Hosp. Corp. of America & Subsidiaries v. Comm'r of Internal Revenue
| Citation | 109 T.C. No. 2,109 T.C. 21 |
| Decision Date | 24 July 1997 |
| Docket Number | 28588–91,No. 10663–91,6351–92.,13074–91,10663–91 |
| Parties | HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
WELLS
Ps own, operate, and manage hospitals and related businesses. For taxable years ended 1985 through 1987 Ps claimed depreciation deductions based on 5–year recovery periods for certain properties they placed in service during those years, which properties Ps claim constitute tangible personal property. R determined that the properties constitute structural components of the buildings to which they relate and that the properties therefore must be depreciated over the same recovery periods as those buildings.
Held: For purposes of assigning appropriate recovery classes or recovery periods to the properties to determine allowable depreciation deductions pursuant to sec. 168, I.R.C., tests developed under prior law for purposes of the investment tax credit are applicable to decide whether the property constitutes tangible personal property.
Held further: The prohibition contained in sec. 168, I.R.C., against the use of the component method of depreciation does not preclude the use of an analysis based on Scott Paper Co. v. Commissioner, 74 T.C. 137, 1980 WL 4586 (1980), and its progeny, and sec. 1.48–1(1), Income Tax Regs., and accordingly such authorities are applied to assign appropriate recovery classes or recovery periods to the properties in issue.
N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr., Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark, Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley, and John W. Bonds, Jr., for petitioners in docket No. 10663–91.
N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr., Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark, Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley, John W. Bonds, Jr., and Daniel R. McKeithen, for petitioners in docket No. 13074–91.
N. Jerold Cohen, Walter H. Wingfield, Stephen F. Gertzman, Amanda B. Scott, Reginald J. Clark, Randolph W. Thrower,Walter T. Henderson, Jr., and John W. Bonds, Jr., for petitioners in docket No. 28588–91.N. Jerold Cohen, Reginald J. Clark, Randolph W. Thrower, Walter T. Henderson, Jr., and John W. Bonds, Jr., for petitioners in docket No. 6351–92.Robert J. Shilliday, Jr.,Vallie C. Brooks, and William B. McCarthy, for respondent.WELLS, Judge:
These cases were consolidated for purposes of trial, briefing, and opinion and will hereinafter be referred to as the instant case.1 Respondent determined deficiencies in petitioners' consolidated corporate Federal income tax as follows:
+----------------------+
¦¦TYE ¦¦Deficiency ¦
++----++---------------¦
¦¦1978¦¦$2,187,079.00 ¦
++----++---------------¦
¦¦1980¦¦388,006.58 ¦
++----++---------------¦
¦¦1981¦¦94,605,958.92 ¦
++----++---------------¦
¦¦1982¦¦29,691,505.11 ¦
++----++---------------¦
¦¦1983¦¦43,738,703.50 ¦
++----++---------------¦
¦¦1984¦¦53,831,713.90 ¦
++----++---------------¦
¦¦1985¦¦85,613,533.00 ¦
++----++---------------¦
¦¦1986¦¦69,331,412.00 ¦
++----++---------------¦
¦¦1987¦¦294,571,908.00 ¦
++----++---------------¦
¦¦1988¦¦25,317,840.00 ¦
+----------------------+
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues to be decided concern the appropriate recovery classes (for tax years ended 1985 and 1986) or appropriate recovery periods (for tax years ended 1987 and 1988) for certain tangible property that petitioners placed in service during those years. To decide whether petitioners utilized the proper recovery classes or periods in calculating their claimed depreciation deductions for those taxable years, we must decide (1) whether the tests developed under prior law for purposes of the investment tax credit are applicable, and, if so (2) whether the respective properties constitute section 1245 personal property or section 1250 real property pursuant to those tests.
Some of the facts have been stipulated for trial pursuant to Rule 91. The parties' stipulations of fact are incorporated herein by reference and are found as facts in the instant case.
Petitioners were members of an affiliated group of corporations whose common parent was Hospital Corporation of America (HCA), which was incorporated under the laws of the State of Tennessee.2 HCA maintained its principal offices in Nashville, Tennessee, on the date the petitions were filed. For each of the taxable years involved in the instant case, HCA and its domestic subsidiaries filed a consolidated Federal corporate income tax return (consolidated return) on Form 1120 with the Director of the Internal Revenue Service Center at Memphis, Tennessee.
Petitioners' primary business is the ownership, operation, and management of hospitals. in Hospital Corp. of Am. v. Commissioner, T.C. Memo.1996–105, we set forth a detailed description of petitioners' hospital operations, which will not be reiterated here. We incorporate herein our findings of fact contained in that Memorandum Opinion.
During the taxable years in issue, petitioners constructed a number of hospital facilities. Those hospital facilities consist generally of 10 different categories, which the parties denominate as follows: (1) Large Medical/Surgical Facilities; (2) Small Medical/Surgical Facilities; (3) Ancillary Facilities; (4) Radiology Facilities; (5) Small Psychiatric Facilities; (6) Large Psychiatric Facilities; (7) Obstetrics Facilities; (8) Ambulatory Surgery Facilities; (9) Patient Bed Facilities; and (10) Ancillary II Facilities.
On their tax returns for taxable years ended 1985, 1986, and 1987, petitioners classified as tangible personal property certain items relating to hospital facilities constructed during those taxable years, and claimed the investment tax credit (ITC),3 and depreciation deductions using a 5–year recovery period. Respondent, however, determined in the notice of deficiency that a number of those items were structural components of the related buildings and not personal property, that those items were not eligible for ITC, and that they must be depreciated over the same recovery period as the buildings to which they related. Prior to trial, the parties resolved the ITC issue, leaving for trial the issue of the proper classification of the property items for purposes of claiming the depreciation deduction for the taxable years in issue.
On their tax returns for taxable years ended 1987 and 1988, petitioners classified as tangible personal property certain items relating to hospital facilities constructed during those years and claimed depreciation deductions using a 5–year recovery period. Respondent, however, determined in the notice of deficiency that a number of those items were structural components of the related buildings and that they must be depreciated over the same recovery period as the buildings to which they related.
All of the property items in issue (disputed property items) were installed in hospitals constructed for petitioners pursuant to contracts with general construction contractors during taxable years ended 1985, 1986, 1987, and 1988. The parties have agreed as to the proper categorization and the total construction cost of each facility, the cost bases of the particular disputed property items,4 and the dates on which each of the facilities (and the property items located therein) were placed in service. The parties have agreed to procedures to be followed to implement our decision once we decide the appropriate recovery classes (or recovery periods) for the disputed property items.
The parties have designated one facility to serve as a “representative facility” for each of the 10 different categories of hospital facilities. The parties agree, however, that the property items in petitioners' hospital facilities are identical to each other in all material respects (i.e., manner of attachment, function, construction, and design) regardless of the facility in which they are contained.
The primary electrical distribution systems,6 which the parties have designated as Property Unit 1900, accept electricity from outside electrical power sources and deliver it to the secondary electrical distribution systems contained within the hospital facilities. Generally, the items comprising the primary electrical distribution systems consist of (1) the electrical wire and conduit extending from the outside power sources to the main electrical distribution panels and (2) the main electrical distribution panels themselves, also known as main switchgears. In some instances, motor control centers or transformers also may be included.
The secondary electrical distribution systems receive electricity from the primary electrical distribution systems and deliver it to the various electrical end-users located throughout petitioners' hospital facilities (e.g., lighting fixtures, fire protection systems, and hospital equipment). The items comprising those secondary electrical distribution systems consist of the electrical wire and conduit extending from the primary electrical distribution panels to the secondary electrical distribution panels, the secondary electrical distribution panels themselves, and any transformers located between the primary electrical distribution panels and the secondary electrical distribution panels.
The main switchgears and the motor control centers are steel cabinets which are attached to concrete pedestals using nuts that are tightened onto bolts extending out of the pedestals. Transformers have a construction similar to that of the switchgears and the motor control centers and are either attached to concrete pedestals...
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