T.C. Memo. 2002-70
UNITED STATES TAX COURT
ANTONIO ROSARIO AND JOYCE ROSARIO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1378-00. Filed March 26, 2002.
Robert J. Fedor, for petitioners.
Katherine Lee Kosar, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$90,454 in petitioners’ Federal income tax for 1993. The issues
for decision are whether $242,556 received by petitioner Antonio
Rosario from Jesse Holman Jones Hospital (the hospital) in 1993
is taxable income to him in 1993 and whether the period of
limitations expired for the 1993 taxable year.
- 2 -
Background
The parties submitted this case fully stipulated pursuant to
Rule 122.1 The stipulation of facts and the attached exhibits
are incorporated herein by this reference. At the time the
petition was filed, petitioners resided in Marion, Ohio.
Petitioner Antonio Rosario (hereinafter, petitioner) is an
orthopedic surgeon. The hospital is located in Springfield,
Tennessee. To induce petitioner to practice in the Springfield
area, petitioner and the hospital executed a Professional
Practice Agreement (the practice agreement) on September 30,
1992. The practice agreement provided, in part:
Income Guarantee. Hospital guarantees that,
during the term of this Agreement, Physician’s gross
income (defined as collected professional fees) will
not be less than Thirty-Three Thousand Three Hundred
Thirty-Four Dollars ($33,334.00) per month. To the
extent that Physician’s gross income in any month
during the term of this Agreement is less than
$33,334.00, the Hospital will pay Physician by the
tenth day of the closing of the Physician’s books for
that month any amount sufficient to raise Physician’s
income for that month to $33,334.00 (such payment by
Hospital, will be referred to as a “Gross Guarantee
Payment”). If, during any month of the term of this
Agreement, Physician’s income is greater than
$33,334.00, Physician will pay to Hospital by the tenth
day after the closing of Physician’s books for the
month, the excess over $33,334.00, to the extent
necessary to reimburse hospital for Gross Guarantee
Payments previously paid. Such payments by Physician
will be made to the Hospital during the term of this
1
All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
- 3 -
Agreement until the total amount of Gross Guarantee
Payments made by Hospital have been repaid in full.
* * *
The practice agreement also provided that petitioner and the
hospital would agree upon repayment terms at the termination of
the agreement if there was any balance due.
In exchange “for the benefits and consideration provided by
Hospital to Physician”, petitioner agreed to operate a medical
practice of orthopedic surgery in the area for a period of at
least 3 years and to become a full member of the medical staff at
the hospital. If petitioner failed to comply with the terms of
the practice agreement, the practice agreement provided that,
upon demand by the hospital, petitioner would repay all amounts
paid to him to meet the income guarantee. The practice agreement
term began on January 1, 1993, continued for a period of 12
months, and could be renewed for an additional 12 months by
mutual consent. The practice agreement also provided that
petitioner would be an independent contractor of the hospital.
Petitioner began operating a medical practice in
Springfield, Tennessee, on September 30, 1992. Beginning in
January 1993, petitioner received funds from the hospital to
ensure a monthly gross income2 of $33,334. During 1993, pursuant
2
For convenience, we use the parties’ terms “income” and
“guarantee payments”, and use of such terms is not intended to be
conclusive as to characterization for tax purposes.
- 4 -
to the practice agreement, petitioner received $242,556 from the
hospital.
On January 1, 1994, petitioner and the hospital executed a
First Amendment to Professional Practice Agreement (amended
agreement). The amended agreement provided:
Hospital intended that Physician, upon expiration of
the Income Guarantee, be required to repay that portion
of the Income Guarantee not repaid pursuant to the
Guarantee Payback, regardless of the level of
Physician’s gross income, * * *.
The amended agreement also stated:
WHEREAS, Physician acknowledges that he, consistent
with this intent, has accounted for amounts advanced by
Hospital pursuant to the Income Guarantee as a loan and
not as income.
In connection with the amended agreement, petitioner executed a
promissory note on January 1, 1994, in the amount of $261,094.
If petitioner ceased practicing in that area, the outstanding
principal balance would be due and payable in full. After more
than 6 years of practice in the area, petitioner ceased in
November 1998.
Petitioner and the hospital discussed repayment of the
promissory note balance by assigning to the hospital petitioner’s
accounts receivable from his practice. On March 2, 1999, the
hospital wrote petitioner that the value of his accounts
receivable had decreased substantially. The hospital then
requested immediate payment of the outstanding balance of
$110,780.
- 5 -
On July 20, 1999, the hospital filed a diversity complaint
against petitioner in the U.S. District Court for the Middle
District of Tennessee to recover the balance of the promissory
note--$110,780 plus accrued interest from November 1998. This
amount represented the funds advanced to petitioner from the
hospital and not yet repaid under the practice agreement. The
U.S. District Court granted summary judgment to the hospital and
awarded it the outstanding balance on the note, accrued interest,
and attorney’s fees and expenses.
Respondent determined that petitioner received unreported
taxable income of $242,556 from the hospital in 1993. Respondent
determined that “the loan from Jesse Holman Jones Hospital does
not constitute a valid loan”.
Discussion
Petitioner argues that the guarantee payments advanced to
him during 1993 constituted a loan. Petitioner argues that these
payments were a loan because the transaction was at arm’s length,
a promissory note was executed which bore interest and required a
balloon payment, each party intended to make or enforce repayment
per repayment terms enumerated in the practice agreement, the
hospital maintained a schedule of all payments and repayments,
and the hospital would charge an interest rate as of the
termination date of the practice agreement. In addition,
- 6 -
petitioner contends that the amended agreement and the hospital’s
proceedings against him in a U.S. District Court to collect
repayment of the guarantee payments received by him should
eliminate “any doubt regarding the treatment of the monies
advanced”.
Respondent argues that amounts paid to petitioner by the
hospital constituted gross income in 1993. Respondent contends
that nothing in the record evidences that, at the time petitioner
entered into the practice agreement, petitioner intended to repay
the guarantee payments received. Respondent also argues that the
practice agreement did not contain an unconditional obligation to
repay because it stated that any terms regarding the payback of a
balance due would be mutually agreed upon at the expiration of
the term.
Gross income includes all income from whatever source
derived, encompassing all “accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion”.
Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431
(1955). Generally, proceeds of a loan do not constitute income
to a borrower because the benefit is offset by an obligation to
repay. United States v. Rochelle, 384 F.2d 748, 751 (5th Cir.
1967); Arlen v. Commissioner, 48 T.C. 640, 648 (1967). Whether a
particular transaction actually constitutes a loan, however, is
- 7 -
to be determined upon consideration of all the facts. Fisher v.
Commissioner, 54 T.C. 905, 909 (1970).
For a payment to constitute a loan, at the time the payments
are received, the recipient must intend to repay the amounts and
the transferor must intend to enforce payment. Haag v.
Commissioner, 88 T.C. 604, 615 (1987), affd. without published
opinion 855 F.2d 855 (8th Cir. 1988); Beaver v. Commissioner, 55
T.C. 85, 91 (1970). Further, the obligation to repay must be
unconditional and not contingent on a future event. United
States v. Henderson, 375 F.2d 36, 39 (5th Cir. 1967); Bouchard v.
Commissioner, 229 F.2d 703 (7th Cir. 1956), affg. T.C. Memo.
1954-243; Haag v. Commissioner, supra at 615.
Intent is a state of mind rarely susceptible of proof by
direct evidence; therefore, we have generally considered a number
of criteria for the purpose of determining the intent of the
parties at the time the payments were made. Dean v.
Commissioner, 57 T.C. 32, 43 (1971). No single factor, standing
alone, is controlling, but each factor is considered with all the
facts and circumstances present. Id. at 44.
On the basis of the evidence in the record, we find that the
guarantee payments advanced to petitioner constituted a loan and
are not taxable income.
- 8 -
First, the practice agreement provided for repayment. The
practice agreement provided that petitioner, to the extent his
income during any month of the term of the agreement exceeded
$33,334, had to repay the hospital for guarantee payments
previously made by the 10th day after the close of petitioner’s
books for that month. Additionally, the practice agreement
provided that the parties would agree upon terms for repayment of
any balance due at the termination of the practice agreement.
Furthermore, the practice agreement provided repayment terms in
certain other instances, e.g., if control or ownership of the
hospital was transferred or changed.3
3
In such instances, the practice agreement provided for
repayment “in twenty-four (24) monthly installments of principal
and interest calculated at the prevailing prime rate of interest
published in the Wall Street Journal as of the day of
termination”.
Additionally, the obligation to repay was shown in the
provisions for the early termination of the practice agreement.
If the hospital terminated the practice agreement early in
certain instances, the practice agreement provided that
petitioner “shall not be obligated to repay Hospital any amounts
paid on behalf of or reimbursed to Physician by Hospital”. We
interpret this sentence as not requiring petitioner to repay the
guarantee payments amounts if the hospital terminated the
practice agreement early, and requiring petitioner to repay
otherwise.
This point was emphasized in the next sentence, which
provided that if the hospital terminated the practice agreement
early in other instances (e.g., petitioner was convicted on a
felony or petitioner did not comply with the terms of the
practice agreement), petitioner “will repay to Hospital, upon
demand by Hospital, all sums of monies paid out to Physician to
meet the income guarantee”.
- 9 -
Petitioner’s intent to repay is further supported by the
amended agreement and the accompanying promissory note. The
amended agreement emphasized petitioner’s obligation to repay the
sums advanced to him as guarantee payments and called the
guarantee payments a “loan”. The amended agreement’s purpose was
to enforce repayment by requiring petitioner to execute the
promissory note in the amount due--the excess of the amount of
the guarantee payments made over the portion of those payments
that petitioner had repaid to the hospital. As a result,
petitioner executed the promissory note for the amount due to the
hospital.
Further, petitioner’s intent to repay was reflected in the
correspondence between petitioner and the hospital after
petitioner ended his practice in the Springfield area. The
correspondence stated that petitioner proposed to assign his
accounts receivable to pay off the remaining balance of the
promissory note and then make arrangements to pay the outstanding
balance. If petitioner had not intended to repay the balance of
the promissory note, petitioner would not have made any
arrangements with the hospital.
Additionally, the hospital’s intent to enforce repayment by
petitioner is reflected in other stipulated documents. For
example, the parties stipulated journal entries titled “Jesse
- 10 -
Holman Jones Hospital Accounts Receivable--Other” under which is
written petitioner’s name. Upon review by the Court, they appear
to be prepared contemporaneously with each transaction. The
journal entries show amounts paid to or on behalf of petitioner
and repayments to the account. The hospital reported the
guarantee payments in the “debit” column. The hospital,
therefore, treated each guarantee payment as an asset or account
receivable; i.e., an amount that it would receive in the future.
In addition, credits are shown in the journal entries, indicating
that repayments were made to the account.
Finally, the hospital’s intent to enforce repayment of the
guarantee payments amount is demonstrated by the hospital’s
proceedings against petitioner in the U.S. District Court to
collect on the promissory note. If the hospital had not intended
to enforce repayment, the hospital would not have filed a lawsuit
on the issue in the U.S. District Court based on diversity and
then sought a summary judgment on the undisputed facts.
On the basis of the record, we conclude that the guarantee
payments advanced to petitioner constituted a loan rather than
taxable income because petitioner intended to repay the amounts
paid to him and the hospital intended to enforce repayment of the
guarantee payment amounts. We hold, therefore, that the
- 11 -
guarantee payments are not includable in petitioner’s income in
1993 because those payments were a loan.
As we have found that petitioners are not liable for the
deficiency, whether the period of limitations expired for the
1993 taxable year is moot.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not herein
discussed, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be
entered for petitioners.