MLR

Court rules advances to new doctors taxable

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A federal district court has determined that “advances” paid by a medical clinic to newly hired physicians in exchange for their promise to work at the clinic for five years were not loans but taxable compensation.

stethoscope on tax return

The Vancouver Clinic entered into “Associate Physician Loan Agreements” with newly hired physicians to facilitate the clinic’s physician recruitment and retention. Each agreement required the physician to work for the clinic for five years in exchange for two advances, ranging from $12,000 to $15,000, during the first and second years of employment.

The physicians would have to repay the advances only if they failed to remain employed by the clinic for five years. The advances accrued interest at the prime rate, but the physicians were not required to pay any interest.

The court agreed with the IRS that the “advances” were in fact compensation for services. The facts of the case showed that the parties did not actually intend repayment (The Vancouver Clinic, Inc. v. United States, DC Washington, April 9, 2013, 111 AFTR 2d 2013-621).

Rather, the expectation was that the physicians would fulfill their promise to work at the clinic for five years and the clinic would forgive the advances. According to the court, the agreement allowed the clinic to “reap the benefits of the productive years of the physician’s tenure” (i.e., the later portion of the five-year term) while “giving the physicians much-needed funds in the early years of employment.”

The court found two facts significant. There was no fixed schedule for repayment at the time that the agreements were signed, and most of the physicians did not have a reasonable prospect of repaying the amounts.