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Two Appeals officers were assigned to the case, Hubert
Johnson (Appeals Officer Johnson) and Robert Sinclair (Appeals
Officer Sinclair). Appeals Officer Johnson was responsible for
the method of accounting issue, but both Appeals officers
attended the conferences relating to the accounting method issue.
Petitioners' tax director, Terry Deaton (Mr. Deaton), and
petitioners' in-house counsel, Charles L. Kown (Mr. Kown), among
others, represented petitioners during the negotiations with the
Nashville Appeals Office regarding the accounting method issue.
In an effort to resolve the case, Appeals Officer Johnson
proposed that the hospitals report a portion of their income and
related expenses on an accrual method and the balance of income
and related expenses on the cash method (hereinafter sometimes
referred to as the hybrid method). Petitioners agreed to the
proposal. Under the hybrid method, the amount included in income
on an accrual basis was computed by multiplying each hospital's
year-end patient receivables by the ratio of total revenue in the
Central Supply and Pharmacy accounts to total revenue in all
patient revenue accounts.
Appeals Officer Johnson and petitioners' representatives
agreed to petitioners' use of a reserve method of accounting for
bad debts,13 calculated by applying the "Black Motor" formula, in
13
HCA's Chart of Accounts defines bad debts as "accounts which
are deemed uncollectible from the patient or any third party due
(continued...)
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