Opinion ID: 575501
Heading Depth: 2
Heading Rank: 2

Heading: Enhanced Compensation for Medical Services Rendered

Text: 30 RMA contends that the Tax Court erred in using collections as the basis for its compensation determination because the owner-physicians performed certain medical supervisory functions that merited enhanced compensation, and the owner-physicians generated the majority of the ancillary revenues. McClung Hospital, Inc. v. Commissioner, 19 T.C.M. 449 (1960). 31 RMA's expert assigned a value of $295,320 for the year 1982 and $310,860 for the year 1983 for medical supervisory services rendered. The court found the expert's methodologies for arriving at these figures lacking. Neither the report submitted by petitioner's expert, nor the report upon which petitioner's expert relied in deriving these amounts, provided figures on the amount of time devoted to such responsibilities. The Court found that some of the medical titles associated with these supervisory responsibilities, i.e. director of radiology and director of anesthesia, carried limited substantive responsibilities because the titles were unrelated to the owner-physicians' medical specialty. 32 RMA's executive secretary and office manager testified that the owner-physicians were entitled to a compensation enhancement because they were the major admitters to the hospital and generated the majority of ancillary revenue. The Tax Court noted that petitioner's expert presented no quantitative analysis of the profit or mark up on ancillary services, and did not specify which owner-physicians provided which services. 33 Based on these factual findings, the Court's decision not to allow additional compensation based on ancillary charges was not clearly erroneous and set the allowable compensation deductions for medical supervisory services at 190,000 for 1982 and 200,000 for 1983. RMA has failed to show that it is entitled to a deduction larger than that determined by the Court. Negligence Penalties 34 Section 6653(a)(1) of the Internal Revenue Code applies a 5 percent penalty on the entire underpayment if any part of the underpayment is due to negligence. In contrast to § (a)(1), § 6653(a)(2) applies a penalty only to the portion of the underpayment that is attributable to negligence or intentional disregard of rules and/or regulations. 6 Negligence is defined as the failure to make a reasonable attempt to comply with the provisions of the Tax Code. 35 The Tax Court found that RMA acted negligently in taking its compensation deduction and applied a § (a)(1) penalty to RMA's entire tax underpayment, and a § (a)(2) penalty to that portion of the deduction for compensation taken by RMA that exceeded RMA's expert's calculation of a minimum reasonable compensation. First, the Court found that the deductions claimed by RMA were substantially in excess of the amounts found to represent reasonable allowances for services provided. Second, RMA's bylaws provided for the distribution of all of its net profits among the owner-physicians at year end. Seventy-five percent was divided according to each ownerphysician's productivity factor, the other 25 percent was divided equally. The Court found that the latter 25 percent represented what should have been distributed based on ownership, i.e., as dividends. Third, RMA's own expert computed 'minimum' reasonable compensation at 66 and 74 percent of the amounts claimed by petitioner in its returns for the years 1982 and 1983 respectively. Based on this evidence, the Court found that RMA acted negligently. 36 RMA argued that it was insulated from liability for negligence because its returns were prepared by a certified public accountant. In the alternative, RMA contends that it acted under a good faith belief that the compensation paid to the owner-physicians was reasonable, and these amounts were fully disclosed on its tax return. It was found that these facts, without more, did not insulate petitioner from the application of a negligence penalty. Epoch v. Commissioner, 57 T.C. 781, 802-803 (1972). Reliance on the advice of an agent employed by the taxpayer does not absolve the taxpayer of the duty to exercise ordinary business care and prudence. United States v. Boyle, 469 U.S. 241, 254 (1985) (Brennan, J. concurring). The Court found that RMA failed to show that its officers, who were well educated and highlypaid individuals, received any advice from its accountant concerning allowable compensation deductions. The record contains no evidence that RMA's owners ever discussed the issue of reasonable compensation with their accountant or received an opinion specifically on that issue. There is no evidence that RMA provided full disclosure of all relevant facts to its accountant so that any accounting advice provided to RMA would constitute an informed opinion. Leonhart v. Commissioner, 414 F.2d 749, 750 (4th Cir.1969). For example, there is no evidence that the accountant had any knowledge of the duties performed by RMA's owners, or of compensation paid to persons similarly situated. 37 In the absence of such evidence, the Tax Court found that RMA's treatment of all distributions to owner-physicians as compensation was unreasonable. In light of the record developed in this case, this finding was not clearly erroneous. While a showing of honesty, good faith, and disclosure by the taxpayer may preclude the existence of fraud, good faith alone does not always preclude negligence. American Properties, Inc. v. Commissioner, 28 T.C. 1100 (1957), affd, 262 F.2d 150 (9th Cir.1958). 38 Thus, by applying a five percent penalty to the entire underpayment pursuant to § (a)(1) and a § (a)(2) penalty to that portion of the deduction for compensation taken by RMA that exceeded its expert's calculation of a minimum reasonable compensation, the Tax Court did not abuse its discretion. 39 AFFIRMED.