The United States Tax Court ruled recently that a group of individual physicians who sold their practice group to a nonprofit hospital were not entitled to take a charitable deduction for the value of intangible assets each individual allegedly conferred in the sale.  

The physicians argued that between $1 million and $2 million in intangible assets - including their patient rosters and professional reputations - were donated.  The court agreed with the position taken by the Internal Revenue Service that the physicians were wholly compensated under the terms of the employment agreement each signed. 

The physicians believed that they had sold a lucrative practice for less than fair market value.  A third party appraiser valued the practice for approximately $4 million, and the physicians transferred their assets for less than half of that.  Therefore, the physicians felt that the value of the intangible assets transferred to, but not purchased by, Sutter Medical Foundation (SMF), a nonprofit, could be considered a charitable donation deduction on the physicians' individual tax returns.  SMF did not purchase the intangible assets, in part, because of concern that it would be seen as payment for physician referrals in violation of federal anti-kickback laws.  After the transaction, the physicians divided an estimated $1.6 million between them as the value of the intangible assets and took it as charitable contribution deduction.  

The court found that the physicians did not actually transfer the good will or patient roster with donative intent, but rather in exchange for valuable consideration.  Among the factors that the court considered in determining that there was valuable consideration were the lack of a noncompete agreement for the physicians, often a requirement by purchasers, and SMF's employment of the physicians on unusually favorable terms, including a $35,000 signing bonus.  The court ordered the individual physicians to pay a total of approximately $240,000 in back taxes, but declined to impose penalties.  

In the 1990s when this transaction occurred, these deals were common for providers.  The decision is relevant today because the number of these deals being done is again on the rise. 

The full text of the opinion is available at this link.

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