[ Corporate Tax - Intermediate Sanctions Excise Taxes ]
Suggested Answers : Case Study #1 - Medical Directorship
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions
Identify, if any, disqualified persons and/or organization managers.
Under the initial contract rules Dr. Splinter is not a
disqualified person for the period immediately prior to
being recruited to the orthopedic department since he
had no former relationship with PMC. After joining the
hospitalís independent medical staff, however, Dr. Splinter
could, under a facts and circumstances test, be argued to
be a disqualified person resulting from his status as the
largest admitter of patients to the hospital.
Dr. Romano, as the hospital administrator, and Dr. Weaver,
as the Chief Medical Officer, are probably by virtue of their
titles and legal responsibilities in the management and
administration of the hospital organization managers.
Describe any potential excess benefit transaction(s).
Medical Director for Residency Training
The $75,000 first year payment to Dr. Splinter would likely not be an excess benefit transaction for the first year because, under the initial contract rules, Dr. Splinter would not be a disqualified person at the time the recruitment package was negotiated. However, if, as the case suggests, the agreement for the $75,000 payment is renewed for subsequent years, it could well be argued to be an excess benefit transaction and Dr. Splinter could be argued to be a disqualified person. Since the original $75,000 agreement was technically for one year only, subsequent year payments would not fall under the exception for initial contracts.
Who would be liable for any potential excise taxes and how much would they be?
Since the other medical directors for residency training at the hospital all appear to have as much or more responsibility than Dr. Splinter and since they have contracts for only $15,000 to $20,000 per year, it would appear that Dr. Splinterís payment of $75,000 may exceed fair market value. The excise tax exposure to Dr. Splinter after the first year would be 25% of the amount paid to him that exceeds the amount that the hospital can document as being fair market compensation for the services he provides as a medical director. In addition, he would need to return the actual excess benefit amount.
Dr. Romano and Dr. Weaver could be jointly liable as organization managers, assuming that they both approved the transactions, for the 10% excise tax.