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available to respondent's agents examining petitioners' books and
returns.
1972-73 Audit
At the end of 1973, petitioners owned and operated 45
hospitals. During an examination of petitioners' corporate
income tax returns for the taxable years ended 1972 and 1973, the
Internal Revenue Service (IRS) District Director, Nashville,
Tennessee, proposed a number of adjustments, including a proposal
to change the method of accounting of HCA's hospitals using the
cash method to an accrual method.
As grounds for the proposal to place those hospitals on an
accrual method of accounting, the revenue agent's report (RAR)
asserted, inter alia, that, because inventories were material and
had a direct effect on taxable income, the cash method did not
properly reflect income. The RAR also asserted that the cash
method did not properly reflect petitioners' income, regardless
of inventories, because the cash method did not match revenue
with expenditures. Furthermore, the RAR indicated that
petitioners had not obtained the approval of the Commissioner of
Internal Revenue (Commissioner) to change the method of
accounting from the accrual basis used to maintain their books
and records to the cash method used for tax purposes.
Additionally, the RAR stated that, because the purchase or sale
of merchandise was an income-producing factor for petitioners'
hospitals, they were required to use inventories pursuant to
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