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The conversion of Blue Cross Blue Shield organizations to
taxable status was enacted because Congress believed that the
prior tax-exempt status of these organizations provided the
organizations unfair competitive advantages over taxable
commercial health insurance companies. H. Rept. 99-426, at 664
(1985), 1986-3 C.B. (Vol. 2) 1, 664.
Petitioner’s 376 health insurance group contracts in issue
herein for 1994 constituted for petitioner self-created assets.3
Understandably, because it was exempt from Federal income
tax, from its organization in 1938 through 1986 petitioner did
not reflect in its tax books and records any cost basis relating
to its self-created health insurance group contracts.4
Accordingly, the basis step-up provision of TRA 1986 provides
petitioner with the only ground for establishing a tax basis in
the 376 group contracts.
Because of petitioner’s new taxable status and under
petitioner’s interpretation herein of the basis step-up provision
of TRA 1986, beginning January 1, 1987, petitioner would have
3 Apparently, petitioner’s 376 group contracts (which were
terminated in 1994 and to which the loss deductions in dispute
herein relate) do not include any of the Lehigh Valley group
contracts that arguably were “purchased” by petitioner in 1985
when petitioner merged with Blue Cross of Lehigh Valley.
4 Also, for the indicated pre-1987 years the evidence does
not indicate that petitioner’s financial books and records
reflected any cost basis in its self-created health insurance
group contracts.
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Last modified: May 25, 2011