IRS bites dentist
Access Dental is a Sacramento success story that now faces tax problems
In the early years, Sacramento dentist Reza Abbaszadeh sacrificed the good life for little pay while he worked on building his dream.
Initially, the hours were long, the meetings numerous and the phone calls seemed almost non-stop. Little by little he, his sister and a third executive plowed ahead to create Access Dental Plan, Inc.
Part of that dream in those early years was the big payoff they saw ahead. But when that day did arrive in 1996, they found there could be a price to pay. The Internal Revenue Service stepped in with a $900,000 tax bill against the company he headed.
To say Abbaszadeh was taken aback would be an understatement. He was flabbergasted to discover that the IRS decided he was not only overpaid by Access Dental, but that his sister, company vice president Terry Abbaszadeh, and Maria Torres, operations vice president, were also overpaid.
“The officers were the ones who started the company and didn’t get compensated for the first few years,” Abbaszadeh, the company’s president, said in a telephone interview. “This was a catch-up payment.”
He, his sister and Torres founded the Sacramento-based company in 1989, which later evolved into a dental insurance underwriter. The beginnings were humble.
Instead of living the good life as a practicing dentist, Abbaszadeh struggled along on a meager salary. He said his sister, an engineer by training, and Torres also made similar sacrifices. He said they believed the rewards would come later as Access Dental attained solid footing.
“I was paid $15,000 that first year,” he added. “I could have made much more than that in private practice. Once the company became profitable, we felt we should be adequately compensated.”
They took that argument into negotiations with the IRS, whose auditors had a different definition in mind of what it meant to be “adequately compensated.” The company’s plea fell on deaf ears. ADP then turned to the U.S. Tax Court in Washington D.C., filing a petition appealing the tax agency’s determination. Abbaszadeh is convinced the company’s argument is correct.
“We’re hoping,” he said. “We’ll see what happens. We believe the compensation paid to the three individuals over four (startup) years was almost nothing.”
With the others, Abbaszadeh guided ADP through the early years of providing dental services through its 15 company-owned facilities. The primary business has since shifted to that of dental insurance underwriter through its Premier Access Insurance subsidiary.
“That portion of our business, the dental facilities, that’s where we started,” Abbaszadeh explained. “Our biggest portion of business now is the dental insurance side.”
As time passed and the millennium arrived, the company found itself underwriting dental plans for 1,200 companies and a few municipalities with 200,000 employees, mostly in Sacramento and seven other Northern California counties.
It’s not stopping there. The company that Abbaszadeh, his sister and Torres nurtured is steadily flexing its muscles and extending its service area. It has grown into a Sacramento economic force with 380 employees with even higher expectations for the future.
“The entities that we cover have a couple hundred thousand members,” Abbaszadeh said. “We have some individual policies, but probably less than 1 percent would be individuals. They can go to any dentist they want, and we cover the cost.”
The company boasts that it has 20,000 preferred providers outside of California besides those under contract within the state serving its members.
The 11-year-old company’s stature seemed to be affirmed when two years ago it was designated, along with 32 other health plans, to service about 580,000 children under the California Healthy Families Program. Under the five-year program, dental, health and vision care services are provided to children of the state’s working poor.
Access Dental was one of three dental plans included in the program. A study by the University of California at Los Angeles said there was a potential for them to provide dental care for up to 514,000 children in 45 counties.
Despite such recognition, the IRS tax action against ADP draped a cloud over the company, even if Abbaszadeh denies that it is one that will dampen the company’s future. He said the company will continue to prosper even if it does lose the case in court, something he does not anticipate.
“We have the resources to pay whatever is asked of the company,” he said. “None of our 380 employees would be jeopardized by an adverse ruling.”
Still, the IRS ruling comes as a rebuke of how the company has handled its finances. The agency denied ADP $1.84 million in deductions for the salaries paid to the firm’s top three executives.
Dismissing the company’s argument that the salaries were needed to compensate the three for their earlier sacrifices, the agency ruled that only $527,487 of Abbaszadeh’s $1.17 million of his 1996 pay could be deducted, $95,040 of his sister’s $695,040 and $104,833 of Torres’ $704,833.
“No deduction is allowed for compensation which is unreasonable or excessive,” the IRS ruling said. “The portion of officers’ salaries and other compensation for personal services that are not reasonable in amount have been disallowed.”
An IRS spokesman said the agency does not comment on pending tax cases.
The agency took other swipes at ADP, increasing its taxable income by $458,000 after ruling the firm had more interest income than reported, and by reducing the firm’s deductions for bad debt losses, rental payments, legal fees, car expenses and charitable contributions.
Even more trouble could be on the horizon. ADP’s petition said that the company’s 1995 tax returns are “currently under examination.”
The IRS notice of deficiency was issued Sept. 7, and the agency has 60 days to respond to the company’s Nov. 13 petition. If the IRS and company fail to negotiate a settlement, the case could go to trial before a tax court judge.