Gassman, Crotty & Denicolo, P.A. Attorneys at Law | 727.442.1200 | [email protected] The Thursday Report August 3, 2017 ǀ Issue #224 Re: ThursdayShack An Update on the Tax Treatment of Hospital Recruiting Loans by Alan Gassman & Brandon Ketron Coordinating Business Conduct: Contractor Relationships and Insurances Part 2 by Chuck Wasson, Scotty Schenck & Alan Gassman School Anxiety by Dr. Rahul Mehra, M.D. Two Ways That Medical Practices Can be Paid by Medicare—Beyond Fee for Service Billing and Ancillaries Part 2 by Alan Gassman and Scotty Schenck The Best Place to Find More Time by David Finkel Richard Connolly’s World Humor! (Or Lack Thereof!) 1 We welcome contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer, please email Alan at [email protected] This report and other Thursday Reports can be found on our website at www.gassmanlaw.com Quote of the Week “Don't be obsessed with your desires Danny. The Zen philosopher, Basho, once wrote, 'A flute with no holes, is not a flute. A donut with no hole, is a Danish.'” -Ty Webb Caddyshack is a 1980 American sports comedy film directed by Harold Ramis and written by Brian Doyle-Murray, Ramis and Douglas Kenney. It stars Michael O'Keefe, Chevy Chase, Rodney Dangerfield, Ted Knight, and Bill Murray. Doyle-Murray also has a supporting role. The film was later dedicated to producer Douglas Kenney, who died shortly after the film's release. This was Ramis' first feature film and was a major boost to Dangerfield's film career; previously, he was known mostly for his stand-up comedy. Caddyshack has garnered a large cult following and has been hailed by media outlets, such as Time and ESPN, as one of the funniest sports movies of all time. Click HERE, HERE, or HERE to view some of our favorite scenes. 2 An Update on the Tax Treatment of Hospital Recruiting Loans by Alan Gassman & Brandon Ketron The following is a brief case synopsis of the cases discussed in the article below: 1. Salloum v. Commissioner T.C. Memo 2017-127 - If a hospital guarantee advance is not reported as income upon receipt and was then treated as a loan, the doctor cannot deduct repayment in a later year. 2. Wyatt v. Commissioner T.C. Memo 2015-31 - The taxpayer and the IRS stipulated that the hospital guarantee advance was a loan and was not income upon receipt. The Court did not scrutinize what the parties agreed to and held forgiveness of the loan was income. 3. Vancouver Clinic, Inc. v. United States WL 1431656 (W.D. Wash. Apr. 9, 2013) - The Court held that a hospital guarantee advance is income upon receipt and not a loan due to the fact that neither party expects for the loan to be repaid due to the physician remaining at the hospital for the commitment period. 4. Rosario v. Commissioner T.C. Memo 2002-70 - The court held that the hospital guarantee amount was a loan relying on the fact that the hospital received a lien on the practice assets and sued the physician for repayment. 5. TAM 2000-40-004 - The IRS ruled that advances were compensation, even though they were secured by a promissory note and bonus agreement due to there being no unconditional and personal obligation to repay the advances. 3 The June 2017 Tax Court Memorandum of Salloum v. Commissioner (T.C. Memo 2017-127) involved a traditional Hospital Recruitment Agreement whereby the physician opened a new practice in an under-served community, and received a loan during the first six months of practice as a compensation guarantee. The end result was that he owed $146,500 after the end of the six month guarantee period. The Agreement provided that the loan amount would be forgiven if he practiced in the community for a total of three years. Under the Agreement, the loan was reduced by 1/30th each month the physician remained in the community following the first six months. For example after the first full year of service, 6/30ths (1/5th) of the total loan balance was forgiven, and the hospital issued a 1099 to him each year for the amount of the loan that was forgiven. The doctor did not include any of the amounts borrowed in income during the six months, and it is not discussed whether the physician included the amounts forgiven in subsequent months as income. In February of 2011, the physician terminated his employment with the hospital and left the community. In 2012, the physician paid to the hospital roughly $47,000 and deducted this amount as a Schedule C expense for repayment of advanced compensation. The IRS disagreed and brought a collection action arguing that the amount paid to the hospital was a repayment of a loan and not deductible by the taxpayer. The Tax Court Decision held that the amounts paid to the physician under the Hospital Recruiting Agreement are considered to be loans and the repayment of the loan is not deductible. The Opinion indicates that the doctor and the IRS both agreed in the first stipulation of facts that the loan amounts received were not income, which we believe was an error on the part of the IRS. In the 2002 Tax Court Memorandum Decision of Rosario v. Commissioner, a doctor borrowed money to start a new practice in the same manner as described above, but there was nothing in the agreement that indicated that the loan would be forgiven. Repayment of the loan would not occur until six years later, and the IRS argued that the loan received was unreported income in the year of receipt. The Court concluded that the parties intended for the payment to be a loan, as proven by the fact that the hospitalist situation received a lien on medical practice assets and also sued for repayment and won the lawsuit. A different result was reached by the 2013 U.S. District Court of Washington case Vancouver Clinic Inc. v. U.S., where a clinic company gave newly recruited physicians loans in addition to compensation that were forgiven if the doctor stayed with the practice for five years. The Court concluded that the intent of the parties was to have the doctor stay for five years, and distinguished the situation from the Rosario case, because in Rosario there was no loan forgiveness provision. The Vancouver Clinic case did not make mention of the Rosario case, and tax lawyer Ralph Levy, Jr., in his 2013 article entitled “Beware of the Tax Consequences of Physician Recruitment Repayments” noted that by comparison the agreement in Rosario did not have forgiveness provisions, plus the amounts owed were secured by accounts receivable and enforcement action was taken. In Vancouver Clinic, the Court noted that an important factor in determining whether the advancements are considered as loans or as income is whether the parties intend for the amounts to be repaid at the time the payment. In determining that the advancement 4 is considered income at the time it is received, the Court was persuaded by the fact that in most cases, the hospital expects for the physician to remain at the hospital for the commitment period and for the “loan” to be forgiven. A previous Thursday Report written on the Vancouver Clinic case and others can be found by clicking here. Link - http://gassmanlaw.com/thursday-report-12-12-13/ In a 2013Tax Court case Wyatt v. Commissioner (T.C. Memo 2015-31), the Tax Court cited to the Rosario and Vancouver Clinic case which presents the two conflicting views on the subject of whether amounts received under a Hospital Recruiting Agreement constitute income upon receipt or a loan. The Court did not discuss the classification, but instead simply agreed with the parties’ stipulation that the amounts received constituted a bona fide loan. Based upon the above, it would seem to us most likely that the correct tax treatment of a typical Hospital Recruitment Agreement which requires the doctor to stay in the geographical area and provides for the loan to be forgiven, will be considered to be income upon receipt by the doctor, unless it can be proven that the doctor and the hospital intend for the doctor to leave the area and repay the loan. It is important to remember that Tax Memorandum Decisions are not reviewed by other Tax Court judges besides the one who wrote the Opinion, are not to have precedential value. The conflicting opinions of Rosario, Vancouver Clinic, Wyatt, and Salloum will doubtlessly cause confusion, while the Salloum opinion may provide some degree of protection for those doctors who do not include recruitment loans in income upon receipt, notwithstanding that this part of the Decision was probably incorrect. The wicket gets stickier when the loan from the hospital goes to a medical group, which in turn hires the doctor and uses the money to prevent having negative cash flow in the first year of employment. If the Employment Agreement signed between the group and the doctor and the Recruitment Agreement signed by the group, the doctor and the hospital, require the doctor to stay in the community until the loan is forgiven, then it would seem more likely that a court would conclude that the loan was not intended to be repaid, unless strong evidence to the contrary can be produced. One question is whether an IRS auditor might claim that income was incorrectly reported in the year that the loan was made, and that income tax should have been paid instead on loan forgiveness that occurred in the subsequent years.