           RECOMMENDED FOR FULL-TEXT PUBLICATION
                Pursuant to Sixth Circuit Rule 206                      2    Hospital Corp. of Am. v. Comm’r            No. 01-1810
        ELECTRONIC CITATION: 2003 FED App. 0383P (6th Cir.)
                    File Name: 03a0383p.06                                                 _________________
                                                                                                COUNSEL
UNITED STATES COURT OF APPEALS
                                                                        ARGUED: N. Jerold Cohen, SUTHERLAND, ASBILL &
                  FOR THE SIXTH CIRCUIT                                 BRENNAN, Atlanta, Georgia, for Appellant. Thomas J.
                    _________________                                   Sawyer, UNITED STATES DEPARTMENT OF JUSTICE,
                                                                        APPELLATE SECTION TAX DIVISION, Washington,
                                                                        D.C., for Appellee. ON BRIEF: N. Jerold Cohen, Walter H.
 HOSPITAL CORPORATION OF       X                                        Wingfield, Teresa W. Roseborough, Amanda B. Scott,
 AMERICA & SUBSIDIARIES,        -                                       Thomas A. Cullinan, Matthew J. Gries, SUTHERLAND,
         Petitioner-Appellant, -                                        ASBILL & BRENNAN, Atlanta, Georgia, for Appellant.
                                -   No. 01-1810                         Thomas J. Sawyer, Teresa E. McLaughlin, UNITED STATES
                                -                                       DEPARTMENT OF JUSTICE, APPELLATE SECTION
          v.                     >
                                ,                                       TAX DIVISION, Washington, D.C., for Appellee.
                                -
 COMMISSIONER OF INTERNAL       -                                                          _________________
 REVENUE,                       -
        Respondent-Appellee. -                                                                 OPINION
                                -                                                          _________________
                               N
                                                                           BOYCE F. MARTIN, JR., Circuit Judge. The petitioner,
      On Appeal from the United States Tax Court.                       Hospital Corporation of America and subsidiaries, appeals
   No. 28588-91—Thomas B. Wells, Tax Court Judge.                       from two decisions of the United States Tax Court ruling in
                                                                        favor of the Commissioner of the Internal Revenue. First, the
                    Argued: March 11, 2003                              Tax Court found that the Secretary of the Treasury reasonably
                                                                        interpreted Internal Revenue Code Section 448(d)(5) in
             Decided and Filed: October 30, 2003                        promulgating a mandatory formula to calculate expected
                                                                        uncollectible receivables. Second, the Tax Court ruled that
        Before: MARTIN and ROGERS, Circuit Judges;                      Hospital Corporation must report in a single taxable year the
                 EDMUNDS, District Judge.*                              entire remaining balance of an adjustment resulting from a
                                                                        change in accounting methods, an adjustment that Hospital
                                                                        Corporation argued could be spread out over ten years. For
                                                                        the following reasons, we AFFIRM the Tax Court on both
                                                                        issues.


    *
     The Honorable Nancy G. Edmunds, United States District Judge for
the Eastern District of Michigan, sitting by designation.

                                 1
No. 01-1810           Hospital Corp. of Am. v. Comm’r          3    4    Hospital Corp. of Am. v. Comm’r             No. 01-1810

                     I. BACKGROUND                                    The parties dispute two issues regarding the treatment of
                                                                    bad accounts and the inclusion of adjustments following the
Factual Background                                                  change in accounting method. The first issue is how Hospital
                                                                    Corporation may calculate the amount to exclude from
  In 1987, some Hospital Corporation subsidiaries changed           income because a portion of accounts receivable will not be
to the accrual accounting method and took into account              collected.     If the Commissioner prevails, Hospital
positive adjustments under Section 481(a) on their 1987 tax         Corporation must use the most recent formula given in
returns. The Hospital Corporation companies not operating           Temporary Treasury Regulation Section 1-448-2T (as
hospitals spread the adjustment over four years; those              amended in 1987), the temporary amended regulation
operating hospitals spread the adjustment over ten years.           interpreting Section 448(d)(5). T.D. 8194, 1988-1 C.B. 186,
                                                                    187. If Hospital Corporation prevails, it may use an older
  On September 1, 1987, HCA Investments, Inc., a wholly-            formula in which the ratio is obtained by dividing the same
owned subsidiary of Hospital Corporation, sold all of the           six-year average of bad accounts by the sum of year-end
stock of subsidiaries that owned and operated hospitals, office     accounts receivable, or accounts still owing, for each year of
buildings, and related medical facilities to HealthTrust, Inc.-     the period. Temp. Treas. Reg. §1-4482T(e)(2)(I),T.D. 8143,
The Hospital Company. HealthTrust did not want all of the           1987-2 C.B. 121.
subsidiary’s assets, so the subsidiary transferred the assets
that HealthTrust wanted to a new subsidiary. This made the            The second issue is whether the Hospital Corporation
subsidiary losing the assets a parent of the newly-formed           subsidiaries that still operated some hospitals could still get
subsidiary. The new parent then transferred the stock of the        the statutory benefit available to “a hospital” with respect to
new subsidiary to HCA Investments in exchange for HCA               hospitals they had spun off. If the answer is yes, the Hospital
Investments stock. HCA Investments then sold the new                Corporation subsidiaries as new parents may report the
subsidiary, which contained the assets HealthTrust wanted, to       adjustment over a ten-year spread. If the answer is no, the
HealthTrust. The new subsidiaries were separate enterprises         Hospital Corporation subsidiaries that became new parents
with separate books and records.                                    must include in 1987 income all of the adjustment balance
                                                                    with respect to hospitals they ceased to operate.
   From 1987 through 1996, the new parent companies that
had relinquished facilities to new subsidiaries proportionally      Statutory Background
reported the balance of adjustments. The adjustments
included those attributable to the facilities that were               In 1986, Congress passed the Tax Reform Act. See Pub. L.
transferred to the new subsidiaries.                                99-514, 100 Stat. 2345. A provision of the Act repealed
                                                                    Section 166 of the Internal Revenue Code, which had allowed
  The Internal Revenue Service determined that the Hospital         corporate taxpayers to determine the amount of bad debt
Corporation subsidiaries that became new parents to the new         deductions, or accounts that would not be paid by those who
subsidiaries incorrectly reported income. The Service               owed the corporation, by using an accounting method called
concluded that these Hospital Corporation subsidiaries must         the reserve method. The Act added Section 448 to the Code,
include the entire balance of the adjustment in 1987 income,        which required use of the accrual method of accounting for
rather than report it proportionally over ten years, with respect   receivables. See 26 U.S.C. § 448.
to those hospitals they had ceased to operate.
No. 01-1810               Hospital Corp. of Am. v. Comm’r                5    6      Hospital Corp. of Am. v. Comm’r            No. 01-1810

  Section 448(d)(5) states that service providers, such as                    most taxpayers affected, the spread period is no more than
hospitals who must use the accrual method, need not accrue                    four years, but for hospitals it is ten years. Section 448(d)(7)
any part of receivables that their experience indicates they                  provides:
will not collect. This is termed the “nonaccrual experience
method.” In significant part, Section 448(d)(5) provides1:                        (7) Coordination with section 481.--In the case of any
                                                                                  taxpayer required by this section to change its method of
  (5) Special rule for services.--In the case of any person                       accounting for any taxable year--
  using an accrual method of accounting with respect to                           (A) such change shall be treated as initiated by the
  amounts to be received for the performance of services                          taxpayer,
  by such person, such person shall not be required to                            (B) such change shall be treated as made with the consent
  accrue any portion of such amounts which (on the basis                          of the Secretary, and
  of experience) will not be collected.                                           (C) the period for taking into account the adjustments
                                                                                  under section 481 by reason of such change--
In June 1987, the Treasury Department issued proposed                             (i) except as provided in clause (ii), shall not exceed 4
Temporary Treasury Regulation Section 1.448-2T, which                             years, and
provided a mandatory formula to compute the amounts of                            (ii) in the case of a hospital, shall be 10 years.
receivables that are unlikely to be collected and, accordingly,
need not be accrued. See 52 Fed. Reg. 22764 and 22795                           The Treasury Department further interpreted Section 448 in
(1987).                                                                       Tax Regulation Section 1.448-1(g)(3)(iii) to cover situations
                                                                              where the taxpayer ceases to engage in the trade in which it
  Changing the accounting method to an accrual method can                     had been operating. If the cessation of trade happens before
cause amounts in the books to be omitted or duplicated. An                    the four- or ten-year adjustment period ends, the taxpayer
adjustment is sometimes necessary to prevent such an                          must take into account the entire remaining balance of the
omission or duplication. A positive adjustment increases                      adjustment in the taxable year in which it stopped the
taxable income, just as a negative adjustment decreases                       business.
taxable income. Internal Revenue Code Section 481
describes when a taxpayer should incorporate an adjustment                                            II. ANALYSIS
brought about by changing its accounting method. Section
481(a) requires that taxpayers take into account for the year                 Standards of Review
of change the adjustments that are necessary because of the
change.                                                                         We review decisions of the Tax Court as we would review
                                                                              a district court decision in civil actions tried without a jury;
  For certain taxpayers, Section 448(d)(7) of the Code allows                 thus, where the Tax Court interpreted statutory provisions and
an extended period for taking into account adjustments. For                   agency regulations, we review its decisions de novo. See
                                                                              Wolpaw v. Comm’r of Internal Revenue, 47 F.3d 787, 790
                                                                              (6th Cir. 1995).
    1
      The statute has since been revised to give the Secretary express
authority to prescribe a regulation that provides a method to determine the      We agree with the Tax Court that the agency regulations at
nonaccrual amo unts but also allows the taxpayer to request a change from     issue in this case should be evaluated under the principles of
the pre scribed form ula. See 26 U.S.C. § 44 8(d)(5)(C).
No. 01-1810           Hospital Corp. of Am. v. Comm’r             7   8       Hospital Corp. of Am. v. Comm’r                 No. 01-1810

Chevron U.S.C., Inc. v. Natural Resources Defense Council,            Revenue Code Section 7805(a), which gives the Secretary
Inc., 467 U.S. 837 (1984), which held that:                           general authority to “prescribe all needful rules and
                                                                      regulations for the enforcement” of the Internal Revenue
  When a court reviews an agency’s construction of the                Code. Such regulations are appropriately accorded Chevron
  statute which it administers, it is confronted with two             deference when they constitute an exercise of implicitly
  questions. First, always, is the question whether                   delegated power to give content to ambiguous statutory terms.
  Congress has directly spoken to the precise question at             As the Supreme Court held in Boeing Company v. United
  issue. If the intent of Congress is clear, that is the end of       States, “if we regard the challenged regulation as interpretive
  the matter; for the court, as well as the agency, must give         because it was promulgated under § 7805(a)’s general
  effect to the unambiguously expressed intent of                     rulemaking grant rather than pursuant to a specific grant of
  Congress. If, however, the court determines Congress                authority, we must still treat the regulation with deference.”
  has not directly addressed the precise question at issue,           123 S.Ct. 1099, 1107 (2003) (citing Cottage Sav. Ass’n v.
  the court does not simply impose its own construction on            Comm’r, 499 U.S. 554, 560-61(1991)).
  the statute, as would be necessary in the absence of an
  administrative interpretation. Rather, if the statute is              Recently, the Supreme Court recognized in United States
  silent or ambiguous with respect to the specific issue, the         v. Mead Corporation, 533 U.S. 218 (2001), that when
  question for the court is whether the agency’s answer is            Congress does not expressly delegate authority to an agency,
  based on a permissible construction of the statute.                 an agency interpretation may still qualify for Chevron
                                                                      deference if Congress delegated authority to the agency
467 U.S. at 842-43 (footnotes omitted). This court has                generally to make rules carrying the force of law, as shown in
applied the Chevron analysis to interpretive Treasury                 ways like agency power to engage in notice-and-comment
Regulations. Ohio Periodical Distribs., Inc. v. Comm’r, 105           rulemaking. See id. at 229.2
F.3d 322, 324-26 (6th Cir. 1997). And indeed, Chevron itself
involved deference to an agency interpretation of a statutory           This Court has addressed the deference due a regulation
term. In Chevron the Environmental Protection Agency                  made under an implicit delegation of authority to an agency,
promulgated a regulation providing for the meaning of the             concluding that without an express delegation of authority,
statutory term “stationary source.” 467 U.S. at 840, n.2. The         the authority is implicit, yet the court must uphold the
Court took the ambiguity of the statutory term to be an               administrative interpretation of a statutory provision if it is
implicit delegation to the agency to give meaning to the term,        reasonable. See Nichols v. United States, 260 F.3d 637, 644
see 467 U.S. at 844, and the Court was accordingly required           (6th Cir. 2001). When the Treasury’s authority is implicit, we
to accept the Agency’s definition once the Court found that it        have directed, “a court may not substitute its own
was a permissible one.                                                construction for the reasonable interpretation of an agency.”
   At issue in this case is the weight attached to the
regulations, which were not issued under an express statutory
provision to set forth rules implementing the particular
                                                                          2
sections of the Code. See I.R.C. Ch. 1, Subchapter E. § 441                As explained later in this opinion, to the extent that the Supreme
et. seq. The regulations were issued under the Secretary of           Court limited the applicability of Chevron deference in Mead
the Treasury’s rulemaking authority pursuant to Internal              Corporation, Mead Corporation is distinguishable from the present case.
No. 01-1810          Hospital Corp. of Am. v. Comm’r           9   10    Hospital Corp. of Am. v. Comm’r                         No. 01-1810

Peoples Fed. Sav. and Loan Ass'n of Sidney v. Comm’r, 948          avoid accrual of uncollectible accounts under Section
F.2d 289, 300 (6th Cir. 1991) (internal citations omitted).        448(d)(5).
  The Court recently expressed its approach to deciding the           Section 448(d)(5) does not mandate any formula or provide
validity of tax regulations in United States v. Cleveland          guidance on computing the exclusion from income, only
Indians Baseball Company, 532 U.S. 200, 218-19 (2001):             stating that the computation be made “on the basis of [the]
                                                                   experience” of a taxpayer. Legislative history provided two
  “[W]e do not sit as a committee of revision to perfect the       formulas, an inconsistency the Tax Court recognized. In the
  administration of the tax laws.” United States v. Correll,       House Report, Congress first described a formula in which
  389 U.S. 299, 306-307 (1967). Instead, we defer to the           “total amount billed” would be multiplied by the ratio of
  Commissioner's regulations as long as they “implement            amount uncollectible in the last five years divided by total
  the congressional mandate in some reasonable manner.”            amount billed in the last five years. The formula appears as:
  Id. at 307. “We do this because Congress has delegated
  to the [Commissioner], not to the courts, the task of            Estimated year-end uncollectible receivables =
  prescribing all needful rules and regulations for the                       Total billed X Total uncollectible last five years
  enforcement of the Internal Revenue Code.” Nat’l                                Total billed last five years
  Muffler Dealers Ass’n, Inc. v. United States, 440 U.S.
  472, 477 (1979) (citing Correll, 389 U.S. at 307 (citing           The next paragraph of the House Report, however,
  26 U.S.C. § 7805(a))).                                           purported to provide an example. In the example, the
                                                                   difference was that the ratio was applied to the receivables
Thus, though we review the Tax Court’s findings of law de          existing at the end of the taxable year. This formula appears
novo and must ensure the Treasury has made at least a              as:
reasonable choice among permissible interpretations of its
statute, we must not impose our own choices.                       Estimated year-end uncollectible receivables =
                                                                     Receivables outstanding at year end X Total uncollectible last five years
Non-Accrual Formula Issue                                                           Total billed last five years

   The Tax Reform Act of 1986 repealed the reserve method            The Secretary issued a Temporary Treasury Regulation
as improperly allowing a deduction for a loss that was to          interpreting Section 448 and requiring accrual-method
occur in the future. See H.R. Rep. No. 99-426, 99th Cong.,         taxpayers who employ the non-accrual experience method for
1st Sess. 577 (1985). The Act also required many taxpayers         bad accounts to use a third formula, the Black Motor formula,
to use the accrual method of accounting but made a provision       to estimate the uncollectible amount, approved by the Tax
for some taxpayers to account for bad debts attributable to        Court in Black Motor Company v. Commissioner, 41 B.T.A.
services rendered. In 1987, Section 448(d)(5) of the Internal      300 (1940), aff’d on other grounds, 125 F.2d 977 (6th Cir.
Revenue Code took effect, whereby taxpayers did not have to        1942). In this formula, a taxpayer estimated the portion of
accrue income for services rendered that experience showed         year-end receivables that would not be collected by
would not be collected. Only taxpayers that provide services       multiplying the year-end receivables outstanding by the ratio
and do not charge interest or penalties for late payment may       of average bad debt write-offs for the current year and the
                                                                   immediately preceding five years, divided by the average
No. 01-1810                    Hospital Corp. of Am. v. Comm’r                        11     12    Hospital Corp. of Am. v. Comm’r                         No. 01-1810

year-end receivables for the same period. The formula looked                                 C.B. at 186. The revised formula computes the estimated
like this:                                                                                   uncollectible receivables by multiplying the year-end
                                                                                             receivables for the current year by a ratio of average bad debts
Estimated year-end uncollectible receivables =                                               written off during the current year and the previous five years,
Receivables outstanding at end of year X Average of bad debt write offs for last six years
                                                                                             divided by its average total sales for the same period. See
          Average year-end receivables for last six years                                    Treas. Reg. § 1.448-2T(e) (2). The formula looks like this:
  The Supreme Court approved the Black Motor formula in                                      Estimated uncollectible receivables =
Thor Power Tool Company v. Commissioner, 439 U.S. 522,                                         Receivables outstanding year-end X Average bad debts written off for six years
549 (1979). The Court commented that while not without its                                              Average total annual charges for six years
faults – such as not giving a taxpayer’s recent experience
more weight than experience from a few years ago – the                                          The difference between the Black Motor formula and the
Black Motor formula had the advantage of “enhancing                                          revised formula is the denominator in the ratio. In the former,
certainty and predictability in an area peculiarly susceptible                               the denominator is the average year-end receivables – in other
of taxpayer abuse.” Id. The Court, however, noted that the                                   words, the accounts remaining to be paid. In the latter, the
Commissioner had issued a formal ruling adopting Black                                       denominator is the total receivables arising in a year,
Motor but also allowed a taxpayer to avoid the Black Motor                                   including accounts that have been paid plus accounts with an
formula if it met its burden to show that the formula would                                  outstanding balance. The revised formula is the same as in
produce an unreasonable result. See id. If a taxpayer showed                                 the House Report, though it uses current-year data in addition
that an amount greater than the estimated amount produced                                    to five-year history.
using the Black Motor formula was reasonable, it could use
the greater amount to determine the addition to its reserve for                                 Hospital Corporation argues that it should be allowed to use
bad debts. See id.                                                                           the Black Motor formula because it more accurately reflects
                                                                                             its bad debt experience. Hospital Corporation used the Black
   In the preamble to the Treasury Decision issuing the                                      Motor formula to determine the portion of year-end
Temporary Regulation, the Secretary pointed out that the                                     receivables it would not collect and would not be required to
House Report contained a reference to a formula, and then                                    accrue for the 1987 and 1988 tax years. Using the Black
stated that the regulations were adopting a six-year moving                                  Motor formula, Hospital Corporation would exclude 19.9
average formula. See T.D. 8143, 1987-C.B. Soon after the                                     percent of outstanding receivables at the end of 1987 and 20.6
regulation was issued, the Secretary became aware that some                                  percent of receivables outstanding at the end of 1988, figures
taxpayers were excluding large amounts of accounts                                           it argues are consistent with previous years. Use of the
receivable, usually in businesses where the companies could                                  revised formula, claims Hospital Corporation, would result in
write off bad debt receivables in less than a year, as in the                                the exclusion of only about four percent of year-end
case of utility companies. The Treasury issued a revised                                     receivables.
Temporary Regulation, which required a new mandatory
formula. See 53 Fed. Reg. 12513 (1988). The Secretary                                          Hospital Corporation adopted the nonaccrual experience
noted that taxpayers expressed confusion in determining                                      method of accounting and then indicated it would use a
whether the denominator should include total sales or year-                                  periodic system in computing the exclusion pursuant to
end balances of accounts receivable. See T.D. 8194, 1988-1                                   Internal Revenue Service Notice 88-51. Hospital Corporation
No. 01-1810           Hospital Corp. of Am. v. Comm’r          13    14   Hospital Corp. of Am. v. Comm’r             No. 01-1810

did not, however, follow Notice 88-51, which also mandates           U.S. at 843. Several permissible constructions may be
the revised formula, and instead computed the excludable             reasonable, and where Congress has left gaps, agencies may
income using the Black Motor formula.                                fill the gaps with necessary rules that are reasonable. See id.
                                                                     The Court directs that we “should not interfere with this
  When analyzing agency action, we start with the language           process,” id., which is what would happen were we to decide
of the statute. See United States v. Am. Trucking Ass’n, Inc.,       whether a method is the better of two possibilities. We need
310 U.S. 534, 543 (1940). The Tax Court concluded, in this           only determine if the one chosen by the Treasury is
case, that Section 448(d)(5) was ambiguous. It observed that         reasonable. In reviewing the legislative history of the statute
the statute provided no formula and merely used the words            and the Treasury Decisions promulgating the regulation, we
“basis of experience” without delineating what experience            conclude that the Treasury did not act arbitrarily but selected
was intended. The Tax Court noted other statutes in which            a reasonable method to measure accounts that should not be
Congress adopted a specific formula, giving it support for the       accrued from experience.
determination that Section 448(d)(5) is ambiguous with
respect to the intended formula. We agree. Moreover,                   Hospital Corporation also argues that the revised temporary
nothing in the statute or its legislative history indicates that     regulation should be invalid even if we were to find it
Congress intended to allow an alternative formula, though the        consistent with the statute. First, Hospital Corporation
House Report seemingly describes two different formulas.             reasons that the Tax Court believed the revised regulation
                                                                     must receive Chevron deference, but relying upon Mead
   Under Chevron, once we determine that the statute is              Corporation, supra, Hospital Corporation believes the Tax
ambiguous, we must decide whether the Treasury regulation            Court erred and should have accorded no deference.
is a reasonable interpretation of the statute. We hold that it is.   According to Hospital Corporation, the revised regulation was
A Treasury regulation must be upheld if it “‘implement[s] the        not issued pursuant to an express or implicit delegation of
congressional mandate in some reasonable manner.’” Rowan             legislative rulemaking power. Nothing in Section 448(d)(5)
Cos. v. United States, 452 U.S. 247, 252 (1981) (quoting             authorized legislative rulemaking, but instead, the Treasury’s
United States v. Correll, 389 U.S. 299, 307 (1967)). The             general interpretive authority in the Internal Revenue Code
statute provides that a taxpayer shall not be required to accrue     gave it authority to issue the regulation, thus making the
amounts that, based on the taxpayer’s experience, will not be        revised regulation an interpretive regulation. See I.R.C.
collected. Hospital Corporation argues that the revised              § 7805(a). The Treasury recognized that it was issuing a
formula issued in the Treasury regulation is flawed                  regulation that need not comply with the Administrative
mathematically, producing a result that is not based on its          Procedure Act and Regulatory Flexibility Act when it
experience. Rather, the final number will be artificially low,       published the revised regulation. See 53 Fed. Reg. 124534.
forcing it to accrue amounts that it will not collect. Hospital
Corporation argues that uncollectible amounts should be                The fact that the temporary regulation was not subject to
computed with a different formula if the amounts from the            notice and comment does not, moreover, require us to eschew
mandatory formula do not accurately reflect experience.              Chevron deference, notwithstanding the Supreme Court’s
                                                                     recent decision in Mead Corporation. In Mead Corporation,
 We must follow our own precedent and that of the Supreme            the Court found that Congress had not implicitly delegated
Court and not substitute our own construction of the tax law         law-interpreting authority through the 10,000 to 15,000 tariff
where the regulation at issue is reasonable. See Chevron, 467        rulings made each year by forty-six different Customs offices
No. 01-1810              Hospital Corp. of Am. v. Comm’r            15     16    Hospital Corp. of Am. v. Comm’r              No. 01-1810

without notice and comment procedures. See 533 U.S. at                     will be treated as initiated by the taxpayer with the consent of
232-33. The Court made clear, however, that while most of                  the Secretary and that the period for taking into account the
the Supreme Court cases applying Chevron involved notice-                  adjustment shall not exceed four years, except that for
and-comment rulemaking or formal adjudication, “the want                   hospitals the period “shall be 10 years.” Id. Treasury
of such procedure . . . does not decide the case, for we have              Regulation Section 1.448-1(g)(2)(ii) provides in pertinent part
sometimes found reasons for Chevron deference even when                    that “[i]n the case of a hospital that is required by this section
no such administrative formality was required and none was                 to change from the cash method, the section 481(a)
afforded.” 533 U.S. at 231. The temporary regulations                      adjustment shall be taken into account ratably (beginning with
involved in this case were arrived at centrally by the Treasury            the year of change) over 10 years.” The regulation further
Department, after careful consideration. They were issued                  specifies what is to occur when a taxpayer ceases the trade or
pursuant to statutory authority to “prescribe” needful rules               business to which the adjustment related.                Treasury
and regulations. See I.R.C. § 7805(a). The regulation was                  Regulation Section 1.448-1(g)(3)(iii) states:
“interpretive” in the same sense that the regulation in Chevron
was interpretive – it gave content to ambiguous statutory                    If a taxpayer ceases to engage in the trade or business to
terms.     Congress clearly intended that the Treasury                       which the section 481(a) adjustment relates . . . and such
Department do so, and Chevron deference is therefore                         cessation or termination occurs prior to the expiration of
appropriate.3                                                                the adjustment period described in paragraph (g)(2)(i) or
                                                                             (ii) of the section, the taxpayer must take into account, in
  Based upon the above reasons, we hold that the Temporary                   the taxable year of such cessation or termination, the
Treasury Regulation at issue is a reasonable interpretation of               balance of the adjustment not previously taken into
the Internal Revenue Code provision and is entitled to                       account in computing taxable income. . . .
deference. The Secretary did not act in an unreasonable or
arbitrary manner by employing a formula from the legislative                  In 1987, Hospital Corporation sold over one hundred of its
history that he thought would effectuate the statutory                     hospitals. At issue is the applicability of the cessation of
mandate.                                                                   trade section for those hospitals transferred to new
                                                                           subsidiaries from new parents. Hospital Corporation argues
Timing of the Section 481 Adjustment                                       that the subsidiaries’ operation of hospitals not sold to
                                                                           HealthTrust allows it to spread the adjustments attributable to
  As discussed supra, Section 448(d)(7) of the Internal                    those hospitals over ten years. Hospital Corporation’s
Revenue Code governs the Section 481 adjustment that                       contention is that the cessation of business provision is
taxpayers make where they have been required to change                     contrary to the portion of the Internal Revenue Code requiring
accounting method. Section 448(d)(7) states that the change                a hospital to take a ten-year spread. The Commissioner and
                                                                           Tax Court, however, reject this view of the regulation.
    3
      Hospital Corporation does not challenge the temporary regulations
                                                                             The Tax Court upheld the regulation, determining that the
as violations of the notice and comment requirements for rulemaking, see   statute was ambiguous and that the regulation was a
5 U.S.C. § 533. Accordingly, we do not reach the issue of whether the      reasonable interpretation. The statute here does not
Administrative Procedure Act requires notice and comment procedures        specifically address the possibility that a taxpayer may cease
before Treasury may promulgate temporary interpretive regulations that     operating the business that gave rise to the adjustment,
make substantive choice s among permissible statutory interpretations.
No. 01-1810           Hospital Corp. of Am. v. Comm’r         17    18    Hospital Corp. of Am. v. Comm’r              No. 01-1810

without regard to the nature of the business. Hospital              Revenue Ruling singles out hospitals for different treatment,
Corporation argues that the statute clearly and unambiguously       nor even mentions the word hospital.
states that the adjustment period for hospitals “shall be 10
years,” so the cessation of business provision conflicts by not       The Tax Court found ambiguity because the statute states
allowing the entire ten-year spread that the statute mandates.      “in the case of a hospital” in the singular and does not address
The statute states that the adjustment period for non-hospitals,    the case of a business owning several hospitals. This was
in contrast, cannot “exceed four years.” Thus, Hospital             relevant to the Tax Court because the Code does not decide
Corporation argues that unlike the hospital taxpayer, the non-      the question whether the ten-year spread of the adjustment
hospital taxpayer is not mandated to a set number of years.         belongs to each individual hospital or to the business that
                                                                    owned the hospitals. The Tax Court also expressed a policy
  The legislative history does not explain why hospitals were       concern that without a cessation of business rule, a taxpayer
to be treated differently, nor does it address the situation in     could restructure its businesses in a manner to omit income
which a business owns several hospitals rather than a sole          resulting from change in accounting methods, thus
facility. The first version of the Code provision, as reported      contravening Section 481(a). A taxpayer could also
by the House Committee on Ways and Means, mandated that             completely liquidate and forgo inclusion of the balance.
the period “shall not exceed 5 years (10 years in the case of a     Though Hospital Corporation argues that general principles
hospital . . . ).” H.R. 3838, 99th Congress 1985. Hospital          of taxation attribute additions to income to the taxpayer and
Corporation points out that Congress ultimately revised the         not to the taxpayer’s asset (e.g., its hospitals), and that other
“shall not exceed” phrase for a hospital and instead enacted        tax provisions would prevent the taxpayer from avoiding
“shall be 10 years for a hospital.” The Committee Report to         inclusion of a previous Section 481(a) adjustment if a
the final bill provided that a Section 481(a) adjustment            corporation were to dissolve, that does not establish
“generally shall be taken into account over a period not to         unreasonableness of the Treasury’s interpretation.
exceed four years,” but “[i]n the case of a hospital, the
adjustment shall be taken into account ratably over a ten-year         We agree with the Tax Court that the statute is ambiguous,
period.” H.R. Rep. No. 99-841.                                      addressing neither cessation of business nor ownership of
                                                                    more than one hospital. Turning to the legislative history, we
   Section 5.09 of Revenue Procedure 84-74 states that where        find that it is unclear as well. Congress could have meant that
a taxpayer ceases to engage in the trade or business to which       any company operating any hospital could use only a ten-year
the adjustment relates, it shall take into account the balance of   spread, no more or no less. Or Congress could have meant to
the adjustment in that taxable year. The procedure refers to        permit application of cessation of business principles where
an earlier Revenue Ruling, which holds that if a division of        a taxpayer no longer owns the hospitals to which the statute
the corporate taxpayer ceases to operate a trade or business,       applied. Without a clear indication of congressional intent,
the taxpayer must take the adjustment into account in the year      we must determine if the interpretation chosen by the
of cessation. See Rev. Proc. 84-74 (citing Rev. Rul. 80-39,         Treasury Department is reasonable. See Chevron, supra.
1980-1 C.B. 112). Revenue Ruling 80-39 reasons that
allowing a corporation to spread the adjustment over years            The interpretation of the Treasury regulation prevents
subsequent to the time its division ceased the trade or             distortion of income or omission of required inclusions after
business would distort the corporation’s income during that         a business ceases to operate, either by liquidating entirely or
spread period. Neither the Revenue Procedure nor the                disposing of a subsidiary business. We agree with the Tax
No. 01-1810          Hospital Corp. of Am. v. Comm’r      19

Court’s reasoning to the effect that Treasury Regulation
1.448-1(g) represents a permissible interpretation of Section
481(a) of the Internal Revenue Code.
  The judgment of the Tax Court is AFFIRMED.
