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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #4 - Joint Venture
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Dr. Rob Hart is a cardiologist and is the Chief of Cardiology at Pennsylvania Hospital (PAH). Dr. Hart is in a three person private practice group at PAH and chairs the PAH diagnostic cardiology equipment medical staff committee. Dr. Hart has, for a number of years, been very interested in advancing the use of technology in the early diagnosis of coronary heart disease. He has been actively involved in research studies using ultra fast CT scanners. The use of ultrafast CT scanners has the potential for much earlier diagnosis of heart disease.

Dr. Hart encouraged his wealthy brother-in-law, Money Bags, to enter into a joint venture arrangement with Cardio-Technologies Inc. to create a start-up company, UFCT, to provide ultra-fast CT services to area hospitals. Money Bags became a 40% owner of UFCT and promised to let Dr. Hart and his family stay a week at his Maui condo (a $5,000 value) if UFCT successfully obtained a new contract from PAH. Dr. Hart suggested that UFCT make a proposal to PAH for the provision of ultra fast CT services. However, Dr. Hart was careful that he did not actively promote UFCT to PAH for these services.

UFCT proposed to provide the services to PAH for $600 per scan, a premium of 25% above what other similar providers would offer. UFCT services used a more advanced technology and would engage Dr. Hart, at a fair market compensation, as a medical director to ensure PAH realized full value from the arrangement. The PAH Executive Director, the VP for Professional Services, and the Director of Radiology Services all reviewed and approved the contract for a long-term arrangement with UFCT to provide services (equipment and technologists) to PAH. They all liked the fact that PAH would be the first to obtain this service in the area and anticipated that PAH would provide approximately 2,500 scans annually, resulting in perhaps 1,000 referrals to PAH cardiologists and 250 additional invasive diagnostic cardiology procedures. Notwithstanding the many positive aspects of the arrangement, they were never able to fully reconcile or document the value UFCT would be providing for the 25% premium.

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