IRS Holds Surgery Center Can Offset Passive Losses

In a recent technical advice memorandum, the National Office of Chief Counsel determined that a properly structured surgical center can be treated as a separate economic unit from a physician owner’s medical practice.  Thus, a physician-owned surgical center can be considered as a passive activity for material participation purposes, even though the physician has an active medical practice.  In the end, income from the surgical center can be offset by passive losses incurred by the physician’s other passive activities.

In TAM 201634022, a physician owned an interest in a partnership which, in turn, owned a minority interest in another partnership that operated an outpatient surgical center.  At the same time, the physician was an owner in an S corporation in which he provided medical services.  The physician also provided services at the surgical facility.  The physician’s income from the surgical facility was unrelated to referrals or surgeries performed by the physician but, instead, was directly proportionate to his ownership interest in the facility.  In addition, the physician and his spouse incurred passive losses from an out-of-state rental condo and had suspended carryover losses for prior years from activities related to the condo.  The National Office of Chief Counsel determined that the taxpayer’s decision not to group the surgical center with his medical practice was appropriate under Treas. Reg. § 1.469-4 and that the IRS lacked authority to change the taxpayer’s grouping.  Accordingly, the physician was able to offset the income from the surgical center with losses from the rental condo.

About the Author:
Brad Gould practices in Dean Mead’s Fort Pierce office located in St. Lucie County, Florida. His practice covers the areas of federal income, estate, and gift tax law and business succession planning. He represents businesses and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, and other general business matters. Mr. Gould represents individuals, businesses and fiduciaries before the IRS and also counsels clients on estate and wealth preservation planning matters. Additionally, he represents trustees, personal representatives and family members in controversies regarding wills, trusts and estates. Mr. Gould is a Certified Public Accountant. He may be reached at