Hospital Corporation of America & Subsidiaries v. Commissioner of Internal Revenue

*The Honorable Nancy G. Edmunds, United States District Judge for
the Eastern District of Michigan, sitting by designation.
1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0383P (6th Cir.)
File Name: 03a0383p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
HOSPITAL CORPORATION OF
AMERICA & SUBSIDIARIES,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
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No. 01-1810
On Appeal from the United States Tax Court.
No. 28588-91—Thomas B. Wells, Tax Court Judge.
Argued: March 11, 2003
Decided and Filed: October 30, 2003
Before: MARTIN and ROGERS, Circuit Judges;
EDMUNDS, District Judge.*
2 Hospital Corp. of Am. v. Comm’r No. 01-1810
_________________
COUNSEL
ARGUED: N. Jerold Cohen, SUTHERLAND, ASBILL &
BRENNAN, Atlanta, Georgia, for Appellant. Thomas J.
Sawyer, UNITED STATES DEPARTMENT OF JUSTICE,
APPELLATE SECTION TAX DIVISION, Washington,
D.C., for Appellee. ON BRIEF: N. Jerold Cohen, Walter H.
Wingfield, Teresa W. Roseborough, Amanda B. Scott,
Thomas A. Cullinan, Matthew J. Gries, SUTHERLAND,
ASBILL & BRENNAN, Atlanta, Georgia, for Appellant.
Thomas J. Sawyer, Teresa E. McLaughlin, UNITED STATES
DEPARTMENT OF JUSTICE, APPELLATE SECTION
TAX DIVISION, Washington, D.C., for Appellee.
_________________
OPINION
_________________
BOYCE F. MARTIN, JR., Circuit Judge. The petitioner,
Hospital Corporation of America and subsidiaries, appeals
from two decisions of the United States Tax Court ruling in
favor of the Commissioner of the Internal Revenue. First, the
Tax Court found that the Secretary of the Treasury reasonably
interpreted Internal Revenue Code Section 448(d)(5) in
promulgating a mandatory formula to calculate expected
uncollectible receivables. Second, the Tax Court ruled that
Hospital Corporation must report in a single taxable year the
entire remaining balance of an adjustment resulting from a
change in accounting methods, an adjustment that Hospital
Corporation argued could be spread out over ten years. For
the following reasons, we AFFIRM the Tax Court on both
issues.

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 3
I. BACKGROUND
Factual Background
In 1987, some Hospital Corporation subsidiaries changed
to the accrual accounting method and took into account
positive adjustments under Section 481(a) on their 1987 tax
returns. The Hospital Corporation companies not operating
hospitals spread the adjustment over four years; those
operating hospitals spread the adjustment over ten years.
On September 1, 1987, HCA Investments, Inc., a wholly-
owned subsidiary of Hospital Corporation, sold all of the
stock of subsidiaries that owned and operated hospitals, office
buildings, and related medical facilities to HealthTrust, Inc.-
The Hospital Company. HealthTrust did not want all of the
subsidiary’s assets, so the subsidiary transferred the assets
that HealthTrust wanted to a new subsidiary. This made the
subsidiary losing the assets a parent of the newly-formed
subsidiary. The new parent then transferred the stock of the
new subsidiary to HCA Investments in exchange for HCA
Investments stock. HCA Investments then sold the new
subsidiary, which contained the assets HealthTrust wanted, to
HealthTrust. The new subsidiaries were separate enterprises
with separate books and records.
From 1987 through 1996, the new parent companies that
had relinquished facilities to new subsidiaries proportionally
reported the balance of adjustments. The adjustments
included those attributable to the facilities that were
transferred to the new subsidiaries.
The Internal Revenue Service determined that the Hospital
Corporation subsidiaries that became new parents to the new
subsidiaries incorrectly reported income. The Service
concluded that these Hospital Corporation subsidiaries must
include the entire balance of the adjustment in 1987 income,
rather than report it proportionally over ten years, with respect
to those hospitals they had ceased to operate.
4 Hospital Corp. of Am. v. Comm’r No. 01-1810
The parties dispute two issues regarding the treatment of
bad accounts and the inclusion of adjustments following the
change in accounting method. The first issue is how Hospital
Corporation may calculate the amount to exclude from
income because a portion of accounts receivable will not be
collected. If the Commissioner prevails, Hospital
Corporation must use the most recent formula given in
Temporary Treasury Regulation Section 1-448-2T (as
amended in 1987), the temporary amended regulation
interpreting Section 448(d)(5). T.D. 8194, 1988-1 C.B. 186,
187. If Hospital Corporation prevails, it may use an older
formula in which the ratio is obtained by dividing the same
six-year average of bad accounts by the sum of year-end
accounts receivable, or accounts still owing, for each year of
the period. Temp. Treas. Reg. §1-4482T(e)(2)(I),T.D. 8143,
1987-2 C.B. 121.
The second issue is whether the Hospital Corporation
subsidiaries that still operated some hospitals could still get
the statutory benefit available to “a hospital” with respect to
hospitals they had spun off. If the answer is yes, the Hospital
Corporation subsidiaries as new parents may report the
adjustment over a ten-year spread. If the answer is no, the
Hospital Corporation subsidiaries that became new parents
must include in 1987 income all of the adjustment balance
with respect to hospitals they ceased to operate.
Statutory Background
In 1986, Congress passed the Tax Reform Act. See Pub. L.
99-514, 100 Stat. 2345. A provision of the Act repealed
Section 166 of the Internal Revenue Code, which had allowed
corporate taxpayers to determine the amount of bad debt
deductions, or accounts that would not be paid by those who
owed the corporation, by using an accounting method called
the reserve method. The Act added Section 448 to the Code,
which required use of the accrual method of accounting for
receivables. See 26 U.S.C. § 448.

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 5
1The statute has since been revised to give the Secretary express
authority to prescribe a regulation that provides a method to determine the
nonaccrual amounts but also allows the taxpayer to request a change from
the pre scribed form ula. See 26 U.S.C. § 44 8(d)(5)(C).
Section 448(d)(5) states that service providers, such as
hospitals who must use the accrual method, need not accrue
any part of receivables that their experience indicates they
will not collect. This is termed the “nonaccrual experience
method.” In significant part, Section 448(d)(5) provides1:
(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.
In June 1987, the Treasury Department issued proposed
Temporary Treasury Regulation Section 1.448-2T, which
provided a mandatory formula to compute the amounts of
receivables that are unlikely to be collected and, accordingly,
need not be accrued. See 52 Fed. Reg. 22764 and 22795
(1987).
Changing the accounting method to an accrual method can
cause amounts in the books to be omitted or duplicated. An
adjustment is sometimes necessary to prevent such an
omission or duplication. A positive adjustment increases
taxable income, just as a negative adjustment decreases
taxable income. Internal Revenue Code Section 481
describes when a taxpayer should incorporate an adjustment
brought about by changing its accounting method. Section
481(a) requires that taxpayers take into account for the year
of change the adjustments that are necessary because of the
change.
For certain taxpayers, Section 448(d)(7) of the Code allows
an extended period for taking into account adjustments. For
6 Hospital Corp. of Am. v. Comm’r No. 01-1810
most taxpayers affected, the spread period is no more than
four years, but for hospitals it is ten years. Section 448(d)(7)
provides:
(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.
The Treasury Department further interpreted Section 448 in
Tax Regulation Section 1.448-1(g)(3)(iii) to cover situations
where the taxpayer ceases to engage in the trade in which it
had been operating. If the cessation of trade happens before
the four- or ten-year adjustment period ends, the taxpayer
must take into account the entire remaining balance of the
adjustment in the taxable year in which it stopped the
business.
II. ANALYSIS
Standards of Review
We review decisions of the Tax Court as we would review
a district court decision in civil actions tried without a jury;
thus, where the Tax Court interpreted statutory provisions and
agency regulations, we review its decisions de novo. See
Wolpaw v. Comm’r of Internal Revenue, 47 F.3d 787, 790
(6th Cir. 1995).
We agree with the Tax Court that the agency regulations at
issue in this case should be evaluated under the principles of

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 7
Chevron U.S.C., Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984), which held that:
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.
467 U.S. at 842-43 (footnotes omitted). This court has
applied the Chevron analysis to interpretive Treasury
Regulations. Ohio Periodical Distribs., Inc. v. Comm’r, 105
F.3d 322, 324-26 (6th Cir. 1997). And indeed, Chevron itself
involved deference to an agency interpretation of a statutory
term. In Chevron the Environmental Protection Agency
promulgated a regulation providing for the meaning of the
statutory term “stationary source.” 467 U.S. at 840, n.2. The
Court took the ambiguity of the statutory term to be an
implicit delegation to the agency to give meaning to the term,
see 467 U.S. at 844, and the Court was accordingly required
to accept the Agency’s definition once the Court found that it
was a permissible one.
At issue in this case is the weight attached to the
regulations, which were not issued under an express statutory
provision to set forth rules implementing the particular
sections of the Code. See I.R.C. Ch. 1, Subchapter E. § 441
et. seq. The regulations were issued under the Secretary of
the Treasury’s rulemaking authority pursuant to Internal
8 Hospital Corp. of Am. v. Comm’r No. 01-1810
2As explained later in this opinion, to the extent that the Supreme
Court limited the applicability of Chevron deference in Mead
Corporation, Mead Corporation is distinguishable from the present case.
Revenue Code Section 7805(a), which gives the Secretary
general authority to “prescribe all needful rules and
regulations for the enforcement” of the Internal Revenue
Code. Such regulations are appropriately accorded Chevron
deference when they constitute an exercise of implicitly
delegated power to give content to ambiguous statutory terms.
As the Supreme Court held in Boeing Company v. United
States, “if we regard the challenged regulation as interpretive
because it was promulgated under § 7805(a)’s general
rulemaking grant rather than pursuant to a specific grant of
authority, we must still treat the regulation with deference.”
123 S.Ct. 1099, 1107 (2003) (citing Cottage Sav. Ass’n v.
Comm’r, 499 U.S. 554, 560-61(1991)).
Recently, the Supreme Court recognized in United States
v. Mead Corporation, 533 U.S. 218 (2001), that when
Congress does not expressly delegate authority to an agency,
an agency interpretation may still qualify for Chevron
deference if Congress delegated authority to the agency
generally to make rules carrying the force of law, as shown in
ways like agency power to engage in notice-and-comment
rulemaking. See id. at 229.2
This Court has addressed the deference due a regulation
made under an implicit delegation of authority to an agency,
concluding that without an express delegation of authority,
the authority is implicit, yet the court must uphold the
administrative interpretation of a statutory provision if it is
reasonable. See Nichols v. United States, 260 F.3d 637, 644
(6th Cir. 2001). When the Treasury’s authority is implicit, we
have directed, “a court may not substitute its own
construction for the reasonable interpretation of an agency.”

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 9
Peoples Fed. Sav. and Loan Ass'n of Sidney v. Comm’r, 948
F.2d 289, 300 (6th Cir. 1991) (internal citations omitted).
The Court recently expressed its approach to deciding the
validity of tax regulations in United States v. Cleveland
Indians Baseball Company, 532 U.S. 200, 218-19 (2001):
“[W]e do not sit as a committee of revision to perfect the
administration of the tax laws.” United States v. Correll,
389 U.S. 299, 306-307 (1967). Instead, we defer to the
Commissioner's regulations as long as they “implement
the congressional mandate in some reasonable manner.”
Id. at 307. “We do this because Congress has delegated
to the [Commissioner], not to the courts, the task of
prescribing all needful rules and regulations for the
enforcement of the Internal Revenue Code.” Nat’l
Muffler Dealers Ass’n, Inc. v. United States, 440 U.S.
472, 477 (1979) (citing Correll, 389 U.S. at 307 (citing
26 U.S.C. § 7805(a))).
Thus, though we review the Tax Court’s findings of law de
novo and must ensure the Treasury has made at least a
reasonable choice among permissible interpretations of its
statute, we must not impose our own choices.
Non-Accrual Formula Issue
The Tax Reform Act of 1986 repealed the reserve method
as improperly allowing a deduction for a loss that was to
occur in the future. See H.R. Rep. No. 99-426, 99th Cong.,
1st Sess. 577 (1985). The Act also required many taxpayers
to use the accrual method of accounting but made a provision
for some taxpayers to account for bad debts attributable to
services rendered. In 1987, Section 448(d)(5) of the Internal
Revenue Code took effect, whereby taxpayers did not have to
accrue income for services rendered that experience showed
would not be collected. Only taxpayers that provide services
and do not charge interest or penalties for late payment may
10 Hospital Corp. of Am. v. Comm’r No. 01-1810
avoid accrual of uncollectible accounts under Section
448(d)(5).
Section 448(d)(5) does not mandate any formula or provide
guidance on computing the exclusion from income, only
stating that the computation be made “on the basis of [the]
experience” of a taxpayer. Legislative history provided two
formulas, an inconsistency the Tax Court recognized. In the
House Report, Congress first described a formula in which
“total amount billed” would be multiplied by the ratio of
amount uncollectible in the last five years divided by total
amount billed in the last five years. The formula appears as:
Estimated year-end uncollectible receivables =
Total billed X Total uncollectible last five years
Total billed last five years
The next paragraph of the House Report, however,
purported to provide an example. In the example, the
difference was that the ratio was applied to the receivables
existing at the end of the taxable year. This formula appears
as:
Estimated year-end uncollectible receivables =
Receivables outstanding at year end X Total uncollectible last five years
Total billed last five years
The Secretary issued a Temporary Treasury Regulation
interpreting Section 448 and requiring accrual-method
taxpayers who employ the non-accrual experience method for
bad accounts to use a third formula, the Black Motor formula,
to estimate the uncollectible amount, approved by the Tax
Court in Black Motor Company v. Commissioner, 41 B.T.A.
300 (1940), aff’d on other grounds, 125 F.2d 977 (6th Cir.
1942). In this formula, a taxpayer estimated the portion of
year-end receivables that would not be collected by
multiplying the year-end receivables outstanding by the ratio
of average bad debt write-offs for the current year and the
immediately preceding five years, divided by the average

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 11
year-end receivables for the same period. The formula looked
like this:
Estimated year-end uncollectible receivables =
Receivables outstanding at end of year X Average of bad debt write offs for last six years
Average year-end receivables for last six years
The Supreme Court approved the Black Motor formula in
Thor Power Tool Company v. Commissioner, 439 U.S. 522,
549 (1979). The Court commented that while not without its
faults – such as not giving a taxpayer’s recent experience
more weight than experience from a few years ago – the
Black Motor formula had the advantage of “enhancing
certainty and predictability in an area peculiarly susceptible
of taxpayer abuse.” Id. The Court, however, noted that the
Commissioner had issued a formal ruling adopting Black
Motor but also allowed a taxpayer to avoid the Black Motor
formula if it met its burden to show that the formula would
produce an unreasonable result. See id. If a taxpayer showed
that an amount greater than the estimated amount produced
using the Black Motor formula was reasonable, it could use
the greater amount to determine the addition to its reserve for
bad debts. See id.
In the preamble to the Treasury Decision issuing the
Temporary Regulation, the Secretary pointed out that the
House Report contained a reference to a formula, and then
stated that the regulations were adopting a six-year moving
average formula. See T.D. 8143, 1987-C.B. Soon after the
regulation was issued, the Secretary became aware that some
taxpayers were excluding large amounts of accounts
receivable, usually in businesses where the companies could
write off bad debt receivables in less than a year, as in the
case of utility companies. The Treasury issued a revised
Temporary Regulation, which required a new mandatory
formula. See 53 Fed. Reg. 12513 (1988). The Secretary
noted that taxpayers expressed confusion in determining
whether the denominator should include total sales or year-
end balances of accounts receivable. See T.D. 8194, 1988-1
12 Hospital Corp. of Am. v. Comm’r No. 01-1810
C.B. at 186. The revised formula computes the estimated
uncollectible receivables by multiplying the year-end
receivables for the current year by a ratio of average bad debts
written off during the current year and the previous five years,
divided by its average total sales for the same period. See
Treas. Reg. § 1.448-2T(e) (2). The formula looks like this:
Estimated uncollectible receivables =
Receivables outstanding year-end X Average bad debts written off for six years
Average total annual charges for six years
The difference between the Black Motor formula and the
revised formula is the denominator in the ratio. In the former,
the denominator is the average year-end receivables – in other
words, the accounts remaining to be paid. In the latter, the
denominator is the total receivables arising in a year,
including accounts that have been paid plus accounts with an
outstanding balance. The revised formula is the same as in
the House Report, though it uses current-year data in addition
to five-year history.
Hospital Corporation argues that it should be allowed to use
the Black Motor formula because it more accurately reflects
its bad debt experience. Hospital Corporation used the Black
Motor formula to determine the portion of year-end
receivables it would not collect and would not be required to
accrue for the 1987 and 1988 tax years. Using the Black
Motor formula, Hospital Corporation would exclude 19.9
percent of outstanding receivables at the end of 1987 and 20.6
percent of receivables outstanding at the end of 1988, figures
it argues are consistent with previous years. Use of the
revised formula, claims Hospital Corporation, would result in
the exclusion of only about four percent of year-end
receivables.
Hospital Corporation adopted the nonaccrual experience
method of accounting and then indicated it would use a
periodic system in computing the exclusion pursuant to
Internal Revenue Service Notice 88-51. Hospital Corporation

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 13
did not, however, follow Notice 88-51, which also mandates
the revised formula, and instead computed the excludable
income using the Black Motor formula.
When analyzing agency action, we start with the language
of the statute. See United States v. Am. Trucking Ass’n, Inc.,
310 U.S. 534, 543 (1940). The Tax Court concluded, in this
case, that Section 448(d)(5) was ambiguous. It observed that
the statute provided no formula and merely used the words
“basis of experience” without delineating what experience
was intended. The Tax Court noted other statutes in which
Congress adopted a specific formula, giving it support for the
determination that Section 448(d)(5) is ambiguous with
respect to the intended formula. We agree. Moreover,
nothing in the statute or its legislative history indicates that
Congress intended to allow an alternative formula, though the
House Report seemingly describes two different formulas.
Under Chevron, once we determine that the statute is
ambiguous, we must decide whether the Treasury regulation
is a reasonable interpretation of the statute. We hold that it is.
A Treasury regulation must be upheld if it “‘implement[s] the
congressional mandate in some reasonable manner.’” Rowan
Cos. v. United States, 452 U.S. 247, 252 (1981) (quoting
United States v. Correll, 389 U.S. 299, 307 (1967)). The
statute provides that a taxpayer shall not be required to accrue
amounts that, based on the taxpayer’s experience, will not be
collected. Hospital Corporation argues that the revised
formula issued in the Treasury regulation is flawed
mathematically, producing a result that is not based on its
experience. Rather, the final number will be artificially low,
forcing it to accrue amounts that it will not collect. Hospital
Corporation argues that uncollectible amounts should be
computed with a different formula if the amounts from the
mandatory formula do not accurately reflect experience.
We must follow our own precedent and that of the Supreme
Court and not substitute our own construction of the tax law
where the regulation at issue is reasonable. See Chevron, 467
14 Hospital Corp. of Am. v. Comm’r No. 01-1810
U.S. at 843. Several permissible constructions may be
reasonable, and where Congress has left gaps, agencies may
fill the gaps with necessary rules that are reasonable. See id.
The Court directs that we “should not interfere with this
process,” id., which is what would happen were we to decide
whether a method is the better of two possibilities. We need
only determine if the one chosen by the Treasury is
reasonable. In reviewing the legislative history of the statute
and the Treasury Decisions promulgating the regulation, we
conclude that the Treasury did not act arbitrarily but selected
a reasonable method to measure accounts that should not be
accrued from experience.
Hospital Corporation also argues that the revised temporary
regulation should be invalid even if we were to find it
consistent with the statute. First, Hospital Corporation
reasons that the Tax Court believed the revised regulation
must receive Chevron deference, but relying upon Mead
Corporation, supra, Hospital Corporation believes the Tax
Court erred and should have accorded no deference.
According to Hospital Corporation, the revised regulation was
not issued pursuant to an express or implicit delegation of
legislative rulemaking power. Nothing in Section 448(d)(5)
authorized legislative rulemaking, but instead, the Treasury’s
general interpretive authority in the Internal Revenue Code
gave it authority to issue the regulation, thus making the
revised regulation an interpretive regulation. See I.R.C.
§ 7805(a). The Treasury recognized that it was issuing a
regulation that need not comply with the Administrative
Procedure Act and Regulatory Flexibility Act when it
published the revised regulation. See 53 Fed. Reg. 124534.
The fact that the temporary regulation was not subject to
notice and comment does not, moreover, require us to eschew
Chevron deference, notwithstanding the Supreme Court’s
recent decision in Mead Corporation. In Mead Corporation,
the Court found that Congress had not implicitly delegated
law-interpreting authority through the 10,000 to 15,000 tariff
rulings made each year by forty-six different Customs offices

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 15
3Hospital Corporation does not challenge the temporary regulations
as violations of the notice and comment requirements for rulemaking, see
5 U.S.C. § 533. Accordingly, we do not reach the issue of whether the
Administrative Procedure Act requires notice and comment procedures
before Treasury may promulgate temporary interpretive regulations that
make substantive choices among permissible statutory interpretations.
without notice and comment procedures. See 533 U.S. at
232-33. The Court made clear, however, that while most of
the Supreme Court cases applying Chevron involved notice-
and-comment rulemaking or formal adjudication, “the want
of such procedure . . . does not decide the case, for we have
sometimes found reasons for Chevron deference even when
no such administrative formality was required and none was
afforded.” 533 U.S. at 231. The temporary regulations
involved in this case were arrived at centrally by the Treasury
Department, after careful consideration. They were issued
pursuant to statutory authority to “prescribe” needful rules
and regulations. See I.R.C. § 7805(a). The regulation was
“interpretive” in the same sense that the regulation in Chevron
was interpretive – it gave content to ambiguous statutory
terms. Congress clearly intended that the Treasury
Department do so, and Chevron deference is therefore
appropriate.3
Based upon the above reasons, we hold that the Temporary
Treasury Regulation at issue is a reasonable interpretation of
the Internal Revenue Code provision and is entitled to
deference. The Secretary did not act in an unreasonable or
arbitrary manner by employing a formula from the legislative
history that he thought would effectuate the statutory
mandate.
Timing of the Section 481 Adjustment
As discussed supra, Section 448(d)(7) of the Internal
Revenue Code governs the Section 481 adjustment that
taxpayers make where they have been required to change
accounting method. Section 448(d)(7) states that the change
16 Hospital Corp. of Am. v. Comm’r No. 01-1810
will be treated as initiated by the taxpayer with the consent of
the Secretary and that the period for taking into account the
adjustment shall not exceed four years, except that for
hospitals the period “shall be 10 years.” Id. Treasury
Regulation Section 1.448-1(g)(2)(ii) provides in pertinent part
that “[i]n 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.” The regulation further
specifies what is to occur when a taxpayer ceases the trade or
business to which the adjustment related. Treasury
Regulation Section 1.448-1(g)(3)(iii) states:
If a taxpayer ceases to engage in the trade or business to
which the section 481(a) adjustment relates . . . and such
cessation or termination occurs prior to the expiration of
the adjustment period described in paragraph (g)(2)(i) or
(ii) of the 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. . . .
In 1987, Hospital Corporation sold over one hundred of its
hospitals. At issue is the applicability of the cessation of
trade section for those hospitals transferred to new
subsidiaries from new parents. Hospital Corporation argues
that the subsidiaries’ operation of hospitals not sold to
HealthTrust allows it to spread the adjustments attributable to
those hospitals over ten years. Hospital Corporation’s
contention is that the cessation of business provision is
contrary to the portion of the Internal Revenue Code requiring
a hospital to take a ten-year spread. The Commissioner and
Tax Court, however, reject this view of the regulation.
The Tax Court upheld the regulation, determining that the
statute was ambiguous and that the regulation was a
reasonable interpretation. The statute here does not
specifically address the possibility that a taxpayer may cease
operating the business that gave rise to the adjustment,

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 17
without regard to the nature of the business. Hospital
Corporation argues that the statute clearly and unambiguously
states that the adjustment period for hospitals “shall be 10
years,” so the cessation of business provision conflicts by not
allowing the entire ten-year spread that the statute mandates.
The statute states that the adjustment period for non-hospitals,
in contrast, cannot “exceed four years.” Thus, Hospital
Corporation argues that unlike the hospital taxpayer, the non-
hospital taxpayer is not mandated to a set number of years.
The legislative history does not explain why hospitals were
to be treated differently, nor does it address the situation in
which a business owns several hospitals rather than a sole
facility. The first version of the Code provision, as reported
by the House Committee on Ways and Means, mandated that
the period “shall not exceed 5 years (10 years in the case of a
hospital . . . ).” H.R. 3838, 99th Congress 1985. Hospital
Corporation points out that Congress ultimately revised the
“shall not exceed” phrase for a hospital and instead enacted
“shall be 10 years for a hospital.” The Committee Report to
the final bill provided that a Section 481(a) adjustment
“generally shall be taken into account over a period not to
exceed four years,” but “[i]n the case of a hospital, the
adjustment shall be taken into account ratably over a ten-year
period.” H.R. Rep. No. 99-841.
Section 5.09 of Revenue Procedure 84-74 states that where
a taxpayer ceases to engage in the trade or business to which
the adjustment relates, it shall take into account the balance of
the adjustment in that taxable year. The procedure refers to
an earlier Revenue Ruling, which holds that if a division of
the corporate taxpayer ceases to operate a trade or business,
the taxpayer must take the adjustment into account in the year
of cessation. See Rev. Proc. 84-74 (citing Rev. Rul. 80-39,
1980-1 C.B. 112). Revenue Ruling 80-39 reasons that
allowing a corporation to spread the adjustment over years
subsequent to the time its division ceased the trade or
business would distort the corporation’s income during that
spread period. Neither the Revenue Procedure nor the
18 Hospital Corp. of Am. v. Comm’r No. 01-1810
Revenue Ruling singles out hospitals for different treatment,
nor even mentions the word hospital.
The Tax Court found ambiguity because the statute states
“in the case of a hospital” in the singular and does not address
the case of a business owning several hospitals. This was
relevant to the Tax Court because the Code does not decide
the question whether the ten-year spread of the adjustment
belongs to each individual hospital or to the business that
owned the hospitals. The Tax Court also expressed a policy
concern that without a cessation of business rule, a taxpayer
could restructure its businesses in a manner to omit income
resulting from change in accounting methods, thus
contravening Section 481(a). A taxpayer could also
completely liquidate and forgo inclusion of the balance.
Though Hospital Corporation argues that general principles
of taxation attribute additions to income to the taxpayer and
not to the taxpayer’s asset (e.g., its hospitals), and that other
tax provisions would prevent the taxpayer from avoiding
inclusion of a previous Section 481(a) adjustment if a
corporation were to dissolve, that does not establish
unreasonableness of the Treasury’s interpretation.
We agree with the Tax Court that the statute is ambiguous,
addressing neither cessation of business nor ownership of
more than one hospital. Turning to the legislative history, we
find that it is unclear as well. Congress could have meant that
any company operating any hospital could use only a ten-year
spread, no more or no less. Or Congress could have meant to
permit application of cessation of business principles where
a taxpayer no longer owns the hospitals to which the statute
applied. Without a clear indication of congressional intent,
we must determine if the interpretation chosen by the
Treasury Department is reasonable. See Chevron, supra.
The interpretation of the Treasury regulation prevents
distortion of income or omission of required inclusions after
a business ceases to operate, either by liquidating entirely or
disposing of a subsidiary business. We agree with the Tax

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No. 01-1810 Hospital Corp. of Am. v. Comm’r 19
Court’s reasoning to the effect that Treasury Regulation
1.448-1(g) represents a permissible interpretation of Section
481(a) of the Internal Revenue Code.
The judgment of the Tax Court is AFFIRMED.

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