This post was originally published on Forbes May 18, 2015
The Tax Court decision in the case of Coastal Heart Medical Group, Inc and Doctor Anil V. Shah is a tax geek's dream covering complicated issues combined in a convoluted manner. It is not nearly as interesting as the related story which includes a physician being framed with a planted gun and drugs.That story is in a decision of the Fourth Appellate District of the State of California - Michael W. Fizgibbons V Integrated Healthcare Holdings Inc. The latter sheds some light on the non-tax issues that Doctor Shah was facing.
Dr. Anil Shah said his group, Orange County Physicians Network, would at least match the $20-million pledged by Dr. Kali P. Chaudhuri toward buying the hospitals, which are considered critical to the county's emergency healthcare system. The facilities handle a quarter of the county's emergency room visits and house one of its three trauma centers.
The infectious disease specialist was arrested and handcuffed in the employee parking lot at Western Medical Center – Santa Ana after police found a handgun and a pair of black gloves in his car. Police questioned him and searched his car after receiving two anonymous 911 calls claiming that a man driving Fitzgibbons' car had waved a gun in traffic.
Thereafter, PCHI leased the hospital properties purchased from Tenant to several different hospitals. Because the leases to these hospitals were “triple-net leases”, the hospitals themselves were responsible for routine maintenance and repairs, not PCHI. Instead, Dr. Shah's duties as a comanager for PCHI during the years at issue were negotiating leases with the other hospitals, dealing with lawsuits pertaining to the transactions, and avoiding bankruptcy. Dr. Shah also spent time finding investors for the hospitals, refinancing loans used for the purchase of the hospitals, and obtaining guaranties on two properties that PCHI rented instead of owned.
At trial Dr. Shah testified that he spent 14 to 16 hours a day, seven days a week in 2004 on negotiating the purchase of several hospitals. He further testified that he worked over 1,000 hours in 2005 and 2006 negotiating leases for the hospitals, finding investors for PCHI, West Coast, and IHHI, and refinancing loans related to the purchase of the hospitals. Although the regulations permit some flexibility concerning the records to be maintained by taxpayers, the Court is not required to accept a postevent “ballpark guesstimate” or the unverified, undocumented testimony of taxpayers. Dr. Shah's testimony appears to be exaggerated and self-serving. On the basis of that testimony we cannot determine with any clarity how many hours Dr. Shah devoted to each entity for which he performed personal services. Dr. Shah did not distinguish the number of hours he spent finding investors for West Coast, a non-real-property trade or business, from the total number of hours he claimed. Furthermore, the Shahs did not describe with any specificity the number of hours they spent performing services for RPS, a legitimate rental real estate trade or business. We decline to accept Dr. Shah's vague testimony regarding the maze of businesses he performed personal services for without adequate documentary support.
Essentially, you are correct in terms of the harsh position taken by the IRS, and “forgetting” about Imaging was a position pursued by the taxpayer and rejected by the IRS. Ultimately, the IRS was not settling for anything less than a whipsaw. However, the article is incorrect as to all the operating expenses claimed by Coastal Heart being disallowed. The Tax Court held that Coastal Heart, not Imaging, should have been allowed to claim the depreciation on the CT scanner. This was Coastal Heart’s position throughout the audit and the case proceeded to trial in large part on the IRS’s failure to allow the depreciation expense to be moved to Coastal Heart.
In trial and trial briefing, it was Coastal Heart that sought the finding that the CT scanner had not been contributed to Imaging and that the depreciation expense should be moved to Coastal Heart. With the Tax Court’s holding, the depreciation of the CT Scanner by Coastal Heart will have to be included in the Rule 155 computation in determining the ultimate tax liability of Coastal Heart, which amount will be significantly less than proposed by the IRS. Thus, though it may not appear so on first glance, the outcome of this case is a victory for Coastal Heart on a primary issue.
You further wrote “Dr. Shah found himself at odds with Bruce Mogel, the CEO of Integrated Healthcare Holdings Inc.,” which is certainly all true. It should further be noted that Dr. Shah won the lawsuit involving these parties and settled for extremely favorable terms in his favor in 2014.