T.C. Memo. 1995-595
UNITED STATES TAX COURT
ANCLOTE PSYCHIATRIC CENTER, INC., Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 4810-92. Filed December 14, 1995.
James D. O'Donnell and V. Jean Owens, for petitioner.
Julie M.T. Foster, for respondent.
MEMORANDUM OPINION
WRIGHT, Judge: This matter is currently before the Court on
petitioner's Motion For Partial Summary Judgment under Rule 121.1
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the years at issue,
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Respondent determined deficiencies in petitioner's Federal income
tax for taxable years 1984 through 1988 as follows:
Year Deficiency
1984 $159,008
1985 110,623
1986 75,490
1987 45,444
1988 62,041
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Florida Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be
granted with respect to all or any part of the legal issues in
controversy "if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that a decision may be
rendered as a matter of law." Rule 121(b); Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th
Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988). The
moving party bears the burden of proving that there is no genuine
issue of material fact, and factual inferences will be read in a
manner most favorable to the party opposing summary judgment.
Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). The facts
presented below do not appear to be in dispute and are stated
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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solely for purposes of deciding the motion and are not findings
of fact for this case. Fed. R. Civ. P. 52(a); Sundstrand Corp.
v. Commissioner, supra at 520.
1. Background
Petitioner was originally incorporated in 1951 as a for-
profit corporation to operate a long-term care psychiatric
hospital in Tarpon Springs, Florida. Petitioner later amended
and restated its articles of incorporation in 1957 to become a
nonprofit corporation. During the years at issue, petitioner's
principal place of business was Tarpon Springs, Florida.
In 1981, petitioner proposed to sell its assets to a Florida
for-profit organization established and owned by members of
petitioner's board of directors. Prior to entering this
transaction, petitioner obtained a letter ruling from the
National Office of the Internal Revenue Service (IRS) dated May
27, 1982, stating that, under the facts alleged by petitioner in
its request for a ruling, the sale of its assets would not
jeopardize its tax-exempt status. In 1983, petitioner sold the
assets to its board of directors for $6,318,000; the sale price
included a $1,818,000 liability assumption by the board of
directors. Two years later, the board of directors sold the
assets to an unrelated third party for $29,587,000. On its 1983
return, petitioner reported a total sale price of $4,500,000.
As a result of these transactions, a RICO civil action suit
was filed in the U.S. District Court of the Northern District of
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Florida against the board of directors. Thereafter, the attorney
general for the State of Florida sued the same board of directors
on the theory that petitioner sold its assets to its board
members for less than fair market value and, therefore, violated
a Florida statute designed to prevent the improper use of any
nonprofit corporation. The State and Federal court proceedings
generated a vast amount of media coverage and publicity, and as a
direct result thereof, a revenue agent employed in the exempt
organization division of the IRS initiated an examination of
petitioner in 1987. During this examination, respondent raised
the issues of whether petitioner could continue to rely on the
1982 ruling letter and whether petitioner's tax-exempt status
should be revoked.
In a technical advice memorandum, issued to petitioner on
April 29, 1991, the National Office determined that petitioner
did not receive fair market value for the sale of its hospital
facility and proposed to revoke its tax-exempt status.
Respondent later issued a final adverse determination letter on
December 12, 1991, revoking petitioner's status as an
organization described in section 501(c)(3) effective for all
years beginning on and after October 1, 1982. Simultaneously
with the formal notice of revocation, respondent issued a notice
of deficiency to petitioner for the taxable periods ending
September 30, 1984 through September 30, 1988. Respondent made
no determination with respect to petitioner's 1983 taxable year
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as the period of limitations with respect to that year had
expired.
On August 30, 1991, petitioner filed a petition for
declaratory judgment pursuant to section 7428 requesting this
Court to make a declaration regarding its continuing tax-exempt
status. Respondent thereafter filed a motion to dismiss for lack
of jurisdiction on the basis that the filing of the petition was
untimely in that it did not satisfy the statutory time
requirements contained in section 7428. We issued an opinion,
Anclote Psychiatric Center, Inc. v. Commissioner, 98 T.C. 374
(1992), in which we held that we had jurisdiction over the
instant case.
For purposes of the instant motion, petitioner concedes that
respondent's revocation is valid. Both petitioner and respondent
agree therefore that petitioner's income was not exempt from tax
under section 501 for the years at issue in the instant case.
Petitioner claims in the instant motion that it is entitled
to judgment as a matter of law with respect to (1) whether
payments totaling $1,014,378.94 made by petitioner to the Florida
Patients Compensation Fund (FPCF) during the years at issue are
deductible as ordinary and necessary expenses under section 162,
and (2) whether petitioner sustained a net operating loss in
taxable year 1983, which it may carry forward to subsequent years
including the years at issue. For the reasons stated herein,
petitioner's motion for partial summary judgment is denied.
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Respondent argues that petitioner (1) is not entitled to the
amount petitioner is now claiming, for purposes of the instant
motion, of $1,014,378.94 as an expense paid to the FPCF during
the years at issue, and (2) did not sustain a net operating loss
in taxable year 1983.
2. FPCF Payments
In 1975, the State of Florida enacted the Medical
Malpractice Reform Act.2 As a part of the Act, the FPCF was
established to provide liability coverage in excess of basic
policy limits for its member hospitals. Petitioner became a
participant in FPCF during the fiscal year ending September 30,
1977. Various assessments were made against petitioner by the
FPCF.
On June 20, 1985, petitioner and the FPCF entered into a
settlement agreement establishing a payment schedule for
petitioner's then outstanding FPCF assessments as well as
subsequent assessments. The payment schedule covers what the
FPCF refers to as the "fifth assessment" and all subsequent FPCF
assessments including the sixth, seventh, and eighth assessments.
The FPCF fifth assessment years are 1977-78, 1979-80, 1980-81,
and 1981-82. The "fourth assessment" involves FPCF years 1976
through 1981. The payment schedule outlined in the settlement
agreement required petitioner to pay on or before each January
2
Fla. Stat., sec. 768.54.
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10, April 10, July 10, and October 10, through the term of the
agreement, the amounts of $72,200 for each of the first four
quarterly payments, $88,400 for each of the next four quarterly
payments, and $80,300 for each quarterly payment thereafter until
petitioner paid the total amount of its assessments.
Petitioner claims it made payments to the FPCF totaling
$1,014,378.94 from January 17, 1984 through May 25, 1988, with
respect to arrears in its insurance coverage between 1976 and
1981. Petitioner, however, has not provided sufficient evidence
as to the amount claimed. Moreover, even if the payments were
made in the amount asserted by petitioner, it is unclear from the
record the years to which the payments correspond. Petitioner
argues that the FPCF payments made between 1984 and 1988 under
the settlement agreement correspond to the "fourth assessment"
which covers FPCF years 1976 through 1981, years in which
petitioner was a tax-exempt organization under section 501. The
settlement agreement, however, clearly states that the payment
schedule prescribed therein covers the fifth, sixth, seventh, and
eighth assessments.
Section 501(a) exempts certain organizations, including
those described under section 501(c)(3), from taxation unless the
exemption is denied under sections 502 or 503. Section 162(a)
allows as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on a trade
or business.
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Under section 265(1)3, payments made to FPCF are not
deductible if they are allocable to a class of exempt income.
Section 265 provides the following:
No deduction shall be allowed for--
(1) Expenses.--Any amount otherwise allowable as a
deduction which is allocable to one or more classes of
income other than interest (whether or not any amount
of income of that class or classes is received or
accrued) wholly exempt from the taxes imposed by this
subtitle * * *.
Respondent contends that, as a section 501(c)(3)
organization from 1977 to October 1, 1982, petitioner's income
was exempt from tax under section 501(a) and as a result section
265(1) disallows deductions for expenses allocable to that
income. Thus, respondent argues, petitioner is not entitled to
deduct payments to the FPCF attributable to insurance coverage
for years in which petitioner was a tax-exempt organization.
Based upon the record, we find that a dispute of material
fact exists as to both the amount of the payments made by
petitioner to the FPCF and the years to which these payments
correspond. Petitioner argues that it is allowed as ordinary and
necessary business expenses the amounts paid to the FPCF under
the settlement agreement. The settlement agreement, at least in
part, required petitioner to make payments for taxable years in
which petitioner was an exempt organization. Petitioner argues
3
Sec. 265(1) was redesignated as sec. 265(a)(1) by sec.
902(d) of the Tax Reform Act of 1986.
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that the first eight quarterly payments were to cover FPCF's
first four assessments while the remaining quarterly payments
covered the fifth through the eighth assessments. The settlement
agreement, however, clearly states that the payment schedule
corresponds to the fifth through the eighth assessments.
We cannot determine, based upon the record before us, the
amount of the payments made by petitioner to the FPCF, or the
years to which these payments correspond whether they are taxable
or tax-exempt years. Accordingly, we find that petitioner has
failed to meet its burden of proof and is not entitled to a
judgment as a matter of law with respect to the deductibility of
payments it made to the FPCF.
3. Net Operating Loss
Petitioner contends that it sustained a net operating loss
in the amount of $706,522 for taxable year 1983. Petitioner
filed a Form 990, Return of Organization Exempt From Income Tax,
rather than a Form 1120, Corporate Income Tax Return, with
respect to 1983, according to petitioner, because at the time of
the filing petitioner was recognized as a tax-exempt
organization. Petitioner argues that had a Form 1120 been filed
the $706,522 loss would have been shown as a net operating loss
for taxable year 1983.
Petitioner contends that the alleged loss of $706,522
satisfies the definition of a net operating loss under section
172(c) and (d) as it is the amount by which its gross income in
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1983 was exceeded by its allowable deductions for that year.
Furthermore, argues petitioner, the fact that petitioner's 1983
taxable year is a closed year, i.e., a year for which neither a
deficiency may be assessed nor a refund allowed because of the
expiration of the limitations period under sections 6501 and
6511, does not preclude a determination that a net operating loss
was sustained in 1983 which may be carried forward to subsequent
years.
As the alleged net operating loss in taxable year 1983
results in part from payments made to the FPCF and in part from
petitioner's failure to accurately report the sale price for the
sale of its assets, we find that there exists a dispute as to
material facts as to whether a net operating loss was in fact
sustained in taxable year 1983. Moreover, there remains a
dispute as to whether the sale price of $6,318,000 grossly
understated the true fair market value of assets sold by
petitioner. Accordingly, we find that petitioner has failed to
meet its burden of proof and is not entitled to a judgment as a
matter of law with respect to the alleged 1983 net operating
loss.
To reflect the foregoing,
An appropriate order
will be issued denying
petitioner's motion for
partial summary judgment.