                         T.C. Memo. 2002-70



                       UNITED STATES TAX COURT



        ANTONIO ROSARIO AND JOYCE ROSARIO, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1378-00.                 Filed March 26, 2002.


     Robert J. Fedor, for petitioners.

     Katherine Lee Kosar, for respondent.



                         MEMORANDUM OPINION


     VASQUEZ, Judge:    Respondent determined a deficiency of

$90,454 in petitioners’ Federal income tax for 1993.    The issues

for decision are whether $242,556 received by petitioner Antonio

Rosario from Jesse Holman Jones Hospital (the hospital) in 1993

is taxable income to him in 1993 and whether the period of

limitations expired for the 1993 taxable year.
                                - 2 -

Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.1   The stipulation of facts and the attached exhibits

are incorporated herein by this reference.    At the time the

petition was filed, petitioners resided in Marion, Ohio.

     Petitioner Antonio Rosario (hereinafter, petitioner) is an

orthopedic surgeon.    The hospital is located in Springfield,

Tennessee.    To induce petitioner to practice in the Springfield

area, petitioner and the hospital executed a Professional

Practice Agreement (the practice agreement) on September 30,

1992.    The practice agreement provided, in part:

          Income Guarantee. Hospital guarantees that,
     during the term of this Agreement, Physician’s gross
     income (defined as collected professional fees) will
     not be less than Thirty-Three Thousand Three Hundred
     Thirty-Four Dollars ($33,334.00) per month. To the
     extent that Physician’s gross income in any month
     during the term of this Agreement is less than
     $33,334.00, the Hospital will pay Physician by the
     tenth day of the closing of the Physician’s books for
     that month any amount sufficient to raise Physician’s
     income for that month to $33,334.00 (such payment by
     Hospital, will be referred to as a “Gross Guarantee
     Payment”). If, during any month of the term of this
     Agreement, Physician’s income is greater than
     $33,334.00, Physician will pay to Hospital by the tenth
     day after the closing of Physician’s books for the
     month, the excess over $33,334.00, to the extent
     necessary to reimburse hospital for Gross Guarantee
     Payments previously paid. Such payments by Physician
     will be made to the Hospital during the term of this


     1
        All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
                               - 3 -

     Agreement until the total amount of Gross Guarantee
     Payments made by Hospital have been repaid in full.
     * * *

The practice agreement also provided that petitioner and the

hospital would agree upon repayment terms at the termination of

the agreement if there was any balance due.

     In exchange “for the benefits and consideration provided by

Hospital to Physician”, petitioner agreed to operate a medical

practice of orthopedic surgery in the area for a period of at

least 3 years and to become a full member of the medical staff at

the hospital.   If petitioner failed to comply with the terms of

the practice agreement, the practice agreement provided that,

upon demand by the hospital, petitioner would repay all amounts

paid to him to meet the income guarantee.    The practice agreement

term began on January 1, 1993, continued for a period of 12

months, and could be renewed for an additional 12 months by

mutual consent.   The practice agreement also provided that

petitioner would be an independent contractor of the hospital.

     Petitioner began operating a medical practice in

Springfield, Tennessee, on September 30, 1992.    Beginning in

January 1993, petitioner received funds from the hospital to

ensure a monthly gross income2 of $33,334.    During 1993, pursuant




     2
        For convenience, we use the parties’ terms “income” and
“guarantee payments”, and use of such terms is not intended to be
conclusive as to characterization for tax purposes.
                               - 4 -

to the practice agreement, petitioner received $242,556 from the

hospital.

     On January 1, 1994, petitioner and the hospital executed a

First Amendment to Professional Practice Agreement (amended

agreement).   The amended agreement provided:

     Hospital intended that Physician, upon expiration of
     the Income Guarantee, be required to repay that portion
     of the Income Guarantee not repaid pursuant to the
     Guarantee Payback, regardless of the level of
     Physician’s gross income, * * *.

The amended agreement also stated:

     WHEREAS, Physician acknowledges that he, consistent
     with this intent, has accounted for amounts advanced by
     Hospital pursuant to the Income Guarantee as a loan and
     not as income.

In connection with the amended agreement, petitioner executed a

promissory note on January 1, 1994, in the amount of $261,094.

If petitioner ceased practicing in that area, the outstanding

principal balance would be due and payable in full.    After more

than 6 years of practice in the area, petitioner ceased in

November 1998.

     Petitioner and the hospital discussed repayment of the

promissory note balance by assigning to the hospital petitioner’s

accounts receivable from his practice.    On March 2, 1999, the

hospital wrote petitioner that the value of his accounts

receivable had decreased substantially.    The hospital then

requested immediate payment of the outstanding balance of

$110,780.
                                - 5 -

     On July 20, 1999, the hospital filed a diversity complaint

against petitioner in the U.S. District Court for the Middle

District of Tennessee to recover the balance of the promissory

note--$110,780 plus accrued interest from November 1998.      This

amount represented the funds advanced to petitioner from the

hospital and not yet repaid under the practice agreement.      The

U.S. District Court granted summary judgment to the hospital and

awarded it the outstanding balance on the note, accrued interest,

and attorney’s fees and expenses.

     Respondent determined that petitioner received unreported

taxable income of $242,556 from the hospital in 1993.    Respondent

determined that “the loan from Jesse Holman Jones Hospital does

not constitute a valid loan”.

Discussion

     Petitioner argues that the guarantee payments advanced to

him during 1993 constituted a loan.     Petitioner argues that these

payments were a loan because the transaction was at arm’s length,

a promissory note was executed which bore interest and required a

balloon payment, each party intended to make or enforce repayment

per repayment terms enumerated in the practice agreement, the

hospital maintained a schedule of all payments and repayments,

and the hospital would charge an interest rate as of the

termination date of the practice agreement.    In addition,
                                - 6 -

petitioner contends that the amended agreement and the hospital’s

proceedings against him in a U.S. District Court to collect

repayment of the guarantee payments received by him should

eliminate “any doubt regarding the treatment of the monies

advanced”.

     Respondent argues that amounts paid to petitioner by the

hospital constituted gross income in 1993.   Respondent contends

that nothing in the record evidences that, at the time petitioner

entered into the practice agreement, petitioner intended to repay

the guarantee payments received.   Respondent also argues that the

practice agreement did not contain an unconditional obligation to

repay because it stated that any terms regarding the payback of a

balance due would be mutually agreed upon at the expiration of

the term.

     Gross income includes all income from whatever source

derived, encompassing all “accessions to wealth, clearly

realized, and over which the taxpayers have complete dominion”.

Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431

(1955).    Generally, proceeds of a loan do not constitute income

to a borrower because the benefit is offset by an obligation to

repay.    United States v. Rochelle, 384 F.2d 748, 751 (5th Cir.

1967); Arlen v. Commissioner, 48 T.C. 640, 648 (1967).     Whether a

particular transaction actually constitutes a loan, however, is
                               - 7 -

to be determined upon consideration of all the facts.        Fisher v.

Commissioner, 54 T.C. 905, 909 (1970).

     For a payment to constitute a loan, at the time the payments

are received, the recipient must intend to repay the amounts and

the transferor must intend to enforce payment.     Haag v.

Commissioner, 88 T.C. 604, 615 (1987), affd. without published

opinion 855 F.2d 855 (8th Cir. 1988); Beaver v. Commissioner, 55

T.C. 85, 91 (1970).   Further, the obligation to repay must be

unconditional and not contingent on a future event.       United

States v. Henderson, 375 F.2d 36, 39 (5th Cir. 1967); Bouchard v.

Commissioner, 229 F.2d 703 (7th Cir. 1956), affg. T.C. Memo.

1954-243; Haag v. Commissioner, supra at 615.

     Intent is a state of mind rarely susceptible of proof by

direct evidence; therefore, we have generally considered a number

of criteria for the purpose of determining the intent of the

parties at the time the payments were made.     Dean v.

Commissioner, 57 T.C. 32, 43 (1971).   No single factor, standing

alone, is controlling, but each factor is considered with all the

facts and circumstances present.   Id. at 44.

     On the basis of the evidence in the record, we find that the

guarantee payments advanced to petitioner constituted a loan and

are not taxable income.
                               - 8 -

     First, the practice agreement provided for repayment.     The

practice agreement provided that petitioner, to the extent his

income during any month of the term of the agreement exceeded

$33,334, had to repay the hospital for guarantee payments

previously made by the 10th day after the close of petitioner’s

books for that month.   Additionally, the practice agreement

provided that the parties would agree upon terms for repayment of

any balance due at the termination of the practice agreement.

Furthermore, the practice agreement provided repayment terms in

certain other instances, e.g., if control or ownership of the

hospital was transferred or changed.3




     3
        In such instances, the practice agreement provided for
repayment “in twenty-four (24) monthly installments of principal
and interest calculated at the prevailing prime rate of interest
published in the Wall Street Journal as of the day of
termination”.
     Additionally, the obligation to repay was shown in the
provisions for the early termination of the practice agreement.
If the hospital terminated the practice agreement early in
certain instances, the practice agreement provided that
petitioner “shall not be obligated to repay Hospital any amounts
paid on behalf of or reimbursed to Physician by Hospital”. We
interpret this sentence as not requiring petitioner to repay the
guarantee payments amounts if the hospital terminated the
practice agreement early, and requiring petitioner to repay
otherwise.
     This point was emphasized in the next sentence, which
provided that if the hospital terminated the practice agreement
early in other instances (e.g., petitioner was convicted on a
felony or petitioner did not comply with the terms of the
practice agreement), petitioner “will repay to Hospital, upon
demand by Hospital, all sums of monies paid out to Physician to
meet the income guarantee”.
                                - 9 -

     Petitioner’s intent to repay is further supported by the

amended agreement and the accompanying promissory note.    The

amended agreement emphasized petitioner’s obligation to repay the

sums advanced to him as guarantee payments and called the

guarantee payments a “loan”.   The amended agreement’s purpose was

to enforce repayment by requiring petitioner to execute the

promissory note in the amount due--the excess of the amount of

the guarantee payments made over the portion of those payments

that petitioner had repaid to the hospital.   As a result,

petitioner executed the promissory note for the amount due to the

hospital.

     Further, petitioner’s intent to repay was reflected in the

correspondence between petitioner and the hospital after

petitioner ended his practice in the Springfield area.    The

correspondence stated that petitioner proposed to assign his

accounts receivable to pay off the remaining balance of the

promissory note and then make arrangements to pay the outstanding

balance.    If petitioner had not intended to repay the balance of

the promissory note, petitioner would not have made any

arrangements with the hospital.

     Additionally, the hospital’s intent to enforce repayment by

petitioner is reflected in other stipulated documents.    For

example, the parties stipulated journal entries titled “Jesse
                              - 10 -

Holman Jones Hospital Accounts Receivable--Other” under which is

written petitioner’s name.   Upon review by the Court, they appear

to be prepared contemporaneously with each transaction.      The

journal entries show amounts paid to or on behalf of petitioner

and repayments to the account.    The hospital reported the

guarantee payments in the “debit” column.    The hospital,

therefore, treated each guarantee payment as an asset or account

receivable; i.e., an amount that it would receive in the future.

In addition, credits are shown in the journal entries, indicating

that repayments were made to the account.

     Finally, the hospital’s intent to enforce repayment of the

guarantee payments amount is demonstrated by the hospital’s

proceedings against petitioner in the U.S. District Court to

collect on the promissory note.    If the hospital had not intended

to enforce repayment, the hospital would not have filed a lawsuit

on the issue in the U.S. District Court based on diversity and

then sought a summary judgment on the undisputed facts.

     On the basis of the record, we conclude that the guarantee

payments advanced to petitioner constituted a loan rather than

taxable income because petitioner intended to repay the amounts

paid to him and the hospital intended to enforce repayment of the

guarantee payment amounts.   We hold, therefore, that the
                             - 11 -

guarantee payments are not includable in petitioner’s income in

1993 because those payments were a loan.

     As we have found that petitioners are not liable for the

deficiency, whether the period of limitations expired for the

1993 taxable year is moot.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not herein

discussed, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                               Decision will be

                                           entered for petitioners.
