INCLUSION OF BLUE CROSS/BLUE SHIELD-TYPE ORGANIZATION WILL NOT REQUIRE CREATION OF NEW CONSOLIDATED GROUP.

Notice 88-107

The Internal Revenue Service intends to issue regulations regarding the effect of section 1012 of the Tax Reform Act of 1986 ("1986 Act") on certain affiliated groups filing consolidated income tax returns ("consolidated groups"). Section 1012 of the 1986 Act removed the tax-exempt status of certain organizations described in section 833(c) of the Internal Revenue Code ("section 833 organizations"). As a result, such organizations have become includible corporations under section 1504(b) of the Code. Therefore, if a section 833 organization owns at least 80 percent of the stock of the common parent of a consolidated group, the inclusion of the section 833 organization in the affiliated group results in the termination of the existing consolidated group and the creation of a new affiliated group under section 1.1502-75(d)(1) of the income tax regulations.

The Internal Revenue Service has determined that the termination of the existing consolidated group and the creation of a new affiliated group was an unintended consequence of the removal of the section 833 organizations' tax-exempt status. Accordingly, regulations will be promulgated that will allow a new affiliated group that is created as the result of section 1012 of the 1986 Act to elect to be treated as a continuation of the old consolidated group. Under the regulations to be issued, an election to treat the old group as remaining in existence despite the addition of the section 833 organization as the new common parent will be deemed to have been made if a consolidated return consistent with that treatment is filed for the first taxable year in which the section 833 organization is an includible corporation. Forthcoming regulations, however, will provide a procedure for filing amended returns for affiliated groups that filed returns inconsistent with treating the old group as remaining in existence prior to September 14, 1988. The tax consequences of such an election generally will parallel the consequences applicable to a reverse acquisition as defined in section 1.1502-75(d)(3) of the regulations. In addition, the regulations will provide that if such an election is made, the removal of the tax-exempt status of the section 833 organization will not be treated as a change in tax character as defined in section 1.1502-47(d)(12)(vii) of the regulations. Detailed guidance regarding the consequences of such an election will be provided in the forthcoming regulations, along with a procedure for revoking elections made prior to publication of the regulations.

ADMINISTRATIVE PRONOUNCEMENT This notice serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

FOR FURTHER INFORMATION

For further information regarding this notice, contact Patricia W. Pellervo of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, at (202) 566-3458 (not a toll-free number).