- 45 -
exchange for SMF's agreement to pay them cash and to employ them
(through SWMG27) pursuant to specified terms.
The transaction had an "inherently reciprocal nature".
Hernandez v. Commissioner, 490 U.S. at 692. The record
demonstrates that Sutter Health clearly wanted the SWMG
physicians' intangible assets, a significant portion of which
consisted in their patient roster and the expectation of continued
patronage from those patients.28 Sutter was engaged in a strategy
of expansion into the Davis area by means of acquiring existing
medical practices to become part of an integrated delivery system
with its hospitals. Sutter also had a nearly completed hospital
in Davis for which it needed to ensure an adequate patient base.
Another portion of petitioners' goodwill, their established
reputation as efficient, cost-effective practitioners, increased
their desirability to Sutter. The negotiations over the terms of
the acquisition transactions were protracted and sometimes
27 Under the integrated and legally interdependent
agreements, petitioners were obligated to form SWMG and to enter
into contracts to provide their medical services exclusively to
SWMG under stated terms, and SMF was obligated to contract with
SWMG for the medical services provided by petitioners and the
other SWMG physicians. The obligation of SMF to purchase, and
petitioners' obligation to sell, the tangible and intangible
assets of their medical practices was contingent on the
foregoing.
28 We note that the PSA provided that once the transaction
was consummated, all patients treated by the SWMG physicians were
deemed to be the patients of SMF (subject to the physicians'
rights to reclaim patients under the "free to compete"
provision). In addition, the APA obligated the SWMG physicians
to use their best efforts to retain existing patients.
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