26 U.S.C. § 833: Treatment of Blue Cross and Blue Shield organizations, etc.

Such organization shall be taxable under this part in the same manner as if it were a stock insurance company. The deduction determined under subsection (b) for any taxable year shall be allowed. Subparagraph (B) of paragraph (4) of section 832(b) shall be applied by substituting “100 percent” for “80 percent”, and subparagraph (C) of such paragraph (4) shall not apply. the claims incurred during the taxable year and liabilities incurred during the taxable year under cost-plus contracts, and the expenses incurred during the taxable year in connection with the administration, adjustment, or settlement of claims or in connection with the administration of cost-plus contracts, over the adjusted surplus as of the beginning of the taxable year. The deduction determined under paragraph (1) for any taxable year shall not exceed taxable income for such taxable year (determined without regard to such deduction). increased by the amount of any adjusted taxable income for such preceding taxable year, or decreased by the amount of any adjusted net operating loss for such preceding taxable year. The adjusted surplus as of the beginning of the organization’s 1st taxable year beginning after December 31, 1986 , shall be its surplus as of such time. For purposes of the preceding sentence and subsection (c)(3)(C), the term “surplus” means the excess of the total assets over total liabilities as shown on the annual statement. without regard to the deduction determined under this subsection, without regard to any carryforward or carryback to such taxable year, and by increasing gross income by an amount equal to the net exempt income for the taxable year. The term “adjusted net operating loss” means the net operating loss for any taxable year determined with the adjustments set forth in subparagraph (C). any tax-exempt interest received or accrued during the taxable year, reduced by any amount (not otherwise deductible) which would have been allowable as a deduction for the taxable year if such interest were not tax-exempt, and the aggregate amount allowed as a deduction for the taxable year under sections 243 and 245. Any determination under this subsection shall be made by only taking into account items attributable to the health-related business of the taxpayer. any existing Blue Cross or Blue Shield organization, and any other organization meeting the requirements of paragraph (3). such organization was in existence on August 16, 1986 , such organization is determined to be exempt from tax for its last taxable year beginning before January 1, 1987 , and no material change has occurred in the operations of such organization or in its structure after August 16, 1986 , and before the close of the taxable year. substantially all the activities of such organization involve the providing of health insurance, at least 10 percent of the health insurance provided by such organization is provided to individuals and small groups (not taking into account any medicare supplemental coverage), such organization provides continuous full-year open enrollment (including conversions) for individuals and small groups, such organization’s policies covering individuals provide full coverage of pre-existing conditions of high-risk individuals without a price differential (with a reasonable waiting period), and coverage is provided without regard to age, income, or employment status of individuals under age 65, at least 35 percent of its premiums are determined on a community rated basis, and no part of its net earnings inures to the benefit of any private shareholder or individual. 15 individuals, or the number of individuals required for a small group under applicable State law. For purposes of subsection (b), the adjusted surplus of any organization meeting the requirements of this paragraph as of the beginning of the 1st taxable year for which it meets such requirements shall be its surplus as of such time. Paragraph (2) shall be applied to an organization described in subparagraph (B) as if it were a Blue Cross or Blue Shield organization. is organized under, and governed by, State laws which are specifically and exclusively applicable to not-for-profit health insurance or health service type organizations, and is not a Blue Cross or Blue Shield organization or health maintenance organization. Notwithstanding the preceding paragraphs, paragraphs (2) and (3) of subsection (a) shall not apply to any organization unless such organization’s percentage of total premium revenue expended on reimbursement for clinical services and for activities that improve health care quality provided to enrollees under its policies during such taxable year (as reported under section 2718 of the Public Health Service Act) is not less than 85 percent. The amendments made by this section [enacting this section and amending section 501 of this title ] shall apply to taxable years beginning after December 31, 1986 . The Secretary of the Treasury or his delegate shall conduct a study of organizations described in section 501(c)(8) of the Internal Revenue Code of 1986 and which received gross annual insurance premiums in excess of $25,000,000 for the taxable years of such organizations which ended during 1984. Not later than January 1, 1988 , the Secretary of the Treasury shall submit to the Committee on Ways and Means of the House of Representatives, the Committee on Finance of the Senate, and the Joint Committee on Taxation the results of such study, together with such recommendations as he determines to be appropriate. The Secretary of the Treasury shall have authority to require the furnishing of such information as may be necessary to carry out the purposes of this paragraph. no adjustment shall be made under section 481 (or any other provision) of such Code on account of a change in its method of accounting for its 1st taxable year beginning after December 31, 1986 , and for purposes of determining gain or loss, the adjusted basis of any asset held on the 1st day of such taxable year shall be treated as equal to its fair market value as of such day. For purposes of section 833(b)(3)(B), the surplus of any organization as of the beginning of its 1st taxable year beginning after December 31, 1986 , shall be increased by the amount of any distribution (other than to policyholders) made by such organization after August 16, 1986 , and before the beginning of such taxable year. Any reserve weakening after August 16, 1986 , by an existing Blue Cross or Blue Shield organization shall be treated as occurring in such organization’s 1st taxable year beginning after December 31, 1986 . The amendments made by this section shall not apply with respect to that portion of the business of Mutual of America which is attributable to pension business. The amendments made by this section shall not apply to that portion of the business of the Teachers Insurance Annuity Association-College Retirement Equities Fund which is attributable to pension business. the retirement fund of the YMCA, the Missouri Hospital Plan, administrative services performed by municipal leagues, and dental benefit coverage provided by a Delta Dental Plans Association organization through contracts with independent professional service providers so long as the provision of such coverage is the principal activity of such organization. For purposes of this paragraph, the term ‘pension business’ means the administration of any plan described in section 401(a) of the Internal Revenue Code of 1954 [now 1986] which includes a trust exempt from tax under section 501(a), any plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b) of such Code, any individual retirement plan described in section 408 of such Code, and any eligible deferred compensation plan to which section 457(a) of such Code applies.” Subparagraphs (A) and (B) of section 1012(c)(4) of the Tax Reform Act of 1986 [ Pub. L. 99–514 , set out as an Effective Date note above] shall not apply to any taxable year beginning after December 31, 1997 . no adjustment shall be made under section 481 (or any other provision) of such Code on account of a change in its method of accounting for its first taxable year beginning after December 31, 1997 , and for purposes of determining gain or loss, the adjusted basis of any asset held on the 1st day of such taxable year shall be treated as equal to its fair market value as of such day. Any reserve weakening after June 8, 1997 , by an organization described in subsection (b) shall be treated as occurring in such organization’s 1st taxable year beginning after December 31, 1997 . The Secretary of the Treasury or his delegate may prescribe rules for providing proper adjustments for organizations described in subsection (b) with respect to short taxable years which begin during 1998 by reason of section 843 of the Internal Revenue Code of 1986.”