Hosp. Corp. of America & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 12 September 1996 |
| Docket Number | 13074-91,Nos. 10663-91,28588-91 and 6351-92.,s. 10663-91 |
| Citation | 107 T.C. No. 6,107 T.C. 73 |
| Parties | HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
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., Atlanta, GA, 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, Atlanta, GA, 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., Atlanta, GA, 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., Atlanta, GA, for petitioners in docket No. 6351-92.Robert J. Shilliday, Jr., Dunwoody, GA, Vallie C. Brooks, Nashville, TN, and William B. McCarthy, Davie, FL, 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. Respondent determined deficiencies in petitioners' consolidated corporate Federal income tax as shown below.
+----------------------+
¦¦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 ¦
+----------------------+
Respondent also determined that the provision for increased interest under section 6621(c) applied. 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 issue for decision in the instant opinion1 is whether certain petitioners which disposed of some of their hospitals and related medical facilities during taxable year ended 1987 are required to include in income for that year the entire section 481(a) adjustment relating to a change in method of accounting during 1987 that is attributable to those hospitals and related medical facilities.
Some of the facts have been stipulated for trial pursuant to Rule 91. The stipulated facts are incorporated herein by reference and are found accordingly.
During the years in issue, petitioners were members of an affiliated group of corporations whose common parent was Hospital Corporation of America (HCA). 2 HCA maintained its principal offices in Nashville, Tennessee, on the date the petitions were filed. For each of the 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. A detailed description of petitioners' hospital operations is set forth in Hospital Corp. of America v. Commissioner, T.C. Memo. 1996-105, which will not be reiterated here. Our findings of fact contained in that Memorandum Opinion are incorporated herein. For clarity, some of our findings of fact pertinent to the issue involved in the instant opinion are repeated below.
For the years ended 1979 through 1986, petitioners operating hospitals used either a hybrid or an overall accrual method of accounting for reporting income for tax purposes. Additionally, for those years some petitioners operating nonhospital businesses used the cash method for reporting income for tax purposes. In Hospital Corp. of America v. Commissioner, supra, we held that petitioners' use of the hybrid method for the hospitals was appropriate for the years ended 1981 through 1986, particularly in view of the hospitals' operations.
For the consolidated return filed for the year ended 1987, pursuant to section 448,3 petitioners not employing an overall accrual method for computing taxable income for the years ended prior to January 1, 1987, changed their method of accounting to that method. Commencing with taxable year ended 1987 those petitioners took into account positive section 481(a) adjustments4 necessary to effect the change to an overall accrual method over the periods provided by section 448(d)(7)(C).5 Thus, on the consolidated return for taxable year ended 1987, those petitioners operating hospitals not theretofore reporting on an overall accrual method included as additional income one-tenth of the income previously deferred under the hybrid method for years ended prior to 1987. Those petitioners operating nonhospital businesses not theretofore reporting on an overall accrual method included additional income equal to one-fourth of the income previously deferred under the cash method.
Also during 1987, pursuant to a reorganization plan of HCA, effective September 1, 1987, HCA Investments, Inc. (HCAII), a wholly owned subsidiary of HCA, sold all of the stock of certain subsidiaries that owned and operated 104 hospitals, approximately 90 professional office buildings, and related medical facilities, to HealthTrust, Inc.--The Hospital Company (HealthTrust)6 for a combination of cash, preferred stock, and warrants to acquire shares of HealthTrust common stock. The hospitals were located in 22 States of the United States. Approximately 40 percent of the hospitals were the only hospitals for the communities they served, and approximately 20 percent of the remaining hospitals were one of two hospitals for the communities they served.
In some instances, a subsidiary whose stock was sold to HealthTrust operated one hospital, office building, or medical facility, or more than one such enterprise,7 and HealthTrust wanted to acquire all of the subsidiary's assets. In those instances, prior to the sale to HealthTrust, HCA transferred the subsidiary's stock to HCAII in exchange for stock of HCAII. Hereinafter, we sometimes will refer to those subsidiaries as Category A Corporations.
In other instances, a subsidiary owned and operated more than one hospital, office building, or medical facility, but HealthTrust did not want to acquire all of the subsidiary's assets. In those instances, the subsidiary (New Parent) contributed to a newly formed subsidiary (New Subsidiary) the hospitals, office buildings, or medical facilities (hereinafter collectively referred to as the Facilities) that HealthTrust wanted. The New Parent immediately thereafter transferred the stock of the New Subsidiary to HCAII in exchange for stock of HCAII. HCAII then sold the stock of the New Subsidiaries to HealthTrust. Hereinafter, we sometimes will refer to the New Subsidiaries as Category B Corporations. Each Category B Corporation was a separate enterprise with a separate trade or business and kept separate books and records. Each New Parent continued to own and operate other hospitals, office buildings, or medical facilities and remained in the hospital business as a subsidiary of HCA.
For purposes of computing gain from the sale of the stock of the Category A Corporations to HealthTrust, petitioners computed HCAII's basis in that stock by taking into account each subsidiary's earnings and profits through the date of sale. At that time, the earnings and profits of each Category A Corporation included only one-tenth of the section 481(a) adjustment with respect to the change in method of accounting. Petitioners anticipated that in HealthTrust's consolidated Federal corporate income tax returns for the succeeding 9 taxable years following 1987 the Category A Corporations would include ratably in income the balance of their section 481(a) adjustments relating to the change in method of accounting.
For purposes of determining gain from the sale of the stock of the Category B Corporations to HealthTrust, petitioners determined HCAII's basis in that stock based upon the values of the assets and liabilities transferred by the New Parents to the Category B Corporations as reflected on financial statement balance sheets. Those assets included the full face amount of the accounts receivable of the Category B Corporations, and hence the assets encompassed some accounts receivable not theretofore included in the income of those Category B Corporations employing the hybrid method of accounting for taxable years ended prior to 1987. For taxable years ended after 1987, the New Parents continued to report ratably over the remaining 9 years the balance of the section 481(a) adjustments relating to the change in method of accounting required by section 448(a), including the portion of those section 481(a) adjustments attributable to the Facilities.
In the notice of deficiency, respondent did not adjust HCAII's basis in the stock of the Category A Corporations. As to the Category B Corporations, however, respondent determined that the New Parents had to include in income for taxable year ended 1987 the entire positive section 481(a) adjustments relating to the change in method of accounting that were attributable to the Facilities. Accordingly, to effectuate that determination, for purposes of determining the gain from the sale of the stock of the Category B Corporations to HealthTrust, respondent reduced HCAII's basis in each Category B Corporation by the amount of its positive...
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