1996 U.S. Tax Ct. LEXIS 39">*39 Ps own, operate, and manage hospitals and related businesses. For taxable year ended 1987 and following years, certain Ps elected to use the nonaccrual-experience method provided pursuant to
107 T.C. 116">*117 WELLS,
1996 U.S. Tax Ct. LEXIS 39">*42
| 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 |
107 T.C. 116">*118 Respondent also determined that the provision for increased interest pursuant to 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 to be decided in the instant opinion is what amount, if any, petitioners may exclude from income for taxable years ended 1987 and 1988 pursuant to the nonaccrual-experience method.
FINDINGS OF FACT
Some of the facts have been stipulated for trial pursuant to Rule 91. We incorporate those stipulated facts herein by reference and find them as facts herein.
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 instant1996 U.S. Tax Ct. LEXIS 39">*43 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, operation, and management of hospitals. A detailed description of petitioners' hospital operations is set forth in
For taxable years ended before January 1, 1987, some petitioner hospitals used the
1996 U.S. Tax Ct. LEXIS 39">*46 With the consolidated return for taxable year ended 1987, petitioners timely filed an application on Form 3115, Application for Change In Accounting Method, to elect the so-called nonaccrual-experience method 51996 U.S. Tax Ct. LEXIS 39">*47 for taxable year ended 1987. Petitioners elected to use the periodic system 6 of the nonaccrual-experience method to estimate on a hospital-by- hospital basis the portion of their income they would not collect (sometimes hereinafter referred to as the Uncollectible Amount), except that petitioners computed the Uncollectible Amount by using the formula (Original Formula) 7 set forth in 107 T.C. 116">*120
For taxable years ended 1987 and 1988, petitioners reduced (or increased) income of each hospital by the sum of (1) net writeoffs of bad debts (i.e., total bad debts written off during the year less any recoveries) and (2) the annual increase or decrease in the aggregate Uncollectible Amount (i.e., the aggregate amount that petitioners estimated would not be collected on accounts receivable outstanding at yearend) computed on the basis of the modified periodic system. Respondent agrees that petitioners' reductions for net writeoffs of bad debts were proper but does not agree with petitioners' computation of the aggregate Uncollectible Amount.
For each petitioner qualified to use the nonaccrual-experience method, petitioners computed the amount of the negative section1996 U.S. Tax Ct. LEXIS 39">*48 481(a) adjustment relating to the change to that method to be equal to the Uncollectible Amount as of December 31, 1986, as calculated under the modified periodic system. 8 In the case of those petitioners that had employed an overall accrual method of accounting for taxable years ended prior to January 1, 1987, each petitioner's negative section 481(a) adjustment relating to the change to the nonaccrual-experience method for taxable years ended 1987 and 1988 equaled the amount of the net positive section 481(a) adjustment relating to the repeal of the reserve method of accounting for those years.
In the case of those petitioners that had employed the hybrid method of accounting1996 U.S. Tax Ct. LEXIS 39">*49 for taxable years ended prior to January 1, 1987, to the extent that the Uncollectible Amount was attributable to the use of the cash method for taxable 107 T.C. 116">*121 years ended prior to January 1, 1987, each qualified petitioner reduced taxable income for each of the years ended 1987 and 1988 by one-tenth of the portion of accounts receivable estimated to be uncollectible as of December 31, 1986, using the modified periodic system. To the extent that the Uncollectible Amount was attributable to the use of an accrual method for taxable years ended prior to January 1, 1987, the Uncollectible Amount was equal to the net positive section 481(a) adjustment relating to the repeal of the reserve method of accounting for bad debts. As calculated by petitioners, for taxable years ended 1987 and 1988 the negative section 481(a) adjustment relating to the election of the nonaccrual-experience method was equal to the positive section 481(a) adjustment relating to the repeal of the reserve method of accounting for bad debts.
On audit, respondent disallowed all reductions in petitioners' taxable income attributable to the use of the nonaccrual-experience method, other than net writeoffs of bad debts for each1996 U.S. Tax Ct. LEXIS 39">*50 year, on the grounds that petitioners had failed to provide documentation needed to compute the portion of petitioners' income earned from the performance of services and that they had not used the proper formula in applying the nonaccrual-experience method. Respondent's adjustments had the effect of disallowing petitioners' negative section 481(a) adjustment attributable to the election of the nonaccrual-experience method, but leaving unchanged the positive section 481(a) adjustment attributable to the repeal of the reserve method of accounting for bad debts. Accordingly, respondent's adjustments increased petitioners' income for each of the years ended 1987 and 1988 by one-fourth of the positive section 481(a) adjustment attributable to the repeal of the reserve method of accounting for bad debts.
As calculated pursuant to the
On their consolidated1996 U.S. Tax Ct. LEXIS 39">*51 return for the taxable year ended 1987 as originally filed, HCA, as parent of the affiliated group, added $ 20 million to their consolidated income, and 107 T.C. 116">*122 thereby reduced by that amount the aggregate Uncollectible Amount as determined under the modified periodic system. Petitioners added the $ 20 million to their consolidated income to account for possible future corrections or adjustments to their nonaccrual-experience method computations following the issuance of final regulations or on audit. In an amended consolidated return for the taxable year ended 1987 (amended return) filed September 9, 1991, HCA claimed that it was entitled to reduce consolidated income, and thereby increase the aggregate Uncollectible Amount, by $ 20 million. On audit, respondent allowed the claimed $ 20 million reduction in consolidated income by offsetting the nonaccrual-experience method adjustment by that amount.
In the amended return, HCA also claimed that petitioners were entitled to a refund of tax based on a computational adjustment in the application of the nonaccrual-experience method for certain petitioners whose stock was sold, or whose assets were transferred to a subsidiary whose stock was 1996 U.S. Tax Ct. LEXIS 39">*52 sold, to HealthTrust, Inc. -- The Hospital Corporation (HealthTrust) in September 1987. On petitioners' original return, the Original Formula was applied to those petitioners by using the accounts receivable as of the date of sale and by using the net writeoffs of bad debts from January 1, 1987, through the date of sale. In the amended return, the computation was made by annualizing the net writeoffs of bad debts for the period from January 1, 1987, through the date of the sale, thus increasing the Uncollectible Amount for the taxable year 1987 by $ 7,366,123.
Petitioners do not charge or otherwise require interest to be paid on their accounts receivable, they do not charge or otherwise impose any penalties for failing to pay an account receivable timely, and no portion of their accounts receivable was owed on account of activities with respect to either (1) lending money or (2) acquiring receivables or other rights to receive payment from other persons.
Petitioner's hospitals make frequent use of various medical and surgical supply items and pharmaceuticals (hereinafter sometimes collectively referred to as medical supplies) in providing medical care to patients. Many of the medical1996 U.S. Tax Ct. LEXIS 39">*53 supplies are used directly on a patient by a physician in the performance of a medical procedure, and others are used by nurses, attendants, and other medical personnel in the treatment 107 T.C. 116">*123 of the patient. The quantities of items used, administered, or consumed and the timing of such use, administration, or consumption are determined by the physician or hospital staff, on some occasions after consultation with the patient.
Medical supplies may be applied to, implanted in, or otherwise administered to, furnished to, or used in connection with the treatment of patients. Examples of these medical supplies include casts, crutches, canes, walkers, bandages, sutures, splints, skin staples, various implants such as joint replacements, pacemakers, and heart valves, orthopedic devices, and physical and occupational therapy items. These items often leave the hospital with the patient, although some items such as sutures, splints, skin staples, and implants can be removed from the patient only by a physician or other trained medical personnel.
Medicines and prescription drugs frequently are administered to a patient during the course of treatment for the patient's condition. Intravenous solutions1996 U.S. Tax Ct. LEXIS 39">*54 or blood and blood derivatives also may be administered to a patient. Medical supplies, moreover, may be used in performing surgical and other procedures on patients, including such items as scalpels and other surgical instruments, sponges, surgical drapes, surgical gowns, towels, syringes, alcohol preparations, drainage and irrigating tubes, and tourniquets.
Additionally, many ancillary hospital departments use medical supplies in the course of performing their particular specialties relating to patient hospital care. For example, x-ray film, chemicals, dyes, and nuclear materials are used in the course of performing radiological diagnostic procedures. Gases are administered to patients during surgery under the strict supervision of an anesthesiologist. Oxygen is administered to patients by the respiratory therapy department. Dyes are injected in patients with possible coronary artery disease during the diagnostic procedure known as cardiac catheterization. Psychiatric facilities sometimes use other medical supplies and equipment in certain treatments, such as insulin therapy, electroshock therapy, and hydrotherapy.
The hospitals employ sophisticated medical records systems to 1996 U.S. Tax Ct. LEXIS 39">*55 identify which medical supplies are used on or for each patient. The hospitals determine patient charge amounts for listing on billing statements for many individual 107 T.C. 116">*124 procedures involving a medical supply based on a schedule of algorithms that typically are a multiple of the cost of the supply item used or a multiple of the average wholesale price of the pharmacy item used.
At discharge, patients are furnished a summary bill that shows separate charge categories such as patient room charges, pharmacy, medical/surgical supplies, and laboratory. Upon request, the patient will receive a more detailed bill that itemizes each separate charge within the broad categories. The items listed on summary bills vary from patient to patient based on the exact medical care received by the patient. For example, the bill often identifies charges as being for the use of patient rooms and for various special areas, such as the operating room, recovery room, delivery room, nursery, emergency room, or intensive care unit. The bill also may identify charges for ancillary procedures such as radiology, anesthesia, nuclear medicine, various laboratory procedures, inhalation therapy, and physical therapy. Some1996 U.S. Tax Ct. LEXIS 39">*56 specific charges on the detailed bill are identified by the name and/or code of a particular medication, supply item, or IV solution used in providing medical services to the patient.
Public or private insurance programs directly or indirectly pay 70 and 80 percent of the hospitals' bills to patients. Those insurance programs calculate payments to the hospitals on a flat amount based on a particular procedure or on some other negotiated per-case or per diem basis. Thus, in most cases, the hospitals' itemized bills do not bear any particular relationship to the amounts that the hospitals actually will be paid for the services provided. See
OPINION
An accrual method taxpayer generally must include a taxable amount in income when all events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy.
Petitioners contend that the Amended Temporary Regulations are invalid1996 U.S. Tax Ct. LEXIS 39">*58 because they are inconsistent with the plain meaning of
Respondent contends, on the other hand, that the Amended Formula is taken directly from the legislative history of
The question is one of first impression.
The temporary regulations apply the nonaccrual-experience method formula to each separate trade or business of a taxpayer.
1996 U.S. Tax Ct. LEXIS 39">*60 107 T.C. 116">*127
The so-called separate receivable system provided in the temporary regulations applies the nonaccrual-experience method to each account receivable which is eligible for that method.
The separate receivable system provides for the determination of the Uncollectible Amount only once for each account receivable, regardless of the term of that receivable.
Alternatively, a taxpayer may elect the so-called periodic system for applying the nonaccrual-experience method. 107 T.C. 116">*128
The periodic system requires the taxpayer to charge wholly or partially worthless accounts receivable directly to bad debt expense, ignoring the Uncollectible Amounts pertaining to those accounts receivable. 1996 U.S. Tax Ct. LEXIS 39">*63 Similarly, the taxpayer must disregard the Uncollectible Amounts of accounts receivable when it accounts for the collection of those receivables.
Petitioners contend that the Amended Regulations are invalid because they are an unreasonable interpretation of an unambiguous statutory provision. In response, respondent contends that the statute is ambiguous in that it does not specify how "experience" is to be determined. Respondent contends further that the Amended Regulations are a valid interpretation of the statute.
In construing
Where a statute is silent or ambiguous, we look to legislative history in an effort to ascertain congressional intent.
The limitation on our authority is found in the so-called When a court reviews an agency's construction of the statute which 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 107 T.C. 116">*130 judicial proceeding. [
Accordingly, "If the administrator's reading fills a gap or defines a term in a way that is reasonable in light of the legislature's revealed design, we give the administrator's judgment 'controlling weight.'"
Petitioners maintain that the phrase "on the basis of experience" is not defined in the statute and that Congress did not delegate to the Commissioner the authority to define the phrase. Petitioners assert further that no definition is necessary because the phrase is not ambiguous and must be interpreted in accordance with its plain, everyday meaning. We conclude, however, that the phrase is ambiguous.
The words in a revenue act generally should be interpreted in their ordinary, everyday sense.
In that regard, petitioners contend that Congress explicitly recognized that the term "experience" as it relates to bad debt experience is synonymous with the
1996 U.S. Tax Ct. LEXIS 39">*70 Petitioners seemingly would have us conclude from the foregoing that the word "experience" in
In sum, we do not find that the statutory language manifests congressional intent as to what method is to be employed to calculate the Uncollectible Amount, and we conclude that
Petitioners maintain that the legislative history of
The committee bill provides that an accrual basis taxpayer need not accrue as income any portion of amounts billed for the performance of services which, on the basis of experience, it will not collect. * * * For example, assume that an accrual-basis taxpayer has $ 100,000 of receivables that have been created during the most recent five taxable years. Of the $ 100,000 of accounts receivable, $ 1,000 have been determined to be uncollectible.
1996 U.S. Tax Ct. LEXIS 39">*73 As the foregoing emphasized language reveals, one paragraph of the committee report specifies that the Uncollectible Amount is calculated by multiplying the
107 T.C. 116">*134
To be valid,
The Original Formula as promulgated in
| Total bad debts with respect to accounts | ||||
| Uncollectible | Accounts | receivable sustained during the current | ||
| amount of a | = | receivable | X | tax year and 5 preceding tax years less |
| receivable | outstanding | recoveries of bad debts during that period | ||
| at yearend | sum of the accounts receivable at | |||
| yearend for the same | ||||
| 6-year period |
1996 U.S. Tax Ct. LEXIS 39">*76 107 T.C. 116">*135 In contrast, the Amended Formula promulgated in
| Total bad debts with respect to accounts | ||||
| Uncollectible | Accounts | receivable sustained during the current | ||
| amount of a | = | receivable | X | tax year and 5 preceding tax years less |
| receivable | outstanding | recoveries of bad debts during that period | ||
| at yearend | sum of accounts receivable earned (i.e., | |||
| total sales) for the same 6-year period |
The substantive difference between the Original Formula and the Amended Formula is the substitution in the denominator of the multiplier of (1) the sum of
1996 U.S. Tax Ct. LEXIS 39">*77 One theme recurring throughout petitioners' challenge to the validity of the Amended Regulations is that the Amended Formula is defective because it does not use the
We are not persuaded by petitioners' argument that, inasmuch as the Original Formula is premised on the
The Secretary's rationale for the amendment to the nonaccrual-experience formula is revealed in the preamble to the Secretary's Decision announcing the modification: 107 T.C. 116">*136 Under the nonaccrual-experience method of accounting, the portion of a receivable that is considered uncollectible and not required to be accrued is the product of the receivable and a fraction representing the taxpayer's bad debt experience. The numerator of the fraction is the taxpayer's bad debts for the taxpayer's current and five preceding taxable years, and the denominator of the fraction is the taxpayer's accounts receivable for the same six-year period. The Internal Revenue Service has received questions from taxpayers as to whether the denominator of the fraction is determined on the basis of (i) total accounts receivable earned throughout the six-year period (i.e., the total amount of sales resulting in accounts receivable throughout the period) or (ii) yearend balances of the accounts receivable over the six-year period. These regulations provide that the denominator is based on total accounts receivable earned throughout the period ending at the close of the six-year period. This interpretation is consistent1996 U.S. Tax Ct. LEXIS 39">*79 with the legislative history of the Act which provides that "the amount of billings that, on the basis of experience, will not be collected is equal to the total amount billed, multiplied by a fraction whose numerator is the total amount of such receivables which were billed and determined not to be collectible within the most recent five taxable years of the taxpayer, and whose denominator is the total of such amounts billed within the same five year period." H.R. Rep. No. 99-426, 99th Cong., 1st Sess. 606 (1985). [
As shown by the foregoing statement, the Secretary reconsidered the Original Temporary Regulations and the legislative history as a result of questions from taxpayers as to the proper formula to use to calculate the Uncollectible Amount which arose following release of the Original Temporary Regulations. A review of H. Rept. 1996 U.S. Tax Ct. LEXIS 39">*80 99-426, at 608 (1985), 1986-3 C.B. (Vol. 2) 1, 608, reveals that
In both the Original Formula and the Amended Formula, the multiplicand is described as the accounts receivable outstanding at yearend. As we explained, however, see
107 T.C. 116">*137 Petitioners contend that the Amended Formula compares two sets of incomparable data. They maintain that a comparison of past bad debts for the current year and 5 preceding years to past total charge transactions, which includes charge transactions that are collected in the same year billed as well as amounts not yet collected, can only predict bad debts1996 U.S. Tax Ct. LEXIS 39">*81 in total current charge transactions, not in yearend receivables. According to petitioners, measuring the historical relationship between annual bad debt writeoffs (net of recoveries) and total annual charges may be appropriate for estimating the portion of annual charges that are not likely to be collected but not for purposes of estimating the portion of yearend accounts receivable that probably will not be collected. Petitioners contend that the Amended Formula produces incorrect results and is contrary to the language and purpose of
1996 U.S. Tax Ct. LEXIS 39">*82 Petitioners assert that the
As we view their position, petitioners essentially would prefer to substitute for1996 U.S. Tax Ct. LEXIS 39">*83 the nonaccrual-experience method provided by Congress the reserve method of accounting for bad debts that was in effect prior to repeal of section 166(c) whereby the addition to the bad debt reserve was based on a reasonable amount determined by the taxpayer, with the reasonableness of that addition tested generally under the
We also do not agree that the result under the Amended Formula is not determined on the basis of the hospitals' experience. The formula utilizes the bad debt history and accounts receivable of the hospitals, not some fictional entity.
Petitioners contend further that
We do not agree with petitioners that the temporary regulation is invalid because it provides one formula to be applied by all taxpayers to determine the Uncollectible Amount. Although the legislative history of
Petitioners further argue essentially that the Amended Formula cannot be valid because the formula does not equal the hospitals' actual bad debt writeoff experience. We do not believe that
The provision of the conference agreement is effective for taxable years beginning after December 31, 1986. * * * Any adjustment required by section 481 as a result of such change * * * [from the cash method to the accrual method of accounting] generally shall be taken into account over a period not to exceed four years. It is the intent of the conferees that this apply to all changes resulting from the provision, including any changes necessitated by the rule that certain accrual taxpayers, including taxpayers presently on the accrual method of accounting, need not recognize income
In the Amended Formula, the multiplicand conforms to one of two multiplicands described in the legislative history. See H. Rept. 1996 U.S. Tax Ct. LEXIS 39">*87 99-426,
The periodic system of the nonaccrual-experience method is not described in
Petitioners assert that the periodic system provided by the Commissioner uses an inappropriate formula to estimate the portion of yearend accounts receivable that a taxpayer will not collect. Petitioners argue that, to prevent an incorrect result, a formula applied to yearend accounts receivable balances must be based on the relationship of writeoffs to yearend accounts receivable balances, not the relationship of writeoffs to annual charges. Accordingly, petitioners' challenge to the periodic system is premised on their contention that the Amended Formula, on which the periodic system is based, is invalid. We already have concluded that the Amended Formula is a permissible construction of
Respondent contends, however, that, inasmuch as petitioners1996 U.S. Tax Ct. LEXIS 39">*89 did not follow the periodic system described in
Because we conclude that the
Additionally, respondent contends that in substance the hospitals "sell" 1996 U.S. Tax Ct. LEXIS 39">*90 medical supplies to their patients. Respondent maintains that income attributable to such sale of medical supplies is not eligible for the nonaccrual-experience method. Respondent asserts further that petitioners' records do not adequately delineate accounts receivable arising from the sale of medical
Petitioners counter that the nonaccrual-experience method is applicable to all of their accounts receivable because all of their income is derived from the performance of services. Alternatively, they contend that, even if a portion of their accounts receivable is derived from the sale of medical supplies, petitioners nevertheless are entitled to use the nonaccrual-experience method with respect to that portion of their income which is derived from the performance of services.
107 T.C. 116">*142 The nonaccrual-experience1996 U.S. Tax Ct. LEXIS 39">*91 method is applicable only to amounts to be received for the performance of services.
1996 U.S. Tax Ct. LEXIS 39">*92 Relying on certain State law cases, respondent contends that the trend is to consider hospital services as part of sale transactions involving medical supplies. According to respondent: "This case law endeavors to protect the patient from defective hospital services, since the patient is unable to discern or control defective services and because physicians are depending on the hospital's services in undertaking the patient's treatment." Respondent thus asserts that any medical services accompanying a "sale" of medical supplies is part of the "sale" transaction.
Petitioners deny that the hospitals engage in the sale of medical supplies. They argue that the hospitals use medical supplies in the course of providing medical services, but they maintain that all of their income is derived from the performance of services. Petitioners contend that the business of operating hospitals is the quintessential service business. They argue that this Court recognized that principle in
107 T.C. 116">*143 In the instant case there is no dispute that the hospitals engage in service activities within the meaning of
We find inapposite to the issue involved here the State law cases relied on by respondent. The focus of those cases is on whether strict tort liability principles should be applied to hospitals. Those cases are concerned with public policy considerations as to who should bear the loss from defective, though not negligent, services and/or products. See
1996 U.S. Tax Ct. LEXIS 39">*95 107 T.C. 116">*144 Medical supplies play a necessary and vital role in the diagnosis, prognosis, and treatment of the hospitals' patients. In many cases, medical services can not be rendered without using medical supplies. The furnishing of medical supplies by the hospitals is merely incidental to the main purpose of rendering health care services that a patient seeks when entering a hospital. The hospitals do not acquire medical supplies for sale to patients but rather to render medical services. Moreover, under current payment arrangements between the hospitals and public and private insurers, the hospitals' bills to patients generally bear no particular relationship to the amounts that the hospitals actually will be paid for the services provided.
Patients, furthermore, do not come to the hospitals to buy medical supplies; rather, they are there primarily to obtain a course of treatment. In many cases patients are not even aware of all of the medical supplies that are used in the course of the medical treatment. Patients generally are concerned with the treatment and healing processes and not with the medical supplies utilized by the hospitals in rendering medical treatment. Patients do not choose1996 U.S. Tax Ct. LEXIS 39">*96 which or how many medical supplies will be used by the hospitals' staffs. With a few exceptions, patients receive no tangible item that they did not have before the rendition of the medical services because the medical supplies generally are used and then discarded by the hospitals. Patients, moreover, generally do not acquire any rights over the medical supplies used by the hospitals in the normal course of the hospitals' operations of providing health care services. We conclude that for purposes of
We find support for our conclusion in
We conclude from the foregoing that, for purposes of
107 T.C. 116">*146 Accordingly, we hold that petitioners' hospitals may utilize the nonaccrual-experience method of accounting for taxable years ended 1987 and 1988. We hold further that the nonaccrual-experience method is applicable to income relating to accounts receivable attributable to medical services and accounts receivable attributable to medical supplies.
To reflect the foregoing,
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 a Memorandum Opinion issued Mar. 7, 1996,
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 Corp.↩
3. The
4. Sec. 166(c), which was repealed by sec. 805(a) of the Tax Reform Act of 1986 (TRA), Pub. L. 99-514, 100 Stat. 2361, provided that an accrual method taxpayer generally could deduct a reasonable addition to a reserve for bad debts in lieu of the specific charge-off of wholly or partially worthless debts provided by sec. 166(a). Congress repealed sec. 166(c) because it believed that allowing deductions for losses that statistically occur in the future was inconsistent with the treatment of other deductions under the all events test inasmuch as allowance of the deduction before the losses occurred permitted a deduction that was larger than the present value of the losses. See H. Rept. 99-426, at 577 (1985), 1986-3 C.B. (Vol. 2) 1, 577; S. Rept. 99-313, at 155 (1986), 1986-3 C.B. (Vol. 3) 1, 155. Pursuant to TRA sec. 805(a), 100 Stat. 2362, the positive sec. 481(a) adjustment relating to the repeal of the reserve method of accounting for bad debts was to be accounted for ratably over a 4-year spread period commencing with the year ended 1987.↩
5. The nonaccrual-experience method provides that an accrual-method taxpayer generally does not have to accrue as gross income at the time the taxpayer normally would be required to recognize income with respect to an account receivable (i.e., at the time all events had occurred to fix the right to receive the income and the amount could be determined with reasonable accuracy) accounts receivable relating to services performed by the taxpayer that, based on experience, the taxpayer will not collect.
6. The periodic system of the nonaccrual-experience method, described in
7. The parties agree that the Original Formula is identical to the
8. In other words, petitioners calculated the portion of accounts receivable that would not be collected by multiplying yearend accounts receivable by the ratio of writeoffs for bad debts (adjusted for recoveries) for the current year and the 5 preceding years over the sum of the yearend accounts receivable balances for the same 6-year period.↩
9. (5) Special rule for services.--In the case of any person using an accrual method of accounting with respect to amounts to be received for the performance of services by such person, such person shall not be required to accrue any portion of such amounts which (on the basis of experience) will not be collected. This paragraph shall not apply to any amount if interest is required to be paid on such amount or there is any penalty for failure to timely pay such amount.↩
10. (e) (ii) * * * * (3)
11.
(a) Reserve for Bad Debts.-- (1) In general.--Except as provided in subsection (c), a bank shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a). * * * * (b) Addition to Reserves for Bad Debts.-- (1) General rule.--For purposes of subsection (a), the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the addition to the reserve for losses on loans determined under the experience method as provided in paragraph (2). (2) Experience method.--The amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of-- (A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or (B) the lower of-- (i) the balance of the reserve at the close of the base year, or (ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. For purposes of this paragraph the base year shall be the last taxable year before the most recent adoption of the experience method, except that for taxable years beginning after 1987 the base year shall be the last taxable year beginning before 1988.↩
12. A provision comparable to
13. Temporary regulations are entitled to the same weight as final regulations.
14. As originally promulgated, (2)
15. Additionally, as stated above, petitioners agree that the relevant legislative history is ambiguous.↩
16. According to petitioners, their tax department calculated that petitioners' actual bad debt experience with respect to accounts receivable outstanding at the end of 1990 shows that approximately 21.4 percent of those accounts receivable was uncollectible during 1991 and 1992. Moreover, with respect to accounts receivable outstanding as of specified dates in 1987, approximately 19 percent of those receivables was uncollectible within a period of 1 year, and approximately 22 percent to 24 percent would become uncollectible within 2 years. In contrast, petitioners contend, the Amended Formula produces exclusion ratios of between 3.4 percent and 5.3 percent of revenue for taxable year ended 1987 and between 2.6 percent and 4.0 percent of revenue for taxable year ended 1988, depending upon whether gross billings, billings net of contractual adjustments, or billings exclusive of Medicare and Medicaid billings are used to approximate annual charge transactions.↩
17. For purposes of
18. Our conclusion that income earned through the performance of services includes income relating to accounts receivable attributable to medical supplies used in the course of the diagnosis, prognosis, and treatment of the hospitals' patients is applicable in the instant case only for purposes of our construction of
19. The Robinson-Patman Price Discrimination Act (Robinson-Patman Act), ch. 592, 49 Stat. 1526 (1936) (current version at
