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examination for the taxable years ended 1974 and 1975 was
suspended, however, when petitioners filed their petition with
the Tax Court relating to the same accounting issue for the
taxable years ended 1972 and 1973.
After the accounting method issue for the taxable years
ended 1972 and 1973 was resolved, the examination of petitioners'
returns for the taxable years ended 1974 and 1975 resumed.
Following consultation with the Nashville Appeals Office, the
revenue agents revised the RAR to compute petitioners' taxable
income for taxable years ended 1974 and 1975 using the hybrid
method, but modified to include in patient receivables the net
debit balances shown as due from Medicare and Medicaid
(hereinafter sometimes referred to as the hybrid method as
modified). Petitioners agreed to those adjustments and paid the
resulting deficiencies for the taxable years ended 1974 and 1975.
1976-78 Audit
In March 1980, a team of revenue agents commenced an
examination of petitioners' returns for the taxable years ended
1976 through 1978. The cash method of accounting had been used
by most of HCA's subsidiaries for such years. The revenue agents
did not propose to change the hospitals to an overall accrual
method of accounting, but rather, after discussions with the
Nashville Appeals Office and pursuant to instructions from their
case manager, they used the hybrid method as modified to compute
income for the hospitals for the years ended 1976 through 1978.
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