UNITED STATES TAX COURT



   BLUE CROSS & BLUE SHIELD OF TEXAS, INC., AND SUBSIDIARIES,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 361-98.                 Filed August 18, 2000.



          Held: “Savings” relating to “coordination of
     benefits” between health insurance companies do not
     qualify under the transition rule of the Omnibus
     Budget Reconciliation Act of 1990, Pub. L. 101-508,
     sec. 11305(c)(3), 104 Stat. 1388-452. Claimed
     “special” deductions relating thereto are not allowed.

          Held, further, the claimed “special” deductions
     also are not allowed under the safe harbor rule of
     sec. 1.832-4(f)(2), Income Tax Regs.



     Richard Bromley, Glen H. Kanwit, R. Lee Christie, and

Tracy D. Williams, for petitioner.

     John S. Repsis, Charles W. Maurer, Jr., Stephanie R. Jensen,

and Michael C. Prindible, for respondent.
                                - 2 -

                               OPINION

     SWIFT, Judge:    For 1992 and 1993, respectively, respondent

determined deficiencies of $3,094,736 and $2,184,916 in

petitioner's Federal income taxes.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After settlement of some issues, the issue for decision is

whether “savings” relating to “coordination of benefits” between

petitioner and other health insurance companies qualify under the

transition rule of the Omnibus Budget Reconciliation Act of 1990

(OBRA 1990), Pub. L. 101-508, section 11305(c)(3), 104 Stat.

1388-452.    If not, we must decide whether the claimed “special”

deductions relating thereto are allowable under the safe harbor

rule of section 1.832-4(f)(2), Income Tax Regs.

     We combine our findings of fact and opinion.    Some of the

facts have been stipulated and are so found.

     During the years in issue, petitioner constituted an

affiliated group of companies engaged in the business of

providing medical health insurance to individuals and businesses.

At the time the petition was filed, Blue Cross & Blue Shield of
                               - 3 -

Texas, Inc., the common parent of petitioner’s affiliated group,

maintained its principal place of business in Richardson, Texas.

Hereinafter, petitioner will be referred to simply as Blue Cross.


Coordination of Benefits Provisions

     Since the 1970's, medical health insurance plans written by

Blue Cross and by other health insurance companies typically

contain nearly identical “coordination of benefits” (COB)

provisions that are based on COB guidelines published by the

National Association of Insurance Commissioners and that are

required by most State insurance laws.   The COB provisions

establish payment responsibility, as between two or more health

insurance companies, where insurance claims are filed that are

covered by more than one health insurance company.   The COB

provisions are intended to prevent duplicate recovery on claims

with respect to the same medical expenses.

     COB provisions are applicable where medical expenses are

incurred by individuals who are covered under two or more health

insurance plans.   A common COB situation arises in a family

context where both parents are employed, with one parent covered

by one group health plan and the other parent covered by another

group health plan, with the spouse of each parent and each child

also covered by both of the parents’ group health plans.    In such
                               - 4 -

a situation, each member of the family has duplicate and

overlapping health insurance coverage –- coverage under the

father’s plan and coverage under the mother’s plan.

     Under COB provisions, in such situations of duplicate and

overlapping health insurance coverage, the various health

insurance companies providing the overlapping insurance coverage

are treated as either primarily or secondarily responsible for

specific expenses and claims based on various and often arbitrary

factors.   For example, under COB provisions, medical expenses

incurred by a husband would be treated as the primary

responsibility of the medical insurance plan covering the husband

directly as an employee.   The insurance plan of the wife that

covers the injured husband only as the spouse of the wife would

be treated as secondarily responsible for the husband’s expenses.

     As a further example, if the two health insurance plans of

the parents cover medical expenses of an injured child only

because the child is a dependent of the parents, under typical

COB provisions, the plan that covers the parent who has the

earlier birthday in the calendar year is treated as having

primary responsibility for the child’s expenses.

     Under COB provisions, health insurance companies that are

treated as primarily responsible for medical expenses and claims

(hereinafter referred to as primary insurers) are obligated to
                                - 5 -

pay claims submitted to them as they would in the absence of any

secondary responsibility by another insurance company.

     Health insurance companies that are treated as secondarily

responsible for medical expenses and claims (hereinafter referred

to as secondary insurers) generally are obligated to pay only

that portion of claims representing the difference between the

amount the primary insurers pay and the total amount of the

claims.   For example, if a child is injured and claims are filed

under health insurance plans maintained by both parents, the

primary insurer (i.e., the insurer issuing the plan of the parent

with the earlier birthday during the calendar year) would be

responsible for the total portion of the claim covered under its

plan (e.g., 80 percent of the amount of the claim) and the

secondary insurer would be responsible for the remaining

20 percent of the claim.


COB Savings

     Each year, the difference between what health insurance

companies would pay if they were the primary insurer on all

claims covered by their medical insurance plans and what they

under COB provisions, as secondary insurers, actually pay on

claims are referred to in the health insurance industry as COB

“savings”.    In the last illustration above, because the secondary

insurer pays only 20 percent of the amount of the claim,

60 percent of the amount of the claim represents, to the
                               - 6 -

secondary insurer, COB savings (i.e., the additional amount the

secondary insurer would have had to pay if it had been primarily

responsible for the claim).   Under the COB provisions, secondary

insurers hypothetically “save” such amounts because they do not

pay the additional portion of the claims that they would have

paid if they had been the primary insurer.

      Under COB provisions, once claims that have overlapping

coverage have been filed and once primary and secondary

responsibility as between two insurance companies for the claims

has been identified, secondary insurers may wait for the primary

insurers to calculate and to make their payments on pending

claims before making the secondary payments (hereinafter referred

to as the “wait-and-pay” approach).    Alternatively, under COB

provisions, secondary insurers may pay up front the full amount

of the pending claims (up to the maximum coverage thereof) and

then seek reimbursement from the primary insurers for amounts for

which the primary insurers are responsible (hereinafter referred

to as the “pay-and-pursue” approach).

     Prior to and throughout the years in issue and unless paid

in error, Blue Cross routinely used the wait-and-pay approach.

Blue Cross only utilized the pay-and-pursue approach in the event

a claimant did not disclose (or in the event Blue Cross’s COB

investigation department did not identify) duplicate health

insurance coverage that would trigger coordination of benefits.
                               - 7 -

Medicare-Related COB Savings

     Another common situation that produces amounts included by

insurance companies in COB savings involves retired employees and

their spouses who are over 65 years of age and who are covered

under insurance plans issued by health insurance companies and

who also are covered under Medicare.   Prior to and throughout the

years in issue, language was included in Blue Cross’ health

insurance plans that excluded from coverage (and from liability)

those medical expenses and claims that were covered “under the

Workers' Compensation law, or any other present or future laws

enacted by the Legislature of any state, or by the Congress of

the United States [such as Medicare].”

     Under typical COB provisions, the difference between what

health insurance companies would be liable to pay for medical

expenses in the event there was no Medicare coverage and the

lesser amount the companies actually are liable for and pay after

taking into account payments to be made by Medicare are referred

to and represent “Medicare-related COB savings”.

     For 1989, Blue Cross calculated a total of $243,646,504 in

total COB savings.   Approximately 85 percent of the $243,646,504

reflects Medicare-related COB savings, which, as indicated, were

excluded from coverage under Blue Cross’ health insurance plans.
                               - 8 -

Financial Reserves and Financial Statements

     To assure eventual payment of expenses relating to injuries

incurred during a year but with respect to which the related

claims are not paid by yearend, health insurance companies are

required by insurance regulators to maintain financial reserves

relating to such estimated unpaid expenses (referred to as

“losses”) and to report such estimated unpaid losses on their

financial statements.   Reserves for unpaid losses, then, reflect

actuarially estimated amounts health insurance companies set

aside for losses incurred during the year but with respect to

which claims are not paid by yearend.

     As of December 31 of each year, Blue Cross and other health

insurance companies are required by insurance regulators and by

generally accepted accounting practices, as applicable to

insurance companies, to report the paid losses and the estimated

unpaid losses incurred during the year on specialized annual

financial statement forms (Annual Statements).

     Paid losses reported on the Annual Statements reflect

amounts of medical expenses that are incurred during the year

that health insurance companies actually pay on claims.

     Unpaid losses reported on the Annual Statements generally

reflect actuarially estimated amounts of medical expenses that

are incurred during the year but that by yearend are not yet paid

by the health insurance companies.
                                - 9 -

     With regard to the calculation each year of the estimated

unpaid losses for which financial reserves are maintained, health

insurance companies that use the pay-and-pursue approach for COB

savings calculate their reserves for unpaid losses based on the

full, total amount of coverage on their health insurance plans –-

including amounts which, under the COB provisions, the reporting

insurance companies will pay and thereafter be reimbursed by

other insurance companies which are the primary insurers with

regard to the claims.

     Health insurance companies, however, such as Blue Cross,

that use the wait-and-pay approach for COB savings, need only

estimate their financial reserves for unpaid losses after taking

into account and subtracting amounts which, under COB provisions,

the reporting insurance companies will not have to pay because of

the responsibility of other insurance companies as the primary

insurers to pay such amounts.

     Because actual funds must be maintained by health insurance

companies in their financial reserves for amounts they calculate

as incurred but unpaid losses, significant financial and economic

differences exist for health insurance companies between

insurance company calculations of loss reserves that do not

subtract estimated COB savings and insurance company calculations

of loss reserves that do subtract estimated COB savings.
                               - 10 -

     Prior to and throughout the years in issue, for financial

statement and Annual Statement reporting purposes, and in

calculations of its financial loss reserves, Blue Cross

subtracted COB savings in its calculations of its unpaid losses.

Blue Cross therefore maintained financial reserves relating to

unpaid losses only for its estimated primary and secondary

payment responsibilities due on claims after primary insurers had

made their primary payments.   In other words, Blue Cross did not

maintain financial reserves with respect to its COB savings

amounts.

     Prior to and throughout the years in issue, Blue Cross also

included language in its health insurance plans that entitled

Blue Cross to recovery or subrogation of amounts Blue Cross had

paid on claims (1) where the injury was caused by third-party

tortfeasers or (2) where, under the COB provisions, the amounts

should have been paid by other health insurance companies.    Such

amounts received from tortfeasers and from other health insurance

companies are treated and referred to by insurance companies as

“subrogation recoverable”.

     The COB guidelines promulgated by the National Association

of Insurance Commissioners treat COB savings differently from

subrogation recoverable.   Blue Cross also treats COB savings

differently from subrogation recoverable, and Blue Cross

maintains separate departments for each.
                               - 11 -

1990 Change in the Tax Code

     Generally, section 832(c)(4) allows health insurance

companies a deduction from taxable income for losses incurred.

For years prior to 1990, losses incurred were to be calculated by

health insurance companies based on losses paid during the year,

less “salvage” actually recovered during the year (i.e., less

amounts recovered from third-party tortfeasors or others relating

to claims they had paid), plus an adjustment for any increase or

decrease in estimated incurred but unpaid losses.   See sec.

832(b)(5)(A), I.R.C. (1986).

     For years prior to 1990, in their calculations of incurred

but unpaid losses, health insurance companies had the option of

taking into account estimated recoveries from third-party

tortfeasors and other health insurance companies.   If health

insurance companies elected to not reduce the calculations of

their estimated incurred but unpaid losses by estimated

recoveries, the health insurance company calculations were

referred to as calculations of “unpaid losses gross of estimated

recoveries”.   If health insurance companies elected to reduce the

calculations of their estimated incurred but unpaid losses by

estimated recoveries, the health insurance company calculations

were referred to as “unpaid losses net of estimated recoveries”.

     In 1990, however, Congress amended section 832(b)(5)(A) for

years beginning January 1, 1990, to require all health insurance

companies, in calculating estimated incurred but unpaid losses
                              - 12 -

and the deductions relating thereto, to take into account

estimates of salvage that might be recovered with respect to

estimated incurred but unpaid losses (i.e., to make their

calculations of unpaid losses net of estimated recoveries).    See

OBRA 1990, sec. 11305(c), 104 Stat. 1388-451.

     For health insurance companies that for years prior to 1990

had reported unpaid losses gross of estimated recoveries, the

above change in section 832(b)(5)(A) would constitute a change in

method of accounting and for 1990 would give rise to section 481

adjustments to income.   Congress, however, granted transitional

relief and a one-time deduction to such companies by permanently

forgiving 87 percent of the amount that under section 481

otherwise would have been includable in gross income for 1990,

thereby reducing the section 481 adjustments that otherwise would

have been required to just 13 percent thereof, to be taken into

income ratably over 4 years beginning with 1990.   See OBRA 1990,

sec. 11305(c)(2), 104 Stat. 1388-451.

     To provide similar or parallel tax treatment for health

insurance companies, such as Blue Cross, that prior to 1990 had

reported unpaid losses net of estimated recoveries, Congress

granted similar transitional or “special” deductions equaling

87 percent of the amount of “estimated salvage recoverable” that

the companies had taken into account during 1989, to be deducted

ratably over 4 years beginning with 1990.   The special deduction
                              - 13 -

rule of OBRA 1990, section 11305(c)(3), 104 Stat. 1388-452 (the

special deduction rule), provided as follows:


          Treatment of companies which took into account
     salvage recoverable.–-In the case of any insurance
     company which took into account salvage recoverable in
     determining losses incurred for its last taxable year
     beginning before January 1, 1990, 87 percent of the
     discounted amount of estimated salvage recoverable as of
     the close of such last taxable year shall be allowed as
     a deduction ratably over its 1st 4 taxable years
     beginning after December 31, 1989.


     For 1990 through 1993, Blue Cross timely filed consolidated

U.S. Corporation income tax returns.   Blue Cross calculated that

under the special deduction rule a total of $70,950,582 reflected

Blue Cross' estimated salvage recoverable relating to incurred

but unpaid losses for its last taxable year beginning before

January 1, 1990.   Accordingly, Blue Cross multiplied the total

$70,950,582 by 87 percent and by a discount factor of

approximately 4 percent, to produce a figure of $59,352,862, and

Blue Cross deducted one fourth of the $59,352,862, or

$14,838,215, for each of the years 1990 through 1993 as its

special deduction.

     On audit for years 1992 and 1993, respondent disallowed each

of Blue Cross' claimed $14,838,215 special deductions.1




1
     The evidence does not indicate respondent's treatment of the
special deductions claimed by Blue Cross on its 1990 and 1991
Federal corporation income tax returns.
                              - 14 -

     Approximately 94 percent of the total $70,950,582 claimed by

Blue Cross as estimated salvage recoverable reflected COB

savings.   Further, as previously indicated, approximately

85 percent of the COB savings amount reflected Medicare-related

COB savings.

     Only approximately 3 percent of the $70,950,582 claimed by

Blue Cross as estimated salvage recoverable reflected amounts

that Blue Cross actually paid and then recovered from tortfeasors

and from other insurance companies.2

     The relevant statutory provisions do not define what is

meant by “estimated salvage recoverable”.    E.g., OBRA 1990,

sec. 11305(c), 104 Stat. 1388-451.     It is therefore necessary to

look beyond the statutory language to the limited regulatory and

case authority on point.

     Section 1.832-4(c), Income Tax Regs., provides that

estimated salvage recoverable includes --




2
     Approximately 1 percent of the $70,950,582 Blue Cross
calculated as total estimated salvage recoverable reflected
amounts for which it was both primary and secondary insurer, or
“blue on blue”. The parties recognize that with respect to blue-
on-blue duplicate coverage, Blue Cross could not recover salvage
from itself. Another approximate 2 percent reflected amounts for
which Blue Cross did not assume the health insurance risks of
employees and dependents, but provided employers with
administrative services only. Blue Cross concedes that this
2 percent clearly does not represent genuine salvage recoverable.
                              - 15 -

     all anticipated recoveries on account of salvage, whether or
     not the salvage is treated, or may be treated, as an asset
     for state statutory accounting purposes. * * * [And]
     includes anticipated recoveries on account of subrogation
     claims arising with respect to paid or unpaid losses.


     Case law relevant to the meaning of estimated salvage

recoverable is limited.   The Supreme Court in a century-old case

explained salvage rights as follows:   “[T]he insurer, when he has

paid * * * the assured * * * is entitled, by way of salvage, to

the benefit of anything that may be received”.   Phoenix Ins. Co.

v. Erie & W. Transp. Co., 

, 321 (1886), cited in

Continental Ins. Co. v. United States, 

, 

(1973).   (Emphasis added.)

     Black's Law Dictionary 1280, 1340 (7th ed. 1999) defines

“recovery” as “the regaining or restoration of something lost or

taken away”, and it defines “salvage” (utilized largely in the

property and casualty insurance industry) as “property saved or

remaining after a fire or other loss, sometimes retained by an

insurance company that has compensated the owner for the loss.”

(Emphasis added.)

     In essence, Blue Cross contends that, because under its

health insurance plans it is contractually liable for the full

potential amount of all claims covered by its insurance plans, it

should be regarded as having a contractual right of recovery or

salvage for all portions of claims with respect to which other

insurance companies and Medicare also have a liability to pay the
                               - 16 -

claims or portions thereof.    Blue Cross argues that, as injuries

occur and as medical expenses relating thereto are incurred by

insured individuals, Blue Cross accrues the right to recover from

other insurance companies and Medicare that also have insured the

same individuals.   In sum, Blue Cross argues that the insured

individuals’ right to recover from other insurance companies and

Medicare is subrogated to Blue Cross where Blue Cross also has

issued insurance plans covering the same individuals.

      Blue Cross argues that there is no significant economic

difference between “taking immediate possession” from the insured

individuals of the intangible rights of recovery and salvage with

respect to COB savings (as it does under a pay-and-pursue

approach) and “leaving” with the insured individuals the rights

of recovery and salvage with respect to COB savings (as it does

under a wait-and-pay approach).   Blue Cross argues that under

either approach, for Federal income tax purposes, it should be

treated as economically realizing the recovery and salvage rights

with respect to COB savings.   Accordingly, Blue Cross contends

that its COB savings relating to incurred but unpaid losses

before January 1, 1990, reflect salvage recoverable and should be

included in the calculations of estimated salvage recoverable

under the special deduction rule.
                               - 17 -

Medicare-Related COB Savings

     Respondent contends that because Medicare-related benefits

are excluded from coverage under Blue Cross’ health insurance

plans, Blue Cross’ Medicare-related COB savings give rise to no

liability on the part of Blue Cross.    Respondent therefore

concludes that the portion of claims covered by Medicare gives

rise to no right of recovery or salvage in favor of Blue Cross

and that the portion of Blue Cross’ claimed salvage recoverable

that is based on and that relates to Medicare-related COB savings

should not, under the special deduction rule, be treated as

salvage recoverable and the claimed loss deductions relating

thereto should not be allowable.   We agree with respondent.

     The language contained in Blue Cross' medical insurance

plans clearly indicates that Blue Cross is not liable to pay

amounts covered by Medicare.   Without contractual liability and

without payment of Medicare-covered benefits, Blue Cross’

Medicare-related COB savings do not constitute estimated salvage

recoverable.


Non-Medicare-Related COB Savings

     Because Blue Cross utilized the wait-and-pay approach with

respect to its non-Medicare-related COB savings, respondent

contends that such non-Medicare-related COB savings likewise do

not constitute estimated salvage recoverable under the special

deduction rule.   Respondent argues that Blue Cross never expected
                              - 18 -

to pay COB savings amounts (i.e., amounts that primary insurers

were responsible for and pay) and that Blue Cross never acquired

fixed and genuine rights of recovery and salvage with regard

thereto.   We again agree with respondent.

     The applicable regulation under section 832 requires that

unpaid losses, to be taken into account in computing losses

incurred, are to represent a fair and reasonable estimate of the

amount health insurance companies actually will be required to

pay, not of what they theoretically might have to pay.   Section

1.832-4(b), Income Tax Regs., in relevant part provides:


          Every insurance company to which this section applies
     must be prepared to establish to the satisfaction of the
     district director that the part of the deduction for “losses
     incurred” which represents unpaid losses at the close of the
     taxable year comprises only actual unpaid losses. * * *
     These losses must be stated in amounts which, based upon the
     facts in each case and the company's experience with similar
     cases, represent a fair and reasonable estimate of the
     amount the company will be required to pay. * * *


     The evidence shows that in the years before 1990, Blue Cross

consistently used the wait-and-pay approach and did not pay

(unless in error), reserve for, or expect to make payments with

respect to its COB savings.

     Blue Cross argues that because it could, after 1989, elect

to use the pay-and-pursue approach or that primary insurers could

fail to make their payments (e.g., in the event a primary insurer

becomes insolvent), Blue Cross’ COB savings, without the benefit
                              - 19 -

of hindsight, theoretically could reflect salvage recoverable

taken into account as of December 31, 1989.

     As previously indicated, for the years in issue and in

subsequent years, Blue Cross generally did not make payments for

which other companies under the COB provisions were primarily

responsible.   We conclude that (because Blue Cross used the wait-

and-pay approach before making secondary payments) Blue Cross’

COB savings do not qualify as estimated salvage recoverable and

are not allowable as a deduction under the special deduction

rule.

     To qualify as estimated salvage recoverable for purposes of

the special deduction rule there must exist an expectation of

actual payment.   The mere fact that a loss has been incurred on

the date of an injury does not mean that health insurance

companies expect to be responsible for and expect to pay the full

amount of claims relating to the injury.

     With respect, however, to the 3 percent of the $70,950,582

that Blue Cross calculated as its total estimated salvage

recoverable reflecting amounts Blue Cross actually paid and then

recovered from third-party tortfeasors and other health insurance

companies, such amounts do represent genuine subrogation

recoverable and do qualify as estimated salvage recoverable under

the special deduction rule.


Safe Harbor Relief
                              - 20 -

     Blue Cross also contends that its estimate of salvage

recoverable and related deductions under the special deduction

rule qualify for safe harbor relief.     Under section 1.832-

4(f)(2), Income Tax Regs., it is provided that, if the

requirements for safe harbor are satisfied, respondent may be

precluded from making an adjustment to the amounts of “bona fide”

estimated salvage recoverable reported and claimed by health

insurance companies.

     Health insurance companies seeking to qualify under the safe

harbor provision, among other things, were required to file with

State insurance regulators by September 16, 1991, a statement

that identifies the extent to which the companies' incurred

losses for each line of business, as reported on their 1989

Annual Statements, were reduced by bona fide estimated salvage

recoverable.   The pertinent language of section 1.832-4(f)(2)(i),

Income Tax Regs., provides as follows:


          (2) Safe Harbor. The requirements of paragraph
     (f)(1) of this section are deemed satisfied and the amount
     that the company reports as bona fide estimated salvage
     recoverable is not subject to adjustment by the district
     director, if–-

               (i) The company files with the insurance
          regulatory authority of the company's state of
          domicile, on or before September 16, 1991, a
          statement disclosing the extent to which losses
          incurred for each line of business reported on its
          1989 annual statement were reduced by estimated
          salvage recoverable.
                             - 21 -

     On or before September 16, 1991, Blue Cross filed a letter

with the Texas Department of Insurance, the entire contents of

which are set forth below:


          As you are aware, in reporting to your department
     [BLUE CROSS] has always followed actuarially accepted
     and certified practices for determining and reporting
     its losses incurred and its incurred unpaid claim
     reserves. In OBRA 1990, Congress granted a special one
     time deduction to insurance carriers who report losses
     incurred as we do. IRS regulations provide that a
     notification filed with your office will establish the
     amount of this allowable tax deduction.

          The sole purpose of this letter is to notify you
     that we have determined our special tax deduction to be
     87% of $74,780,518 discounted at 96.1538% for
     recoveries related to our losses incurred deduction
     prior to 1990 and reported in the 1989 Annual
     Statement.

          OUR REPORTING TO YOU HAS NOT CHANGED AND WILL NOT
     CHANGE IN ANY RESPECT FROM THE ACCEPTED METHODS AND
     APPROACHES WE HAVE ALWAYS USED. Our incurred unpaid
     claim reserves will continue to be determined using the
     same methods, include the same actuarial certifications
     as always and continue to be in full compliance with
     established methods and practices approved and
     routinely examined by your department. [Emphasis in
     original.]


     As respondent notes, the language of the above letter does

not begin to disclose to Texas insurance regulators the extent to

which Blue Cross' losses that were incurred for each line of

business, as reported on its 1989 Annual Statement, were reduced

by estimated salvage recoverable.   No separate lines of business

are disclosed, and the words “estimated salvage recoverable” are
                               - 22 -

not even used in the letter.     We conclude that Blue Cross did not

satisfy the disclosure requirement for safe harbor relief under

section 1.832-4(f)(2), Income Tax Regs.

     Further, as previously held, Blue Cross’ calculation of its

estimated salvage recoverable (consisting predominantly of COB

savings) does not reflect “bona fide” or genuine salvage

recoverable, and therefore Blue Cross’ disclosure of that

calculation would not satisfy the disclosure required for safe

harbor relief under section 1.832-4(f)(2), Income Tax Regs.

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.