Discussion:Income Guarantee - FICA Tax

I am a CPA that would love to hear your thoughts on the following situation...the scenario is as follows:

A physician is recruited by a hospital in which the hospital agrees to an "income guarantee". Basically, the physician has a "line of credit" that he can pull from as he begins his new practice in this area. He has no ties to the hospital in terms of employment, i.e. he does not have to provide any special service to the hospital. This line of credit/guarantee helps pay the physicians personal and business expenses in his attempt to become profitable as a new physician. The physician can access this line of credit as he sees fit (up to a certain amount) for two years. When the two years has ended, the hospital agrees to forgive whatever amount the line of credit has grown to (again, to a certain threshold) over a two year period, i.e. 1/24 of the amount each month. However, in order for the hospital to agree to the forgiveness over the two year period the physician must stay in the "area" and basically work as a physician. Even at this point, the physician has no obligation to the hospital in terms of services provided to the hospital and/or referrals to the hospital. If the physician does move out of state, for instance, he will be required to pay back the outstanding amount with interest.

The hospital has issued an amount equal to six months of loan forgiveness for 2007 (filed an extension) on Form 1099, Box 7, Nonemployee Compensation. This begs the question as to the tax implications relative to this loan/income guarantee. Certainly it is income as suggested on the Form 1099, however, is it or should it be subject to the self employment tax, resulting in a Schedule C filing or is it debt forgiveness in which Form 1099C would more accurately reflect the nature of the income? We are dealing with a fairly large sum for the six months in 2007. He will not pay much in terms of the medicare/social security tax as he has not drawn a wage and his business is not profitable.

Thanks in advance for any and all responses...it is greatly appreciated. It is tremendous that folks are willing to take time to share thoughts and expertise as we run the gauntlet of income tax reporting and compliance.

Agree with Riley that the amounts are subject to SE tax.

I went to a one day CLE seminar on this, but I can't remember much of it because I was sick with a 106% fever, and couldn't afford to go to the doctor. The left lobe of my brain burned out, which left me very uncreative. But anyway, if the brain I have intact can be of any service... well, I forgot what I was going to say. Never mind.

I am still going back and forth on this one, I can see the argument for and against with regard to the SE tax. It seems to me that there is a argument that the hospital is a lending institution in this sense and this "line of credit" is in fact merely debt that must be repaid if the physician leaves the general area within two years post the line of credit terms which is two years as well, i.e. he can draw on the line of credit of two years. The hospital believes they will benefit from this physician being in the area otherwise they would not agree to do this. However, this physician has no allegiance and/or obligation to the hospital in any way. He does not have to refer patients and/or perform surgeries at this hospital...in that sense it feels more like the regular acquisition of capital via a bank or lending institution of your choice. I suppose you guys and gals would agree that forgiveness of debt via the traditional acquisition of capital (go to a bank and get a loan to start a business) would be subject to the SE tax as well? If you agree that this "traditional" route would not be SE tax then I think there is potential argument that this is very similar in that the hospital is merely acting as the lending institution.

Any further responses will be gladly accepted and appreciated as I my head is kind of spinning right now. Maybe I am just trying to come up with something that just isn't there.