Portable X-Ray Provider Is Personal Service Corporation

[2] This document may include confidential information subject to the attorney-client and deliberative process privileges, and may also have been prepared in anticipation of litigation. This document should not be disclosed to anyone outside the IRS, including the taxpayer(s) involved, and its use within the IRS should be limited to those with a need to review the document in relation to the subject matter or case discussed herein.

[6] The radiologic technologist takes the x-ray pursuant to instructions left by the patient's doctor and returns to the taxpayer's office to develop the film. The film is then taken to a radiologist who works as a Form 1099 contractor for the taxpayer. The radiologist reviews the x-ray film and dictates his/her findings, forwarding the same to the taxpayer. Taxpayer's employees then transcribe the radiologist's tape and forward the report and x-rays to the patient's doctor. The taxpayer bills Medicare or the patient's insurance company and, upon receipt of payment, pays the radiologist for his/her services.

[7] The taxpayer has no health care license (it is not absolutely clear whether a health care license is required under * * * law; other states provide for the licensure of portable x-ray companies and the health care industry in * * * appears to be heavily regulated). The taxpayer's insurance policy is a general commercial policy which covers business operations and business premises (i.e., normal business torts) but does not cover any medical malpractice. The radiologist utilized by the taxpayer is required by Medicare regulations to sign an annual company manual certifying the taxpayer's compliance with state and federal law. The radiologist advised that the taxpayer takes only very simple x-rays. No barium or injected dye x-rays are used, nor is any radiation therapy used by the taxpayer.

[9] Section 11(b)(2) provides that qualified personal service corporations (as defined in section 448(d)(2)) are not eligible for the graduated rate structure. Therefore, the next question is whether the instant corporation is a qualified personal service corporation within the meaning of section 448(d)(2). To answer this question, we need to examine section 448 and the regulations thereunder.

[10] Section 448(d)(2) and Treas. Reg. section 1.448-1T(e)(3) provide that a qualified personal service corporation is a corporation which meets two tests, i.e., a function test and an ownership test. With respect to the ownership test, section 448(d)(2)(B) provides that the ownership test is met if substantially all of the stock of the corporation is held by employees performing services for the corporation. It is our understanding that the corporation is jointly owned by husband and wife and that these individuals are employees of the corporation. Therefore, the ownership test is met under the express language of section 448(d)(2)(B).

[11] Taxpayer's counsel, in her "protest" letter dated * * *, very briefly states on page 6 as follows: "Furthermore, the taxpayer contends that because substantially all of its services are not performed by employee/owners, as defined in section 269(A)(b)(2), substantially all of the taxpayer's stock is not held directly by employees as defined in section 448(d)(2)(B)." This appears to be a very weak argument which is not supported by any discussion or further authority. Taxpayer's counsel appears to be arguing that substantially all of the work completed by the corporation must be completed by the owners. We do not believe this to be the case and we do agree with this argument. The only authority she cites, section 269A(b)(2) is irrelevant. Therefore, we believe that the ownership test of section 448(d)(2)(B) is met in this case.

[12] With respect to the function test, Treas. Reg. section 1.448-1T(e)(4)(i) provides that a corporation meets the function test if substantially all of the corporation's activities for the taxable year are involved in the performance of services in one or more of eight enumerated fields, including the field of health. Therefore, the next question is whether the instant taxpayer was involved in the performance of services in the field of health.

[13] Treas. Reg. section 1.448-1T(e)(4)(ii) defines the meaning of "services performed in the field of health" as the "provision of medical services by physicians, nurses, dentists, and other health- care professionals." Therefore, the next questions are: (1) whether the taxpayer provides medical services; and (2) whether the taxpayer's employees are health-care professionals.

[14] First, we believe that the instant taxpayer is a provider of medical services. The * * * Code provides that "medical laboratory technicians," among others, are "providers of health care." * * *. And "health care records" include x-rays. * * *

[15] Furthermore, the Medicare regulations, which govern the taxpayer's operation, cite section 1861(s)(3) of the Social Security Act for the proposition that the term "medical and other health services" includes diagnostic x-rays. 42 C.F.R. section 405.1401(a) (1992).

[16] Finally, Treas. Reg. section 1.213-1(e)(1)(i), which provides definitions with respect to items that are deductible as medical care under section 213, defines medical care to include the diagnosis, cure, mitigation, treatment, or prevention of disease. Expenses paid for medical care include those expenses paid for the purpose of affecting any structure or function of the body. Id. Treas. Reg. section 1.213-1(e)(1)(ii) provides that amounts paid for x-ray treatments are deemed to be for the purpose of affecting any structure or function of the body. Therefore, x-ray treatments are deemed to be included within the definition of medical care. Id. Furthermore, Treas. Reg. section 1.213-1(e)(1)(ii) provides that payments for diagnostic services are to be considered payments for medical services. This definition would include the EKGs taken by the taxpayer. Accordingly, the cited authorities strongly support an argument that the instant taxpayer is a provider of medical services.

[17] The second question is whether the employees of the taxpayer are health care professionals. Medicare regulations require that radiologic technologists working for the taxpayer have a minimum of 24 months of formal educational training. Specifically, the regulations require that all operators of portable x-ray equipment meet the following educational requirements:

[19] The term "professional" implies professed attainments in special knowledge, as distinguished from mere skill. Black's Law Dictionary 1089 (5th Ed. 1979). Special knowledge of the human anatomy and of the use of the radiologic equipment (which is dangerous if used or maintained improperly) is required of radiologic technologists.

[20] For example, the radiologic technologist needs to be educated about: the precautions necessary to protect the patient, the operator, and those individuals in the surrounding environment from unnecessary exposure to radiation; the considerations necessary in determining which area of the patient's body will receive the primary beam; the determination of the time interval at which to check personnel radiation monitors; the proper use and maintenance of the equipment; the protection against electrical hazards; the hazards of excessive exposure to radiation; the use of diaphragms, cones, or adjustable collimators to restrict the useful beam to the area of clinical interest; the aluminum equivalent of the total filtration in the primary beam, etc.

[21] Furthermore, the employment application of one of the taxpayer's typical staff radiologic technologists * * * reveals that she is a graduate of * * * Radiologist Technology program and that she successfully completed the following courses, among others:

[22] Additionally, Treas. Reg. section 1.448-1T(e)(4)(ii), supra, includes nurses within the definition of health care professionals. In some states, an individual can become a registered nurse (R.N.) with only a two-year associate's degree from a community college. A licensed practical nurse (L.P.N.) is required to have even less formal training. Since the instant radiologic technologists are required to have at least 24 months of specialized educational training, we believe that they are the professional equivalent of nurses for the purpose of this discussion. Therefore, the employees of the instant corporation should be considered to be health care professionals.

[23] Nevertheless, we realize that this conclusion is not entirely free from litigating hazards. Department of Labor wage and hour regulations provide that x-ray technicians are generally not exempt from wage and hour legislation since they may not be considered to be "employees employed in a bona fide professional capacity." See 29 C.F.R. section 541.306(c). (It is unclear whether an individual who is considered to be a radiologic technologist is the professional equivalent of an individual who is considered to be an x-ray technician.) Nevertheless, the conclusion in the Department of Labour regulations appears to assume that the x-ray technicians are performing their duties under the supervision of more highly qualified "exempt" technologists. This may not be the case here if the technologists' work is reviewed directly by the radiologist, without internal review by a more senior "exempt" technologist. Nevertheless, it is important to remember that the taxpayer's employees also perform EKGs. This may require professional judgment not required of x-ray technicians.

[24] It should be noted that the Service recently concluded that a taxpayer engaged solely in the business of providing physical therapy services is to be treated as a qualified personal service corporation under sections 448(b)(2) and 448(d)(2). TAM 92-22-004 (May 29, 1992). The rationale employed in TAM 92-22-004 is similar to the rationale employed in this field service advice.

[25] In conclusion, the instant taxpayer should be treated as a qualified personal service corporation under sections 448(b)(2) and 448(d)(2). Therefore, the taxpayer is ineligible for the graduated rate structure provided by section 11(b)(1). Instead, all of its income should be taxed at the highest corporate rate of 34 percent. Section 11(b)(2).

[26] If you have any questions regarding this matter, please contact * * * at (202) 622-7910.