IRS still maintains influence on DVMs

Dr. Thomas Kendall, who once picked a battle with the IRS and won, findssatisfaction in the service's latest cash accounting notice.

Kendall, partner at Arden Animal Hospital (AAH) in Sacramento, says thecash basis accounting method can benefit veterinarians in the market tosell a practice.

"(Previously) there was a million dollar limit for people on thecash accounting system to use the installment method of sale of practice,"he says. "...By having this up to $10 million, if you sell your practiceand use the cash method then you can use the installment sale as opposedto taking all income in the year of sale. You'll have capital gains in oneyear instead of over 10-15 years."

Although he is accrual-based now, because of the tax law change, Kendallsays he may use the cash system to use the installment sale benefit.

"It's a big deal if you're selling your practice to take all thecapital gains in the year of sale versus spreading it out."

Kendall's first memorable encounter with the IRS occurred in 1997.

His practice, a 'C' corporation, which paid graduated tax rates, receiveda letter from the IRS - not an audit - which stated he made a mistake andshould have been classified as a personal service corporation (PSC), meaninghe must pay a flat 35 percent tax rate. They requested $25,000 in back taxes.

That letter motivated Kendall to hire lawyer Stuart Yasgoor to takethe case, because as Kendall believed, "I was right, the IRS was wrong"(in classifying him as a PSC instead of C status).

In the end, the IRS conceded that Kendall's practice's grooming, petboarding, and retail product sales are non-veterinary activities not incidentto veterinary services. Ultimately, IRS found more than 5 percent of AAH'srevenues were from non-veterinary activity and AAH did not need to be classifiedas a PSC.

The IRS auditor who handled Kendall's case wrote him a letter explainingthe decision, which Kendall submitted to the AVMA to declare it a nationalissue.

Following his case, AVMA worked with the IRS to develop an audit taxguide. In fact in its latest update, published last November, the associationincluded the IRS letter Kendall received which interpreted his case.