Charles A. and Marian L. Derby, et al. - Page 45




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          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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