Capital Blue Cross and Subsidiaries - Page 11

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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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