Hosp. Corp. of America v. Comm'r of Internal Revenue
| Decision Date | 21 September 1983 |
| Docket Number | 13183–78.,Docket Nos. 12988–78 |
| Citation | 81 T.C. No. 31,81 T.C. 520 |
| Parties | HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
HCA was in the hospital management business in the United States. It operated hospitals owned by it or its domestic subsidiary corporations and operated other hospitals under management contracts entered into with the owners thereof. In 1973, HCA decided to pursue an opportunity to contract with the Royal Cabinet of the Kingdom of Saudi Arabia to manage the King Faisal Specialist Hospital in Riyadh, Saudi Arabia. HCA formed a Cayman Islands corporation to negotiate and perform this management contract. HCA performed services for and made available to its Cayman Islands subsidiary its hospital management system, expertise, and experience.
Held, HCA's Cayman Islands subsidiary is not a “sham corporation” and is recognized as a separate legal entity for Federal tax purposes. Held further, HCA did not transfer the management contract or other property to its Cayman Islands subsidiary so as to require a ruling under sec. 367, I.R.C. 1954. Held further, HCA did not receive the stock in its Cayman Islands subsidiary as compensation for services. Held further, an allocation of profits from the management contract determined under sec. 482, I.R.C. 1954. William Waller, Teresa H. Johnson, James T. O'Hare, and Charles L. Kown, for the petitioners.
Vallie C. Brooks, for the respondent.
In docket No. 12988–78, respondent determined deficiencies in Federal income taxes of $6,789,289.25 for 1972 and $22,398,355.65 for 1973. In docket No. 13183–78, respondent determined deficiencies as follows:
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¦Petitioner ¦1969 ¦1970 ¦1971 ¦
+--------------------------------+----------+----------+--------------------¦
¦Broadway Hospital, Inc. ¦$2,341 ¦$2,522.00 ¦$6,305 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Community Hospital ¦ ¦7,858.00 ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Crestwood Hospital ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Nursing Home, Inc. ¦377 ¦141.00 ¦351 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Detar Hospital, Inc. ¦ ¦ ¦ ¦$6,895 ¦
+--------------------------------+----------+----------+----------+---------¦
¦ ¦ ¦ ¦ ¦(4/30/72)¦
+--------------------------------+----------+----------+----------+---------¦
¦Detar Properties, Inc. ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦(merged into Detar ¦ ¦ ¦34 ¦96 ¦
+--------------------------------+----------+----------+----------+---------¦
¦Hospital, Inc.) ¦ ¦ ¦(8/31/71) ¦(8/31/72)¦
+--------------------------------+----------+----------+----------+---------¦
¦Diagnostic Center Hospital ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Corp. of Texas ¦ ¦ ¦12,692 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Doctors Hospital of Mobile, Inc.¦ ¦11,331.00 ¦28,327 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Donelson Hospital, Inc. ¦ ¦ ¦19,719 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Great Southwest General ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Hospital ¦ ¦2,328.00 ¦5,819 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Hospital Corp. of America ¦99,993 ¦91,424.00 ¦159,525 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Hospital Corp. of America— ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦West (merged into Hospital ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Corp. of America) ¦ ¦ ¦265 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Shields Products, Inc. ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦(merged into Hospital ¦959 ¦2,030.00 ¦5,076 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Corp. of America) ¦(11/30/70)¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Hospital Development ¦ ¦ ¦ ¦18,019 ¦
+--------------------------------+----------+----------+----------+---------¦
¦and Services Corp. ¦ ¦ ¦ ¦(6/27/72)¦
+--------------------------------+----------+----------+----------+---------¦
¦Johnston-Willis Hospital, Inc. ¦4,373 ¦7,004.00 ¦17,510 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Lewis-Gale Hospital, Inc. ¦44,145 ¦59,232.00 ¦38,898 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦McMinnville Hospital, Inc. ¦722 ¦1,171.00 ¦2,928 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Pasadena Bayshore Hospital, Inc.¦1,635 ¦2,864.00 ¦7,160 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Physicians General Hospital ¦ ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦d.b.a. Arlington General ¦557 ¦1,687.00 ¦4,217 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Raleigh General Hospital ¦141 ¦29,881.00 ¦73,965 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Rio Hondo Memorial Hospital ¦ ¦309.00 ¦2,896 ¦4,416 ¦
+--------------------------------+----------+----------+----------+---------¦
¦ ¦ ¦(10/31/70)¦(10/31/71)¦(6/21/72)¦
+--------------------------------+----------+----------+----------+---------¦
¦Ross General Hospital ¦935 ¦1,814.06 ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Smith County Hospital, Inc. ¦195 ¦358.00 ¦896 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Sun Towers, Inc. ¦1,278 ¦1,764.00 ¦4,410 ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦ ¦(6/30/70) ¦ ¦ ¦ ¦
+--------------------------------+----------+----------+----------+---------¦
¦Ukiah General Hospital, Inc. ¦429 ¦652.00 ¦1,630 ¦ ¦
+---------------------------------------------------------------------------+
All of the adjustments in the separate notices of deficiency issued to each of the petitioners in docket No. 13183–78 and all but one of the adjustments in the notice of deficiency issued in docket No. 12988–78 have been resolved by agreement of the parties. The issues remaining for decision concern the adjustment to foreign income. The questions presented are:
1. Whether the Cayman Islands subsidiary is a “sham” corporation so that all of its income for the year 1973 is attributable to Hospital Corporation of America under section 61;1
2. Whether property in the form of the contract to manage the King Faisal Specialist Hospital in Riyadh, Saudi Arabia was transferred by Hospital Corporation of America to its Cayman Islands subsidiary in 1973 without obtaining an advance ruling pursuant to section 367;
3. Whether Hospital Corporation of America received stock in its Cayman Islands subsidiary as compensation for services; and
4. Whether some or all of the 1973 income of the Cayman Islands subsidiary should be allocated to Hospital Corporation of America under section 482.
Some of the facts have been stipulated and are so found.
Hospital Corporation of America (hereinafter referred to as HCA or petitioner) maintained its principal offices in Nashville, Tennessee on the date the petition was filed. During the years in question, the stock of HCA was publicly held and traded on the New York Stock Exchange. For each of the years ended December 31, 1972 and December 31, 1973, HCA and its domestic subsidiaries filed a consolidated U.S. Corporation Income Tax Return, Form 1120, with the Internal Revenue Service Center at Memphis, Tennessee.
Petitioner was incorporated in 1960 under the laws of the State of Tennessee as Park View Hospital, Inc. In 1968, it joined with 11 other hospitals to form Hospital Corporation of America. HCA's founders were Jack C. Massey, Dr. Thomas F. Frist, Sr., and Dr. Thomas F. Frist, Jr. HCA's management views the primary objective of the HCA hospitals as the delivery of...
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