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From its organization in 1938 through the time of trial in
March and April of 2003, petitioner has been exempt from
Pennsylvania premium and Pennsylvania income taxes. See 40 Pa.
Cons. Stat. Ann. sec. 6103(b) (West 1999).
From its organization in 1938 through December 31, 1986, for
Federal income tax purposes, petitioner operated as a tax-exempt
organization under section 501(c)(4) and its predecessor
statutes.
Effective January 1, 1987, as a result of enactment of
sections 501(m) and 833 and because petitioner constituted an
existing Blue Cross Blue Shield organization, petitioner became
subject to Federal income tax. Tax Reform Act of 1986, Pub. L.
99-514, sec. 1012(a) and (b), 100 Stat. 2085, 2390-2394 (TRA
1986). The basis step-up provision of section 1012(c)(3)(A)(ii)
of TRA 1986 (hereinafter generally cited simply as TRA 1986
section 1012(c)(3)(A)(ii)) was applicable specifically to
petitioner and to other Blue Cross Blue Shield organizations.
This basis step-up provision, in situations about which the
parties dispute, provided generally that Blue Cross Blue Shield
organizations such as petitioner were entitled, for purposes of
determining gain or loss for Federal income tax purposes, to step
up their tax basis in assets owned on January 1, 1987, to the
assets’ January 1, 1987, fair market value.
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