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of business was in Oklahoma City, Oklahoma. Dr. D. Richard
Ishmael, an oncologist, owns 100 percent of the stock of both
Mid-Del and PC. PC is Dr. Ishmael’s personal service
corporation, and Mid-Del is a subchapter C corporation owned and
managed by Dr. Ishmael.
During the relevant periods, petitioners operated medical
clinics that purchased and used chemotherapy drugs (drugs) to
treat patients with cancer and other illnesses. PC maintained an
onsite pharmacy where the drugs purchased by both PC and Mid-Del
were stored and where a pharmacist employed by PC mixed and
prepared chemotherapy treatments for both clinics. Petitioners
used approximately 85 different drugs to treat patients.
With the exception of Mid-Del’s Federal income tax return
for the taxable year 1993, both Mid-Del and PC used the cash
method of accounting (cash method) for income tax purposes and
consistently reported the drugs used in patient treatments as
supplies and not as inventory. Mid-Del’s 1993 return, which
originally was filed using the accrual method of accounting
(accrual method), was amended to report income and expenses on
the cash method after a revenue agent determined on audit that
Mid-Del was required to use the cash method. It was a customary
and accepted practice in the health care industry for health care
practitioners to use the cash method.
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Last modified: May 25, 2011