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34(...continued)
(1) There is no allocation of any value to the professional
goodwill of the SWMG physicians. Mr. Dutcher distinguishes, in
the case of the goodwill of a professional practice, between
"practice" goodwill and "professional" goodwill, the former
attributable to characteristics of the practice entity such as
patient records, provider contracts, and workforce in place; and
the latter attributable to the personal attributes of the
individual practitioner, such as charisma, skill, and reputation.
Mr. Dutcher further acknowledges that professional goodwill is
not transferable. The intangible asset value attributed by Mr.
Dutcher to SWMG was derived to a substantial degree from the
discounted present value of the distributable earnings stream
that would be generated by the SWMG physicians in the 5 years
after the affiliation with SMF. (That is, Mr. Dutcher treated
the value of SWMG's intangible assets as equal to the present
value of its future distributable earnings, less implied working
capital and tangible assets.) Yet those distributable earnings
were undoubtedly generated in part by patients who continued to
see a physician because of that physician's charisma, skill,
and/or reputation--his or her professional goodwill. Several
petitioners testified that they understood the goodwill that they
transferred to SMF to consist of the foregoing elements. We
believe that some portion of the earnings from which Mr. Dutcher
derived his intangible value estimate were generated as a result
of professional goodwill. However, Mr. Dutcher made no
adjustment to his intangible value estimate to account for any
portion attributable to the professional goodwill that he
concedes is nontransferable. To that extent, his estimate of
value of the intangible assets transferred by the SWMG physicians
to SMF is inflated and unreliable.
(2) There is no adjustment for the fact that the SWMG
physicians were not required to execute noncompete agreements.
Mr. Dutcher treated each SWMG physician as transferring an
allocable share of SWMG's intangibles, including goodwill, which
was not treated as diminished in any way by the physicians' not
having executed noncompete agreements with respect to SWMG or
SMF. However, in Norwalk v. Commissioner, T.C. Memo. 1998-279,
we found that there is no transferable or salable goodwill where
a company's business depends on its employees' personal
relationships with clients and the employees have not provided
covenants not to compete. We acknowledged, distinguishing
Schilbach v. Commissioner, T.C. Memo. 1991-556, that some of the
goodwill of a medical practice is inherent in the operating
(continued...)
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