
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC833]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                    Subchapter L--Insurance Companies
 
                   PART II--OTHER INSURANCE COMPANIES
 
Sec. 833. Treatment of Blue Cross and Blue Shield organizations, 
        etc.
        

(a) General rule

    In the case of any organization to which this section applies--

                    (1) Treated as stock company

        Such organization shall be taxable under this part in the same 
    manner as if it were a stock insurance company.

                    (2) Special deduction allowed

        The deduction determined under subsection (b) for any taxable 
    year shall be allowed.

      (3) Reductions in unearned premium reserves not to apply

        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.

(b) Amount of deduction

                           (1) In general

        Except as provided in paragraph (2), the deduction determined 
    under this subsection for any taxable year is the excess (if any) 
    of--
            (A) 25 percent of the sum of--
                (i) the claims incurred during the taxable year and 
            liabilities incurred during the taxable year under cost-plus 
            contracts, and
                (ii) 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

            (B) the adjusted surplus as of the beginning of the taxable 
        year.

                           (2) Limitation

        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).

                        (3) Adjusted surplus

        For purposes of this subsection--

        (A) In general

            The adjusted surplus as of the beginning of any taxable year 
        is an amount equal to the adjusted surplus as of the beginning 
        of the preceding taxable year--
                (i) increased by the amount of any adjusted taxable 
            income for such preceding taxable year, or
                (ii) decreased by the amount of any adjusted net 
            operating loss for such preceding taxable year.

        (B) Special rule

            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.

        (C) Adjusted taxable income

            The term ``adjusted taxable income'' means taxable income 
        determined--
                (i) without regard to the deduction determined under 
            this subsection,
                (ii) without regard to any carryforward or carryback to 
            such taxable year, and
                (iii) by increasing gross income by an amount equal to 
            the net exempt income for the taxable year.

        (D) Adjusted net operating loss

            The term ``adjusted net operating loss'' means the net 
        operating loss for any taxable year determined with the 
        adjustments set forth in subparagraph (C).

        (E) Net exempt income

            The term ``net exempt income'' means--
                (i) 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
                (ii) the aggregate amount allowed as a deduction for the 
            taxable year under sections 243, 244, and 245.

        The amount determined under clause (ii) shall be reduced by the 
        amount of any decrease in deductions allowable for the taxable 
        year by reason of section 832(b)(5)(B) to the extent such 
        decrease is attributable to deductions under sections 243, 244, 
        and 245.

          (4) Only health-related items taken into account

        Any determination under this subsection shall be made by only 
    taking into account items attributable to the health-related 
    business of the taxpayer.

(c) Organizations to which section applies

                           (1) In general

        This section shall apply to--
            (A) any existing Blue Cross or Blue Shield organization, and
            (B) any other organization meeting the requirements of 
        paragraph (3).

         (2) Existing Blue Cross or Blue Shield organization

        The term ``existing Blue Cross or Blue Shield organization'' 
    means any Blue Cross or Blue Shield organization if--
            (A) such organization was in existence on August 16, 1986,
            (B) such organization is determined to be exempt from tax 
        for its last taxable year beginning before January 1, 1987, and
            (C) 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.

    To the extent permitted by the Secretary, any successor to an 
    organization meeting the requirements of the preceding sentence, and 
    any organization resulting from the merger or consolidation of 
    organizations each of which met such requirements, shall be treated 
    as an existing Blue Cross or Blue Shield organization.

                       (3) Other organizations

        (A) In general

            An organization meets the requirements of this paragraph for 
        any taxable year if--
                (i) substantially all the activities of such 
            organization involve the providing of health insurance,
                (ii) 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),
                (iii) such organization provides continuous full-year 
            open enrollment (including conversions) for individuals and 
            small groups,
                (iv) 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,
                (v) at least 35 percent of its premiums are determined 
            on a community rated basis, and
                (vi) no part of its net earnings inures to the benefit 
            of any private shareholder or individual.

        (B) Small group defined

            For purposes of subparagraph (A), the term ``small group'' 
        means the lesser of--
                (i) 15 individuals, or
                (ii) the number of individuals required for a small 
            group under applicable State law.

        (C) Special rule for determining adjusted surplus

            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.

        (4) Treatment as existing Blue Cross or Blue Shield 
                                organization

        (A) In general

            Paragraph (2) shall be applied to an organization described 
        in subparagraph (B) as if it were a Blue Cross or Blue Shield 
        organization.

        (B) Applicable organization

            An organization is described in this subparagraph if it--
                (i) 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
                (ii) is not a Blue Cross or Blue Shield organization or 
            health maintenance organization.

(Added Pub. L. 99-514, title X, Sec. 1012(b)(1), Oct. 22, 1986, 100 
Stat. 2391; amended Pub. L. 104-191, title III, Sec. 351(a), Aug. 21, 
1996, 110 Stat. 2071; Pub. L. 105-34, title XVI, Sec. 1604(d)(2)(A), 
Aug. 5, 1997, 111 Stat. 1098.)


                               Amendments

    1997--Subsec. (b)(1)(A)(i). Pub. L. 105-34, Sec. 1604(d)(2)(A)(i), 
inserted ``and liabilities incurred during the taxable year under cost-
plus contracts'' before the comma.
    Subsec. (b)(1)(A)(ii). Pub. L. 105-34, Sec. 1604(d)(2)(A)(ii), 
inserted ``or in connection with the administration of cost-plus 
contracts'' before the last comma.
    1996--Subsec. (c)(4). Pub. L. 104-191 added par. (4).


                    Effective Date of 1997 Amendment

    Section 1604(d)(2)(B) of Pub. L. 105-34 provided that: ``The 
amendment made by subparagraph (A) [amending this section] shall take 
effect as if included in the amendments made by section 1012 of the Tax 
Reform Act of 1986 [Pub. L. 99-514].''


                    Effective Date of 1996 Amendment

    Section 351(b) of Pub. L. 104-191 provided that: ``The amendment 
made by this section [amending this section] shall apply to taxable 
years ending after December 31, 1996.''


                             Effective Date

    Section 1012(c) of Pub. L. 99-514, as amended by Pub. L. 100-647, 
title I, Sec. 1010(b)(1), (2), Nov. 10, 1988, 102 Stat. 3451, provided 
that:
    ``(1) In general.--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.
    ``(2) Study of fraternal beneficiary associations.--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.
    ``(3) Special rules for existing blue cross or blue shield 
organizations.--
        ``(A) In general.--In the case of any existing Blue Cross or 
    Blue Shield organization (as defined in section 833(c)(2) of the 
    Internal Revenue Code of 1986 as added by this section)--
            ``(i) 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
            ``(ii) 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.
        ``(B) Treatment of certain distributions.--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.
        ``(C) Reserve weakening after august 16, 1986.--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.
    ``(4) Other special rules.--
        ``(A) 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.
        ``(B) 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.
        ``(C) The amendments made by this section shall not apply to--
            ``(i) the retirement fund of the YMCA,
            ``(ii) the Missouri Hospital Plan,
            ``(iii) administrative services performed by municipal 
        leagues, and
            ``(iv) 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.
        ``(D) 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.''
    [The due date for the report referred to in section 1012(c)(2) of 
Pub. L. 99-514, set out above, extended to July 1, 1992, by Pub. L. 101-
508, title XI, Sec. 11831(b), Nov. 5, 1990, 104 Stat. 1388-559.]


    Termination of Certain Exceptions From Rules Relating to Exempt 
          Organizations Which Provide Commercial-Type Insurance

    Pub. L. 105-277, div. J, title IV, Sec. 4003(g), Oct. 21, 1998, 112 
Stat. 2681-910, provided that: ``Rules similar to the rules of section 
1.1502-75(d)(5) of the Treasury Regulations shall apply with respect to 
any organization described in section 1042(b) of the 1997 Act [section 
1042(b) of Pub. L. 105-34, set out below].''
    Section 1042 of Pub. L. 105-34 provided that:
    ``(a) In General.--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.
    ``(b) Special Rules.--In the case of an organization to which 
section 501(m) of the Internal Revenue Code of 1986 applies solely by 
reason of the amendment made by subsection (a)--
        ``(1) 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
        ``(2) 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.
    ``(c) Reserve Weakening After June 8, 1997.--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.
    ``(d) Regulations.--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.''


 Rules Providing Adjustments for Certain Taxpayers Affected by Section 
                         1012 of Pub. L. 99-514

    Pub. L. 100-647, title I, Sec. 1010(b)(3), Nov. 10, 1988, 102 Stat. 
3451, provided that: ``The Secretary of the Treasury or his delegate may 
prescribe rules providing proper adjustments for taxpayers which become 
subject to subchapter L of chapter 1 of the 1986 Code by reason of the 
amendments made by section 1012 of the Reform Act [Pub. L. 99-514, 
enacting this section and amending section 501 of this title] with 
respect to short taxable years which begin during 1987 by reason of 
section 843 of such Code.''

                  Section Referred to in Other Sections

    This section is referred to in section 56 of this title.
