Hospital Corp. of America v. Commissioner
| Decision Date | 07 March 1996 |
| Docket Number | Docket No. 10663-91.,Docket No. 28588-91.,Docket No. 6351-92.,Docket No. 13074-91. |
| Citation | 71 T.C.M. 2319 |
| Parties | Hospital Corporation of America and Subsidiaries<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Respondent determined deficiencies in petitioners' consolidated corporate Federal income taxes as follows:
Year 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 petitioners are liable for increased interest under section 6621(c)2 for each year in issue. The issue we decide in the instant opinion3 is whether respondent's determination changing certain petitioners from a hybrid method of accounting to an overall accrual method of accounting for the taxable years ended 1981 through 1986 was an abuse of respondent's discretion.
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). 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 U.S. Corporation Income Tax Return on Form 1120 with the Director of the Internal Revenue Service Center at Memphis, Tennessee.
In 1960, Park View Hospital, Inc., was incorporated under the laws of the State of Tennessee. During 1968, Park View Hospital, Inc., joined with 11 other hospitals to form HCA, and thereafter until 1989, HCA stock was publicly held and traded on the New York Stock Exchange.4
Petitioners' primary business is the ownership, operation, and management of hospitals. As of January 1, 1981, petitioners owned and operated 101 hospitals. By the end of 1986, petitioners owned and operated 243 hospitals through 134 corporations.
HCA and its subsidiaries were formed as for-profit corporations, based on the theory that operating health care facilities as a group promotes greater efficiency and provides economies of scale and thereby generates a profit. HCA was one of the first public corporations to operate hospitals as a for-profit business.
Most of petitioners' hospitals are acute care hospitals providing a facility, personnel, equipment, and medical supplies and pharmaceuticals5 needed to perform medical and surgical procedures to treat injured or sick persons with various physical disorders. Some of petitioners' facilities are psychiatric hospitals providing medical treatment to persons with mental or emotional disorders and drug and alcohol dependency problems. Certain petitioners operate a variety of medically related businesses ancillary to the hospitals, including laundries, office buildings, home health care facilities, ambulance companies, and laboratories.6
All of petitioners' hospitals maintain and operate patient floors on which patient rooms are situated. They also maintain and operate kitchens which are used to prepare food for patients and for the hospital cafeterias.
Petitioners' acute care hospitals provide to the physicians on their staff and their patients the facilities, equipment, medical supplies, and nursing and other personnel necessary for the diagnosis and treatment of physical conditions that cannot be performed at the physicians' own offices. The physicians on the medical staff of petitioners' hospitals generally are not employees of the hospital and usually operate medical practices independent of the hospitals. They join the staff of the hospital in order to gain access to the hospitals' facilities for use by them and their patients.
A wide range of medical procedures is performed in petitioners' hospitals, such as diagnostic and surgical procedures (inpatient and outpatient), emergency treatment, child delivery, neonatal care, and intensive care treatment. Most of those procedures require the use of medical supplies.
Petitioners' hospitals employ administrative personnel, nurses, patient attendants, laboratory technicians, physical therapists, and other medical personnel to provide medical treatment to patients under the direction and supervision of the patient's attending physician. All registered nursing positions and many other positions require special professional or technical training and/or certification.
When admitted to one of petitioners' hospitals, a patient is required to sign various releases, insurance assignments, and patient agreements. The hospital generally requires each patient to agree to pay for all charges incurred while in the hospital upon demand by the hospital. Medicare.7 Blue Cross, health maintenance organization (HMO), and some other insurance plan patients, however, are responsible only for a copayment.8
For acute care hospital patients, the nurses and patient attendants perform a wide variety of services, including, but not limited to, assisting physicians during patient examinations and medical procedures and treatments, administering medications, preparing and operating specialized equipment used in treating patients, monitoring patients' conditions, serving meals to patients and regulating and monitoring their food intake, assisting in bathing patients, and helping them into and out of bed. Nurses and other hospital personnel also are involved in surgical procedures performed at a hospital. If an acute care hospital maintains a delivery room and obstetric care and newborn care units, delivery room nurses and other staff employees assist the physician in the delivery of newborn infants, provide daily nursing care for newborn infants, and instruct mothers in postnatal self-care and newborn care.
For patients in intensive care units, the nurses and patient attendants provide care of a more sustained and specialized nature than that provided to the usual medical and surgical patients. Nurses and attendants also staff the emergency room.
Acute care hospitals generally provide numerous ancillary services in support of basic hospital and nursing care provided to patients. Ancillary units include laboratories for performing diagnostic and routine laboratory tests of all kinds, a blood bank for procuring, receiving, and storing a supply of blood and blood derivatives to be used in surgery and patient treatment, an electrocardiology department for performing a variety of diagnostic testing of patients with heart disease, a radiology department for taking radiographs and fluorographs (often including a separate cardiac catheterization laboratory, ultrasound laboratory, nuclear medicine facility, angiocardiology center, and other units performing various radiological functions), and an anesthesiology department for assisting in surgery and other in-hospital procedures by administering gases and other anesthetics. The various ancillary departments employ many specially trained personnel who perform specific technical service functions necessary for patient treatment.
As of December 31, 1986, acute care hospitals owned by petitioners were located in 26 States and four foreign countries.
As of January 1, 1981, petitioners did not own any psychiatric hospitals although a number of petitioners' hospitals operated psychiatric wards within them. During 1981, petitioners acquired and operated 22 psychiatric hospitals. At the end of 1986, petitioners operated 39 psychiatric hospitals, which were located in 14 States and one foreign country.
Petitioners' psychiatric hospitals provide for the mid- and long-term treatment of persons suffering from mental and emotional diseases and disorders. Typically, these facilities do not provide the broad range of medical treatment provided by petitioners' acute care hospitals.
Petitioners' psychiatric hospitals employ administrative personnel, nurses, patient attendants counselors, therapists, pharmacists, and other medical personnel to care for patients with mental and emotional diseases and disorders. The professional personnel working at psychiatric facilities are trained in procedures such as crisis intervention and special therapies for treating mental problems associated with aging, substance abuse, sexual abuse, depression, grief and...
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