Hosp Corp Amer v. CIR

• Court: Court of Appeals for the Sixth Circuit
• Decided: October 30, 2003
• Docket: 01-1810
• Status: Published

Opinion

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

* The Honorable Nancy G. Edmunds, United States District Judge for the Eastern District of Michigan, sitting by designation.

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I. BACKGROUND The parties dispute two issues regarding the treatment of bad accounts and the inclusion of adjustments following the Factual Background change in accounting method. The first issue is how Hospital Corporation may calculate the amount to exclude from In 1987, some Hospital Corporation subsidiaries changed income because a portion of accounts receivable will not be to the accrual accounting method and took into account collected. If the Commissioner prevails, Hospital positive adjustments under Section 481(a) on their 1987 tax Corporation must use the most recent formula given in returns. The Hospital Corporation companies not operating Temporary Treasury Regulation Section 1-448-2T (as hospitals spread the adjustment over four years; those amended in 1987), the temporary amended regulation operating hospitals spread the adjustment over ten years. interpreting Section 448(d)(5). T.D. 8194, 1988-1 C.B. 186, 187. If Hospital Corporation prevails, it may use an older On September 1, 1987, HCA Investments, Inc., a wholly- formula in which the ratio is obtained by dividing the same owned subsidiary of Hospital Corporation, sold all of the six-year average of bad accounts by the sum of year-end stock of subsidiaries that owned and operated hospitals, office accounts receivable, or accounts still owing, for each year of buildings, and related medical facilities to HealthTrust, Inc.- the period. Temp. Treas. Reg. §1-4482T(e)(2)(I),T.D. 8143, The Hospital Company. HealthTrust did not want all of the 1987-2 C.B. 121. subsidiary’s assets, so the subsidiary transferred the assets that HealthTrust wanted to a new subsidiary. This made the The second issue is whether the Hospital Corporation subsidiary losing the assets a parent of the newly-formed subsidiaries that still operated some hospitals could still get subsidiary. The new parent then transferred the stock of the the statutory benefit available to “a hospital” with respect to new subsidiary to HCA Investments in exchange for HCA hospitals they had spun off. If the answer is yes, the Hospital Investments stock. HCA Investments then sold the new Corporation subsidiaries as new parents may report the subsidiary, which contained the assets HealthTrust wanted, to adjustment over a ten-year spread. If the answer is no, the HealthTrust. The new subsidiaries were separate enterprises Hospital Corporation subsidiaries that became new parents with separate books and records. must include in 1987 income all of the adjustment balance with respect to hospitals they ceased to operate. From 1987 through 1996, the new parent companies that had relinquished facilities to new subsidiaries proportionally Statutory Background reported the balance of adjustments. The adjustments included those attributable to the facilities that were In 1986, Congress passed the Tax Reform Act. See Pub. L. transferred to the new subsidiaries. 99-514, 100 Stat. 2345. A provision of the Act repealed Section 166 of the Internal Revenue Code, which had allowed The Internal Revenue Service determined that the Hospital corporate taxpayers to determine the amount of bad debt Corporation subsidiaries that became new parents to the new deductions, or accounts that would not be paid by those who subsidiaries incorrectly reported income. The Service owed the corporation, by using an accounting method called concluded that these Hospital Corporation subsidiaries must the reserve method. The Act added Section 448 to the Code, include the entire balance of the adjustment in 1987 income, which required use of the accrual method of accounting for rather than report it proportionally over ten years, with respect receivables. See 26 U.S.C. § 448. to those hospitals they had ceased to operate. No. 01-1810 Hospital Corp. of Am. v. Comm’r 5 6 Hospital Corp. of Am. v. Comm’r No. 01-1810

Section 448(d)(5) states that service providers, such as most taxpayers affected, the spread period is no more than hospitals who must use the accrual method, need not accrue four years, but for hospitals it is ten years. Section 448(d)(7) any part of receivables that their experience indicates they provides: will not collect. This is termed the “nonaccrual experience method.” In significant part, Section 448(d)(5) provides1: (7) Coordination with section 481.--In the case of any taxpayer required by this section to change its method of (5) Special rule for services.--In the case of any person accounting for any taxable year-- using an accrual method of accounting with respect to (A) such change shall be treated as initiated by the amounts to be received for the performance of services taxpayer, by such person, such person shall not be required to (B) such change shall be treated as made with the consent accrue any portion of such amounts which (on the basis of the Secretary, and of experience) will not be collected. (C) the period for taking into account the adjustments under section 481 by reason of such change-- In June 1987, the Treasury Department issued proposed (i) except as provided in clause (ii), shall not exceed 4 Temporary Treasury Regulation Section 1.448-2T, which years, and provided a mandatory formula to compute the amounts of (ii) in the case of a hospital, shall be 10 years. receivables that are unlikely to be collected and, accordingly, need not be accrued. See 52 Fed. Reg. 22764 and 22795 The Treasury Department further interpreted Section 448 in (1987). Tax Regulation Section 1.448-1(g)(3)(iii) to cover situations where the taxpayer ceases to engage in the trade in which it Changing the accounting method to an accrual method can had been operating. If the cessation of trade happens before cause amounts in the books to be omitted or duplicated. An the four- or ten-year adjustment period ends, the taxpayer adjustment is sometimes necessary to prevent such an must take into account the entire remaining balance of the omission or duplication. A positive adjustment increases adjustment in the taxable year in which it stopped the taxable income, just as a negative adjustment decreases business. taxable income. Internal Revenue Code Section 481 describes when a taxpayer should incorporate an adjustment II. ANALYSIS brought about by changing its accounting method. Section 481(a) requires that taxpayers take into account for the year Standards of Review of change the adjustments that are necessary because of the change. We review decisions of the Tax Court as we would review a district court decision in civil actions tried without a jury; For certain taxpayers, Section 448(d)(7) of the Code allows thus, where the Tax Court interpreted statutory provisions and an extended period for taking into account adjustments. For agency regulations, we review its decisions de novo. See Wolpaw v. Comm’r of Internal Revenue, 47 F.3d 787, 790 (6th Cir. 1995). 1 The statute has since been revised to give the Secretary express authority to prescribe a regulation that provides a method to determine the We agree with the Tax Court that the agency regulations at nonaccrual amo unts but also allows the taxpayer to request a change from issue in this case should be evaluated under the principles of the pre scribed form ula. See 26 U.S.C. § 44 8(d)(5)(C). No. 01-1810 Hospital Corp. of Am. v. Comm’r 7 8 Hospital Corp. of Am. v. Comm’r No. 01-1810

Chevron U.S.C., Inc. v. Natural Resources Defense Council, Revenue Code Section 7805(a), which gives the Secretary Inc., 467 U.S. 837 (1984), which held that: general authority to “prescribe all needful rules and regulations for the enforcement” of the Internal Revenue When a court reviews an agency’s construction of the Code. Such regulations are appropriately accorded Chevron statute which it administers, it is confronted with two deference when they constitute an exercise of implicitly questions. First, always, is the question whether delegated power to give content to ambiguous statutory terms. Congress has directly spoken to the precise question at As the Supreme Court held in Boeing Company v. United issue. If the intent of Congress is clear, that is the end of States, “if we regard the challenged regulation as interpretive the matter; for the court, as well as the agency, must give because it was promulgated under § 7805(a)’s general effect to the unambiguously expressed intent of rulemaking grant rather than pursuant to a specific grant of Congress. If, however, the court determines Congress authority, we must still treat the regulation with deference.” has not directly addressed the precise question at issue, 123 S.Ct. 1099, 1107 (2003) (citing Cottage Sav. Ass’n v. the court does not simply impose its own construction on Comm’r, 499 U.S. 554, 560-61(1991)). the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is Recently, the Supreme Court recognized in United States silent or ambiguous with respect to the specific issue, the v. Mead Corporation, 533 U.S. 218 (2001), that when question for the court is whether the agency’s answer is Congress does not expressly delegate authority to an agency, based on a permissible construction of the statute. an agency interpretation may still qualify for Chevron deference if Congress delegated authority to the agency 467 U.S. at 842-43 (footnotes omitted). This court has generally to make rules carrying the force of law, as shown in applied the Chevron analysis to interpretive Treasury ways like agency power to engage in notice-and-comment Regulations. Ohio Periodical Distribs., Inc. v. Comm’r, 105 rulemaking. See id. at 229.2 F.3d 322, 324-26 (6th Cir. 1997). And indeed, Chevron itself involved deference to an agency interpretation of a statutory This Court has addressed the deference due a regulation term. In Chevron the Environmental Protection Agency made under an implicit delegation of authority to an agency, promulgated a regulation providing for the meaning of the concluding that without an express delegation of authority, statutory term “stationary source.” 467 U.S. at 840, n.2. The the authority is implicit, yet the court must uphold the Court took the ambiguity of the statutory term to be an administrative interpretation of a statutory provision if it is implicit delegation to the agency to give meaning to the term, reasonable. See Nichols v. United States, 260 F.3d 637, 644 see 467 U.S. at 844, and the Court was accordingly required (6th Cir. 2001). When the Treasury’s authority is implicit, we to accept the Agency’s definition once the Court found that it have directed, “a court may not substitute its own was a permissible one. construction for the reasonable interpretation of an agency.” 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 2 sections of the Code. See I.R.C. Ch. 1, Subchapter E. § 441 As explained later in this opinion, to the extent that the Supreme et. seq. The regulations were issued under the Secretary of Court limited the applicability of Chevron deference in Mead the Treasury’s rulemaking authority pursuant to Internal Corporation, Mead Corporation is distinguishable from the present case. No. 01-1810 Hospital Corp. of Am. v. Comm’r 9 10 Hospital Corp. of Am. v. Comm’r No. 01-1810

Peoples Fed. Sav. and Loan Ass'n of Sidney v. Comm’r, 948 avoid accrual of uncollectible accounts under Section F.2d 289, 300 (6th Cir. 1991) (internal citations omitted). 448(d)(5). The Court recently expressed its approach to deciding the Section 448(d)(5) does not mandate any formula or provide validity of tax regulations in United States v. Cleveland guidance on computing the exclusion from income, only Indians Baseball Company, 532 U.S. 200, 218-19 (2001): stating that the computation be made “on the basis of [the] experience” of a taxpayer. Legislative history provided two “[W]e do not sit as a committee of revision to perfect the formulas, an inconsistency the Tax Court recognized. In the administration of the tax laws.” United States v. Correll, House Report, Congress first described a formula in which 389 U.S. 299, 306-307 (1967). Instead, we defer to the “total amount billed” would be multiplied by the ratio of Commissioner's regulations as long as they “implement amount uncollectible in the last five years divided by total the congressional mandate in some reasonable manner.” amount billed in the last five years. The formula appears as: Id. at 307. “We do this because Congress has delegated to the [Commissioner], not to the courts, the task of Estimated year-end uncollectible receivables = prescribing all needful rules and regulations for the Total billed X Total uncollectible last five years enforcement of the Internal Revenue Code.” Nat’l Total billed last five years Muffler Dealers Ass’n, Inc. v. United States, 440 U.S. 472, 477 (1979) (citing Correll, 389 U.S. at 307 (citing The next paragraph of the House Report, however, 26 U.S.C. § 7805(a))). purported to provide an example. In the example, the difference was that the ratio was applied to the receivables Thus, though we review the Tax Court’s findings of law de existing at the end of the taxable year. This formula appears novo and must ensure the Treasury has made at least a as: reasonable choice among permissible interpretations of its statute, we must not impose our own choices. Estimated year-end uncollectible receivables = Receivables outstanding at year end X Total uncollectible last five years Non-Accrual Formula Issue Total billed last five years

The Tax Reform Act of 1986 repealed the reserve method The Secretary issued a Temporary Treasury Regulation as improperly allowing a deduction for a loss that was to interpreting Section 448 and requiring accrual-method occur in the future. See H.R. Rep. No. 99-426, 99th Cong., taxpayers who employ the non-accrual experience method for 1st Sess. 577 (1985). The Act also required many taxpayers bad accounts to use a third formula, the Black Motor formula, to use the accrual method of accounting but made a provision to estimate the uncollectible amount, approved by the Tax for some taxpayers to account for bad debts attributable to Court in Black Motor Company v. Commissioner, 41 B.T.A. services rendered. In 1987, Section 448(d)(5) of the Internal 300 (1940), aff’d on other grounds, 125 F.2d 977 (6th Cir. Revenue Code took effect, whereby taxpayers did not have to 1942). In this formula, a taxpayer estimated the portion of accrue income for services rendered that experience showed year-end receivables that would not be collected by would not be collected. Only taxpayers that provide services multiplying the year-end receivables outstanding by the ratio and do not charge interest or penalties for late payment may of average bad debt write-offs for the current year and the immediately preceding five years, divided by the average No. 01-1810 Hospital Corp. of Am. v. Comm’r 11 12 Hospital Corp. of Am. v. Comm’r No. 01-1810

year-end receivables for the same period. The formula looked C.B. at 186. The revised formula computes the estimated like this: uncollectible receivables by multiplying the year-end receivables for the current year by a ratio of average bad debts Estimated year-end uncollectible receivables = written off during the current year and the previous five years, Receivables outstanding at end of year X Average of bad debt write offs for last six years divided by its average total sales for the same period. See Average year-end receivables for last six years Treas. Reg. § 1.448-2T(e) (2). The formula looks like this: The Supreme Court approved the Black Motor formula in Estimated uncollectible receivables = Thor Power Tool Company v. Commissioner, 439 U.S. 522, Receivables outstanding year-end X Average bad debts written off for six years 549 (1979). The Court commented that while not without its Average total annual charges for six years faults – such as not giving a taxpayer’s recent experience more weight than experience from a few years ago – the The difference between the Black Motor formula and the Black Motor formula had the advantage of “enhancing revised formula is the denominator in the ratio. In the former, certainty and predictability in an area peculiarly susceptible the denominator is the average year-end receivables – in other of taxpayer abuse.” Id. The Court, however, noted that the words, the accounts remaining to be paid. In the latter, the Commissioner had issued a formal ruling adopting Black denominator is the total receivables arising in a year, Motor but also allowed a taxpayer to avoid the Black Motor including accounts that have been paid plus accounts with an formula if it met its burden to show that the formula would outstanding balance. The revised formula is the same as in produce an unreasonable result. See id. If a taxpayer showed the House Report, though it uses current-year data in addition that an amount greater than the estimated amount produced to five-year history. using the Black Motor formula was reasonable, it could use the greater amount to determine the addition to its reserve for Hospital Corporation argues that it should be allowed to use bad debts. See id. the Black Motor formula because it more accurately reflects its bad debt experience. Hospital Corporation used the Black In the preamble to the Treasury Decision issuing the Motor formula to determine the portion of year-end Temporary Regulation, the Secretary pointed out that the receivables it would not collect and would not be required to House Report contained a reference to a formula, and then accrue for the 1987 and 1988 tax years. Using the Black stated that the regulations were adopting a six-year moving Motor formula, Hospital Corporation would exclude 19.9 average formula. See T.D. 8143, 1987-C.B. Soon after the percent of outstanding receivables at the end of 1987 and 20.6 regulation was issued, the Secretary became aware that some percent of receivables outstanding at the end of 1988, figures taxpayers were excluding large amounts of accounts it argues are consistent with previous years. Use of the receivable, usually in businesses where the companies could revised formula, claims Hospital Corporation, would result in write off bad debt receivables in less than a year, as in the the exclusion of only about four percent of year-end case of utility companies. The Treasury issued a revised receivables. Temporary Regulation, which required a new mandatory formula. See 53 Fed. Reg. 12513 (1988). The Secretary Hospital Corporation adopted the nonaccrual experience noted that taxpayers expressed confusion in determining method of accounting and then indicated it would use a whether the denominator should include total sales or year- periodic system in computing the exclusion pursuant to end balances of accounts receivable. See T.D. 8194, 1988-1 Internal Revenue Service Notice 88-51. Hospital Corporation No. 01-1810 Hospital Corp. of Am. v. Comm’r 13 14 Hospital Corp. of Am. v. Comm’r No. 01-1810

did not, however, follow Notice 88-51, which also mandates U.S. at 843. Several permissible constructions may be the revised formula, and instead computed the excludable reasonable, and where Congress has left gaps, agencies may income using the Black Motor formula. fill the gaps with necessary rules that are reasonable. See id. The Court directs that we “should not interfere with this When analyzing agency action, we start with the language process,” id., which is what would happen were we to decide of the statute. See United States v. Am. Trucking Ass’n, Inc., whether a method is the better of two possibilities. We need 310 U.S. 534, 543 (1940). The Tax Court concluded, in this only determine if the one chosen by the Treasury is case, that Section 448(d)(5) was ambiguous. It observed that reasonable. In reviewing the legislative history of the statute the statute provided no formula and merely used the words and the Treasury Decisions promulgating the regulation, we “basis of experience” without delineating what experience conclude that the Treasury did not act arbitrarily but selected was intended. The Tax Court noted other statutes in which a reasonable method to measure accounts that should not be Congress adopted a specific formula, giving it support for the accrued from experience. determination that Section 448(d)(5) is ambiguous with respect to the intended formula. We agree. Moreover, Hospital Corporation also argues that the revised temporary nothing in the statute or its legislative history indicates that regulation should be invalid even if we were to find it Congress intended to allow an alternative formula, though the consistent with the statute. First, Hospital Corporation House Report seemingly describes two different formulas. reasons that the Tax Court believed the revised regulation must receive Chevron deference, but relying upon Mead Under Chevron, once we determine that the statute is Corporation, supra, Hospital Corporation believes the Tax ambiguous, we must decide whether the Treasury regulation Court erred and should have accorded no deference. is a reasonable interpretation of the statute. We hold that it is. According to Hospital Corporation, the revised regulation was A Treasury regulation must be upheld if it “‘implement[s] the not issued pursuant to an express or implicit delegation of congressional mandate in some reasonable manner.’” Rowan legislative rulemaking power. Nothing in Section 448(d)(5) Cos. v. United States, 452 U.S. 247, 252 (1981) (quoting authorized legislative rulemaking, but instead, the Treasury’s United States v. Correll, 389 U.S. 299, 307 (1967)). The general interpretive authority in the Internal Revenue Code statute provides that a taxpayer shall not be required to accrue gave it authority to issue the regulation, thus making the amounts that, based on the taxpayer’s experience, will not be revised regulation an interpretive regulation. See I.R.C. collected. Hospital Corporation argues that the revised § 7805(a). The Treasury recognized that it was issuing a formula issued in the Treasury regulation is flawed regulation that need not comply with the Administrative mathematically, producing a result that is not based on its Procedure Act and Regulatory Flexibility Act when it experience. Rather, the final number will be artificially low, published the revised regulation. See 53 Fed. Reg. 124534. forcing it to accrue amounts that it will not collect. Hospital Corporation argues that uncollectible amounts should be The fact that the temporary regulation was not subject to computed with a different formula if the amounts from the notice and comment does not, moreover, require us to eschew mandatory formula do not accurately reflect experience. Chevron deference, notwithstanding the Supreme Court’s recent decision in Mead Corporation. In Mead Corporation, We must follow our own precedent and that of the Supreme the Court found that Congress had not implicitly delegated Court and not substitute our own construction of the tax law law-interpreting authority through the 10,000 to 15,000 tariff where the regulation at issue is reasonable. See Chevron, 467 rulings made each year by forty-six different Customs offices No. 01-1810 Hospital Corp. of Am. v. Comm’r 15 16 Hospital Corp. of Am. v. Comm’r No. 01-1810

without notice and comment procedures. See 533 U.S. at will be treated as initiated by the taxpayer with the consent of 232-33. The Court made clear, however, that while most of the Secretary and that the period for taking into account the the Supreme Court cases applying Chevron involved notice- adjustment shall not exceed four years, except that for and-comment rulemaking or formal adjudication, “the want hospitals the period “shall be 10 years.” Id. Treasury of such procedure . . . does not decide the case, for we have Regulation Section 1.448-1(g)(2)(ii) provides in pertinent part sometimes found reasons for Chevron deference even when that “[i]n the case of a hospital that is required by this section no such administrative formality was required and none was to change from the cash method, the section 481(a) afforded.” 533 U.S. at 231. The temporary regulations adjustment shall be taken into account ratably (beginning with involved in this case were arrived at centrally by the Treasury the year of change) over 10 years.” The regulation further Department, after careful consideration. They were issued specifies what is to occur when a taxpayer ceases the trade or pursuant to statutory authority to “prescribe” needful rules business to which the adjustment related. Treasury and regulations. See I.R.C. § 7805(a). The regulation was Regulation Section 1.448-1(g)(3)(iii) states: “interpretive” in the same sense that the regulation in Chevron was interpretive – it gave content to ambiguous statutory If a taxpayer ceases to engage in the trade or business to terms. Congress clearly intended that the Treasury which the section 481(a) adjustment relates . . . and such Department do so, and Chevron deference is therefore cessation or termination occurs prior to the expiration of appropriate.3 the adjustment period described in paragraph (g)(2)(i) or (ii) of the section, the taxpayer must take into account, in Based upon the above reasons, we hold that the Temporary the taxable year of such cessation or termination, the Treasury Regulation at issue is a reasonable interpretation of balance of the adjustment not previously taken into the Internal Revenue Code provision and is entitled to account in computing taxable income. . . . deference. The Secretary did not act in an unreasonable or arbitrary manner by employing a formula from the legislative In 1987, Hospital Corporation sold over one hundred of its history that he thought would effectuate the statutory hospitals. At issue is the applicability of the cessation of mandate. trade section for those hospitals transferred to new subsidiaries from new parents. Hospital Corporation argues Timing of the Section 481 Adjustment that the subsidiaries’ operation of hospitals not sold to HealthTrust allows it to spread the adjustments attributable to As discussed supra, Section 448(d)(7) of the Internal those hospitals over ten years. Hospital Corporation’s Revenue Code governs the Section 481 adjustment that contention is that the cessation of business provision is taxpayers make where they have been required to change contrary to the portion of the Internal Revenue Code requiring accounting method. Section 448(d)(7) states that the change a hospital to take a ten-year spread. The Commissioner and Tax Court, however, reject this view of the regulation. 3 Hospital Corporation does not challenge the temporary regulations The Tax Court upheld the regulation, determining that the as violations of the notice and comment requirements for rulemaking, see statute was ambiguous and that the regulation was a 5 U.S.C. § 533. Accordingly, we do not reach the issue of whether the reasonable interpretation. The statute here does not Administrative Procedure Act requires notice and comment procedures specifically address the possibility that a taxpayer may cease before Treasury may promulgate temporary interpretive regulations that operating the business that gave rise to the adjustment, make substantive choice s among permissible statutory interpretations. No. 01-1810 Hospital Corp. of Am. v. Comm’r 17 18 Hospital Corp. of Am. v. Comm’r No. 01-1810

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