc., paid and maintained the offices of MAL, employed the nurses and medical technologists, and purchased all of the necessary supplies for MAL.
Prior to December 3, 1973, petitioner's income from his pathology practice came from two sources: (i) His share of partnership profits of MAL and (ii) his compensation from MAL, Inc., for the supervisory services he rendered.
Sometime during 1973, petitioner became concerned about his family's future financial needs. Until that time, his planning in that regard had been minimal. Petitioner consequently sought the advice of an attorney and some pension consultants. He was informed of the various perceived advantages of incorporating his professional practice, in particular, the adoption of a pension plan for himself. Petitioner was also aware that incorporation of his practice could provide him with a more liberal medical reimbursement plan than that under which he was then covered through MAL.
On December 3, 1973, petitioner caused a professional corporation, Dan F. Keller, M.D., Inc. (Keller, Inc.), to be organized under the Oklahoma Professional Corporation Act. At the organizational meeting, petitioner, who was the sole shareholder, was duly elected as sole director. Pursuant to that meeting, Keller, Inc., also adopted corporate bylaws; elected petitioner president-treasurer and his wife, petitioner Marilyn F. Keller, secretary; appointed a bank in Oklahoma City as the official depository bank; adopted a section 12441 stock plan (relating to losses on “Small Business Stock”); set petitioner's annual salary; adopted an employees medical expense reimbursement plan; adopted an employees wage continuation plan; adopted a defined benefit pension plan and trust; and approved an employment contract between petitioner and Keller, Inc., which was dated the date of the meeting.
As stated above, petitioner was the sole shareholder of Keller, Inc., having subscribed for and purchased on December 3, 1973, 500 shares of the common stock. Such shares constituted all of the then-issued and outstanding stock. Petitioner ceased to be a partner of MAL, and Keller, Inc., was substituted as a partner pursuant to a written agreement executed by petitioner, all the other partners of MAL, and Keller, Inc. Pursuant to the agreement between petitioner and the MAL partners, petitioner also personally agreed to guarantee all obligations arising out of the relationship between Keller, Inc., and the partnership.
Under the aforesaid employment contract, petitioner agreed to render his services as a pathologist to Keller, Inc., in return for an annual salary of $60,000.
Within 2 months after its creation, Keller, Inc., opened a checking account with a bank in Oklahoma City; it maintained and used that account during all of 1974 and 1975. On or about July 31, 1975, Keller, Inc., also opened a savings account with a savings and loan association in Oklahoma City.
Shortly after December 3, 1973, Keller, Inc., applied to the Internal Revenue Service for an employer identification number. In addition, petitioner's name was removed from the entrance door to the MAL facility and the name “Dan F. Keller, M.D., Inc.” was substituted for petitioner's name. A similar substitution was effected on the letterhead of the various laboratory test report and consultation report forms which MAL uses in its practice.
Keller, Inc., filed an initial franchise tax return with the State of Oklahoma, regularly filed annual franchise tax returns in 1974 and 1975, and received annual corporate licenses from the State of Oklahoma for 1974 and 1975. Keller, Inc., filed annual certificates of professional corporation with the Oklahoma secretary of state in 1974 and 1975, and also, for both of those years, filed appropriate returns with the Oklahoma Employment Security Commission and paid the contributions thereunder (relating to unemployment compensation coverage).
Keller, Inc.'s pension plan, which had been adopted at its first organizational meeting, was submitted to the Internal Revenue Service for a determination of its qualification under section 401(a). In a letter dated February 7, 1977, the Internal Revenue Service determined that the plan would be qualified if the amendments proposed by Keller, Inc.'s representative (in a letter dated December 14, 1976) were adopted.
Keller, Inc., maintained books of account during all of 1974 and 1975, consisting of general ledgers, prepared balance sheets, and profit and loss statements.
After entering into the employment contract with Keller, Inc., petitioner devoted all of his professional time and effort to such employment on a full-time basis, with the single exception of certain services rendered to MAL, Inc., in 1974, as outlined below. Keller, Inc., compensated petitioner for his services by paying him salaries in the amounts of $55,000 and $61,000 for 1974 and 1975, respectively. During 1974 and 1975, Keller, Inc., withheld Federal and State income taxes and FICA employee taxes from the salary it paid to petitioner, and it regularly remitted the appropriate withheld amounts to the Internal Revenue Service and the Oklahoma Tax Commission.
During the years in question, Keller, Inc., received monthly partnership draws from MAL totaling $84,000 and $105,000 for 1974 and 1975, respectively; these amounts were deposited in due course in its bank account.
Although Keller, Inc., had been substituted as a partner in MAL by way of the agreement among petitioner, MAL, and Keller, Inc., dated December 3, 1973, a similar agreement respecting the compensation paid by MAL, Inc., for the supervisory services rendered to it was not executed until January 1, 1975. During 1974, MAL, Inc., paid $21,076.80 attributable to such supervisory services, all of which was deposited in the bank account of Keller, Inc. The checks...
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