The Tax Court Case Derby et al v. Commissioner is important for a variety of reasons, not the least of which is its instructive value as today’s consolidation in the healthcare industry mirrors that in the early and mid-1990s when the Derby case originated.  Key factors in the case include those which this author has repeatedly cited in numerous articles over the last 10 years in CPA Expert, the Journal of Accountancy and elsewhere.


  1. The use of expected post-transaction physician compensation in the discounted cashflow model based on the transaction documents rather than use of some arbitrary compensation figure, such as the median for a given physician specialty.
  2. Allocating Enterprise or Invested Capital Value among Working Capital, Fixed Assets and Intangible Assets.
  3. Carefully studying transaction documents to discern the character and extent of any intangibles being transferred or not being transferred.
  4. The critical import of allocating between personal/professional goodwill and enterprise goodwill when valuing a medical practice for acquisition by a hospital.
  5. The importance of any noncompete agreement in determining the value of the medical practice.
  6. The need for “donative intent” when claiming a deduction for the value of a medical practice or other enterprise allegedly donated to a tax-exempt entity.
  7. The extent of relevance of the Friendly Hills private letter ruling and the 1994 Exempt Organizations Continuing Professional Education Technical Instruction Program manuals.

I plan to submit an article on this case later this year but will update my BLOG periodically with additional thoughts.  For anyone valuing medical practices who hasn't read the 1994 Exempt Organizations Continuing Professional Education Technical Instruction Program manual, the link is posted elsewvere on the BLOG.

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  • There are many reasons you may need to know the value of your business — if you are considering buying a business, a merger or outright sale, for tax or loan purposes, or for estate planning. Whatever the reason for needing to know this information, trying to come up with a valid figure can be a major effort and challenge.
    Pricing a business too high can result in the business not being sold for a long period of time; sometimes not at all. If the business owner eventually adjusts the price to how the market is responding, the deal will often be tainted with the view that something is wrong with the business or that the owner is desperate, possibly resulting in an even lower business appraisal than it would have originally been valued at.



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