Hospital Corporation of America and Subsidiaries - Page 13

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          the prospect of Federal income tax deductions for the reserves5             
          that would be maintained against insured labilities of the                  
          operating companies.  HCA management believed that setting up a             
          legitimate U.S. insurance company managed by insurance                      
          professionals would offer the best chance of obtaining that                 
          deduction, though they realized that favorable tax treatment was            
          not assured.                                                                



          The Formation of Parthenon                                                  
               During 1976, HCA formed Parthenon as a wholly owned                    
          subsidiary under the Colorado captive insurance statute, Colorado           
          Rev. Stat. secs. 72-36-1 to 72-36-30 (1963), now codified at                
          secs. 10-6-101 to 10-6-130 (1991).  HCA management expected that            


          5  In Western Natl. Mut. Ins. Co. v. Commissioner, 102 T.C.                 
          338, 350-351 (1994), affd. 65 F.3d 90 (8th Cir. 1995), we defined           
          the term "reserve" as follows:                                              
               In the insurance industry a policy reserve represents a                
               liability; i.e., it represents an obligation to the                    
               policyholders.  Historically, reserves have been described             
               in PC [property and casualty] insurance literature as                  
               estimated liabilities for losses and loss adjustment                   
               expenses.  To some extent, loss reserves are estimates                 
               extrapolated from past trends, patterns, averages, and                 
               inferences and predictions as to the future.  Accordingly,             
               "The reserve simply operates as a charge on so much of an              
               insurance company's assets as must be maintained in order              
               for the company to be able to meet its future commitments              
               under the policies it has issued."  The general concept for            
               reserves is the same for life and PC insurance companies.              
               [Fn. ref. omitted; citations omitted.]                                 




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