Bergquist v. Commissioner: Not Quite What These Doctors Ordered
In Bergquist v. Commissioner, the Tax Court came down hard on a group of doctors who attempted (quite unsuccessfully) to obtain significant charitable deductions on their income tax returns in connection with the consolidation of their medical practice group with a larger entity.
The Facts
The petitioners, a group of several anesthesiologists, practiced medicine as employees and as stockholders in University Anesthesiologists, P.C. ("UA"). Through UA, the petitioners provided medical services to patients of the Oregon Health & Science University Hospital ("OHSU"), a public teaching and research hospital. In 1998 OHSU decided to form the OHSU Medical Group ("OHSUMG") and register as a Section 501(c)(3) tax-exempt professional service corporation to serve as a single consolidated medical group into which thirty different medical practice specialty groups (including UA) would be consolidated. In early 1999 and in light of the pending consolidation of UA into OHSUMG, one of the petitioners attended a conference sponsored by the Medical Group Management Association during which he learned that some doctors throughout the country were claiming substantial charitable contribution deductions relating to donations to academic-affiliated institutions of stock in their medical groups. The conference attendee reported this information back to UA's attorney and accountant, and at the next UA shareholders' meeting the petitioners decided to adopt the following plan:
Because UA consisted only of voting stock, the first step was to issue a new class of nonvoting stock so that each shareholder could "donate" their nonvoting stock to OHSUMG prior to the consolidation (and thereafter claim substantial charitable deductions on their income tax returns), while at the same time making sure the doctor shareholders retained control of UA in compliance with the Oregon law that required a majority of the voting stock in a medical professional service corporation be held by licensed doctors. After the consolidation, the UA shareholders would "donate" all of their their voting stock to OHSUMG, and claim additional charitable deductions. Once the consolidation of UA into OHSUMG was complete, UA would cease to operate, would have no doctors and no patients, and would continue in existence just long enough to collect its accounts receivable. As a last step before proceeding with the "donation", UA retained the services of a valuation firm to determine the values of the nonvoting and voting stock.
With this plan in place, just prior to the consolidation of UA into OHSUMG, 24 of the 28 UA shareholders each donated all of their nonvoting stock, and just under half of their voting stock, to OHSUMG on September 14, 2001. Using the valuation figures reached by the valuation service hired by UA, the petitioners' deductions for the year 2001 ranged from $176,787 to $200,895. On January 1, 2002, the consolidation into OHSUMG was complete, and UA continued in existence only long enough to collect its accounts receivables. In auditing the petitioners' returns for 2001, the IRS completely disallowed the claimed charitable deductions.
The Holding
The Tax Court upheld the IRS' disallowance of the petitioners' 2001 charitable deductions, finding as follows:
The valuation of the UA stock by petitioners' experts was overinflated and in error, as the petitioners' experts incorrectly treated the UA stock as a "going concern". Section 170(a)(1) of the Internal Revenue Code allows for charitable deductions equal to the fair market value (FMV) of the contributed property on its date of contribution. The FMV of the property is defined as the price at which "the property wold change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." Sec. 1.170A-1(c)(2) Income Tax Regs. While the Tax Court will not generally look at subsequent events in determining whether a valuation was accurate, it may consider relevant subsequent events if they are reasonably foreseeable "because they would be foreseeable by a willing buyer and a willing seller, and they therefore would affect the valuation of the property." Estate of Gimbel v. Commissioner, T.C. Memo 2006-270. In the case at hand, the Tax Court found ample evidence that the petitioners were aware of the fact that UA would no longer be operative (and thus no longer a "going concern") shortly after the donation of the UA stock to OHSUMG. This evidence included the minutes from several shareholders' meetings describing the consolidation of UA with OHSUMG as a way to reap a potential "150k" windfall. While the petitioners' argued that the consolidation was uncertain (they cited uncertainty as to whether OHSUMG would adopt a governmental retirement plan that met the petitioners' approval), the Tax Court concluded otherwise, and found that petitioners certainly would not have donated their UA stock to OHSUMG if the consolidation were uncertain at that point.
The Penalty
Under Section 6662(h) of the Internal Revenue Code, a taxpayer can be liable for a 40% accuracy-related penalty on the portion of an underpayment of tax attributable to a gross valuation misstatement. A gross valuation misstatement exists if the value of the property as reported on the tax return is 400% or more of the amount finally determined to be the correct value; but a penalty is enforced only to the extent the misstatement exceeds $5,000. While Section 6664(c)(1) allows for an exception from the penalty in cases where the taxpayer (1) relied on a "qualified appraisal" made by a "qualified appraiser" AND (2) made a good faith investigation into the value of the contributed property, the Tax Court found that the petitioners in this case made no such good faith investigation. Relying blindly on advice from appraisers will not suffice as evidence of a good faith investigation. Further, there was evidence on the record that the petitioners were actually advised NOT to bring their own tax advisers to the UA shareholders' meeting where the stock donation plan was voted on, and were directed to actually withhold information from their own tax advisers. Thus, to the extent the petitioners' gross valuation misstatements exceeded $5,000, each was liable for a 40% accuracy penalty.
The Tax Court finally went on to hold that to the extent the Section 6662(h) 40% accuracy penalty was not applicable to petitioners, each would be liable for a 20% accuracy-related penalty under Section 6662(b)(1) for understatement of tax attributable to negligence or to disregard of rules or regulations.
