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The issues we must decide in the instant case are:2 (1)
Whether Mr. Rogers received an interest in certain property
during 1991 as compensation from Alpha Hospital Management, Inc.
(Alpha Hospital), an S corporation in which Mr. Rogers was a
shareholder; (2) the value, if any, of such interest; and (3)
whether petitioners are liable for a penalty pursuant to section
6662(a) for substantial understatement of tax.
2 Respondent's notice of deficiency determined a deficiency in
the Rogerses' 1991 Federal income tax in the amount of $3,506,517
and a penalty pursuant to sec. 6662 in the amount of $701,303.
In calculating the deficiency, respondent redetermined
petitioner's income with respect to Alpha Medical, Inc. (Alpha
Medical), a subchapter S corporation of which Mr. Rogers was the
sole shareholder. Respondent determined that $8,622,642 reported
by both Alpha Medical and Mr. Rogers as compensation to Mr.
Rogers was excessive. Accordingly, respondent denied Alpha
Medical's deduction for compensation to the extent of $8,122,015
and decreased Mr. Rogers' income from compensation to $500,627.
Respondent further denied Alpha Medical deductions for other
expenses in the amount of $1,507,344. Accordingly, respondent
increased Mr. Rogers' proportionate share of subchapter S income
from Alpha Medical from a loss in the amount of $363,243 to
income in the amount of $9,266,116. Respondent has conceded by
stipulation that Mr. Rogers' distributive share of income from
Alpha Medical is in fact a loss in the amount of $363,243.
Respondent also determined in the notice of deficiency that
Mr. Rogers was not entitled to report under the installment
method $9,804,000 from the sale of contract rights regarding
certain property. See infra note 5. Subsequently, respondent
amended the answer in the instant case to allege that, during
1991, Mr. Rogers received a compensatory interest in certain
properties as payment for his services in arranging a transaction
between American Medical Holdings, Inc. and Vista Hospital
Systems, Inc. By stipulation, respondent conceded the adjustment
in the notice of deficiency in the amount of $9,804,000 with
respect to the installment sale. Respondent's position is that
the value of the compensatory interest received by Mr. Rogers
during 1991 was $10,320,000.
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