                       T.C. Memo. 1995-595



                      UNITED STATES TAX COURT




 ANCLOTE PSYCHIATRIC CENTER, INC., Petitioner v. COMMISSIONER OF
                   INTERNAL REVENUE, Respondent




     Docket No. 4810-92.                  Filed December 14, 1995.


     James D. O'Donnell and V. Jean Owens, for petitioner.

     Julie M.T. Foster, for respondent.


                        MEMORANDUM OPINION


     WRIGHT, Judge:   This matter is currently before the Court on

petitioner's Motion For Partial Summary Judgment under Rule 121.1


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the years at issue,
                                -2-

Respondent determined deficiencies in petitioner's Federal income

tax for taxable years 1984 through 1988 as follows:

          Year           Deficiency

          1984           $159,008
          1985            110,623
          1986             75,490
          1987             45,444
          1988             62,041


     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be

granted with respect to all or any part of the legal issues in

controversy "if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law."   Rule 121(b); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988).       The

moving party bears the burden of proving that there is no genuine

issue of material fact, and factual inferences will be read in a

manner most favorable to the party opposing summary judgment.

Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985).    The facts

presented below do not appear to be in dispute and are stated



and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                 -3-

solely for purposes of deciding the motion and are not findings

of fact for this case.   Fed. R. Civ. P. 52(a); Sundstrand Corp.

v. Commissioner, supra at 520.

1.   Background

     Petitioner was originally incorporated in 1951 as a for-

profit corporation to operate a long-term care psychiatric

hospital in Tarpon Springs, Florida.     Petitioner later amended

and restated its articles of incorporation in 1957 to become a

nonprofit corporation.   During the years at issue, petitioner's

principal place of business was Tarpon Springs, Florida.

     In 1981, petitioner proposed to sell its assets to a Florida

for-profit organization established and owned by members of

petitioner's board of directors.    Prior to entering this

transaction, petitioner obtained a letter ruling from the

National Office of the Internal Revenue Service (IRS) dated May

27, 1982, stating that, under the facts alleged by petitioner in

its request for a ruling, the sale of its assets would not

jeopardize its tax-exempt status.      In 1983, petitioner sold the

assets to its board of directors for $6,318,000; the sale price

included a $1,818,000 liability assumption by the board of

directors.   Two years later, the board of directors sold the

assets to an unrelated third party for $29,587,000.     On its 1983

return, petitioner reported a total sale price of $4,500,000.

     As a result of these transactions, a RICO civil action suit

was filed in the U.S. District Court of the Northern District of
                                -4-

Florida against the board of directors.   Thereafter, the attorney

general for the State of Florida sued the same board of directors

on the theory that petitioner sold its assets to its board

members for less than fair market value and, therefore, violated

a Florida statute designed to prevent the improper use of any

nonprofit corporation.   The State and Federal court proceedings

generated a vast amount of media coverage and publicity, and as a

direct result thereof, a revenue agent employed in the exempt

organization division of the IRS initiated an examination of

petitioner in 1987.   During this examination, respondent raised

the issues of whether petitioner could continue to rely on the

1982 ruling letter and whether petitioner's tax-exempt status

should be revoked.

     In a technical advice memorandum, issued to petitioner on

April 29, 1991, the National Office determined that petitioner

did not receive fair market value for the sale of its hospital

facility and proposed to revoke its tax-exempt status.

Respondent later issued a final adverse determination letter on

December 12, 1991, revoking petitioner's status as an

organization described in section 501(c)(3) effective for all

years beginning on and after October 1, 1982.    Simultaneously

with the formal notice of revocation, respondent issued a notice

of deficiency to petitioner for the taxable periods ending

September 30, 1984 through September 30, 1988.    Respondent made

no determination with respect to petitioner's 1983 taxable year
                                 -5-

as the period of limitations with respect to that year had

expired.

     On August 30, 1991, petitioner filed a petition for

declaratory judgment pursuant to section 7428 requesting this

Court to make a declaration regarding its continuing tax-exempt

status.    Respondent thereafter filed a motion to dismiss for lack

of jurisdiction on the basis that the filing of the petition was

untimely in that it did not satisfy the statutory time

requirements contained in section 7428.     We issued an opinion,

Anclote Psychiatric Center, Inc. v. Commissioner, 98 T.C. 374

(1992), in which we held that we had jurisdiction over the

instant case.

     For purposes of the instant motion, petitioner concedes that

respondent's revocation is valid.      Both petitioner and respondent

agree therefore that petitioner's income was not exempt from tax

under section 501 for the years at issue in the instant case.

     Petitioner claims in the instant motion that it is entitled

to judgment as a matter of law with respect to (1) whether

payments totaling $1,014,378.94 made by petitioner to the Florida

Patients Compensation Fund (FPCF) during the years at issue are

deductible as ordinary and necessary expenses under section 162,

and (2) whether petitioner sustained a net operating loss in

taxable year 1983, which it may carry forward to subsequent years

including the years at issue.   For the reasons stated herein,

petitioner's motion for partial summary judgment is denied.
                                    -6-

        Respondent argues that petitioner (1) is not entitled to the

amount petitioner is now claiming, for purposes of the instant

motion, of $1,014,378.94 as an expense paid to the FPCF during

the years at issue, and (2) did not sustain a net operating loss

in taxable year 1983.

2.   FPCF Payments

        In 1975, the State of Florida enacted the Medical

Malpractice Reform Act.2      As a part of the Act, the FPCF was

established to provide liability coverage in excess of basic

policy limits for its member hospitals.       Petitioner became a

participant in FPCF during the fiscal year ending September 30,

1977.       Various assessments were made against petitioner by the

FPCF.

     On June 20, 1985, petitioner and the FPCF entered into a

settlement agreement establishing a payment schedule for

petitioner's then outstanding FPCF assessments as well as

subsequent assessments.       The payment schedule covers what the

FPCF refers to as the "fifth assessment" and all subsequent FPCF

assessments including the sixth, seventh, and eighth assessments.

The FPCF fifth assessment years are 1977-78, 1979-80, 1980-81,

and 1981-82.       The "fourth assessment" involves FPCF years 1976

through 1981.       The payment schedule outlined in the settlement

agreement required petitioner to pay on or before each January


        2
         Fla. Stat., sec. 768.54.
                                -7-

10, April 10, July 10, and October 10, through the term of the

agreement, the amounts of $72,200 for each of the first four

quarterly payments, $88,400 for each of the next four quarterly

payments, and $80,300 for each quarterly payment thereafter until

petitioner paid the total amount of its assessments.

     Petitioner claims it made payments to the FPCF totaling

$1,014,378.94 from January 17, 1984 through May 25, 1988, with

respect to arrears in its insurance coverage between 1976 and

1981.   Petitioner, however, has not provided sufficient evidence

as to the amount claimed.   Moreover, even if the payments were

made in the amount asserted by petitioner, it is unclear from the

record the years to which the payments correspond.   Petitioner

argues that the FPCF payments made between 1984 and 1988 under

the settlement agreement correspond to the "fourth assessment"

which covers FPCF years 1976 through 1981, years in which

petitioner was a tax-exempt organization under section 501.    The

settlement agreement, however, clearly states that the payment

schedule prescribed therein covers the fifth, sixth, seventh, and

eighth assessments.

     Section 501(a) exempts certain organizations, including

those described under section 501(c)(3), from taxation unless the

exemption is denied under sections 502 or 503.   Section 162(a)

allows as a deduction all the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade

or business.
                                -8-

     Under section 265(1)3, payments made to FPCF are not

deductible if they are allocable to a class of exempt income.

Section 265 provides the following:

     No deduction shall be allowed for--

          (1) Expenses.--Any amount otherwise allowable as a
     deduction which is allocable to one or more classes of
     income other than interest (whether or not any amount
     of income of that class or classes is received or
     accrued) wholly exempt from the taxes imposed by this
     subtitle * * *.

     Respondent contends that, as a section 501(c)(3)

organization from 1977 to October 1, 1982, petitioner's income

was exempt from tax under section 501(a) and as a result section

265(1) disallows deductions for expenses allocable to that

income.   Thus, respondent argues, petitioner is not entitled to

deduct payments to the FPCF attributable to insurance coverage

for years in which petitioner was a tax-exempt organization.

     Based upon the record, we find that a dispute of material

fact exists as to both the amount of the payments made by

petitioner to the FPCF and the years to which these payments

correspond.   Petitioner argues that it is allowed as ordinary and

necessary business expenses the amounts paid to the FPCF under

the settlement agreement.   The settlement agreement, at least in

part, required petitioner to make payments for taxable years in

which petitioner was an exempt organization.   Petitioner argues


     3
      Sec. 265(1) was redesignated as sec. 265(a)(1) by sec.
902(d) of the Tax Reform Act of 1986.
                                -9-

that the first eight quarterly payments were to cover FPCF's

first four assessments while the remaining quarterly payments

covered the fifth through the eighth assessments.    The settlement

agreement, however, clearly states that the payment schedule

corresponds to the fifth through the eighth assessments.

     We cannot determine, based upon the record before us, the

amount of the payments made by petitioner to the FPCF, or the

years to which these payments correspond whether they are taxable

or tax-exempt years.   Accordingly, we find that petitioner has

failed to meet its burden of proof and is not entitled to a

judgment as a matter of law with respect to the deductibility of

payments it made to the FPCF.

3.   Net Operating Loss

     Petitioner contends that it sustained a net operating loss

in the amount of $706,522 for taxable year 1983.    Petitioner

filed a Form 990, Return of Organization Exempt From Income Tax,

rather than a Form 1120, Corporate Income Tax Return, with

respect to 1983, according to petitioner, because at the time of

the filing petitioner was recognized as a tax-exempt

organization.   Petitioner argues that had a Form 1120 been filed

the $706,522 loss would have been shown as a net operating loss

for taxable year 1983.

     Petitioner contends that the alleged loss of $706,522

satisfies the definition of a net operating loss under section

172(c) and (d) as it is the amount by which its gross income in
                                 -10-

1983 was exceeded by its allowable deductions for that year.

Furthermore, argues petitioner, the fact that petitioner's 1983

taxable year is a closed year, i.e., a year for which neither a

deficiency may be assessed nor a refund allowed because of the

expiration of the limitations period under sections 6501 and

6511, does not preclude a determination that a net operating loss

was sustained in 1983 which may be carried forward to subsequent

years.

     As the alleged net operating loss in taxable year 1983

results in part from payments made to the FPCF and in part from

petitioner's failure to accurately report the sale price for the

sale of its assets, we find that there exists a dispute as to

material facts as to whether a net operating loss was in fact

sustained in taxable year 1983.    Moreover, there remains a

dispute as to whether the sale price of $6,318,000 grossly

understated the true fair market value of assets sold by

petitioner.   Accordingly, we find that petitioner has failed to

meet its burden of proof and is not entitled to a judgment as a

matter of law with respect to the alleged 1983 net operating

loss.

     To reflect the foregoing,

                                             An appropriate order

                                        will be issued denying

                                        petitioner's motion for

                                        partial summary judgment.
