Pediatric Surgical Associates, P.C. - Page 7




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          have hospital privileges, in Tarrant County, Texas, he must pay             
          petitioner $5,000 a month until 96 months have passed.                      
          Cash Bonuses                                                                
               In the middle of each month, petitioner would determine the            
          amount remaining in its bank account and the amount of cash                 
          necessary to meet anticipated cash-flow needs for the immediate             
          and near future.  The balance in the account, if any, was paid              
          out, in equal amounts, as bonuses to the shareholder surgeons,              
          pursuant to the shareholder employment agreements.                          
          Audit Year Compensation of Shareholder Surgeons                             
               On petitioner’s U.S. Corporation Income Tax Returns,                   
          Forms 1120 (Forms 1120), for the audit years, petitioner deducted           
          compensation paid to shareholder surgeons under the heading                 
          “Compensation of officers”, in the following amounts:                       
                                        1994             1995                         
               Dr. Ellis           $239,866            $172,896                       
                    Dr. Mann       347,968             452,969                        
                    Dr. Miller     355,391             450,485                        
                    Dr. Black        357,006          451,775                         
                         Total       1,300,231        1,528,125                       
               All such payments were subjected to appropriate wage                   
          withholding and were reported on Forms W-2, Wage and Tax                    
          Statements, issued by petitioner to the shareholder surgeons.               
          Nature of Petitioner’s Income From Shareholder Surgeons                     
               All of the income received by petitioner on account of the             
          employment of the shareholder surgeons was received on account of           
          the provision of medical services by those shareholder surgeons.            





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