Smith v. United States

• Decision Date: 14 April 1969
• Docket Number: No. 67-1133-Civ.,67-1133-Civ.
• Parties: Ballard F. SMITH and Helen Smith, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of Florida

301 F. Supp. 1016

Ballard F. SMITH and Helen Smith, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 67-1133-Civ.

United States District Court S. D. Florida.

April 14, 1969.

James O. Murphy, Jr., of Rimes & Greaton, Fort Lauderdale, Fla., for plaintiffs.

Lavinia L. Redd, Asst. U. S. Atty., Miami, Fla., for defendant.

MEMORANDUM OPINION

FULTON, Chief Judge.

The Plaintiffs, Dr. and Mrs. Smith, instituted this action against the United States for a refund of income taxes in the amount of $7,954.39 for the year 1965. They claim that said amount was collected from them erroneously in that the Commissioner determined that Dornberger Smith Ferayorni McKay Lauderdale Group Professional Association (hereinafter referred to as the "Professional Association") was taxable as a partnership, rather than as a corporation, and that a distributable share of the partnership income in the amount of $14,462.50 was accordingly taxable to Dr. Smith as a 16 2/3 % partner in the Professional Association.

From 1957 to 1961, Dr. Smith practiced medicine in partnership with two other physicians, Drs. Dornberger and Ferayorni, and all three of them were physicians duly licensed under the laws of Florida. In 1959 the partnership, known as the Lauderdale Medical Group, took in a fourth licensed Florida physician, Dr. McKay.

In October, 1961, the four partners agreed to organize a Florida corporation (Plaintiff's Exhibit 1) and pursuant to that Agreement, on October 20, 1961, the Professional Association was incorporated under Chapter 621 of the Florida Statutes, F.S.A. Its initial stockholders were the four former partners, Drs. Smith, Dornberger, Ferayorni and McKay, who agreed that no stockholder could transfer or encumber his shares of Professional Association stock without the unanimous consent of all others at a stockholders' meeting called specifically for that purpose.

At the time of its incorporation, the Professional Association acquired all of the assets and liabilities of the former partnership. (These assets included cash on hand and in banks in the amount of $2,000, the partnership goodwill, and a lease on the premises of 3000 Bayview Drive, Fort Lauderdale, Florida.) All of the former partnership's employees, including nurses, secretaries, and technicians, became employees of the Professional Association.

Following the incorporation, the four doctor-stockholders executed substantially identical employment contracts with the Professional Association. Dr. Smith's contract with the Professional Association (Plaintiff's Exhibit 2) required him to furnish professional services for the Professional Association on a year to year basis, for which he was to receive from the Professional Association either a certain percentage of his billings or a stipulated minimum guarantee, whichever was greater. The contract further provided that all medical records and case histories were and shall be the sole and permanent property of the Professional Association.

In accordance with Florida's Professional Service Corporation Act, Chapter 621, Florida Statutes, 1961, F.S.A., Article XI of the Professional Association's Articles of Incorporation (Plaintiff's Exhibit 4) precluded the issuance of any capital stock to anyone other than an individual who is a graduate physician licensed to practice in the State of Florida.

The Articles further precluded any stockholder from selling or transferring his stock in the corporation "without the unanimous approval, at a stockholders' meeting called specifically for such purpose, of all stockholders of the corporation." The stockholders were, however, permitted to adopt by-laws providing for purchase or redemption by the corporation of its shares. Article XII, Articles of Incorporation, Plaintiff's Exhibit 4. That provision is echoed in Article V, Section 3(a) of the By-Laws (Plaintiff's Exhibit 5), which also provides that if such unanimous consent is not granted, the corporation shall purchase all of that stockholder's stock.

Since its inception, the Professional Association has operated as a corporation. As prescribed by the By-Laws (Plaintiff's Exhibit 5), its affairs and business have been managed by the Board of Directors (who have been, since 1965, Drs. Smith, Dornberger and Ferayorni). The Board of Directors has held regular annual and monthly meetings and various special meetings in accordance with the By-Laws since incorporation, and written minutes of the regular meetings have been transcribed. Among the decisions concerning the day-to-day operation of the Professional Association made by the Board have been the following:

(a) Scheduling of professional and non-professional employees;

(b) Scheduling nights and week-ends on call for professional employees;

(c) Scheduling vacation times for all employees;

(d) Deciding upon and approving all purchases in excess of $50.00;

(e) Deciding when new professional and non-professional employees are needed;

(f) Hiring, firing and setting salaries of non-professional employees (g) Hiring professional employees, after consultation with all stockholders;

(h) Determining contributions to the Professional Association's profit-sharing plan, and deciding how the plan's funds are to be invested;

(i) Making lease arrangements for the building which the Professional Association occupies and the equipment it uses;

(j) Determining compensation of professional employees, within the terms of their respective employment contracts.

Stationery, medical and business forms have been printed, and all bear the Professional Association's name. The Professional Association maintains a bank account in its name and all checks issued in connection with the operation of the medical practice have been and are issued in the name of the Professional Association. All accounting records are kept in the name of the Professional Association and receipts for payments to the Professional Association, statements issued to patients and all accounting records relating to the patients are in the name of the Professional Association. The Professional Association, and not the individual physicians, is billed for materials furnished by suppliers. Once a patient is accepted by the Professional Association, no individual physician may refuse to treat that patient, and indeed, no individual physician may accept only those patients he wishes to treat. Over the course of years, a patient will see each physician employed by the Professional Association.

In the Professional Association's practice of medicine, there is no supervision of one physician over another, nor is there duplication of work by the physicians. Generally the physician who is then responsible for a patient who requires hospitalization admits that patient to the hospital. However in case of an emergency, the physician who is on call admits a patient requiring immediate hospitalization.

The physician who treats a patient sets the fee for that treatment, but he must and does do so within guidelines established by the Board of Directors. Moreover, fee charges are subject to, and have been, reviewed by the Board of Directors. All checks received by the Professional Association for medical services performed by physician-employees are deposited in the Professional Association's bank account. No fees are received or retained by an individual physician; each of the physicians is compensated by the Professional Association according to his employment contract with the Professional Association, which employment contract sets forth in detail all of the rights and duties of the physician relating to his employment by the Professional Association.

Each of the physician-employees of the Professional Association, including Dr. Smith, has individual malpractice insurance coverage with the Professional Association named as an additional insured. Since June, 1966, the malpractice insurance policy has insured the physician-employees both individually and as the Professional Association. Both policies cover acts performed by the insured as an individual and on behalf of the Professional Association. The premiums on all such malpractice policies are paid by the Professional Association.

At all times material to this action, Florida's Professional Service Corporation Act set forth the liabilities of employees of the Professional Association, as well as of the Association itself.

"Nothing contained in this act shall be interpreted to abolish, repeal, modify, restrict or limit the law now in effect in this state applicable to the professional relationship and liabilities between the person furnishing the professional services and the person receiving such professional service and to the standards for professional conduct. Any officer, shareholder, agent or employee of a corporation organized under this act shall remain personally and fully liable and accountable for any negligent or wrongful acts or misconduct committed by him, or by any person under his direct supervision and control, while rendering professional service on behalf of the corporation to the person for whom such professional services were being rendered. The corporation shall be liable up to the full value of its property for any negligent or wrongful acts or misconduct committed by any of its officers, shareholders, agents, or employees while they are engaged on behalf of the corporation in the rendering of professional services." Section 621.07, Florida Statutes, F.S.A.

The Professional Association has since 1961 been continuously engaged in the practice of medicine under Florida's Professional Service Corporation Act. It has timely filed a corporate Federal Income Tax Return for each and every calendar year since its incorporation in 1961. Each and every year since 1961 it has also filed Federal Payroll Tax Returns (Form 941) for all of its employees, including its physician employees (and thus including Dr. Smith), which Payroll Tax Returns include the...