Final Regs Reflect Blue Cross/Blue Shield Groups' Status as Includable Corporations

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations providing rules relating to the removal of the tax-exempt status of organizations described in section 833 of the Internal Revenue Code (relating to certain Blue Cross or Blue Shield organizations and certain other health insurers). The rules were needed because, as a result of the removal of tax-exempt status, such organizations are, for taxable years beginning after 1986, includible corporations under section 1504(b) of the Code.

 EFFECTIVE DATE: The regulations are effective for taxable years beginning after December 31, 1986.

 FOR FURTHER INFORMATION CONTACT: David B. Friedel, 202-622-7770 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

Section 1012 of the Tax Reform Act of 1986 denied, for taxable years beginning after December 31, 1986, tax-exempt status to certain organizations described in section 833(c) of the Internal Revenue Code ("section 833 organizations"), relating to certain Blue Cross or Blue Shield organizations and certain other health insurers. As a result, such organizations became includible corporations under section 1504(b) of the Code. Under section 1.1502-75(d)(1), as a result of a section 833 organization becoming the new common parent of an existing consolidated group ("old consolidated group"), the old consolidated group terminated and a new affiliated group with the section 833 organization as the new common parent was created.

 There is no indication that Congress intended the termination of the old consolidated group and the creation of a new affiliated group as a consequence of the denial of tax-exempt status to section 833 organizations. Therefore, on September 14, 1988, the Service announced in Notice 88-107, 1988-2 C.B. 445, that it would promulgate regulations ameliorating the harsh results that would follow from the termination of the old groups.

 On September 5, 1990, a notice of proposed rulemaking by cross- reference to temporary regulations adding section 1.1502-75T(d)(5) to part 1 of title 26 of the Code of Federal Regulations was published in the Federal Register (55 FR 36290). These regulations adopted a neutrality principle which was intended to preclude treating members of an old group better or worse by reason of the enactment of section 833.

 One written comment responding to the proposed rules was received. No public hearing was requested or held. For the reasons set forth below, the proposed rules are adopted without modification.

 The written comment objected to the application of the separate return limitation year rules to an old group which elected to be treated as remaining in existence with the section 833 organization as its new common parent. As explained in the explanation of provisions in the temporary regulations, T.D. 8310, 55 FR 36274 (September 5, 1990), the proposed regulations provided a modified rule under which a taxable year beginning before 1987 of a member of an old group that elected to remain in existence is not treated as a separate return limitation year with respect to the post-1986 taxable years of any corporation that was a member of the old group for each day of that taxable year.

 Under this modified rule, pre-1987 losses may generally be carried forward to offset the post-1986 income of other members of the same old group, but those losses may not offset the post-1986 income of any other corporation, including the section 833 organization which became the group's new common parent. Thus, the loss carryover treatment of each corporation affiliated with the section 833 organization is generally unaffected by the enactment of section 833. The Service continues to believe that this rule is the proper rule under the neutrality principle.

SPECIAL ANALYSES

 These final regulations are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required.

 It is hereby certified that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.

 It is hereby certified that these rules do not have a significant impact on a substantial number of small entities. The rules will primarily affect consolidated groups, which tend to be larger businesses. The rules will not significantly alter the reporting or recordkeeping duties of small entities. Therefore, a final Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

 Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking for the regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact of the rules on small businesses.

DRAFTING INFORMATION

 The principal author of these regulations is David B. Friedel, of the Office of Assistant Chief Counsel (Corporate) within the Office of Chief Counsel, Internal Revenue Service. Other personnel of the Internal Revenue Service and the Treasury Department participated in developing the regulations.

LIST OF SUBJECTS

26 CFR SECTIONS 1.1502-75 THROUGH 1.1502-100.

 Income taxes.

Treasury Decision 8438

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: * * * 26 U.S.C. 7805 * * * Section 1.1502-75T also issued under 26 U.S.C. 1502. * * *

Par. 2. Section 1.1502-75 is amended by adding and reserving paragraph (d)(4) and by redesignating section 1.1502-75T(d)(5) as section 1.1502-75(d)(5).

Par. 3. Section 1.1502-75T is amended by revising the section heading to read as set forth below and by removing paragraphs (c) and (d).

SECTION 1.1502-75T TEMPORARY REGULATIONS FOR FILING CONSOLIDATED RETURNS; COORDINATION WITH SECTION 338(h)(10) (TEMPORARY).

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