Hosp. Corp. of America v. Comm'r of Internal Revenue, Docket Nos. 12988–78
| Court | United States Tax Court |
| Writing for the Court | PARKER |
| Citation | 81 T.C. No. 31,81 T.C. 520 |
| Parties | HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Docket Number | 13183–78.,Docket Nos. 12988–78 |
| Decision Date | 21 September 1983 |
81 T.C. 520
81 T.C. No. 31
HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 12988–78
13183–78.
United States Tax Court
Filed September 21, 1983.
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.
[81 T.C. 521]
William Waller, Teresa H. Johnson, James T. O'Hare, and Charles L. Kown, for the petitioners.
Vallie C. Brooks, for the respondent.
PARKER, Judge: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:
+---------------------------------------------------------------------------+
¦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 ¦ ¦
+---------------------------------------------------------------------------+
[81 T.C. 522]
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.
Petitioner's Organization and OperationsHospital 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.
[81 T.C. 523]
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 the highest possible quality of health care at a reasonable cost.
After 1968, the HCA organization expanded rapidly and by March 31, 1973, petitioner and its subsidiaries operated a total of 49 hospitals in 12 states. Petitioner and its subsidiaries owned 41 of these hospitals. Petitioner operated those hospitals that it did not own under management contracts. In 1970, HCA had only two such management contracts and in 1972 had four such management contracts. In 1973 HCA initiated “a new program of actively soliciting additional hospitals under management contracts . . . .” Petitioner was attracted by the potential for increased profits without significant capital investment. Moreover, management of existing hospitals under contract offered petitioner a faster means of expansion than the construction of new hospitals. These management contracts were generally entered into by HSP, Inc., a subsidiary of petitioner.
Petitioner began soliciting and negotiating for management contracts across the United States. Dr. Frist, Jr., was the person primarily involved in this solicitation and negotiation. His role was that of a salesman selling the concept of a hospital management contract. Part of this concept involved long-range planning and management skills. The sales pitch used was petitioner's track record in successfully managing many...
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Lilly v. Comm'r of Internal Revenue, Docket No. 5113-76.
...above reasoning in Seminole Flavor has been consistently applied in later cases. See Hospital Corporation of America v. Commissioner, 81 T.C. 520, 583 (1983); Polak's Frutal Works, Inc. v. Commissioner, 21 T.C. 953, 976 (1954). Accordingly, we will not disregard petitioner's transfer of the......
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...Motor Co. v. Commissioner, 321 F.2d 796, 800 (4th Cir. 1963), affg. 39 T.C. 348 (1962); Hospital Corp. of America v. Commissioner, 81 T.C. 520, 594 (1983); Foster v. Commissioner, 80 T.C. 34, 160, 178 (1983). Petitioner's factual allegations regarding the reasons respondent denied the reque......
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...proper allocation of income." Sundstrand Corp. v. Commissioner, 96 T.C. 226, 354 (1991); see Hosp. Corp. of Am. & Subs. v. Commissioner, 81 T.C. 520, 596-597, 601 (1983); Nat Harrison Assocs., Inc. v. Commissioner, 42 T.C. 601, 617-618 (1964) (determining a proper allocation "without the be......
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Zand v. Commissioner, Docket No. 32434-88.
...at least one case in his legal argument that deals with "sham" corporations. Hospital Corp. of America v. Commissioner [Dec. 40,476], 81 T.C. 520 (1983). Respondent has not contended that Diesel Power was a "sham" or shell corporation, and we, therefore, do not consider this aspect of petit......
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Lilly v. Comm'r of Internal Revenue, Docket No. 5113-76.
...above reasoning in Seminole Flavor has been consistently applied in later cases. See Hospital Corporation of America v. Commissioner, 81 T.C. 520, 583 (1983); Polak's Frutal Works, Inc. v. Commissioner, 21 T.C. 953, 976 (1954). Accordingly, we will not disregard petitioner's transfer of the......
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Macy v. Comm'r of Internal Revenue (In re Estate of Gardner) , Docket No. 28332–83.
...Motor Co. v. Commissioner, 321 F.2d 796, 800 (4th Cir. 1963), affg. 39 T.C. 348 (1962); Hospital Corp. of America v. Commissioner, 81 T.C. 520, 594 (1983); Foster v. Commissioner, 80 T.C. 34, 160, 178 (1983). Petitioner's factual allegations regarding the reasons respondent denied the reque......
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Coca-Cola Co. v. Comm'r, 155 T.C. No. 10
...proper allocation of income." Sundstrand Corp. v. Commissioner, 96 T.C. 226, 354 (1991); see Hosp. Corp. of Am. & Subs. v. Commissioner, 81 T.C. 520, 596-597, 601 (1983); Nat Harrison Assocs., Inc. v. Commissioner, 42 T.C. 601, 617-618 (1964) (determining a proper allocation "without the be......
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Zand v. Commissioner, Docket No. 32434-88.
...at least one case in his legal argument that deals with "sham" corporations. Hospital Corp. of America v. Commissioner [Dec. 40,476], 81 T.C. 520 (1983). Respondent has not contended that Diesel Power was a "sham" or shell corporation, and we, therefore, do not consider this aspect of petit......