Section of Taxation Publications
  VOL. 57
NO. 4
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Deference Due Treasury Regulations: The Low Reasonableness Standard in Hospital Corporation of America v. Commissioner
Jared E. Hansen


In Hospital Corporation of America v. Commissioner, the Sixth Circuit held that Treasury Regulations are entitled to full deference from the courts, provided only that the regulations “implement the statutory mandate in some reasonable manner.” The case dealt with the tax accounting treatment of expected uncollectible receivables in the course of a realignment of a parent corporation and its subsidiaries. Relying primarily on Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., the court upheld the Commissioner’s application of Regulations sections 1.448-2T and 1.448-1(g)(3)(iii). First, the court found that Temporary Regulation section 1.448-2T, which required the use of a specific method of calculating amounts that, because experience shows they will not be paid, are exempted from treatment as income under section 448(d)(5),6 to be reasonable and therefore entitled to deference. Second, the court found that Regulation section 1.448-1(g)(3)(iii), which required full payment of adjustments related to subsidiaries that had ceased operation in the same taxable year as the cessation, was reasonable. While the court considered possibly ambiguous statutory language that seemed to suggest that the Regulations at issue produced an erroneous result, nonetheless it believed that deference was still appropriate. The court’s decision to apply Chevron deference is not remarkable, as the Sixth Circuit and other courts have granted such deference in the past. Unlike in previous cases, however, the leeway the court gave to the Service in this case, upon finding the ambiguity, was so broad as to nullify the purpose of the statute itself. The decision in Hospital Corp. is significant for two reasons. First, by applying a low standard both for statutory ambiguity and regulatory reasonableness, it accords an extraordinarily high level of deference to interpretive Treasury Regulations. The decision thus represents a grant of power to the Treasury that, by elevating the deference accorded to the Treasury in issuing Regulations above that accorded to the plain meaning of the statute, removes a powerful argument from the arsenal available to taxpayers involved in disputes with the Service. Second, in denying taxpayers the statutory benefit granted to “hospitals” with respect to the hospitals’ taxpayers had sold, notwithstanding taxpayers’ continuing operation of other hospitals, the court relied upon a strikingly counterintuitive distinction between parent corporations and their subsidiaries.

Part I of this Note provides the factual and legal background of the Hospital Corp. case. Part II summarizes the Sixth Circuit’s opinion. Part III analyzes the opinion and discusses the flaws in the court’s reasoning, emphasizing the court’s misapplication of the Chevron doctrine to the Regulations at issue. Finally, Part IV concludes with a look at the implications of the Hospital Corp. decision, noting some ramifications for taxpayers and pitfalls for practitioners portended by Hospital Corp.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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