Hospital Corporation of America and Subsidiaries - Page 5

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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          4   Sec. 166(c), which was repealed by sec. 805(a) of the Tax               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  Congress repealed sec. 166(c) because             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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