Opinion
No. C97-2094 MJM
May 21, 1999.
ORDER
Introduction
This matter involves a claim for a tax refund by the plaintiff, Chickasaw Ambulance Service, Inc. ("Chickasaw"). After an audit of Chickasaw's tax returns for its 1993, 1994, and 1995 tax years, the Internal Revenue Service (IRS) determined that Chickasaw should pay tax at the flat rate for "qualified personal service corporations" instead of the lower graduated corporate rates under Internal Revenue Code § 11(b), 26 U.S.C. § 11(b) (hereinafter "IRC"). Chickasaw paid the additional taxes, and its Claim of Refund was denied November 18, 1997. Chickasaw filed this lawsuit seeking a refund on December 4, 1997. This matter now comes before the court on cross-motions for summary judgment. The court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).
As discussed below, the applicable tax rate depends on whether Chickasaw was a "qualified personal services corporation" as defined by IRC § 448(d)(2). Both parties agree that this case is controlled by the applicable Treasury Regulations, 26 C.F.R. § 1.448-1T(e)(3)-(5) (hereinafter "Treas. Reg."). Because this court agrees with Chickasaw that its employees did not devote more than 95 percent of their time to the "provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals," id. § 1.448-1T(e)(4)(ii), the court will grant summary judgment to Chickasaw.
Standard of Review
Summary judgment is appropriate in a tax refund case when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Northern States Power Co. v. United States, 151 F.3d 876, 879 (8th Cir. 1998). Accordingly, this court will review the undisputed material facts contained in the record to determine whether Chickasaw was a "qualified personal service corporation" under the definition in IRC § 448(d)(2).
Factual Background
Chickasaw is an ambulance service company located in Fredericksburg, Iowa. In the three tax years in question (1993, 1994, and 1995), Chickasaw earned taxable income (total income less deductions) of $50,378, $50,173, and $60,322, respectively. Chickasaw paid taxes of $7,845, $7,543, and $10,081, based on the graduated corporate income tax rates. The IRS subsequently determined that Chickasaw had deficiencies of $9,707, $10,018, and $11,032 (for a total of $30,757 plus interest) on the basis that Chickasaw was a "qualified personal service corporation" under IRC § 448(d)(2).
Corporate Background. Chickasaw was founded and incorporated in the late 1960s. (James Cook Aff. ¶ 3 (hereinafter "Cook Aff."); James Cook Dep. 5 (hereinafter "Cook Dep.")). Since 1976, there have been 8,350 shares of stock issued and outstanding. In 1983, James and Doreen Cook, who began working for Chickasaw in 1973, purchased 8,050 shares, or more than 96 percent of Chickasaw's stock. (Cook Dep. 55; Cook Aff. ¶ 2). The Cooks maintained this ownership interest throughout the three-year period at issue in this case. (Cook Aff. ¶ 2). Chickasaw maintained its offices in the basement of the Cooks' house. (Cook Aff. ¶ 3). The record does not reveal how or when Chickasaw's corporate income was distributed to its owners.
Personnel.
During the tax years in dispute, James Cook was Chickasaw's "service director" responsible for managing Chickasaw's daily operations. In this capacity, Cook purchased equipment, trained new crew members, conducted "professional education" for crew members, and supervised at some emergency scenes. (Cook Dep. 53; Cook Aff. ¶ 4). Doreen Cook worked as Chickasaw's office manager and bookkeeper. (Cook Aff. ¶ 3). According to James Cook, neither he nor his wife worked full time for Chickasaw. (Cook Dep. 142). Doreen Cook held a full-time position as a warehouse supervisor for another company. (Cook Dep. 21; Cook Aff. ¶ 3). James Cook worked at a dairy until it closed in 1995. (Cook Dep. 53).
In addition to the Cooks, Chickasaw employed about 65 people as drivers, attendants, and lead emergency medical technicians (EMTs) at any given time during the three tax years in question. (Cook Dep. 17; Chickasaw Ans. to Interrog. No. 4). None of these employees worked full-time for Chickasaw, but rather were "paid volunteers" on call from their homes to go to an ambulance scene if necessary. (Cook Dep. 142). In addition, Chickasaw had a volunteer medical director who approved Chickasaw's medical protocols and reviewed ambulance run reports for quality assurance purposes. (Cook Dep. 88-89).
Training.
As stated above, Chickasaw employed drivers, attendants, and EMTs. Chickasaw ordinarily used three-person crews which consisted of at least one driver and a lead EMT, plus a third crew member (either an attendant or a second EMT). (Cook Dep. 109).
Drivers were responsible for the safe operation of the ambulance and "assist[ing] at scenes according to certification level." (Chickasaw Ans. to Interrogatory No. 7). Drivers were required to complete a 40-hour first responder course, a four-hour basic life support or CPR course, and a four-hour driving course. (Cook Dep. 14-15). Chickasaw would often hire people as drivers, then help them obtain the required training for the job. (Cook Dep. 118).
Attendants were responsible for "patient care in accordance with certification level." (Chickasaw Ans. to Interrog. No. 7). Attendants were required by Chickasaw to be certified in cardiopulmonary resuscitation (CPR). (Cook Dep. 26). Like the drivers, many attendants completed the 40-hour "first responder" course in basic first aid. (Cook Dep. 18). One of the basic duties of attendants was to help lift patients onto stretchers and into the ambulance. (Cook Dep. 109, 115-16).
Lead EMTs directed the ambulance staff while on an ambulance run and were also responsible for "patient care in accordance with certification level." (Chickasaw Ans. to Interrogatory No. 7; Cook Dep. 112). An "EMT-Ambulance" or "EMT-A" certification required passing two "national registry exams" involving more than 100 hours of classes. (Cook Dep. 19, 27; Iowa Admin. Code § 641-131.5(1)). An EMT-A was required to have a high school diploma or equivalent, but this requirement was rescinded on March 10, 1993. (Iowa Admin. Code § 641-131.4(1)(g)). Other EMT certifications required certification as an "EMT-A" along with additional training. Specifically, an "EMT-Defibrillator" or "EMT-D" certification required four additional hours of training on automatic defibrillation equipment (which is used to normalize the heart beat of those suffering from irregular heart conditions). (Cook Dep. 30-31). An "EMT-Intermediate" or "EMT-I" certification required an additional 120 to 150 hours of training, "ride time" on ambulance runs, and clinical experience "honing their IV skills." (Cook Dep. 32-33). Finally, an "EMT-Paramedic" or "EMT-P" certification required an additional 300-350 hours of training and 200 hours of clinical time during which trainees learn to start intravenous solutions (IVs), insert tubes to open blocked airways ("intubation"), and administer medications. (Cook Dep. 35-38, 104). Each EMT category required at least 24 hours of continuing education every two years. (Cook Dep. 40; Iowa Admin. Code § 641-131.4(4)(c)).
Services.
Chickasaw provided "transportation for individuals who were either sick or injured requiring transport to or from the local hospital." (Cook Dep. 8). Chickasaw did not contract to haul anything other than patients in its ambulances. (Cook Dep. 80-81). The services which Chickasaw provided ranged from "simple transportation without anything being done to . . . emergency cardiac care in the field." (Cook Dep. 9). Chickasaw maintained medical malpractice insurance. (Cook Dep. 10). During the three years, "medical equipment was available on each of the plaintiff's ambulance runs." (Chickasaw Resp. to Req. for Admis. No. 2; Cook Dep. 120). As James Cook testified, "[O]n some ambulance calls we do provide some treatment. . . . It would be rather difficult for me to say that we don't provide emergency medical care. We do provide that, but again, that is only half, at best half, of what we do because we still must get them from Point A to Point B." (Cook Dep. 25, 124).
During the three tax years in question, Chickasaw made between 864 and 891 ambulance runs each year. (Cook Dep. 57-58; Cook Aff. ¶ 5). In addition, Chickasaw provided stand-by service at fires, athletic events, tractor pulls, and the county fair in the event of a medical emergency. (Cook Dep. 56-57).
Chickasaw classified ambulance runs as "emergency," "immediate," and "non-emergency" trips. (Cook Dep. 41-42; Chickasaw Ans. to Interrog. No. 5). Cook testified that non-emergency transportation involved nothing more than taking a patient's blood pressure and securing the patient on a stretcher or gurney in the ambulance. (Cook Dep. 71-72). Chickasaw took blood pressure on every run simply to give the employee practice and to give a record of the blood pressure to the hospital to which the patient is delivered. (Cook Dep. 72-73, 95). Cook testified that taking a person's vital signs does not constitute "medical service" because it does not involve "an intervention" and is commonly performed by non-medical personnel. (Cook Dep. 96). Although medical emergencies are possible on non-emergency runs, Chickasaw did not administer unexpected medical treatment during a non-emergency run between 1993 and 1995. (Cook Dep. 69). Overall, Chickasaw contends that it did not provide oxygen, IVs, medications, or other medical services on between 18% and 26% of its ambulance runs. (Cook Aff. ¶ 6).
Chickasaw also transported corpses. Cook explained that although corpses obviously do not need emergency assistance, (Cook Dep. 106-07), Chickasaw transported corpses because it was often easier for Chickasaw to transport a corpse than to "wait for the funeral home to get their personnel together and come and pick up the body." (Cook Dep. 71). He estimated such runs were "probably less" than five percent of their total ambulance runs each year. (Cook Dep. 70-71). In total, he estimated Chickasaw transported corpses about 5 to 10 times each year. (Cook Dep. 70, 146).
Cook testified that patients transported by Chickasaw needed ambulance service "because of patient condition" (e.g., fractures, inability to sit upright, and doctor's orders to remain flat) or because of the unavailability of alternative transportation from nursing homes to the hospital. (Cook Dep. 66-67). In addition, Cook recognized that insurance companies would cover ambulance runs only if there was a "justifiable reason why [the patients] needed to go by ambulance and could not go by car." (Cook Dep. 98).
Each ambulance run is guided by "medical protocols from our medical director[.]" (Cook Dep. 73). Cook acknowledged that "there is potential for things to happen during a transport-only ambulance run" which requires employees to remain alert. (Cook Dep. 81-82). In the event of an incident, the employees "would be expected to operate within the full training of their certification level." (Cook Dep. 82-83). Part of Chickasaw's routine practice is to make verbal contact with a hospital on every run to report the time the ambulance is expected to arrive and the reason the patient is being transported to the hospital. (Cook Dep. 73-75). Based on the patient's symptoms and medical protocols, Chickasaw's personnel are authorized, to the extent of their training, to provide oxygen or other measures for the comfort and care of the patients until they arrive at the hospital. (Cook Dep. 99-101).
Cook testified that Chickasaw expected its employees to act "in a professional manner," but that he did not consider ambulance service a "medical profession. At some point it may be, but it isn't yet." (Cook Dep. 138-39).
Analysis
As stated above, the sole issue before the court is whether Chickasaw should be taxed under the lower graduated corporate tax rates contained in IRC § 11(b)(1), or under the higher flat tax rate for "qualified personal service corporations" contained in IRC § 11(b)(2). Section 11(b)(2) of the IRC incorporates the definition of "qualified personal service corporation" provided by IRC § 448(d)(2). Under § 448(d)(2), a qualified personal service corporation is defined as "any corporation" where (1) "substantially all of the [corporation's] activities . . . involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting," and (2) "substantially all of the [corporation's] stock" is owned by certain employees, retired employees, or their estates or beneficiaries.
Section 448 allows qualified personal service corporations to utilize a cash method of accounting instead of the accrual method. See, e.g., In re EWC, Inc., 114 F.3d 1071, 1072-73 (10th Cir. 1997) (explaining difference between cash and accrual methods of accounting).
The Treasury Regulations explain that this definition incorporates a "function" test and an "ownership" test. Treas. Reg. § 1.448-1T(e)(3). The ownership test is met if certain employees, retired employees, or their estates or beneficiaries own 95% or more of the corporation. Id. § 1.448-1T(e)(5). The function test is met "only if 95 percent of more of the time spent by employees of the corporation, serving in their capacity as such, is devoted to the performance of services in a qualifying field." Id. § 1.448-1T(e)(4)(i). Under the Treasury Regulations, "the performance of any activity incident to the actual performance of services in a qualifying field is considered performance of activities in that field." Id. The regulations explain that "[a]ctivities incident to the performance of services in a qualifying field include the supervision of employees engaged in directly providing services to clients, and the performance of administrative and support services incident to such activities." Id.
The relevant "qualifying field" at issue in this case is the field of health. The Treasury Regulations provide that "the performance of services in the field of health means the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals." Treas. Reg. § 1.448-1T(e)(4)(ii). While activities "incident" to the provision of medical services by health care professionals are included, id. § 1.448-1T(e)(4)(i), this definition does not include services not "directly related to the medical field, even though the services may purportedly relate to the health of the service recipient [such as operation of a health club]." Id. § 1.448-1T(e)(4)(ii).
In this case, Chickasaw concedes it met the ownership test, because substantially all of the stock was held by James and Doreen Cook who were employees performing services "in connection with" activities involving the health field. (Chickasaw Initial Br. at 2). However, Chickasaw contends it did not meet the function text because its employees did not devote more than 95 percent of their time to "the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals." The United States takes the contrary position, arguing that the EMTs are "other similar healthcare professionals" and that more than 95 percent of Chickasaw's activities involved the provision of "medical services" by the EMTs.
Both parties contend that their positions are supported by the plain language of the regulation. Chickasaw argues that "professionals" has a plain meaning provided by Iowa's Professional Corporation Act, see Iowa Code Ann. § 496C.2(4) (West Supp. 1999) (list of profession does not include emergency medical technicians), or by federal labor regulations defining the "professional exemption" for purposes of the Fair Labor Standards Act (FLSA). See 29 C.F.R. § 541.306(c) (x-ray technicians are not professionals). On the other hand, the United States argues that "professional" has a broader meaning in numerous other contexts. See, e.g., 7 C.F.R. § 110.2 (federal agricultural regulations include "emergency medical technician" within the definition of licensed health care professionals for purposes of regulations restricting the use of certain pesticides). However, these definitions arise in other contexts and do not provide a useful definition of "professional" for tax purposes.
The most applicable of the three definitions to the "qualified personal service corporation" inquiry is probably the Iowa Professional Corporation Act, which deals with issues of incorporation by professionals. However, it was enacted to enable certain professionals to incorporate notwithstanding historic prohibitions on such incorporation, see Iowa Code § 496C.7, and thus is not particularly relevant to whether EMTs are professionals for tax purposes.
In the context of Treas. Reg. § 1.448-1T(e)(4)(ii), the court believes that the plain language of the phrase "other similar healthcare professionals" supports Chickasaw's position. The court recognizes that the term "professional" is subject to differing, reasonable interpretations. However, as it is used in the Treasury Regulations, the term conveys the need for advanced education and intellectual training "similar" to physicians, nurses, and dentists. Id. A "profession" is "a vocation or occupation requiring special, usually advanced, education and skill." Black's Law Dictionary 1089 (5th ed. 1979) (emphasis added). A profession is "an occupation or vocation requiring training in the liberal arts or the sciences and advanced study in a specialized field." The American Heritage Dictionary of the English Language 1044-45 (William Morris, ed., 1976) (emphasis added). Moreover, "[t]he labor and skill involved in a profession is predominantly mental or intellectual, rather than physical or manual." Black's Law Dictionary 1089 (5th ed. 1979). Although some of the EMTs in this case were required to have several hundred hours of training and clinical experience, they were not required to have a high school diploma or equivalent, let alone any college or post-graduate degrees. Furthermore, the record shows that emergency medical services is not a profession dominated by mental or intellectual job requirements. Thus, the court concludes that EMTs are not professionals within the meaning of Treas. Reg. § 1.448-1T(e)(4)(ii).
The United States, however, argues that state law defines EMTs as "professionals," and thus they are professionals for federal income tax purposes. Specifically, the United States cites Iowa Admin. Code 641-131.5(5)(d), which includes "advanced emergency medical care personnel" in a list of "health care professionals" who are authorized to conduct emergency medical training. Furthermore, under state law, EMTs are required to obtain licenses from the state department of health. See Iowa Code Ann. §§ 147A.4 (requiring rules to govern training and experience requirements for emergency medical care providers). State law provides that licenses for the EMTs may be revoked due to "negligence" or "professional incompetency." See Iowa Code Ann. § 147A.7. Although these facts may show that the State of Iowa treats EMTs as "professionals," the meaning of "other similar healthcare professionals" for purposes of federal taxation cannot depend on the status of health care workers under various state laws. Similarly, the fact that Chickasaw expected its employees to act in a professional manner and conducted professional education does not mean that EMTs were professionals for purposes of federal taxation. Many employers give their employees ongoing training and expect them to act in a professional manner, but this fact, standing alone, does not bring the employees within the definition of "professional" under the tax code.
Although neither party cites to any legislative or regulatory history, the court believes that excluding Chickasaw from the scope of the definition of "qualified personal service corporation" is supported by the Congressional purpose in taxing such corporations at the higher flat rate rather than the lower graduated tax rates which apply to other corporations.
Congress enacted the different rates for corporations and qualified personal service corporations contained in IRC § 11(b) in the Omnibus Budget Reconciliation Act of 1987, § 10224, 101 Stat. 1330 (1987). In a committee report, the House Ways and Means Committee explained:
The personal service income of corporations owned by its employees is taxed to the employee-owners at the individual graduated rates as it is paid out as salary. The committee believes that it is inappropriate to allow the retained earnings to be taxed at the lower corporate graduated rates.
H.R. Rep. 100-391, 100th Cong., 1st Sess. 1087, reprinted in 1987 U.S.C.C.A.N. 2313-1, at 2313-712. This amendment was adopted without further explanation by the conference committee. H. Conf. R. 100-495, 100th Cong., 1st Sess. 963-64, reprinted in 1987 U.S.C.C.A.N. 2313-1245, at 2313-1709 to 2313-1710. The court has not found any other legislative history to shed light on why Congress decided to tax qualified personal service corporations at a different rate.
Similarly, there is virtually no legislative history to explain why Congress defined qualified personal service corporations in the manner that it did. As noted above, Congress initially enacted IRC § 448 as part of the Tax Reform Act of 1986, § 801, 100 Stat. 2085, 2345-48 (1986), to allow qualified personal service corporations to use the cash method of accounting, rather than an accrual method of accounting. H. Conf. R. 99-841, 99th Cong., 2nd Sess. II-285 to II-289, reprinted in 1986 U.S.C.C.A.N. 4075, 4373-77. However, the legislative history of IRC § 448 does not explain why companies involved in health and the other specified fields, as opposed to other employee-owned corporations, were allowed to use the cash method of accounting.
Although this legislative history is relatively sparse, commentators have explained that Congress intended "professionals and certain other personal service providers who desire to provide their services in corporate form to be treated for tax purposes as if they were providing their services as partners or individuals." Morton A. Harris, "Special Concerns and Planning Opportunities for Personal Service Corporations," ALI-ABA Course of Study: Qualified Plans, PCs, and Welfare Benefits, 255, 281 (American Law Institute 1992) (reproduced on Westlaw as "C724 ALI-ABA 253"). Furthermore, Congress apparently believed that "professional and other personal service organizations had no need to accumulate significant amounts of capital for business reasons and that the only reason a professional or other personal service corporation would accumulate any significant amount of its profits would be to take advantage of the lower brackets of the corporate tax rates." Id. at 282.
Based on this legislative history and commentary, it appears clear that Congress wanted to stop professional individuals from incorporating, or using their corporate status, in order to obtain lower graduated corporate tax rates, when Congress believed that professional individuals should be paying the higher individual income tax rates. Furthermore, Congress did not see any reason why qualified personal service corporations, who were being paid largely for their mental or intellectual skill, needed to accumulate capital for future corporate investment.
These legislative purposes suggest that the phrase "other similar healthcare professionals" should be interpreted narrowly to protect companies performing personal services in the field of health which are not trying to use their corporate structure to avoid paying the higher individual income tax rates they would pay if not incorporated. Unlike a physician's office, an ambulance service company is not the type of business which is ordinarily operated by individual proprietors or partnerships. Moreover, an ambulance service company may have a greater need to accumulate capital than physicians, nurses, or dentists for the purchase of ambulances and other equipment.
Finally, the court's conclusion that the EMTs were not "professionals" performing medical services is supported by the fact that so many of the services provided by Chickasaw did not require the EMTs to use intellectual skills, exercise independent judgment, or perform any medical interventions (i.e., did not require EMTs to act as professionals). Chickasaw frequently performed stand-by services at high school football games, tractor pulls, county fairs, and other area events which did not require the provision of professional medical services. Chickasaw transported five to ten corpses a year. Chickasaw estimates that between 18% and 26% of its runs involved nothing more than taking a patient's pulse and transporting the patient to the hospital. Chickasaw sometimes drove patients from nursing homes to hospitals because the patients were physically incapable of riding in an automobile. Such services may be incident to the provision of professional medical services at the hospital, but they do not involve the performance of professional medical services by Chickasaw as defined under Treas. Reg. § 1.448-1T(e)(4)(ii).
Based on the plain language of the regulation, the legislative purpose, and the overall facts of this case, the court concludes that Chickasaw did not devote 95 percent or more of its time to the performance of medical services by physicians, nurses, dentists, and other similar healthcare professionals. Accordingly, Chickasaw was not a qualified personal service corporation during its tax years 1993, 1994, and 1995.
ORDER
For the foregoing reasons, Chickasaw Ambulance Service's motion for summary judgment is GRANTED and the United States' motion for summary judgment is DENIED. Judgment shall be entered accordingly.