- 29 -
section 1.446-1(a)(4)(i), Income Tax Regs. The RAR further
asserted that the existence of merchandise inventories required
the hospitals to use an overall accrual method.
In disagreeing with the proposed adjustments, petitioners
contended that they were entitled to use the cash method in
reporting their income because the hospitals merely used or
consumed various medical supplies in the course of providing
typical hospital services. Subsequently, the Commissioner issued
a notice of deficiency for the years ended 1972 and 1973.
Petitioners timely filed a petition in the U.S. Tax Court
challenging the proposed change in accounting method as well as
certain other determinations of the Commissioner. The issues
raised in the petition, including the accounting method
adjustment, were then referred for consideration to the IRS
Appeals Office in Nashville (Nashville Appeals Office). The
Nashville Appeals Office considered the case in early 1980.12
12
Respondent objects to the admission of evidence relating to
consideration of the proposed adjustments for the years ended
1972 and 1973 by the Nashville Appeals Office on the ground that
the discussions with the Appeals officers were settlement
negotiations and, thus, evidence relating to such matters is
inadmissible pursuant to Fed. R. Evid. 408, which generally
renders inadmissible evidence of compromises and offers to
compromise. We have held in a prior opinion in the instant case
that evidence relating to the resolution of such matters is not
excludable under Fed. R. Evid. 408 because the evidence was not
presented to show the validity or invalidity of petitioners'
claim that the hybrid method clearly reflects income. Hospital
Corp. of America v. Commissioner, T.C. Memo. 1994-100; see also
Wentz v. Commissioner, 105 T.C. 1, 5-7 (1995).
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