tim[at]timkelly.com wrote:

- quote -

In my view, your client does not have COD income. I believe
he has income in the same form as the capitation fees he
earns. Likewise, the corporation has the same expense on
its corporate return as the capitation fees it pays.

As you know, not all cancellation of indebtedness results in
COD income. Debt discharge may also be compensation or, if
you prefer, gross income derived from business. There was
never an intent for the money to be paid back. You even
said in the OP, "It could hardly be a bad debt since it it
pursuant to a contract." To me, that neither gives rise to
COD income on the client side, nor gives rise to bad debt
expense on the corporation side.

What is left is an analysis of 1) the facts giving rise to
the contract; 2) the relationship between the corporation
and the physician; 3) the wording in the loan agreement; and
4) any other pertinent fact(s).

The hospital wanted to increase business in a particular
geographic location. Towards that end, it entered into a
contract with a physician who agreed to establish a practice
in that area in exchange for a loan that would be forgiven
incrementally as milestones were reached. (In this case,
temporal milestones.)

The normal compensation arrangement was that of a capitation
fee. The physician, as an independent contractor, takes
these fees into income and pays income taxes, medicare,
OASDI, etc. The hospital, on its corporate return, reports
the capitation fee expense as a current deduction. I
imagine the hosital issues a 1099-MISC to the physician (or
to his P.C., if applicable), since he is in a trade /
business.

The forgiveness of the debt is additional compensation paid
by the hospital to the physician in exchange for the
physician meeting the applicable temporal milestone. That
is, in order to have the loan forgiven, the physician had to
provide services to patients over a set period of time. In
other words, he earned it (and it "cost" the hospital in the
amount forgiven) by providing the same services that give
rise to capitation fee income on the physician side and
capitation fee expense on the hospital side.

Here is my disclaimer:

CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to
federal taxes that is contained in this communication is not intended
or written to be used, and cannot be used, for the purpose of (1)
avoiding penalties under the Internal Revenue Code or (2) promoting,
marketing or recommending to another party any plan or arrangement
addressed herein.

Peter C. Gatto, CPA

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Thank you Peter. I found the CCA's very useful, more for
what they did not say. My client performs no services for
the hospital directly and is independently compensated on a
capitation program. But my my main question is still how COD
under 61(a)(12) is treated by the creditor on a corporate
tax return. I called all my "Kovel" accountants and no one
seems to know.

Timothy E Kelly, Esq.
Certified Specialist
Taxation Law
State Bar of California
Board of Legal Specialization

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

I am going to assume a "fact not in evidence" in that in
addition to the loan being for the establishment of a
practice in a given area, the loan is also for services
provided or to be provided. That is, the physician is an
employee of the hospital or an independent contractor who
receives compensation from the hospital.

If the physician is an employee of the hospital it is W-2
wages and the hospital has compensation expense.

If the physician is not an employee of the hospital it is
1099-MISC non-employee compensation (also immediately
deductible by the hospital).

See Chief Counsel Advice 200003008 as modified by Chief
Counsel Advice 200130038. These relate to a hospital that
forgave student loans made to a physician in exchange for
services, but the analysis should be similar.

(The original CCA stated that if the hospital was an
"applicable financial entity" (e.g., a hospital operated by
an agency of the federal government, such as a military
hospital), and it discharged indebtedness of a person who
was not an employee of the hospital in exchange for
services, the amount would have to be reported on Form
1099-C per Section 6050P. The second CCA clarified that a
1099-MISC would be filed for a non-employee rather than the
1099-C.)

Peter C. Gatto, CPA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

A hospital corporation loans money to a physician to
establish a practice in a given area. For each year the
physician practices in that area a portion of the debt is
forgiven by the terms of the loan agreement. The physician
obviously has COD income, but can any of you accounting pros
tell me what the treatment of the forgiveness is by the
creditor, the corporation? Is this a current expense, a
capital loss or what? It could hardly be a bad debt since it
it pursuant to a contract.

Thanks for your help.

Timothy E Kelly, Esq.
Certified Specialist
Taxation Law
State Bar of California
Board of Legal Specialization

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >