Health Law

TAX COURT: NO CHARITABLE DEDUCTION FOR MEDICAL PRACTICE ?GOOD WILL?

By Greg Piche'

Medical Practice ?good will? is one of those amorphous concepts like pornography that is difficult to define, but you know it when you see it.  Not infrequently ?good will? is deemed the largest component in the appraised value of a medical practice.  In many medical practices the actual hard assets of the practices have little or no value.  Part of the value of intangible good will can be identified in the surrender of the right to compete and the potential for generating revenues and income in the future.  Compliance oriented appraisals of medical practices generally assess the value of future revenue multiples after deducting the expenses and salaries of replacement physicians (with substantially lower compensation levels for physicians without a seasoned practice.)

In Charles A. Derby et al. v. Commissioner, T.C. Memo 208-45, the U.S. Tax Court rejected a claimed charitable deduction by a physician who sold his practice to a non-profit organization, Sutter Medical Foundation for the value of the hard assets of the practice alone.  Dr. Derby and his fellow physicians had obtained an appraisal of their practice with a value of 4 million dollars.  They sold the hard assets to Sutter for a little over a million two hundred thousand dollars and entered into long term employment agreements at favorable levels of compensation.

Clearly the motive of Dr. Derby and the others was not based on eleemosynary  passion (sort of like when Bill Clinton took a tax deduction for donating his used underwear to charity).  But that alone does not determine deductibility.  Here the Tax Court found that Dr. Derby and the others received something in return for their donation, namely higher salaries and more favorable employment terms, leveraged by the value of the ?good will.?  Under Sec. 170(a)(1) of the Internal Revenue Code the donation of money or property is not deductible if something is expected in return.  Charitable donations made as part of an integrated deal are suspect.  The difficult struggle with defining the value of professional practice ?good will? continues.  In some practices it is only a couple of heart attacks away from extinction. 

Full post as published by Healthcare Law Blog on March 21, 2008 (boomark / email).