Legal War stories

As all adults know, and as so many adolescents seem to ignore, the end of formal education tends to be the beginning of our interaction with the real world and the rights and responsibilities associated with that world.

We might get away with working little or not at all when we are full-time students, but after our final graduation, society expects us to work, to interact with the workplace, and to accommodate and adapt to the obstacles and dangers associated with our employment.

This is a reality that all of us, as veterinarians, acknowledge and share. The world is a tough place, as our parents told us and as their parents told them. Nonetheless, the work world can be navigated more easily, and more comfortably if we remain open to sound advice, exercise due diligence in the decision-making process, and keep an open mind when experienced people share a glimpse into their workplace war stories.

The trapped associate

Dr. Leonard wasn't a new graduate; he had been around the employment block a few times. After working at a few smaller clinics, he finally found a privately owned, multi-DVM small animal practice in a nice town that offered good quality of life, a reasonable cost of living and no emergency duty. Presented with a contract, he signed on the dotted line for a three-year associate position with a limited-area non-compete.

Everything was dandy for the first few months. The older, very knowledgeable owner was a super mentor; the other doctors were less experienced but amiable, and the work was challenging. Down the road, though, things began to change.

The owner got a great deal from a corporate hospital chain. The practice sold in a month, and the client fees rose dramatically. Doctor Mentor departed for greener pastures and suddenly Dr. Leonard was the de-facto chief of staff, but with no compensating increase in salary. Stressed and disillusioned, the young doctor decided that he would rather depart the deteriorating circumstances than lobby for a raise.

Dr. Leonard had been an employee before, so he felt comfortable notifying the new owners that he would be departing six weeks in the future. After all, he thought, his contract had no notice requirement. Leonard was being generous, or so he thought.

When he stopped in to the practice manager's office, though, his confidence instantly dissolved. "You have a 36-month contractual commitment," he was told, "and no amount of notice is sufficient. We expect you to stay for three years and will take legal action if you don't."

Dr. Leonard was appalled. What could he do? An initial consultation with a local attorney gave him some comfort in that he was told that courts in their state didn't like enforcing long employment commitments. He explained, though, that the veterinary practice could harass him legally for some time. Therefore, he might not have to stay, but he also might have to pay thousands in legal fees. These would be costs which insurance would not cover.

Finally, since Dr. Leonard had not amassed a substantial nest egg, and he knew that the dispute could loom over any subsequent employment opportunity, he grudgingly decided to ride out the 36-month stint.

The trapped practice owner

Dr. Tom had always had something of an entrepreneurial spirit. After only four years of employment, he boldly opened his own mixed-animal practice and suddenly, he was doing better than even he had expected. The clients loved him, and they kept coming. So many of them came, in fact, that he decided to incorporate. After he did that, more good things followed, such as an associate, and then another, and then a second location, followed by two more associates.

Tom never thought it would happen, but retirement time finally arrived. His two best and most trusted associates made him an offer to buy the practice assets and lease the practice buildings from him. The sale was done, Tom moved to his lake place and everything was great, until three years later.

Six weeks before the statute of limitations would expire on his tax return covering the year of the practice sale, Doc Tom got an affectionate letter from the Treasury Department informing him that it would like to audit that return.

During the audit, the IRS agent politely asked Tom why he treated the practice sale as a capital gain (which is taxed at a much lower tax rate). He explained that in fact, the sale was a capital gain. Doc had paid virtually nothing to get into business, then sold out for seven figures. He owned the practice over a year, so surely it must be a capital gain with the beneficial tax treatment.

Thereupon, the agent politely asked Dr. Tom to show her the documentation where he had liquidated his corporation after the assets were sold. "I never got around to closing out that corp," Tom said, "but that shouldn't matter since we never did any more business."

Unfortunately, Dr. Tom was mistaken. The IRS took the position that the corporation did not qualify for the immediate capital gain treatment since it had not officially ceased doing business. A trap slammed shut on Dr. Tom, and it cost him thousands in additional income taxes, penalties and interest.

The trapped practice buyer

Dr. Young had been an associate for about 10 years, at which point he decided to strike out on his own. He located a nice practice in Queens, N.Y., that was doing a brisk small animal business and a certain amount of retail sales of pet food, collars and such. He approached Dr. Oldtimer, the current owner, and the two hammered out a very fair price for the practice.

Oldtimer's lawyer put together a boilerplate contract out of a form book and before you knew it, the deal was closed. Oldtimer moved into his West Palm home permanently. Dr. Young loved the new practice and everybody lived happily thereafter — until the following January.

When the mail arrived one morning, it contained a love note from the New York State Department of Taxation and Finance.

It seems that Oldtimer really was an "old timer." He hadn't wanted to be bothered with charging sales tax on collars and baths and all that, so he just didn't.

You'll be surprised to know that New York State wanted its back sales tax on all the taxable items. Furthermore, until they got every nickel, they wanted Dr. Young to know that if necessary the Empire State would seize the X-ray machine, the ultrasound and the Q-Tips and sell them to satisfy Oldtimer's sales tax obligation. That's how Empires operate, and so do a lot of other states.

What's the legal principle we can gain from these anecdotes? When dealing with the tough real world out there, research and discover all that is reasonably knowable.

That, my friends, is the definition of "due diligence."

Dr. Allen is a partner in Associates in Veterinary Law P.C., a law practice specializing in business and legal counsel for veterinarians and their families. He can be reached at www.veterinarylaw.com or call (607) 648-6113.