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with the Director of the Internal Revenue Service Center at
Memphis, Tennessee.
Petitioners' primary business is the ownership, operation,
and management of hospitals. A detailed description of
petitioners' hospital operations is set forth in Hospital Corp.
of America v. Commissioner, T.C. Memo. 1996-105, most of which
will not be reiterated here. Our findings of fact contained in
that Memorandum Opinion are incorporated herein.
For taxable years ended before January 1, 1987, some
petitioner hospitals used the Black Motor formula3 to determine
the portion of their yearend accounts receivable that was
unlikely to be collected. Those hospitals established reserves
for bad debts (bad debt reserves) and, based on the Black Motor
determinations, for years ended prior to 1987 they deducted
additions to the bad debt reserves as ordinary business expenses
in accordance with section 166(c).4 In audits of petitioners'
3 The Black Motor formula is based on a method for computing
additions to a reserve for bad debts that was described initially
in Black Motor Co. v. Commissioner, 41 B.T.A. 300 (1940), affd.
on another issue 125 F.2d 977 (6th Cir. 1942).
4 Sec. 166(c), which was repealed by sec. 805(a) of the Tax
Reform Act of 1986 (TRA), Pub. L. 99-514, 100 Stat. 2361,
provided that an accrual method taxpayer generally could deduct a
reasonable addition to a reserve for bad debts in lieu of the
specific charge-off of wholly or partially worthless debts
provided by sec. 166(a). Congress repealed sec. 166(c) because
it believed that allowing deductions for losses that
statistically occur in the future was inconsistent with the
treatment of other deductions under the all events test inasmuch
as allowance of the deduction before the losses occurred
(continued...)
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