Health Organization Special Deduction

§ 833. Treatment of Blue Cross and Blue Shield organizations, etc.(a) General ruleIn the case of any organization to which this section applies—(1) Treated as stock companySuch organization shall be taxable under this part in the same manner as if it were a stock insurance company. (2) Special deduction allowedThe deduction determined under subsection (b) for any taxable year shall be allowed. (3) Reductions in unearned premium reserves not to applySubparagraph (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 generalExcept 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) LimitationThe 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 surplusFor purposes of this subsection—(A) In generalThe 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 ruleThe 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 incomeThe 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 lossThe 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 incomeThe 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