Charles A. and Marian L. Derby, et al. - Page 5

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          WHA had two partners, Drs. Leon Schimmel (Dr. Schimmel) and Carol           
          Lynne Conrad-Forrest (Dr. Conrad-Forrest), both of whom practiced           
          obstetrics/gynecology.  Dr. Schimmel was the tax matters partner            
          of WHA.  At the time the petition for WHA was filed, Dr. Schimmel           
          resided in California.                                                      
               Petitioners were primary care physicians5 (with three                  
          exceptions:  an orthopedic surgeon, an otolaryngologist, and a              
          psychiatrist) that had been practicing in individual and small              
          group practices (as sole proprietorships, S corporation                     
          shareholders, or partners) in the Davis, California, area for               
          periods ranging from 1 to 21 years in 1994.                                 
          II. Background                                                              
               A.  Healthcare Industry                                                
               Through the early 1980s, medicine was generally practiced in           
          the Davis, California, area under a "fee-for-service" model, in             
          which physicians were paid fees when services were provided to              
          patients.  Patients with health insurance paid fixed premiums to            
          a health insurer, and the insurer would in turn contract directly           
          with physicians to establish a fee schedule for services provided           
          to its insureds.  Though collecting premiums, the insurer paid              

               5 Each individual petitioner physician filed a joint return            
          with his or her spouse, and the spouses are petitioners in these            
          cases by virtue of having filed joint returns.  We shall refer to           
          the individual petitioner physicians as "petitioners".  For                 
          convenience, we shall also generally refer to the two partners of           
          WHA, Dr. Schimmel and Dr. Conrad-Forrest, as petitioners.                   

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