*37 Ps own, operate, and manage hospitals and related businesses. For taxable year ended 1987, pursuant to
Held: The cessation of trade or business provision of
Held further: the entire balance of the
*74 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*39 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 opinion 1 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
*40 FINDINGS OF FACT
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, *41 operation, and management of hospitals. A detailed description of petitioners' hospital operations is set forth in
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
*76 For the consolidated return filed for the year ended 1987, pursuant to
*44 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, *77 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.
*45 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*46 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 *78 sale. At *47 that time, the earnings and profits of each Category A Corporation included only one-tenth of the
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*48 the remaining 9 years the balance of the
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
*79 OPINION
During 1987, pursuant to a restructuring plan, HCA divested itself of 104 hospitals, approximately 90 professional office buildings, and related medical facilities that were owned and operated by*49 various wholly owned subsidiaries of HCA. In some cases, all of the hospitals, office buildings, and related facilities owned by a subsidiary (i.e., a Category A Corporation) were divested. In that case, the stock of the Category A Corporation was transferred to another wholly owned subsidiary of HCA (HCAII) which in turn sold the stock of the Category A Corporation to HealthTrust. The parties agree that under those circumstances, in effect, the
In other cases, not all of the hospitals, office buildings, and related medical facilities owned and operated by a subsidiary were divested. In those cases, the HCA subsidiary (i.e., the New Parent) formed a New Subsidiary (i.e., a Category B Corporation) to which the New Parent transferred the Facilities that were to be divested. The New Parent, however, continued*50 to own and operate at least one other hospital, professional office building, or related medical facility. The New Parent then transferred the stock of the Category B Corporation to HCAII, which in turn sold that stock to HealthTrust. The parties agree that the portion of the
Petitioners contend that the New Parents are not required to include in income for 1987 the entire balance of the positive
Respondent contends, on the other hand, that, upon disposition of the hospital to which the adjustment relates, the spread period that
In construing
Where a statute is silent or ambiguous, however, we look to legislative history in an effort to ascertain congressional intent.
The limitation on our authority is found in the so-called Chevron rule as stated in the following passage:
When a court reviews an agency's construction of the statute which*54 it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. [
See also
need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding. * * * [Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., supra at 843 n.11.]
Accordingly, "If the administrator's reading fills a gap or defines a term in a way that is reasonable in light of the *82 legislature's revealed design, we give the administrator's judgment 'controlling weight.'"
Petitioners contend that the unambiguous language of
As we stated above, in accordance with the Chevron rule, our first task in construing
Respondent argues that the phrase "shall not exceed", which modifies the 4-year spread period provided in clause (i) of
Transitional rules*58
The committee bill treats any change from the cash method of accounting required as a result of the committee bill as a change in the taxpayer's method of accounting, initiated by the taxpayer with the consent of the Secretary of the Treasury. In order to prevent items of income and expense from being included in taxable income either twice or not at all, an adjustment under
In the case of the business of operating a hospital, the transitional rules will apply with the
Petitioners maintain further that the legislative history relating to
Any adjustment required by
The conferees intend that the timing of the
In our view, petitioners have focused their analysis too narrowly in construing
On brief, neither party addresses the significance of Congress' choice of the term "a hospital" in
Additionally, the language of
*64 *86 The statute, thus, has left gaps creating ambiguity as to its precise meaning.9Regulations issued under
*65
Final regulations interpreting
Absent a provision similar to the cessation-of-business acceleration provision, any portion of a
*89 The rationale for the difference in the spread period for the
*71 The cessation-of-business acceleration provision is in harmony with the purposes of both
Does the Cessation-of-Business Acceleration Provision Apply in the Instant Case?
Additionally, petitioners contend that acceleration of the
Petitioners counter that in the instant case the
*74 Petitioners appear to base their position in part on the following language contained in H. Conf. Rept. 99-841 (Vol. 2), at II-288 (1988), 1986-3 C.B. (Vol. 4) 1, 288: "The conferees intend that the timing of the
*76 We do not read the cryptic passage in the conference report as a clear expression of congressional intent to restrict the Commissioner's authority to compel acceleration of the 10-year spread of a
The rules and requirements of
Additionally, we conclude that requiring the Category B Corporations to include the entire balance of the
Respondent has taken the position that where a corporation maintains different divisions for each trade or business and one of the divisions ceases to engage in its trade or business, the corporation ceases to engage in that trade or business and, therefore, must include in income any remaining portion of a
Based on the foregoing, we conclude that petitioners must include in income for 1987 all of the
To reflect the foregoing,
Appropriate orders will be issued.
Footnotes
1. The instant case involves several issues, some of which have been settled. The issues remaining to be decided involve matters that may be classified into four reasonably distinct categories, which the parties have denominated the tax accounting issues, the MACRS depreciation issue, the HealthTrust issue, and the captive insurance or Parthenon Insurance Co. issues. Issues involved in the first three categories were presented at a special trial session, and the captive insurance issues were severed for trial purposes and were presented at a subsequent special trial session. Separate briefs of the parties were filed for each of the distinct categories of issues. In an opinion issued Mar. 7, 1996, we addressed one of the tax accounting issues.
Hospital Corp. of America v. Commissioner, T.C. Memo. 1996-105↩ . The instant opinion addresses another of the tax accounting issues and specifically involves taxable year ended 1987, which year was not involved in the prior Memorandum Opinion. Other issues will be addressed in one or more separate opinions subsequently to be released.2. On Feb. 10, 1994, HCA was merged with and into Galen Healthcare, Inc., a subsidiary of Columbia Healthcare Corp. of Louisville, Kentucky, and the subsidiary changed its name to HCA-Hospital Corp. of America. On that same date, the parent changed its name to Columbia/HCA Healthcare Corporation.↩
3.
Sec. 448↩ , which was added to the Internal Revenue Code by sec. 801 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2345, provides generally that, with certain exceptions not applicable in the instant case, a C corporation, a partnership that has a C corporation as a partner, or a tax shelter may not use the cash method of accounting to compute taxable income.4.
Sec. 481(a) provides generally that, if a taxpayer's method of accounting is changed from the method used for the preceding taxable year, adjustments determined necessary solely by reason of the change to prevent amounts from being duplicated or omitted are to be taken into account for the year of change to compute taxable income. A positivesec. 481(a) adjustment increases taxable income, and a negativesec. 481(a) adjustment decreases taxable income.Sec. 481(c) additionally provides generally that thesec. 481(a) adjustment may be taken into account over the period and pursuant to the terms and conditions permitted by regulations. See alsosec. 1.481-5, Income Tax Regs. , now incorporated insec. 1.481-4, Income Tax Regs.↩ 5.
Sec. 448(d)(7) provides as follows:(7) Coordination with
section 481 .--In the case of any taxpayer required by this section to change its method of accounting for any taxable year--(A) such change shall be treated as initiated by the taxpayer,
(B) such change shall be treated as made with the consent of the Secretary, and
(C) the period for taking into account the adjustments under
section 481 by reason of such change--(i) except as provided in clause (ii), shall not exceed 4 years, and
(ii) in the case of a hospital, shall be 10 years.↩
6. Prior to Sept. 17, 1987, HealthTrust, under a different name, was an inactive subsidiary of HCA, and HCAII owned all of its stock. On Sept. 17, 1987, HCAII sold the shares of common stock of HealthTrust that it then owned to an employee stock ownership plan adopted by HealthTrust. Other issues relating to the sale of the Category A Corporations and the Category B Corporations to HealthTrust will be addressed in a separate opinion subsequently to be released.↩
7. At the outset of its organization, HCA generally placed all newly constructed or acquired hospitals in separate corporations. In later years, in some cases, HCA placed all newly acquired or newly constructed hospitals located in a particular State in a separate corporation rather than having a separate corporation for each hospital in that State. In a few instances, HCA acquired a group of hospitals that, for various business reasons, were placed in a single corporation or were allowed to remain in the acquired corporation.↩
4. Under that revenue procedure, the adjustment from a change in accounting generally is included in income over a period equal to the less [sic] of the number of years the taxpayer has used the accounting method or a specified number of years.↩
8. As originally reported by the House Committee on Ways and Means on Dec. 7, 1985, the provision in the bill that subsequently became
sec. 448(d)(7)(C) provided as follows:the period for taking into account the adjustment under
section 481↩ by reason of such change [from the cash method to an accrual method of accounting] shall not exceed 5 years (10 years in the case of a hospital described in section 144(b)(3)). [H.R. 3838, 99th Cong., 1st Sess. sec. 902 (1985).]9. Moreover, by treating the change in method of accounting required under
sec. 448(a) as a change initiated by the taxpayer, seesec. 448(d)(7)(A) , it could be argued that the statute indicates a congressional intent to permit the Commissioner to impose reasonable terms and conditions on the making of that change pursuant to the provisions ofsecs. 1.446-1(e)(3) and1.481-5, Income Tax Regs.↩ , that would prevent a taxpayer from escaping forever taxation upon income previously deferred under the hybrid method.10.
Sec. 1.448-1(g), Income Tax Regs. , provides in pertinent part as follows:(g) Treatment of accounting method change and timing rules for
section 481(a) adjustment--(1) Treatment of change in accounting method. * * *(2) Timing rules for
section 481(a) adjustment--(i) In general. Except as otherwise provided in paragraphs (g)(2)(ii) and (g)(3) of this section, a taxpayer required by this section to change from the cash method must take thesection 481(a) adjustment into account ratably (beginning with the year of change) over the shorter of--(A) The number of taxable years the taxpayer used the cash method, or
(B) 4 taxable years, provided the taxpayer complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first
section 448 year.(ii) Hospital timing rules--(A) In general. In the case of a hospital that is required by this section to change from the cash method, the
section 481(a) adjustment shall be taken into account ratably (beginning with the year of change) over 10 years, provided the taxpayer complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its firstsection 448 year.* * * *
(iii) Untimely change in method of accounting to comply with this section. Unless a taxpayer (including a hospital and a cooperative) required by this section to change from the cash method complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first
section 448 year within the time prescribed by those paragraphs, the taxpayer must take thesection 481(a) adjustment into account under the provisions of any applicable administrative procedure that is prescribed by the Commissioner after January 7, 1991, specifically for purposes of complying with this section. Absent such an administrative procedure, a taxpayer must request a change under§ 1.446-1(e)(3) and shall be subject to any terms and conditions (including the year of change) as may be imposed by the Commissioner.(3) Special timing rules for
section 481(a) adjustment--(i) One-third rule. If, during the period thesection 481(a) adjustment is to be taken into account, the balance of the taxpayer's accounts receivable as of the last day of each of two consecutive taxable years is less than 66 2/3 percent of the taxpayer's accounts receivable balance at the beginning of the first year of thesection 481(a) adjustment, the balance of thesection 481(a) adjustment (relating to accounts receivable) not previously taken into account shall be included in income in the second taxable year. This paragraph (g)(3)(i) shall not apply to any hospital * * ** * * *
(iii) Cessation of trade or business. If the taxpayer ceases to engage in the trade or business to which the
section 481(a) adjustment relates, or if the taxpayer operating the trade or business terminates existence, and such cessation or termination occurs prior to the expiration of the adjustment period described in paragraph (g)(2)(i) or (ii) of this section, the taxpayer must take into account, in the taxable year of such cessation or termination, the balance of the adjustment not previously taken into account in computing taxable income. For purposes of this paragraph (g)(3)(iii), the determination as to whether a taxpayer has ceased to engage in the trade or business to which thesection 481(a) adjustment relates, or has terminated its existence, is to be made under the principles of§ 1.446-1(e)(3)(ii)↩ and its underlying administrative procedures.11.
Sec. 1.448-1(i), Income Tax Regs. , provides in pertinent part as follows:(i) Effective date. (1) In general. Except as provided in paragraph (i)(2), (3), and (4) of this section, this section applies to any taxable year beginning after December 31, 1986.
* * * *
(4) Transitional rule for paragraphs (g) and (h) of this section. To the extent the provisions of paragraphs (g) and (h) of this section were not reflected in paragraphs (g) and (h) of
§ 1.448-1T (as set forth in26 CFR Part 1↩ as revised on April 1, 1993), paragraphs (g) and (h) of this section will not be adversely applied to a taxpayer with respect to transactions entered into before December 27, 1993.12. The temporary income tax regulations relating to
sec. 448 as originally promulgated inT.D. 8143, 2 C.B. 121">1987-2 C.B. 121 , were amended byT.D. 8194, 1 C.B. 186">1988-1 C.B. 186 ;T.D. 8329, 1 C.B. 62">1991-1 C.B. 62 ; andT.D. 8514, 1 C.B. 141">1994-1 C.B. 141↩ .13. In their opening brief, petitioners refer to
sec. 1.448-1(g)(3)(iii), Income Tax Regs. , as temporary regulations. Prior to modification by the final regulations, the applicable cessation of business provision reads as follows:(iii) Cessation of trade or business.If a taxpayer ceases to engage in the trade or business to which the
In their brief, however, petitioners quote the final regulations in discussing the cessation-of-business acceleration provision. Based on the quoted language and the substance of their arguments, it is clear to the Court that petitioners utilized the final regulations in formulating their arguments relating to the cessation-of-business acceleration provision. We agree that the final regulations are applicable in the instant case and, therefore, we restrict our discussion to those regulations. Nonetheless, for purposes of the specific issue before the Court, our conclusion that petitioners must include in income for 1987 all of thesection 481(a) adjustment relates prior to the expiration of the adjustment period described in paragraph (g)(2)(i) or (ii) of this section, the taxpayer must take into account, in the year of such cessation, the balance of the adjustment not previously taken into account in computing taxable income. If the taxpayer is acquired in a transaction to which section 381 applies, and the acquiring corporation continues to engage in the trade or business to which thesection 481(a) adjustment relates, the acquiring taxpayer shall continue to take into account thesection 481(a) adjustment as if it were the distributor or transferor taxpayer.[Sec. 1.448-1T(g)(3)(iii), Temporary Income Tax Regs. ,52 Fed. Reg. 22772 -22773 (June 16, 1987).]sec. 481(a)↩ adjustments relating to the Category B Corporations would be the same had we relied on the cessation-of-business provision as it was defined in the temporary regulations.14.
Rev. Proc. 84-74, 2 C.B. 736">1984-2 C.B. 736 , which clarified, modified, and supersededRev. Proc. 80-51, 2 C.B. 818">1980-2 C.B. 818 , effective for Forms 3115, Application for Change in Accounting Method, filed for taxable years beginning on or after Oct. 29, 1984,Rev. Proc. 84-74 ,secs. 1 ,11 ,1984-2 C.B. at 737 , 751, was modified and superseded byRev. Proc. 92-20, 1 C.B. 685">1992-1 C.B. 685 , effective for Forms 3115 filed on or after Mar. 23, 1992,Rev. Proc. 92-20 ,secs. 1 ,14 ,1992-1 C.B. at 688 ↩, 706.