107 T.C. No. 6

UNITED STATES TAX COURT

HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners v.

 COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10663-91, 13074-91 Filed September 12, 1996.

 28588-91, 6351-92.

Ps own, operate, and manage hospitals and related

businesses. For taxable year ended 1987, pursuant to

sec. 448, I.R.C., Ps not already using an overall

accrual method changed their method of accounting to

that method. Also during 1987, HCAII, a wholly owned

subsidiary of HCA, sold all of the stock of some

subsidiaries that owned and operated hospitals and

other facilities. On audit, R determined that for

certain of those subsidiaries (Category B Corporations)

Ps had to include in income for taxable year ended 1987

the entire sec. 481, I.R.C., adjustment relating to the

change in method of accounting required by sec. 448,

I.R.C. Ps contend that, even though the Category B

Corporations were sold during 1987, pursuant to sec.

448(d)(7)(C)(ii), I.R.C., HCA is entitled to include

ratably in income over a 10-year period the portion of

the sec. 481(a), I.R.C., adjustment attributable to the
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Category B Corporations.

Held: The cessation of trade or business provision

of sec. 1.448-1(g)(3)(iii), Income Tax Regs., is a

permissible construction of sec. 448(d)(7)(C)(ii),

I.R.C.

Held further: the entire balance of the sec.

481(a), I.R.C., adjustment attributable to the Category

B Corporations must be included in Ps' income for

taxable year ended 1987.

N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming,

Jr., Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,

Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,

and John W. Bonds, Jr., for petitioners in docket No. 10663-91.

N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr.,

Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,

Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,

John W. Bonds, Jr., and Daniel R. McKeithen, for petitioners in

docket No. 13074-91.

N. Jerold Cohen, Walter H. Wingfield, Stephen F. Gertzman,

Amanda B. Scott, Reginald J. Clark, Randolph W. Thrower, Walter

T. Henderson, Jr., and John W. Bonds, Jr., for petitioners in

docket No. 28588-91.

N. Jerold Cohen, Reginald J. Clark, Randolph W. Thrower,

Walter T. Henderson, Jr., and John W. Bonds, Jr., for petitioners

in docket No. 6351-92.

Robert J. Shilliday, Jr., Vallie C. Brooks, and William B.

McCarthy, for respondent.

WELLS, Judge: These cases were consolidated for purposes of
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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

(continued...)

trial, briefing, and opinion and will hereinafter be referred to

as the instant case. Respondent determined 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 opinion1 is whether
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1 (...continued)

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 HCAHospital Corp. of America. On that same date, the parent changed

its name to Columbia/HCA Healthcare Corporation.

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 section

481(a) adjustment relating to a change in method of accounting

during 1987 that is attributable to those hospitals and related

medical facilities.

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
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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. 

Memphis, Tennessee. 

Petitioners' primary business is the ownership, operation,

and management of hospitals. A detailed description of

petitioners' hospital operations is set forth in Hospital Corp.

of America v. Commissioner, T.C. Memo. 1996-105, which will not

be reiterated here. Our findings of fact contained in that

Memorandum Opinion are incorporated herein. For clarity, some of

our findings of fact pertinent to the issue involved in the

instant opinion are repeated below. 

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

Hospital Corp. of America v. Commissioner, supra, we held that

petitioners' use of the hybrid method for the hospitals was

appropriate for the years ended 1981 through 1986, particularly

in view of the hospitals' operations.

For the consolidated return filed for the year ended 1987,

pursuant to section 448,3 petitioners not employing an overall

accrual method for computing taxable income for the years ended
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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 positive sec. 481(a) adjustment increases

taxable income, and a negative sec. 481(a) adjustment decreases

taxable income. Sec. 481(c) additionally provides generally that

the sec. 481(a) adjustment may be taken into account over the

period and pursuant to the terms and conditions permitted by

regulations. See also sec. 1.481-5, Income Tax Regs., now

incorporated in sec. 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. 

prior to January 1, 1987, changed their method of accounting to

that method. Commencing with taxable year ended 1987 those

petitioners took into account positive section 481(a)

adjustments4 necessary to effect the change to an overall accrual

method over the periods provided by section 448(d)(7)(C).5 Thus,

on the consolidated return for taxable year ended 1987, those

petitioners operating hospitals not theretofore reporting on an
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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.

overall accrual method included as additional income one-tenth of

the income previously deferred under the hybrid method for years

ended prior to 1987. Those petitioners operating nonhospital

businesses not theretofore reporting on an overall accrual method

included additional income equal to one-fourth of the income

previously deferred under the cash method. 

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, 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. 

In some instances, a subsidiary whose stock was sold to

HealthTrust operated one hospital, office building, or medical
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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. 

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 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
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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 sale. At

that time, the earnings and profits of each Category A

Corporation included only one-tenth of the section 481(a)

adjustment with respect to the change in method of accounting. 

Petitioners anticipated that in HealthTrust's consolidated

Federal corporate income tax returns for the succeeding 9 taxable

years following 1987 the Category A Corporations would include

ratably in income the balance of their section 481(a) adjustments

relating to the change in method of accounting. 

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
- 10 -

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 the remaining 9 years the

balance of the section 481(a) adjustments relating to the change

in method of accounting required by section 448(a), including the

portion of those section 481(a) adjustments attributable to the

Facilities. 

 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 section 481(a) adjustments relating to

the change in method of accounting that were attributable to the

Facilities. Accordingly, to effectuate that determination, for

purposes of determining the gain from the sale of the stock of

the Category B Corporations to HealthTrust, respondent reduced

HCAII's basis in each Category B Corporation by the amount of its

positive section 481(a) adjustment relating to the change in

method of accounting that had not already been included in

income. 

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 various wholly owned subsidiaries of HCA. In some
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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 section 481(a) adjustment relating

to the change in method of accounting required by section 448(a)

that was attributable to the Category A Corporation remains with

the Category A Corporation and henceforth should be reported

ratably over the remaining applicable spread period in the

consolidated Federal corporate income tax returns filed by

HealthTrust for succeeding tax years.

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 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 section 481(a) adjustment relating to the

change in method of accounting required by section 448(a) that is
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attributable to those hospitals, office buildings, and related

medical facilities that the New Parent continued to own and

operate is to be included in the income of the New Parent ratably

over the remaining applicable spread period. The parties do not

agree, however, as to the proper tax treatment of the portion of

the section 481(a) adjustment that is attributable to the

Facilities transferred to the Category B Corporation, the stock

of which was then transferred to HCAII and immediately sold to

HealthTrust. Respondent contends that the New Parents ceased to

engage in the trade or business of the Facilities and,

consequently, the New Parents must include in income for 1987 all

of the section 481(a) adjustments relating to the change in

method of accounting required by section 448(a) that are

attributable to the Facilities. Petitioners counter that the New

Parents retained the deferred tax liability for the 10-year

spread of the section 481(a) adjustment applicable to the

Category B Corporations, the New Parents continued to engage in

their trade or business of owning and operating hospitals, and

therefore they may continue to report ratably in income over the

remaining applicable spread period the portion of the section

481(a) adjustments required under section 448(a) that are

attributable to the Facilities. 

Petitioners contend that the New Parents are not required to

include in income for 1987 the entire balance of the positive

section 481(a) adjustments relating to the change in method of
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accounting required by section 448(a) that are attributable to

the Facilities because section 448(d)(7)(C)(ii) clearly and

unambiguously gives hospitals a 10-year period in which to spread

any section 481(a) adjustment relating to a change in accounting

method required by section 448(a). As a result, petitioners

argue, resort to the legislative history of section 448 is not

appropriate. Petitioners contend further that the legislative

history of section 448(d)(7) supports the plain meaning of the

statute.

Respondent contends, on the other hand, that, upon

disposition of the hospital to which the adjustment relates, the

spread period that section 448(d)(7)(C)(ii) provides for

hospitals to account for section 481(a) adjustments relating to a

change in accounting method required under section 448(a) may be

less than 10 years. Respondent maintains that the legislative

history of section 448(d)(7) supports the position that the

spread period for hospitals is not to remain 10 years under such

circumstances.

In construing section 448(d)(7) our task is to give effect

to the intent of Congress. We begin with the statutory language,

which is the most persuasive evidence of the statutory purpose. 

United States v. American Trucking Associations, Inc., 310 U.S.

534, 542-543 (1940); Helvering v. Stockholms Enskilda Bank, 293

U.S. 84, 93-94 (1934); General Signal Corp. & Subs. v.

Commissioner, 103 T.C. 216, 240 (1994), supplemented by 104 T.C.
- 14 -

248 (1995). Ordinarily, the plain meaning of statutory language

is conclusive. United States v. Ron Pair Enters., Inc., 489 U.S.

235, 241-242 (1989). 

Where a statute is silent or ambiguous, however, we look to

legislative history in an effort to ascertain congressional

intent. Burlington No. R.R. v. Oklahoma Tax Commn., 481 U.S.

454, 461 (1987); United States v. American Trucking Associations,

Inc., supra at 543-544; Peterson Marital Trust v. Commissioner,

102 T.C. 790, 799 (1994), affd. 78 F.3d 795 (2d Cir. 1996); U.S.

Padding Corp. v. Commissioner, 88 T.C. 177, 184 (1987), affd. 865

F.2d 750 (6th Cir. 1989). Even where the statutory language

appears to be clear, we are not precluded from consulting

legislative history. United States v. American Trucking

Associations, Inc., supra at 543-544. Nevertheless, our

authority to construe a statute is limited where the agency

charged with administering that statute has promulgated

regulations thereunder. 

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 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
- 15 -

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. [Chevron

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467

U.S. 837, 842-843 (1984); fn. refs. omitted.]

See also NationsBank v. Variable Annuity Life Ins. Co., 513 U.S.

___, 115 S. Ct. 810, 813 (1995); Pension Benefit Guar. Corp. v.

LTV Corp., 496 U.S. 633, 647-648 (1990). The Supreme Court

further has stated that a reviewing court

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

legislature's revealed design, we give the administrator's

judgment 'controlling weight.'" NationsBank v. Variable Annuity

Life Ins Co., 513 U.S. at ___, 115 S. Ct. at 813-814. Despite

the fact that the Chevron rule "has had a checkered career in the

tax arena", Central Pa. Sav. Association v. Commissioner, 104

T.C. 387, 391-392 (1995), the Court of Appeals for the Sixth

Circuit, to which an appeal of the instant case would lie absent

stipulation of the parties to the contrary, has stated that where

"Congress has not directly spoken to the precise question at

issue, the [Chevron] rule * * * should be applied". Peoples Fed.

Sav. & Loan Association v. Commissioner, 948 F.2d 289, 299 (6th
- 16 -

Cir. 1991), revg. T.C. Memo. 1990-129. "If there are gaps left

by silence or ambiguity of the statutes in question, agencies may

fill the gaps with necessary rules, providing they are

reasonable, and courts should not interfere with this process." 

Id. at 300. 

Petitioners contend that the unambiguous language of section

448(d)(7)(C)(ii) allowing hospitals to spread over a 10-year

period a section 481(a) adjustment relating to a change in method

of accounting required under section 448(a) may not be limited

under any circumstances. Respondent contends, on the other hand,

that a hospital business is entitled to the benefits of a 10-year

spread only for as long as the hospital engages in the specific

trade or business which generated the section 481(a) adjustment

being spread over those 10 years. 

As we stated above, in accordance with the Chevron rule, our

first task in construing section 448(d)(7)(C) is to determine

whether Congress addressed the precise question in issue. As we

view the matter, the specific question we must resolve in the

instant opinion is whether a taxpayer may continue to spread

ratably over a 10-year period a section 481(a) adjustment

attributable to a hospital that relates to a change in method of

accounting made to conform the hospital's method of accounting to

the requirements of section 448(a) even after the taxpayer ceases

to operate that hospital. The question is one of first

impression. 
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Section 448(d)(7)(C)(i) generally provides that a taxpayer

required by section 448(a) to change from the cash method of

accounting may spread the section 481(a) adjustment attributable

to that change over a period that "shall not exceed 4 years".

Section 448(d)(7)(C)(ii), however, provides that, for "a

hospital", the spread period "shall be 10 years." See supra note

5.

Respondent argues that the phrase "shall not exceed", which

modifies the 4-year spread period provided in clause (i) of

section 448(d)(7)(C), applies also to the 10-year spread period

specified for hospitals in clause (ii) of that section. 

Respondent relies on the following excerpt from H. Rept. 99-426,

at 608-609 (1985), 1986-3 C.B. (Vol. 2) 1, 608-609, to support

the position that Congress did not intend to give hospitals,

under all circumstances, an unlimited 10-year period for the

section 481(a) adjustment:

Transitional rules

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 section 481 is required

to be made. The amount of such adjustment will be included

in income over a period not to exceed five taxable years. 

It is expected that the concepts of Revenue Procedure 84-74,

1984-2 C.B. 736, generally will apply to determine the

actual timing of recognition of income or expense as a

result of the adjustment.4

In the case of the business of operating a hospital,
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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).]

the transitional rules will apply with the section 481

adjustment amount to be included in income over a period not

to exceed ten taxable years, rather than five. * * * 

[Emphasis supplied.]

___________

4Under 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. 

Petitioners assert that the quoted excerpt is based on

language that was not enacted.8 Under the bill as originally

proposed, the spread for hospitals was a period that "shall not

exceed" 10 years. The law as enacted, however, provides for a

spread period that "shall be" 10 years. Petitioners argue that

the fact that the provision was changed demonstrates that the

difference in treatment for hospital and nonhospital businesses

was intentional. 

Petitioners maintain further that the legislative history

relating to section 448(d)(7)(C) confirms that Congress intended

to make a distinction between hospitals, which were given a fixed

10-year period to spread section 481(a) adjustments required as a
- 19 -

result of the enactment of section 448(a), and other businesses,

which were given a 4-year period that could be shortened under

appropriate circumstances. In support of their position,

petitioners rely on H. Conf. Rept. 99-841 (Vol. 2), at II-288 to

II-289 (1986), 1986-3 C.B. (Vol. 4) 1, 288-289, which states in

pertinent part as follows:

Any adjustment required by section 481 as a result of such

change [from the cash method to an accrual method] generally

shall be taken into account over a period not to exceed four

years. * * * In the case of a hospital, the adjustment

shall be taken into account ratably over a ten-year period. 

* * *

The conferees intend that the timing of the section 481

adjustment other than for a hospital will be determined

under the provisions of Revenue Procedure 84-74, 1984-2 C.B.

736. * * *

We agree with petitioners that Congress intended to provide a

different section 481(a) adjustment period for hospitals from the

period provided for nonhospital businesses. We do not agree,

however, that the wording of the statute requires the conclusion

that under no circumstances may the 10-year spread period for

hospitals be shortened.

In our view, petitioners have focused their analysis too

narrowly in construing section 448(d)(7)(C). We agree that the

phrase "shall be 10 years" by itself appears clear on its face. 

The language of a statute, however, cannot be viewed in

isolation. See Norfolk S. Corp. v. Commissioner, 104 T.C. 13,

40, supplemented by 104 T.C. 417 (1995). In construing the

meaning of section 448(d)(7)(C), it is necessary to consider all
- 20 -

of the words of the statute as well as their context, the

purposes of the law, and the circumstances under which the words

were employed. See Deal v. United States, 508 U.S. 129, 132

(1993); Shell Oil Co. v. Iowa Dept. of Revenue, 488 U.S. 19

(1988); Sundstrand Corp. v. Commissioner, 17 F.3d 965, 967 (7th

Cir. 1994), affg. 98 T.C. 518 (1992). Furthermore, we must view

the statute in context as a whole and with a view to its place in

the overall statutory scheme. King v. St. Vincent's Hosp., 502

U.S. 215, 221 (1991); Stanford v. Commissioner, 297 F.2d 298, 308

(9th Cir. 1961), affg. 34 T.C. 1150 (1960); Norfolk S. Corp. v.

Commissioner, supra at 41.

Section 448(d)(7)(C)(ii) provides that, for purposes of

determining the period for taking into account a section 481(a)

adjustment relating to a change in method of accounting required

under section 448(a), the spread period "in the case of a

hospital, shall be 10 years." Petitioners' analysis of the

statutory language focuses primarily on the phrase "shall be 10

years." Their analysis basically ignores the other words in the

statute and the purposes of the statutory provision as a whole.

On brief, neither party addresses the significance of

Congress' choice of the term "a hospital" in section

448(d)(7)(C)(ii) to the precise question involved in the instant

opinion. Indeed, petitioners generally paraphrase section

448(d)(7)(C)(ii) to read: "the period for taking into account

the adjustment under section 481 for hospitals shall be 10
- 21 -

9 Moreover, by treating the change in method of accounting

required under sec. 448(a) as a change initiated by the taxpayer,

see sec. 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

(continued...)

years." (Emphasis added.) We believe, however, that Congress'

choice of the words "in the case of a hospital" rather than the

phrase "in the case of hospitals" renders section

448(d)(7)(C)(ii) ambiguous inasmuch as it is silent as to the

question of whether, where a taxpayer is engaged in the business

of operating hospitals, the tax benefit of spreading over 10

years a section 481(a) adjustment required to conform a

hospital's method of accounting to section 448(a) belongs to the

hospital to which the adjustment is attributable or to the

taxpayer that owns that hospital. Neither the statute nor the

legislative history addresses that precise question. 

Additionally, the language of section 448(d)(7)(C) gives no

indication that Congress gave any consideration to the treatment

of the section 481(a) adjustment where a hospital ceases to

engage in the trade or business giving rise to that section

481(a) adjustment or where the hospital terminates existence

prior to the end of the spread period. Nor is there any evidence

in the legislative history of section 448 that Congress ever had

a specific or particular intent with respect to that question. 

The statute, thus, has left gaps creating ambiguity as to

its precise meaning.9 Regulations issued under section
- 22 -

9 (...continued)

change pursuant to the provisions of secs. 1.446-1(e)(3) and

1.481-5, 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 the

section 481(a) adjustment into account ratably (beginning

with the year of change) over the shorter of--

(A) The number of taxable years the

(continued...)

448(d)(7)(C) attempt to fill the gaps by requiring both hospital

and nonhospital businesses that either cease to engage in the

trade or business to which a section 481(a) adjustment relates or

terminate existence prior to the end of the spread period to take

into account in the year of cessation or termination any

remaining portion of the section 481(a) adjustment. Under such

circumstances, the Chevron rule prevents us from substituting our

own construction of section 448 if the Commissioner's

interpretation is reasonable. Peoples Fed. Sav. & Loan

Association v. Commissioner, 948 F.2d at 300. 

Are the Regulations Valid?

Final regulations interpreting section 448(d)(7)(C) are

provided in section 1.448-1(g), Income Tax Regs.10 The final 
- 23 -

10 (...continued)

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 first section 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 the section 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 the section 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 the section 481(a) adjustment, the 

balance of the section 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 * * *

(continued...)
- 24 -

10 (...continued)

* * * * * * *

(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 the 

section 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

(continued...)

regulations, effective generally for taxable years beginning

after December 31, 1986, were promulgated in 1993 pursuant to the

Commissioner's authority found in section 7805(a) to "prescribe

all needful rules and regulations for the enforcement of this

title". T.D. 8514, 1994-1 C.B. 141; sec. 1.448-1(i)(1), Income

Tax Regs.11 The final regulations interpreting section
- 25 -

11 (...continued)

set forth in 26 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 in T.D. 8143, 1987-2 C.B. 121, were

amended by T.D. 8194, 1988-1 C.B. 186; T.D. 8329, 1991-1 C.B. 62;

and T.D. 8514, 1994-1 C.B. 141. 

448(d)(7)(C) adopted, with certain modifications, applicable

provisions under temporary regulations, as amended, originally

promulgated in 1987. T.D. 8514, supra; see T.D. 8143, 1987-2

C.B. 121.12 Since Congress did not expressly delegate authority

to the Commissioner to fill the gaps left by Congress, the

Commissioner's authority is implicit rather than explicit. For

the reasons discussed below, we find reasonable the provision of

section 1.448-1(g)(3)(iii), Income Tax Regs., regarding the

acceleration of the balance of the adjustment not previously

taken into account upon a cessation of the respective businesses

to which the section 481 adjustment relates (hereinafter the

cessation-of-business acceleration provision). 

Section 448(d)(7)(C) specifically coordinates section 448

with section 481(a). Section 448 effectuates Congress' intent to

require most large corporations to use an overall accrual method

of accounting. See H. Rept. 99-426, at 604-607 (1985), 1986-3

C.B. (Vol. 2) 1, 604-607. Section 448(d)(7)(C) generally is

effective for taxable years beginning after December 31, 1986. 
- 26 -

Tax Reform Act of 1986, Pub. L. 99-514, sec. 801(d), 100 Stat.

2348. Section 448(d)(7) provides coordination with section 481

for those taxpayers that are required by section 448(a) to change

from the cash method of accounting. 

Section 481 was enacted during 1954. It was designed to

prevent items of income or expense from being omitted or

duplicated as a result of a change in method of accounting

initiated by either the taxpayer or the Government. S. Rept.

1622, 83d Cong., 2d Sess. 307-311 (1954). Prior to the enactment

of section 481, consistent with rules laid down by the decided

cases, adjustments needed to prevent such omission or duplication

could be made only if the change in method of accounting was

initiated by the taxpayer. Dearborn Gage Co. v. Commissioner, 48

T.C. 190, 200 (1967); S. Rept. 1622, supra at 307-311. The

provision does not apply, however, to adjustments attributable to

years before 1954 unless the change in method of accounting is

initiated by the taxpayer. Sec. 481(a)(2). Section 481(c)

provides that a spread of the section 481(a) adjustment over more

than 1 year is allowed only as permitted under regulations. 

Regulations interpreting section 481(c) provide that a section

481(a) adjustment may be taken into account under terms and

conditions agreed to by the Commissioner and the taxpayer. Sec.

1.481-5, Income Tax Regs.

Absent a provision similar to the cessation-of-business

acceleration provision, any portion of a section 481(a)
- 27 -

adjustment being reported ratably over a number of years that had

not yet been accounted for at the time a taxpayer ceased to

engage in the trade or business to which the adjustment relates

might be omitted from the income of the trade or business which

gave rise to that section 481(a) adjustment. Thus, in the

absence of a cessation-of-business acceleration provision, a

taxpayer could contravene the general intent of section 481(a),

which is to prevent the omission or duplication of an item of

income or expense as a result of a change in method of

accounting, by merely restructuring its business. Under such

circumstances, the taxpayer would distort its overall lifetime

income.

The rationale for the difference in the spread period for

the section 481(a) adjustment granted hospital and nonhospital

businesses is not explained in either the language of section 448

or its legislative history. It is clear, however, that Congress,

for whatever reason, gave hospitals a longer spread period than

nonhospital businesses in reporting a section 481(a) adjustment

relating to the change in method of accounting required by

section 448(a). Nevertheless, there is nothing in the statute or

its legislative history to indicate that Congress intended to

give hospital businesses an advantage in determining the total

amount of the section 481(a) adjustment that would be required to

be included in income. In other words, in giving hospitals a

longer period within which to account for the section 481(a)
- 28 -

adjustment, Congress expressed no specific intent to give

hospitals a mechanism to contravene the provisions of section

481(a) and thereby omit items of income which they previously had

deferred under the cash method. 

The cessation-of-business acceleration provision is in

harmony with the purposes of both sections 448 and 481 and is not

inconsistent with the statutory scheme as a whole. Moreover, the

cessation-of-business acceleration provision accelerates the 10-

year period given hospitals to spread the section 481(a)

adjustment only under explicit and limited circumstances that

prevent the omission or duplication of income. We believe the

regulation implements the purpose of the statute in a reasonable

manner and, thus, must be upheld as a permissible construction of

the statute. See Chevron U.S.A., Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. at 842-843; United States v. Correll, 389

U.S. 299, 307 (1967).

Does the Cessation-of-Business Acceleration Provision Apply in

the Instant Case?

Additionally, petitioners contend that acceleration of the

section 481(a) adjustment is not required in the instant case

because the hospitals that transferred assets to the Category B

Corporations did not cease to engage in the hospital business

after the sale of those assets to HealthTrust. Respondent

counters that a taxpayer ceases business when there is an

elimination of the taxpayer's business completely or when there
- 29 -

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

section 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 the

(continued...)

is a sale or termination of one of several businesses being

conducted by the taxpayer. In respondent's view, the New Parents

ceased to conduct the business of those hospitals transferred to

the Category B Corporations and then sold to HealthTrust;

therefore, the New Parents are not entitled to spread over 10

years any portion of the section 481(a) adjustments attributable

to those hospitals. Thus, respondent maintains, the New Parents

must recognize for 1987 all of the section 481(a) adjustments

relating to the change in method of accounting attributable to

the Category B Corporations. 

Petitioners counter that in the instant case the section

481(a) adjustments relate to the trade or business of operating

hospitals, and that no petitioner ceased to engage in that trade

or business. Petitioners argue that respondent's position

interprets the provisions of section 1.448-1(g)(3)(iii), Income

Tax Regs.,13 as if the principles of Rev. Proc. 84-74, 1984-2
- 30 -

13 (...continued)

section 481(a) adjustment relates, the acquiring taxpayer

shall continue to take into account the section 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).]

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 the sec. 481(a) adjustments relating to the Category B

Corporations would be the same had we relied on the cessation-ofbusiness provision as it was defined in the temporary

regulations.

C.B. 736, apply to hospitals as well as to other types of

business. That interpretation, petitioners contend, is

inconsistent with the statutory language and its legislative

history and is not required by the literal language of the

regulations. We find petitioners' reading of the regulation too

broad.

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 section 481 adjustment other than

for a hospital will be determined under the provisions of Rev.

Proc. 84-74, 1984-2 C.B. 736." Rev. Proc. 84-74, 1984-2 C.B.
- 31 -

14 Rev. Proc. 84-74, 1984-2 C.B. 736, which clarified,

modified, and superseded Rev. Proc. 80-51, 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 by Rev. Proc. 92-20, 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.

736,14 as did its predecessor and as does it successor,

prescribed general administrative procedures under section 1.446-

1(e), Income Tax Regs., for taxpayers to obtain the consent of

the Commissioner for changes in methods of accounting for Federal

income tax purposes. The revenue procedure provided, among other

things, rules for determining the appropriate period for taking

into account the section 481(a) adjustments relating to changes

in methods of accounting and under specified circumstances

required acceleration of the reporting of the section 481(a)

adjustment, including in the event that a taxpayer ceased to

engage in the trade or business to which the section 481(a)

adjustment related, on which occasion the taxpayer had to include

any unreported section 481(a) adjustment in income for the year

when trade or business ceased. See Rev. Proc. 84-74, secs. 5.06-

5.09, 1984-2 C.B. at 742-744. 

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 section 481(a) adjustment relating to a change in

method of accounting required under section 448(a) should a
- 32 -

taxpayer cease to engage in the trade or business to which that

adjustment relates. As we discussed above, we find the

cessation-of-business acceleration provision a permissible

construction of the statute inasmuch as it fulfills the

congressional objective of coordinating section 448(a) and

section 481(a) in a reasonable manner. In our view, the presence

of a similar provision in Rev. Proc. 84-74 is not sufficient to

defeat its inclusion in the regulations.

The rules and requirements of Rev. Proc. 84-74 were detailed

and complex. The language of section 448(d)(7)(C) and of its

legislative history gives no indication that Congress even

focused on the cessation-of-business acceleration provision

contained in that revenue procedure. Moreover, the requirement

that the balance of a section 481(a) adjustment must be taken

into income when a taxpayer ceases to engage in the trade or

business to which the section 481(a) adjustment relates is not a

condition unique to Rev. Proc. 84-74. Indeed, commencing at

least from the early 1970's, a cessation-of-business acceleration

provision appears to have been included customarily as a

condition to consent to a spread of a section 481(a) adjustment

whenever the Commissioner issued a change in accounting method

ruling. See, e.g., Rev. Rul. 85-134, 1985-2 C.B. 160; Rev. Rul.

80-39, 1980-1 C.B. 112; Rev. Rul. 77-264, 1977-2 C.B. 187; Rev.

Rul. 70-318, 1970-1 C.B. 113; see also Rev. Proc. 85-8, 1985-1

C.B. 495 (procedure for accrual basis taxpayers to change method
- 33 -

of accounting for bad debts from the specific charge-off method

to the reserve method); Rev. Proc. 84-27, 1984-1 C.B. 469

(mandatory procedure for taxpayers to change their method of

accounting for interest on indebtedness when they had been

reporting interest income or deductions in accordance with the

Rule of 78 computation); Rev. Proc. 83-54, 1983-2 C.B. 569

(procedure for taxpayers to expeditiously obtain consent to

change their method of accounting for gambling receivables); Rev.

Proc. 78-22, 1978-2 C.B. 499 (procedure for farmers, nurserymen,

and florists to change from accrual method to cash method of

accounting); Rev. Proc. 70-16, 1970-1 C.B. 441, amplifying Rev.

Proc. 67-10, 1967-1 C.B. 585 (procedure for taxpayers to

expeditiously obtain consent to change from the cash method to

the accrual method of accounting) to add specifically the

condition that any remaining balance of a section 481(a)

adjustment must be included in income for the year that the

taxpayer ceased to engage in the trade or business to which the

adjustment related; Rev. Proc. 70-15, 1970-1 C.B. 441, amplifying

Rev. Proc. 64-51, 1964-2 C.B. 1003 (procedure for taxpayers to

expeditiously obtain consent to change their method of accounting

for bad debts from the specific charge-off method to the reserve

method) to add specifically the cessation-of-business

acceleration provision; see also Shore v. Commissioner, 69 T.C.

689, 691-692 (1978), affd. 631 F.2d 624 (9th Cir. 1980)

(Commissioner is given authority under sections 446(e) and 481(c)
- 34 -

to prescribe the cessation-of-business acceleration provision as

a condition to obtaining consent to a change in method of

accounting and a spread of the resulting section 481(a)

adjustment). Accordingly, we conclude that the presence of a

cessation-of-business acceleration provision in Rev. Proc. 84-74

does not render section 1.448-1(g)(3)(iii), Income Tax Regs.,

inconsistent with section 448(d)(7)(C).

Additionally, we conclude that requiring the Category B

Corporations to include the entire balance of the section 481(a)

adjustment in income for 1987 is within the scope of section

1.448-1(g)(3)(iii), Income Tax Regs. The cessation-of-business

acceleration provision contained in the regulations is applicable

whenever a "taxpayer has ceased to engage in the trade or

business to which the section 481(a) adjustment relates" prior to

the end of the adjustment period. The determination as to

whether a taxpayer has ceased to engage in the trade or business

to which the section 481(a) adjustment relates, or has terminated

its existence, is made under the principles of section 1.446-

1(e)(3)(ii), Income Tax Regs., and its underlying administrative

procedures. Sec. 1.448-1(g)(3)(iii), Income Tax Regs. 

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
- 35 -

section 481(a) adjustment relating to the division's trade or

business. Rev. Proc. 87-55, sec. 4.05(1), 1987-2 C.B. 671, 673;

see also Rev. Rul. 80-39, 1980-1 C.B. 112 (a corporation seeking

permission to change its method of accounting for one of its

divisions must agree to include the balance of the related

section 481(a) adjustment in income for the year in which the

division ceases to engage in that trade or business). In the

instant case, petitioners stipulated that each Category B

Corporation was a separate enterprise with a separate trade or

business and kept separate books and records. The assets of

those Category B Corporations consisted of those Facilities owned

and operated by the New Parents that HealthTrust wanted to

acquire. The Facilities were separate trades or businesses of

the New Parents. Indeed, 40 percent of the hospitals were the

only hospitals for the communities they served, and 20 percent of

the remaining hospitals were one of two hospitals for the

communities they served. The New Parents ceased to engage in

those trades or businesses when the Facilities were transferred

to the Category B Corporations and sold to HealthTrust. 

Consequently, although the New Parents continued to own and

operate other hospitals, office buildings, or medical facilities,

they did not continue the business of those Facilities which had

been spun off to the Category B Corporations. Requiring the New

Parents to include in income the portion of the section 481(a)

adjustment attributable to the Category B Corporation for the
- 36 -

year they were sold to HealthTrust is reasonable because the New

Parents ceased operating the businesses that gave rise to that

portion of the section 481(a) adjustment. Moreover, permitting

the New Parents to continue to account for a section 481(a)

adjustment attributable to businesses they no longer operate

would distort the income of the New Parents over the remaining

adjustment period.

Based on the foregoing, we conclude that petitioners must

include in income for 1987 all of the section 481(a) adjustment

relating to the change in method of accounting attributable to

the Category B Corporations.

To reflect the foregoing,

 Appropriate orders

 will be issued.