If you can’t fight city hall, what chance do you have fighting the IRS when you feel the agency has made a wrong decision? And what if that wrong decision is requiring you to pay more than $250 million in excise taxes for your family-owned business?
Things might seem pretty bleak, but there is a happy ending to this story. The Sta-Home Health Agency, which now operates in 42 counties in Mississippi, went through years of audit and litigation after the IRS greatly overvalued the agency when it moved from non-profit to for-profit status in 1996. But in 2006, the Fifth Circuit Court of Appeals sided with the owners of Sta-Home Health Agency and overturned the decision of the IRS and the Tax Court.
“The taxpayers contend that the Tax Court made numerous factual and legal errors in valuing the assets transferred in the conversion from exempt to nonexempt status,” the Fifth Circuit Court of Appeals ruling in the case stated. “We agree. As explained below, the Tax Court erred as a matter of law in affirming the Commissioner’s decision to impose excise taxes after the Commissioner failed to meet his burden of proving that the taxes were correctly assessed; erred as a matter of law in selecting the method to value the assets and liabilities transferred; and made clearly erroneous fact findings in applying that valuation method. We reverse and render because the record establishes as a matter of law that the taxpayers did not receive any ‘net excess benefit’ and therefore are not liable for the excise taxes assessed.”
Big bill settled
To win the difficult and protracted legal battle ended up costing Sta-Home Health Agency more than $1 million. But recently the agency received reimbursement of its attorney fees and costs from the IRS in the amount of $1,079,377.
“The award of attorney fees is a complete vindication of Sta-Home in connection with the conversion to for-profit status,” said Vincent Caracci, president and CEO of Sta-Home Health Agency. Caracci thanked Sta-Home’s attorneys Ted Sanderson and Tom Kirkland of Copeland, Cook, Taylor & Bush, P.A., Jackson, for their work in pursuing the attorney fee award.
The amount and circumstances of the award are believed to be unprecedented in the entire U.S.
Sanderson, formerly a senior attorney in the IRS National Office, said the amount and circumstances of the attorney fee award are unprecedented.
“Businesses and individuals faced with IRS assertions that additional tax is owed should take the Sta-Home case as an example that the IRS is not always right,” Sanderson said. “Sometimes the IRS does not even have substantial justification for its position, as was ultimately conceded by the IRS in the Sta-Home case after we filed the motion for attorney fees. Unfortunately, taxpayers have to be able and willing to expend time and money challenging the IRS’ position in the administrative and judicial processes. If the taxpayer prevails, in some instances the IRS may be forced to reimburse the taxpayer for attorney fees and costs.”
Kirkland said while the IRS has been required to reimburse taxpayers before in tax assessments, this is the largest amount ever reimbursed to the taxpayer by the IRS.
“If there are any other cases out there in excess of that, we haven’t been able to find them,” Kirkland said. “What this decision may tell people is in dealing with the government there is a system where you can address an inappropriate government action through the court system. Some people think you can’t fight city hall, but there is an appeal system. If you have a good case concerning a tax matter, or any other matter for that concern, the federal court system will give you an outlet to have your case heard. And if you are correct, then you are going to win. The process is sometimes complicated. It takes a while. This tax case started in 1997 and it has taken all these years to get a resolution out of it. But with time, patience and money, you can have your case heard in court. And if you are correct, you are going to win.”
Back to the beginning
The case goes back to the mid-1990s. At the time, costs for home healthcare were reimbursed by Medicare after the fact. Companies would provide services, and Medicare would come back and say whether it was deemed medically necessary. If Medicare decided the services weren’t necessary, costs wouldn’t be reimbursed even if a physician had determined the healthcare was needed. Home healthcare agencies were in a tough position because they had already paid nurses to go to people’s homes.
“A lot of home health agencies had cash flow issues,” Kirkland said. “Sta-Home was non profit, and wanted to move to being for-profit in order to be able to borrow money when necessary, and to raise capital by selling stock.”
When home healthcare programs began in the 1980s, Medicare required all home health agencies to be non-profit. But that changed in the 1980s. Kirkland said Sta-Home had few real “brick-and-mortar” assets because its services were provided in people’s homes. But the agency had a lot of debt at the time.
When Sta-Home converted to for-profit status, the company obtained valuations by qualified experts that determined the company’s assets didn’t exceed liabilities. The company had very little value on paper, and did the conversion on that basis. But the IRS came in and said Sta-Home was worth millions.
After years of legal battles, the Fifth Circuit Court of Appeals ruled that Sta-Home had acted appropriately in conversion from non-profit to for-profit. All tax assessments were reversed.
“When they did that, there was a statute where the IRS could be required to reimburse costs taxpayers have in defense of that type of assessment,” Kirkland said. “That is where we went next and filed a petition against the IRS requesting reimbursement of all attorney fees. We filed that in the Tax Court in Atlanta. In the process of that litigation, the IRS agreed to reimburse Sta-Home Health Agency attorney fees and expenses. The fact of the reimbursement isn’t that unusual. But the amount is, as far as we know, the highest amount of fees reimbursed by the IRS to a taxpayer.”
Kirkland said the decision is particularly important because Sta-Home is a family-owned business started by a nurse, Joyce Carraci, and her husband, Vincent, in the mid-1970s in order to provide an opportunity for people to stay at home and receive medical care rather than being forced into a nursing home or hospital. The Carracis started the company from scratch, and have been very successful now providing care in 42 Mississippi counties with offices in Jackson, Carthage and Greenwood, serving Central and Southwest Mississippi and the Mississippi Delta.
“A family that started a business out of a desire to help people ran headlong into the IRS with an inappropriate assessment,” Kirkland said. “The family had to fund defense of this case while providing this care. That the case culminated with getting attorney fees vindicated the family and put things back into perspective.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.