Free Motion for Summary Judgment - District Court of Federal Claims - federal

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DEFENDANT'S EXHIBIT 1

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IN THE UNITED STATES COURT OF FEDERA CLAIMS

HIGHM INC., SUCCESSOR IN
INTEREST TO PENNSYLVAN BLUE

) ) )

SHIELD AN SUBSIDIAS
Plaintiff,
v.

THE UNTED STATES,
Defendant.

) ) ) ) ) ) ) )
)

Civil Action No. 05-1030 T Judge Margolis

)
)

PLAITIFF'S SECOND AMNDED RESPONSE TO DEFENDANT'S FIRST SET OF REQUESTS FOR ADMISSIONS
PlaintiffHighark, Inc., successor in interest to Pennsylvania Blue Shield and

Subsidiares, ("Plaintiff' or "PBS") by and through its undersigned counel, hereby responds and
objects to Defendant the United States' ("Defendant" or "United States") First Set of

Requests for

Admissions as follows. Plaintiff reserves the right to supplement its responses.

GENERA OBJECTIONS
1. Plaintiff objects to each and every Request for Admission to the extent that ;t.v....iù
for information that is protected by the attorney-client privilege, the work product p;octrne, the
hereby
self-critical analysis privilege, or any other privilege or protection from disclo-3ure. Plaintiff

asserts all such applicable privileges and exemptions. Any disclosure of tJrivileged or protected

information in response to any Request for Admssion is inadverent an,d not intended to waive , ,

those privileges. i
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2. Plaintiff objects to the Requests for Admissions to the extent they seek information

wholly irrelevant to the claims asserted by Plaintiff and are not reasonably calculated to lead to the
discovery of admissible evidence.
3. Plaintiff objects to the Requests for Admissions to the extent that Defendant already

possesses or has equal access to the information sought.
4. Plaintiff objects to the Requests for Admissions to the extent that they are overbroad

and harassing and any attempt to respond would be unduly burdensome, expensive and/or
oppressive.
5. Plaintiff objects to the Requests for Admissions to the extent that they are vague or

ambiguous.
6. Whenever in these responses Plaintiff employs the phrase "subject to and without

waiving its obj ections," Plaintiff is responding to the paricular request for admission as it may be

narrowed by Plaintiffs general and specific objections and without waiver of any objections.
7. Plaintiffs responses herein shall not waive or prejudice any objections that Plaintiff

may later assert. These General Objections apply to and are incorporated by reference into each of

Plaintiffs specific responses and objections below, and the specific responses and objections set

forth below are not to be deemed a waiver, either in whole or in par, of any ofthese General
Objections.

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SPECIFIC RESPONSES AND OBJECTIONS
1. Plaintiff

has never capitalized the costs associated with creating healthcare coverage

contracts.

RESPONSE: Plaintiff objects to this Request on the ground that the terms "associated with
creating healthcare coverage contracts" are vague and undefined. Subject to and without waiving

its objections, Plaintiff answers as follows. For Federal income tax purposes, Plaintiff
characterized the costs associated with creating healthcare coverage contracts as required by the

Internal Revenue Code. Plaintiff fuher responds that to the best of its knowledge, Plaintiff did not
routinely capitalize the costs associated with internally developing or otherwse acquiring
healthcare coverage contracts in its financial accounting records and tax retus and that on neither

its financial books and records nor its tax retus has the Plaintiff recorded an asset account
containing or relating to healthcare coverage contracts, because the financial accounting rules and
Internal Revenue Code did not require Plaintiff

to do so.

2. In each of

the years 1987 through 1996, plaintiff

incured substantial costs in creating, or

facilitating the creation of, healthcare coverage contracts.

RESPONSE: Plaintiff objects to this Request on the ground that the term "substantial" is vague
and undefined. Subject to and without waiving its objections, Plaintiff answers as follows. It is
admitted that in each of the years 1987 through 1996, plaintiff incurred costs in creating, or
facilitating the creation of, healthcare coverage contracts.
3. The expenditues plaintiff

made in the years 1987 through 1996 to create or facilitate the

creation of, healthcare coverage contracts were not limited to expenditures for advertising
and other selling expenses.

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RESPONSE: Plaintiff objects to this Request on the grounds that the terms "create, or facilitate
the creation of, healthcare coverage contracts" and "other sellng expenses" are vague and
undefined. Subject to and without waiving its objections, Plaintiff answers as follows. Admitted.

4. The expenditues plaintiff made in the years 1987 though 1996 to create, or facilitate the

creation of, healthcare coverage contracts included payments to third paries for activities
that helped plaintiff determine what rates to charge prospective subscribers.

RESPONSE: Plaintiff objects to this Request on the grounds that the terms "create, or facilitate
the creation of, healthcare coverage contracts" are vague and undefined. Subject to and without
waiving its objections, Plaintiff answers as follows. Subject to and without waiving its objections,
Plaintiff has made adiligent search of its records and answers as follows. While Plaintiff

believes

that it may have made expenditues in the years 1987 through 1996 to create, or facilitate the

creation of, healthcare coverage contracts including payments to third-paries for activities that
helped plaintiff determine what rates to charge to prospective subscribers, Plaintiff

has been unable

to locate records to confirm or deny this belief. By way of further response, Plaintiff refers
Defendant to an October 15, 1991 letter to Mrs. Carol Slack of the Commonwealth of

Pennsylvania

Insurance Deparent, Bates No. PBS-022265, which states that "Blue Shield spent $4550 to
prepare the filings. This amount reflects the fee for an independent actuarial review of

the filings."

5. A portion ofplaintiffs internal costs (e.g., employee salaries and benefits) in the years 1987

through 1996 was attbutable to creating, or facilitating the creation of, healthcare coverage
contracts.

RESPONSE: Plaintiff objects to this Request on the grounds that the terms "creating, or
facilitating the creation of, healthcare coverage contracts" are vague and undefined. Subject to and

without waiving its objections, Plaintiff answers as follows. Admitted.

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6. A portion of the salares and benefits paid by plaintiff to certain of its employees in the

years 1987 through 1996 was attbutable to time spent reviewing applications for
healthcare coverage contracts by prospective subscribers.

RESPONSE: Admitted.

7. A portion of the salaries and benefits paid by plaintiff to certain of its employees in the
years 1987 through 1996 was attbutable to time spent investigating and/or analyzing the
claims history of prospective subscribers.

RESPONSE: Admitted.
8. A portion of the salares and benefits paid by plaintiff to certaîn of its employees in the

years 1987 through 1996 was attbutable to time spent setting rates for healthcare coverage
contracts for prospective subscribers.
RESPONSE: Admitted.
9. A portion of the salares and benefits paid by plaintiff to certain of its employees in the

years 1987 through 1996 was attbutable to time spent setting rates for healthcare coverage
contracts for prospective subscribers on a subscriber-specific basis.
RESPONSE: Admitted.
10. In the years 1987 through 1996, some ofplaintiffs employees spent all or most oftheir

time performing one or more ofthe following activities: (1) investigating the claims history
of prospective subscribers; (2) analyzing the claims history of prospective subscribers;
(3) setting rates for healthcare coverage contracts for prospective subscribers.
RESPONSE: Admitted.

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11. In the years 1987 through 1996, some of plaintiff's employees spent at least one half of
their time performng one or more of

the following activities: (1) investigating the claims

history of prospective subscribers; (2) analyzing the claims history of prospective
subscribers; (3) setting rates for healthcare coverage contracts for prospective subscribers.
RESPONSE: Admitted.
12. In the years 1987 though 1996, some ofplaintiffs employees spent at least one quarer of

their time performing one or more of the following activities: (1) investigating the claims

history of prospective subscribers; (2) analyzing the claims history of prospective
subscribers; (3) setting rates for healthcare coverage contracts for prospective subscribers.
RESPONSE: Admitted.
13. In the years 1977 through 1996 plaintiff

incured costs associated with creating, or

facilitating the creation of, healthcare coverage contracts, but unelated to advertising or
selling expenses, that contrbuted to the generation of subscription income and provided a
long-term benefit that plaintiff realized over the lives of

the contracts.

RESPONSE: Plaintiff objects to this Request on the grounds that many ofthe terms used therein
are vague and undefined, including "costs associated with," "creating, or facilitating the creation of,

healthcare coverage contracts," "selling expenses," "contrbuted to the generation of subscription
income," and "long-term benefit that plaintiff realized over the lives of

the contracts." Subject to

and without waiving its objections, Plaintiff answ:ers as follows. Plaintiffresponds that it is
admitted with respect to some, but not all, healthcare coverage contracts. However, Plaintiff

notes

that it recognzes revenue with respect to healthcare coverage contracts on a monthly basis as
premiums are eared and collected as required by the relevant financial accounting standards.

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14. Each of

plaintiff'

s healthcare coverage contracts constitutes a separate and distinct

intangible asset.
RESPONSE: Admitted.
15. Plaintiff has a propery interest in each of

its healthcare coverage contracts.

RESPONSE: Admitted.
16. Plaintiffs property interest in each of

its healthcare coverage contracts can be sold or

transferred separate and apar from the rest ofplaintiffs business.
RESPONSE: Admitted.
17. The benefits plaintiff realizes from the expenditues plaintiff makes to create, or facilitate

the creation of, healthcare coverage contracts are not fully realized within the year in which
the expenditues are made.

RESPONSE: Plaintiff objects to this Request on the grounds that the term "create, or facilitate the
creation of, healthcare coverage contracts" is vague and undefined. Subject to and without waiving
its objections, Plaintiff answers as follows. Admitted that some of

the benefits are not fully

realized within the year in which the expenditues are made.
18. Plaintiffs healthcare coverage contracts are assets with expected useful

lives exceeding one

year.

RESPONSE: Plaintiff objects to ths Request on the grounds that it is vague and undefined.
Admitted that some of

Plaintiffs healthcare coverage contracts are assets with expected useful

lives exceeding one year. Denied that all are.

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19. Plaintiffs healthcare coverage contracts provide benefits to plaintiff

for a period of

time

extending beyond the year in which they are entered into.
RESPONSE: Plaintiff objects to ths Request on the grounds that the ters "provide benefits to

plaintiff for a period of time extending beyond the year in which they are entered into" are vague

and undefined. Subject to and without waiving its objections, Plaintiff answers as follows.
Admtted that some of Plaintiff's healthcare coverage contracts provide benefits to Plaintiff

for a

period of

time beyond the year in which they are entered

into. Denied that all do.
the contracts referred to in

20. Plaintiff

has never sold or exchanged for consideration any of

paragraph 24 of the complaint.
RESPONSE: Admitted.
21. In each of

the years 1987 through 1996, for puroses of calculating its federal income tax

liability, plaintiff deducted as ordinar and necessar business expenses certain costs
incured in creating, or facilitating the creation of, healthcare coverage contracts.

RESPONSE: Plaintiff objects to this Request on the grounds that the term "creating, or facilitating
the creation of, healthcare coverage contracts" is vague and undefined. Subject to and without

waiving its objections, Plaintiff answers as follows. Admitted.
22. In each of

the 1987 though 1996 tax years, for puroses of calculating its federal income

tax liability, plaintiff deducted as ordinary and necessar business expenses the costs
referred to in number 13, supra.

RESPONSE: Admitted subject to Plaintiffs responses and objections to Request 13 and fuher
subject to the qualification that plaintiff characterized the costs referred to in Request 13 as
required by the Internal Revenue Code.

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23. Durng the period Januar 1, 1977, through Januar 1, 1996, plaintiff expensed the costs
referred to in number 13, supra, for purposes of

its financial accounting records.

RESPONSE: Admitted subject to Plaintiffs responses and objections to Request 13.

24. Expensing the costs referred to in number 13, supra, durng the period Januar 1, 1977,
through Januar 1, 1996, was consistent with professional financial accounting standards.

RESPONSE: Admitted subject to Plaintiffs responses and objections to Request 13.

25. Expensing the costs referred to in number 13, supra, durng the period Januar I, 1977,
through Januar 1, 1996, was consistent with applicable insurance regulations.

RESPONSE: Admitted subject to Plaintiffs responses and objections to Request 13.
26. On its original income tax retus for the 1987 through 1994 tax years, plaintiff did not

claim deductions for terminated or cancelled healthcare coverage contracts.
RESPONSE: Admitted.
27. Plaintiff claimed deductions for terminated or cancelled healthcare coverage contracts for

each of

the 1991 through 1994 tax years by filing a formal or informal refund claim with

the IRS sometime after September 1, 1995.
RESPONSE: Admitted.
28. Plaintiff claimed deductions for terminated or cancelled healthcare coverage contracts for

the 1995 tax year on its originally filed income tax return for that year.
RESPONSE: Admitted.
29. Plaintiff did not secure the consent of the IRS to change its method of accounting for the

termination or cancellation of

health

care coverage contracts between the time it filed its

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original income tax retus for the 1987 through 1994 tax years and the time it filed its
refud claims for the 1991 though 1994 tax years.

RESPONSE: Plaintiff objects to ths Request on the grounds that it incorrectly assumes a change
in method of accounting. Plaintiff denies that any change in method of accounting took place.
Plaintiff fuher responds that except for the consent sought and secured by the filing of the

attached document (PBS 002317-002327), which was attached to PBS's 1987 Federal Income Tax
Retu, Plaintiff did not secure the consent of the IRS to change its method of accounting for the

termnation or cancellation of

health

care coverage contracts between the time it fied its original

income tax returns for the 1987 through 1994 tax years and the time it filed its refud claims for the
1991 through 1994 tax years, because it did not change its method of accounting.
30. Plaintiff did not secure the consent of the IRS to change its method of accounting for the

termination or cancellation of

health

care coverage contracts between the time it filed its

original income tax retus for the 1987 through 1994 tax years and the time it filed its
original income tax return for the 1995 tax year.

RESPONSE: Plaintiff objects to this Request on the grounds that it incorrectly assumes a change
in method of accounting. Plaintiff denies that any change in method of accounting took place.
Plaintiff fuer responds that except for the consent sought and secured by the fiing of the

attached document (PBS 002317-002327), which was attached to PBS's 1987 Federal Income Tax
Retu, Plaintiff did not secure the consent of the IRS to change its method of accounting for the

termination or cancellation of

health

care coverage contracts between the time it filed its original

income tax returns for the 1987 through 1994 tax years and the time it filed its original income tax
retu for the 1995 tax year, because it did not change its method of accounting.

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31. Plaintiff contends that, for the 1987 through 1996 tax years, plaintiff is entitled to income

tax deductions for expenses incured in each of those years to create, or facilitate the
creation of, healthcare coverage contracts as well as deductions for losses it sustained upon
the termination or cancellation of health

care coverage contracts.

RESPONSE: Admtted that for the 1987 through 1996 tax years that, in accordance with the
provisions of the Intemal Revenue Code, plaintiff is entitled to income tax deductions for certain

expenses incured to create, or facilitate the creation of, healthcare coverage contracts as well as
deductions for losses it sustained upon the termination or cancellation of health

care coverage

contracts held by plaintiff on Januar 1, 1987.
the healthcare coverage contracts held by plaintiff

32. A number of

on Januar 1, 1987, were

terminated or cancelled in each year after 1986.
RESPONSE: Admitted.
33. Plaintiff intends to claim a deduction for the termination or cancellation of each healthcare

coverage contract held by plaintiff on Januar i, 1987, until all ofthe healthcare coverage
contracts held by plaintiff on Januar 1, 1987, have ceased to be renewed.

RESPONSE: Plaintiff admts that it intends to claim a deduction for the termination or
cancellation of each healthcare coverage contract held by plaintiff on January 1, 1987, when such
contracts are actually terminated or cancelled.
34. Plaintiff made no attempt to calculate the fair market value of the contracts referred to in

paragraph 24 ofthe complaint until the year 1998.

RESPONSE: Admitted, except that the effort began on or about 1995.

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35. With respect to each of

the following categories of

information, admit or deny that
the

plaintiffs records do not contain the infornlation on a subscriber-specific basis for all of

healthcare coverage contracts referred to in paragraph 24 of the complaint:
(I) the subscriber's payment patterns from the contract's star date until Januar 1,

1987;

(2) the subscriber's claims experience from the contract's star date until Januar 1,

1987;

(3) the subscriber's level of

satisfaction with plaintiff's servces as ofJanuary 1, 1987;

(4) the existence and terms of any proposals for coverage that the subscriber received

from another health insurer before Januar 1, 1987; and

(5) the subscriber's net anual income as of Januar 1, 1987.

RESPONSE: Plaintiff objects to ths Request on the grounds that it is vague and unduly
burdensome. Subject to and without waiving its objections, Plaintiff answers as follows. Denied

for some, but not all, as to (1), (2) and (3). Admitted for (4) and (5).
36. With respect to each ofthe following categories of information, admt or deny that
plaintiffs records do not contain the information for all of

the paricipants covered by the

healthcare coverage contracts referred to in paragraph 24 of the complaint:
health problems before Januar 1, 1987;

(1) the participant's history of

(2) the paricipant's claims experience from the contract's star date until January 1,

1987;

(3) the paricipant's occupation as of Januar I, 1987;

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(4) the paricipant's income level as of Januar 1, 1987;

(5) the participant's education level as of Januar 1, 1987;

(6) the paricipant's marital status as ofJanuar 1, 1987; and

(7) the number, sex, and age of

the paricipant's dependents as ofJanuar 1, 1987.

RESPONSE: Plaintiff objects to this Request on the grounds that it is vague and unduly

burdensome. Subject to and without waiving its objections, Plaintiff answers as follows. Denied
for (2). Admitted for (1), (3), (4), (5), (6), and (7).
37. With respect to each of the following categories of information, admit or deny that, in
calculating the $21,329,919 tax refud set forth in the prayer for relief

in the complaint,

plaintiff did not take into account the information on a subscriber-specific basis for all of
the healthcare coverage contracts referred to in paragraph 24 of

the complaint:

(1) the subscriber's payment patterns from the contract's star date until Januar 1,

1987;

(2) the subscriber's claims experience from the contract's star date until Januar 1,

1987;

(3) the subscriber's level of satisfaction with plaintiff s services as of Januar 1, 1987;

(4) the existence and terms of any proposals for coverage that the subscriber received

from another health insurer before Januar 1, 1987; and

(5) the subscriber's net anual income as of Januar 1, 1987.

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RESPONSE: Plaintiff objects to this Request on the grounds that it is vague and unduly
burdensome. Subject to and without waiving its objections, Plaintiff answers as follows. Denied
for some, but not all, as to (1). Admitted for (2), (3), (4), and (5).

38. With respect to each of the following categories of information, admit or deny that, in
calculating the $21,329,919 tax refund set forth in the prayer for relief in the complaint,

plaintiff did not take into account the information for all of the participants covered by the
healthcare coverage contracts referred to in paragraph 24 of

the complaint:

(1) the paricipant's gender;

(2) the paricipant's history of

health problems before Januar i, 1987;

(3) the paricipant's claims experience from the contract's star date until January 1,

1987;

(4) the paricipant's occupation as of Januar 1, 1987;

(5) the paricipant's income level as of January 1, 1987;

(6) the paricipant's education level as of January 1, 1987;

(7) the paricipant's martal status as of Januar 1, 1987; and

(8) the number, sex, and age of

the participant's dependents.

RESPONSE: Plaintiff objects to this Request on the grounds that it is vague and unduly
burdensome. Subject to and without waiving its objections,

Plaintiff answers as follows. Denied

for some, but not all, as to (3). Admitted for (1), (2), (4), (5), (6), (7), and (8).

39. As of January 1, 1987, in setting its rates for direct pay (individual) healthcare coverage
contracts, plaintiff did not take into account the subscriber's claims history.

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RESPONSE: Admitted.
40. As of Januar 1, 1987, in setting its rates for group healthcare coverage contracts with

fewer than fifty paricipants, plaintiff did not take into account the subscriber's claims
history.
RESPONSE: Admitted.
41. With respect to each of the following categories of

information, admit or deny that, as of

Januar 1, 1987, in setting its rates for healthcare coverage contracts, plaintiff did not take

into account the information for all of the participants covered by the contract:
(1) the paricipant's gender;

(2) the paricipant's history of

health problems before Januar 1, 1987;

(3) the paricipant's occupation as of Januar I, 1987;

(4) the paricipant's income level as of Januar 1, 1987;

(5) the paricipant's education level as of January 1, 1987;

(6) the paricipant's martal status as ofJanuar 1, 1987; and

(7) the number, sex, and age of

the participant's dependents.

RESPONSE: Plaintiff objects to this Request on the grounds that it is vague and unduly
burdensome. Subject to and without waiving its objections, Plaintiff answers as follows.

Admitted.
42. With respect to each of the following categories of information, admit or deny

that, as of

Januar 1, 1987, in setting its rates for healthcare coverage contracts, plaintiff did not take

into account the information:

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(1) the subscriber's payment patterns from the contract's start date until January 1,
1987;

(2) the subscriber's level of satisfaction with plaintiffs services as of Januar 1, 1987;

(3) the existence and terms of any proposals for coverage that the subscriber received

from another health insurer before Januar i, 1987; and

(4) the subscriber's net anual income as of

Januar 1, 1987.

RESPONSE: Plaintiff objects to this Request on the grounds that it is vague and unduly
burdensome. Subject to and without waiving its objections, Plaintiff answers as follows.
Admitted.
43. Each ofthe contracts referred to in paragraph 24 of

the complaint had a term of one year or

less.
RESPONSE: Admtted that some of the contracts referred to in paragraph 24 of

the complaint had

a term of one year or less. Denied that all did.
44. Plaintiff curently markets its healthcare coverage products to groups and individuals

previously covered by the types of expired healthcare coverage contracts for which plaintiff
is seeking a deduction in this case.

RESPONSE: Plaintiff objects to this Request on the grounds that the terms "curently markets"
are vague and undefined. Subject to and without waiving its objection, Plaintiff answers as

follows. Plaintiff admits that it curently markets its healthcare coverage products to some of the
groups and individuals previously covered by the tyes of expired healthcare coverage contracts for
which plaintiff is seeking a deduction in this case.

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45. Plaintiff

has sold healthcare coverage contracts to groups and individuals who were

previously covered by the types of expired healthcare coverage contracts for which plaintiff

is seeking a tax deduction in ths case.

RESPONSE: Admitted that Plaintiffhas sold some healthcare coverage contracts to groups and
individuals who were previously covered by the types of expired healthcare coverage contracts for
which plaintiff is seeking a tax deduction in this case.
46. Some of

the groups and individuals covered by the healthcare coverage contracts at issue in
this case are presently covered by subsequently issued healthcare coverage contracts held
by plaintiff.

RESPONSE: Admitted.

47. In December, 1986, plaintiff expected an increase in enrollment losses in 1987 and
subsequent years due to increased premium rates for its healthcare coverage contracts.
RESPONSE: Denied.

48. As of Januar 1, 1987, plaintiff expected to experience an underwriting loss for the year
1987.

RESPONSE: Admitted.
49. In December, 1986, the market for healthcare coverage contracts in Pennsylvana was very

competitive due, in par, to the increasing popularty of new health insurance products, such
as Health Maintenance Organizations ("HMOs"), Preferred Provider Organizations

("PPOs"), and Administrative Services Only ("ASOs").

RESPONSE: Plaintiff objects to this Request on the grounds that the terms "market for healthcare
coverage contracts," "very competitive," and "new" are vague and undefined. Subject to and
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without waiving its objections, Plaintiff

answers as follows. Admitted that in December 1986,

there was some degree of competition in the Pennsylvana insurance market due, in par, to health
insurance products such as Health Maintenance Organzations ("HMOs"), Preferred Provider
Organzations ("PPOs"), and Adminstrative Services Only ("ASOs").

50. Due to increased competition in the health insurance industr, as of Januar 1, 1987,
plaintiff was expecting to be unable to continue raising its premium rates to the same extent
it had done over the preceding twenty years.
RESPONSE: Denied.

51. Due to increased competition in the health insurance industr, as ofJanuar 1, 1987,
plaintiff was expecting its subscriber atttion rate in the coming ten years to exceed the
attrtion rate experienced in the period 1980 through 1987.
RESPONSE: Denied.
52. As of Januar 1, 1987, plaintiff

was expecting its operating margis over the coming ten

years to fall short of its operating margins over the preceding ten-year period.
RESPONSE: Denied.
Respectfully submitted,

(J;J tf li. JLf Arhur Newbold ..
Dechert LLP

Cira Centre 2929 Arch Street Philadelphia, P A 19104
Phone (215) 994-2624

Fax (215) 655-2624 Counsel for Plaintiff

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Date: January 23,2007
Of Counsel:

Frederick J. Gerhar
James J. Spadaro, Jr.

Andrea M. Kirshenbaum
Dechert LLP

Cira Centre 2929 Arch Street Philadelphia, P A 19104

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CERTIFICATE OF SERVICE
I certify that service of

the foregoing document has, ths 23rd day of Januar, 2007, been

made on the Defendant's attorney by mailing a copy thereof

to the following address:

Karen E. Servdea, Esquire

U.S. Deparent of Justice
Tax Division Court of

Federal Claims Section, JCB/8804

555 4th Street, N.W.
Washington, D.C. 20001

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~.
!'

o Copera (S 1381(a)) 0 Ins. Co. (S 801) 0 Ins. Co. (Se. 831) 0 Qulifie Perl Sece Corpraon

;.
1:

t:

H "Yes. ., se Speifc Insctions fo Se H. Do no fill in Señ A. "-No. - yDU mus cOmplete SéA.
Seon A. Applicable to All Filers Other Than Thse AnswerinlllYes" to IINote" Above
la Tax yer of chng bens of yo

NOE:myomalcl7aneMun'ie458? . -, Taxble Insurance COmD~ . ~' --J. . 0 Ya lX No
(mo., da, yr.)~ ____-!an'!~ l_i_l~S'L__ and 8n (mo., day, yr.)~ up_~~_ai~L~J.J_J9_Sita yer~ __-!~~__~~_J_~Slftlisda is earfierthn daya sied this Form 3115 on page 6. se

.' 0 Exptorgnizon;.Enrcoseon~ _u___uuu.____uml_ '. (Sse44.)..1 W ~r(sp)~ ,.T~='~~t-9;gan. .._~tj.()~.lS\1l,j~c:t.to:.sê'ct:lo~ ~.50. iem) .j:O ._,-1

p. t:.

~f"
~L.' 1" , . Enrth 180 day

Gel1llnsct fo -La Aplicns- beor prin any furtr. .
2 ~_~p;~;;1;!~~~~;;r~~::-~~~~~~~~~-~:i~-~~-:~:.~~~~~::~-~~-~=~~~_==:::~-3 Th folowne chng in acuntng me is reueed (chec

~;
t~:-' ~ R¡

~

and coplete appprie spce): '. .

ti:

. IX Ovu meod of acuntng fro ~ ..ße. _ .5ec. ÍJu..l ___m____ _____ __ to __..~ ____n___ un _______n ---un.. se 1.441T, Re. Pn 8536an Re. Pr 8537. Iftli la)'Í$reuea ci tothacl me,sese 44. Tempo Regla
It IX Th accuntng tren of (idnt It) ~ ___ s_~~__ St:çt_~J!_!!_____________ __________ ----~--- _u______..____~.___,
fr (pr me). .________.__.___________._~_______________ to

~. '"
1:'

(ne metod) ~ .-------------.-------~..--.;-,;-...-

~;r
~~:

IX Acl 0 Ca 0 Hy (Elain th ovll hybrid me in deil in a separae sttement.) tI Is yo us of your prnt me splly no perm by th Intrnl Renue Co. th Income Tax Regla,
orbya deon of th U.s. Supr Court? Se se

e If a change is reue und 3b abo. ch the pre ovl meth of acunng: .

Attch a separa stment prding all relevnt fact. ineluding a deiled desript of your prent and pr meod. Se als itm 15 of Sen A on pae 2 rerding the -lel bais- for the prpo chng.

4, S,and 60fRev. Pr. 8474 . S~e. S.eqt:ton R _ . .

~.

. Is th reue chng spifll rere by th Tax Refor Act of1986? .'. . . . . . .... . . . .
f Ar yo curr under exminaon, or we yo or any membe of th afli grup coct in any manner by a

I

. rent of th Intl Ree Se fo th purp of sculing an exmination of your Fedral ta
.' res) pr to th fiing of

f4 'i.
~~. l).;,"

this applic, or do you have an exmina under consderan by an apls ofcer or

be any Fedl cour or is any crminal invigtion pending? Se sens 4 thro 7 of Rev. Proc. 8474 , . :
. Are yo a tayer tht pruc pr or acquire prpert fo rele to whom seon 263A apie? If it to be

~, ?O~.

.,
l:
,.

chng is a se 263 itm, se 0 mus be colet '. . . . . . . . . . . . -. . . . . . .
4a In th la 6 years ha yo reue permison to chang or have you chng your accouting peod, your ovrall

meod of acntng or th acc~ntn¡ trent of any item? (Affilia grup members filing a conslidat reurn.
se it 8lon pa 2.). _. . . . . . . . . . . . . . . . . . . . . . . . It . . . . . .
. II If q is "Yes.. Wa a ruling le grntg peisio to make th chng isue If "Yes, - and the change wa made,

ri;

atch a co of th ler. If peision wa ¡rnt, bu yo did not make the chang, atch an exnaton. , . .

c Regrdle of your rens to 4a. do you or an afflia corpon have peding any acntng meod or pe
ruin or tenicl ad re in th Nanal Ofce? . ,; . . . . . . . : . . . . . . .'. . . . X
. . If 4e is "Yes,- indic th ty of re (met, pe, et.) and th

~;~.'

~,
~.

spc isue inv in each reue~ .__~!_~______.__..

~

-------.------ --- --------------------. -_._--- -------------------_.-------------------- --...-- -- ---- --_...--._-- -------I If engad in a bu or pron: a Enr your table income or (los). fr opraons fo

ta purp for the fie (5) ta

yers pring th yer of change: (S Specifc Insructon for Seon A.)

,...:II.,r. i--ini ". ,.en:_. ". ,.1I:mo yr.
('.
It Enrthamontot ne operang los to be carred over to th yer of chang,

i-øn0 'Iax Exempt Under Sectio 501 c 2i.. lI Jl llin1ri None
Ifany. . , . . $ N A
B-24
PBS-002317

d Other creit carrr, If any. (Ident) ~ $ N A
For Pape Reduc Ac NGt se øp Indl Far 3115 (R.

c Amo of general buines crit carr to yer of chng, if any. . . . . . . . . $ N A
..ivi ener li pnt ll (lo) fr ii peip en øniiiry ii II (l); lMbe If .. illiteclfP fiiii. COte iem, ,. it 8b Glii 2.

11-8 11111pa 740.163

Filed Under Rev. Proe. 87-51

Case 1:05-cv-01030-LSM
Form 3115 (Rev_ 11.87)

Document 23-3

Filed 02/15/2007

Page 23 of 30
Pa 2

~

Pennsylvania Blue Shield, 12-31-87, #23-1294723

(

6 Gross receipts for the three (3) tax years prec:edingthe year of change, (See Specific Instructions for Secton A.)

btf:~ 12 _ 86 Zn=~~. 12 . 85 3tlr~""_ 12 . 84

1.517.899.579 1,427,320,099 1,286,431.491

Yes No
X

,a

Do you have more thn one trade or busne? . . . . . . . . . . . . . . . . . . . . . . . .
additional information tha mus be prded . . . . . . . . . . . . . . . . . . . . . . . - . -:

b If 7a is -Yes. - do you account for each tre or busines separately? If -Yes, - se Speific Instctions for Secion A fo
Sa Is applicant a member of an afliated group filing a conslidat reum for th ta yer of chang? . . . . . . .
b If Sa is "Ves," stte parent corpration's name, idehtifying number. addres. tax year, and Service Centr where return

x

is filed, and provde th informon reueed in itm 5 on a consolidated bais ~ ..l_~'!sy1-Y_al_~~..:Sl-~~__SÃ;~l
. is. .th.~. llei:etJ_~Qr.Oxa.t:f"Jl.lQl: _$ll)_ Af_~lJ.t.il_t~.4. &rP.'lP_ .9f..!..w. PJii.4l.i3tl~§l. ..-....____

c If Sa is "Yes, It do all oter membe of th affliated grup employ the me of accuntng for which th chang is reed?

If "No," exlain ~ ___Q.her_..itie_..~_.iont:fu:.as_.taxal£l_~nioi:Uone__n.m._u

d If Sa is .Yes: are any of th items involved in the calculation of th net secion 481(a) adjusnt atibutbl to
trnsactonsbetweenmembersofthaffiliatedgrup?lf-Yes,-atehexplanaon. . . . . . . .' . N/A . .
~.r.

. If Sa is .Yes,- pride the informaton reuesed in itms 4a, 4b, 4c, and 4d fo each membe of the affliated grup.
9a Is applicant a member of an afliated group not filing a consolidatedreumforthetaxy

earofctnge? . . . . . .

" ;.¡.~-

b If 98 is -Yes, - are any of the itms invlve in the calculaion of th net seon 481(a) adjusment attbutble to
trnsctions between members of the affilated grup or oter related partes? If .Yes,. atch exlanan . .N lA. .

~ ~:
of

10 If chnge is granted, wil the new method be used for financil rerting purpes? . . S~e. S~c.tï.o-q lL . . .
If -No, - atch an exlanation. Such explanation should include a discussion of whether your new mettiod of accounting

t;i

conforms to generally acpt accnt prnciple and why it will clrly re inco.
11 Enter th ne secon 481(1) adjusent for th At year of change. and the net seion 481(a) ye tt of benil1

th etngen. lstprngyuren. 2nprin&yearti, 3rdprinyeen.
of th Atttlinniioftt Atttbeoftt - At th beinnin

adjust that would hae be reuired if th en: mo yr. enr: mo. yr. en mo. yr. . ener mo ,1.

reuesed change had ben made for each of the 3 .,
tax ~ars pnaing tt ~ear of change. (Se Not Applicable - See

r
~~ ~

Spfic Insruons for Seion A.) . .Attached . $ . .. . . Appendix t
Has net adjusent under seon 481(a) for the yer of change ben reuce in any way by a pre-l95 amount?

12

Number of ta years prent mehod has ben used for which the change is requested in item 3a or 3b. (Se Spec

Instrctions for Secon A.). ..nn_s-~~ns.E!~ f:l?"n .A.un_____nunn____n_ ___ u_ n__ _n_Uu.u .mnn__
Has your prent method ben desed by change in met of accountng to which

a Rev. Rul. or Rev. Pro. more than 2 yers beore filing this fo as a
sen 5.12(2) of Rev. Pr. 8474

.. '. ..- ..-")

applies? . Se~ Se.ct,ian.R. . . .

1. 15 State th rean(s) including th legl basis (sttutes, reulaon, published ruling, etc.) wh you belie approl to make this
chnge

should be grnt. Seseon 7 of Rev. Proc 84-74. __.r_tl!!~n'!.~~.!.!~Y.':_Rr?'=:__s.Z:-?.!:nnm_m_nun..

Tax Reform Act of 1986, Pub. Law No~ 99-154, Section 1012.
:::~.¡~: :S~Çt:t9~:!! ~::::::::::::::::::::: :::::::::: :::::::::::::::::::::::::::::::::::: ::::::: ::::::::::::: ::::::: :::

Secton 8. i. Change In Overall Meth of Accunting
i Th folloinR- amounts shuld be stte as of the end of the tax year prin¡ the year of chnge. If none. ste "None." (Altough

soe of the itms listed below may not have ben reuire in the computtion of your table ince due to your prent method of
8ccountng, it is nery that they be entre here for this form to be compl. Show the net section 481(a) adjusent
IIributble to long-term con on line 8, Seion E. page 5.) Provde on a schedule th breakdown of th individual

Itms which

make up the -Amount- for line la through Ig. Se secion 448. Temporary Regulations seon 1.44-1T, Rev. Pro. 85.36, and
Rev. Pr. 85-37 for rule to chng

to th accrual meho expitiously. .

Sh by ( V' ho trte on la yer's rem:

Am
. Inc acced but not reve . . . . . .

e-...'

-. , -~

b 'm: reve bee th da OI wt it wa earn. Ste
_li of iie. If d~nt on iaslme.loins, se Sen

f on pa¡e 5. For advance pame fo pd an selY, se
Spic Ins fo Se 8-1. ~ ____.________..__

Not Applicable See Section H

c Exnse accrued bu not paid. . . . . . .
d Oter (sp) ~ ___.u____.__.___.__.____._._. . Prepaid exns prevously deducted. .

f Suppie on hand prevous deuc. . . . .

I Inv on hand . . . . . $

Invnt re on yor rern $ Dlerece . . . . . . . . . . . . .

h II -l a1(.) -Iusnt (caii rii 11 tf 11)

page 740.164 '11'''

B-25

PBS-002318

Filed Under Rev. Proc. 87-51 Case 1:05-cv-01030-LSM Document 23-3 Filed 02/15/2007 For311(fev.11.87 Pennsylvania Blue Shield 12-31-87 #23-1294723

Page 24 of 30

~

2 Nature of inventory ~ ..~~.~.::lP.~~.:~.~~!:..-..__...__...-_n-------.....-..._.......n.-....---..--.----

~(
Ie
t:' ~;:::

4 Method of identifg co in inntor: 0 Spific identifcation 0 FIFO FO
5 Have any recivables ben sold in the pa Jsi-Ílyuen. en. 3iii.~en.

3 Method us to value inventory: 0 Co 0 Co or market, whichever is lower D Oter (attch

thre yers? . . . . . . 0 Yes 0 No -i mo. .". .". -iin ".
t"

threyers . . . . . . . . . . . $ $
If "Yes.. en th amo so for Pdt of th
ath co ines scheule prde wi yor Fedral income ta retrn or return of inc for th pe.

6 Att copies of proft and lo st heule F (Form 1040) in the cae of farmrs) and balanc shet. if aplicable, as of th cl of

r of chnp. Ste acunng meod us when prring balance sh If bo of ac are no ke,

if amont in 1 (Son

k
~.

) do no ag wih th shon on pr and lo sttement and balanc sh, exin on sera pa.
Secton B.2. Chan e to the Cah Method of Accountn (Farmer com fete Secon 8.3 instead of

this seon.)
perfrm, en th

.
fr..
r.

Note:Alcomp/etseonB.l. Not applicable

1 Pride i deiled sttemen desing th natu of th taxpyer's busine. Deribe th opra

2 Pre a deriptn of th 1Br's int in capitl items and le . ern us in th tar's trde or bu, and

type of ad if mo thn on. .

th retinsip be th it and th seice pe usne.

k
1.(
y¡~: r.:"

3. Pr i dept of lI iii ite (p th sale iie) inciny maer pe _ie us il ca oa th bu

'l...

4 Pn th IlIi Df lI sI . IS el IJ l de of tlr du iD call ou th løs li

5 Pre i scule . ag of reivables for th yer of chng and th 3 tax ye prg th yer of chng.

.6 Pre an lo sttemen co on th cah fept and disburs me fo th yer of chng and th 3 ta
l.
,~'.. ~? ,.'

Seon B-3. Chn e In Ovenill Method of Re rtn Income of Farmen to Cah Recel and Disbursment Metod

pring the yer of chnge. .
Al coplte Se

r

i Isthtaacorpon? .. . . . .. I . . . . . . . .. . oi . .
2 Is th tar a partrsip wi a corp as a part? . . . . .'. .

Not:

B-1. Not applicable

~... ~:..

~

l!':

3 If eitr 1 or 2 is -Ves," ha the ta ha I\ reipt of $1,00

~i'

~;í
~, 0'.
~~\
"¡".

bening lir 19751 . . ... . . . . . . . . . . . . . . . . If -No,. atch a scheule sh whic yers yer's reipt were more thn $1,00,00. 4a Do th tayer pruce . pre-prucanpe out mosen 26 fo an yers?tr. or. . . . . . . ..J: Y- 0 No of of thn 2 bune? 0 Y- 0 No elon
"If 4a is "Yes" ha er or rela part made

DYes

o No

elf 4b is · , lain.. ...............--............-------.---....-.....-----..----.------........------------.----

e th follow informtin forthe fi tax ars bere th r of cl

li piin.". 2n pn yr.

-i lI.".

.. ~.r.: ..~;:'
I'i'.,
,"r ,
~~..'.

. Gro rept fr fa. .

Not a lie: ble

It Irw Cr, etc. .
Uv hed fo sale:

~Íõ ,.
-T.

t(~
. ..... '0'.,

Uw hed fo dr brn¡
. Totl i

PI ...... . . . ...... Ra
sp or Pu dairy . . . . . . . purp:

~'

',' .

Rais

~~ - . :~:: ,I.':

li Me value invry (ch apro bo: .

r

. Co 0 Co or market, whiche is low '0 Fami pr CI Unit livk pr 0 Otr (exlain on serae page)

~..

Seon C. Chinge In Method of Vilulniinventñes (Se Speific Instrns for Seon C.)

~..
hi

. i Dept of inv ¡o be chnp ~....n......n......................_.......n........nn. 2 De of in ('If an) no bein chnå ~ n. ...._..... ....u.... u un"". ......... 3 Prmeofidinøcolninv: 0 Spidon Cl FlF FO
th us of If "UFO:' Ith co of For 970 adptng th meod an co of any F fled to exd

NoAlcopiSeD. Not applicable

th meod.

e Pr me us to value inv: 0 Co 0 Co or ,ic is lo 0 Reil co
D Retil, CO or mark 0 Otr (atch exlana)

.C

I Sh me and value of

th In' i1 at

th en of th ta ye precinsth yer of cha uner:

. copu us to arr at th se 481 adjus
clfcUn¡ me,are

. Pr me ~ ;........... ......................................................................1: b ~ ~ ........................ ...... ........ .... ...... ......-.-.................. ......J- Y.. 0 No idnaco? ............0
yo¡onatoei UFO fo

B-26 PBS-002319

. t/page 741.165

Case 1:05-cv-01030-LSM87-51 Document 23-3 FILED UNER REV. FROC.

Filed 02/15/2007

Page 25 of 30

'""'1;',-,. i

.(3

_ Fll31lS(Rev.ii.87 Pennsylvania Blue Shield, 12-31-87, #23-1294723 ,.4
'implete this seion If th reueed chnge invlve eiter prpert prouc. prrt icquired for rele. or Iote contct.
, . (~ection D. Method of Cost Allocation : . iease chek Cv? the approprte boxes in

Part I and li shong which co are included, under boh th prent and propo me.

; in the cost of the propert pruced or acquired for rele under sen 263A and allocted to longterm cotrct under seon 460. If

¡. any boxe are not cheeke. It is asumed tht th co are exuded. Plea mark eN/A- in bo fo co th do no appl to tl
~, tayer. If you are pr incuding only a porton of a ty of co. entr -po in th approprie bo ind of CV''" . ,.~':'.

,.

. mD . Direct and Indirect Cost (Required to be allocated)
1 Dire maril . . . . . . . . ~ . . . 0 '0 . 2 Dirct labor. 0 . 0 0 . . .. . . . .' 0 . 0 . . . 0 3 Repairs th re to a pruct, rele. or log-te coct

,
j "

¡"

,.

1;. E. r:'"

. . .. .

ac .
;. .

4
5 6

Maintenace . ....

r
k

l~

Utlit. . . . . . . .. . . . . . . .

Rent _ . . . . . . . . . . . . . .
Indire matels and supplie . 0 0 . . .

~k
~~
~.

7 Inire labo and pructon supe wa .

. ,

.
)

Too and equipm . . .. 0 0 0, . 0 0

t.:

~ iF:
rr
;.

10 11 12
13 14

Qualit co an inio. . 0 . . 0 . .
Taices oter thn st, lol.

lI fo inco l. . . . -

Deren, amorton, and co rery aUownc fo equipmet a
serv and no terily id . 0 0 . . 0 . . . . .

f

Administi co (butno including any co of selin¡ or any m on capitl) . .
lrnce. .. ~ . . .. .. .. .. .. .' .. . . ..

De . . . l" ¡¡ . . . . .. . . . . .. . . ...

k 15 Dire or indire co of oter adminiti, serv. or su funcn or derten . ¡; 16 Of' copeti (no inudingselinaac) . ..

f~r~

Empl be . . . .. . . .. . . . . . .

~t ..9 /'.' 20

Rerc and exrintl exns at
Rewo labor, stp, and spila .'

~ 21 Biddin ex incrred in th taye . --~ ... .. '.. ..... .. ..

22 Ennering and de (no incuding sen 174 rerc and exme ex) . . .

.....................

.......... icon of partlar coct u1 awrd to th

23 Stor and wareho' co incuding. port of alloble gel and .dminis co.-. . 24 Purchng co . Uding a po of allobl øenel an adminis co .'. . . 0 ; .

25 Handling 'ng asmbl. and ieng co includng a portn of allole ie1anc
co CAtch a liofsu

.t
!i~
t.~,. :

admi .......... .. . .. .. .. .. .. .. .. .. .. .. .. .. ca .. .. .. .......................
co.) . . . . 0 . . . . . '0 . . . . . . . . .
. Resler ma diinguish be of-s in on stge, an are no reire to capiliz
OMite stra co. Chek this box if ire a reler allon only of-se storage co . .. 0

f

r.

Oter Co (Not uired to be allocaed)
. 1

~.. t"'
t....
l~..'

Repairs th do no re to a pructon, rele, or Iote ai ac . . . . .

~.,i;" oR
':'.'

i;; ..

2 3

Rerc and exnmentl exns not Inud on ün 19, Part I
Biding ex no inud on lin 21, PIrt I. . .. . 0 . 0 . . . .

.

Mark selin¡ adrting end disbu ex .

~d V . Gel and acini co 8lbu to th be or are no inrr by re of. partular

~: :,'J ~~ .

Inse co. of ñd an plns 0 ....... l-. . Pa

", rele, or Io.te cont ac .

se th do no diry

Caof . .. . . . · . .
Additional

co (Attch a list of suct co, . . . . .

(

Information

: \.

1

o Sp idon D Stnd co me 0 Bu me (at ei (at exnan)
o OIer (ex) .................. .. ........... ..... _._.. .................... .... ......... ....... ....... ......... ..... Taxrs subje . ñt of se 26 pl ch th appropr boes) to inca th simplifie mes), If
._ . 0 Simplif rele metod 0 Simplifed prouc me 0 Simplifed serve cos mehod

Me of aUocn¡ indire co: Not applicable

2 3

Meho of allocng se co: 0 Di 0 Ste aUoc
B-27

pa 740,186 il1M1

PBS-002320

Case 1:05-cv-01030-LSM
Filed Under Rev. Proc. 8i-51

Document 23-3

Filed 02/15/2007

Page 26 of 30

'l2
o No o No o No

For311S R...11.8 Pennsylvania 'Blue Shield. 12-31-87 #23-1294723

Section E. Change In Method of Reportl,.& Income From Lone.Term Cotrct

Note:AJcoplæsetinD. Not applicable

~
t
~:, ~~d
r:~'

i Ar your contrac: Ion¡.term cont as define in seon 46? . . . . . . . . . . 2 Doe the d1ng involv any prMarch i, 1986 coct? . . . . . . . .

3 Wil th taye ei th simpifie co.to meod fo dennin th de of con

4 Is th same me us fo rert aft Iote co rerd of duran? .
If -Yes: plea pr a separae co alloction wo (S D) oundinaatth fo

:0 'N

If-No, . exin. ._........_......._......__. -..- .-. -..-...--.. ....--.. -. ... .-----------..---.-..... .....-......---...

5 '00 any of your c: quarif for th smll coct expton uner se 46e)? . . . . ci Y.. 0 No
6
bennin of th ta yer of

.. -.. --- .._. _.- --- ..- _.-- _.-- _.-.. - ..-_.- _.- ---- _. - - - _.-.- ._. .__.------- ---------- ------ ---- ..-- ------------ .--- - ---

su co ..0 Y.. 0 No . ch? .

.
t.
Wi

If -No.. -.lain. ___________~___ ......--------.----.--------------_._--------..-------------_.---_.-------- --------..-----

7 ¡;;~.;;;;;.---..:plus.~:;,;.;;d;;r-F;;;;k;;;;;;;?:..~..:.:-.:--~~-'--:.-:--:.-:.Ö'y;'".Ö.ie.
If -Ves. proe th In in it 2 thro 6 abo an copl th chrt in Se D
Nehdius reuire un se 481(a). . . . . . . . . . . . . . . . . . . . . . I $
Section F. Ch.n e In Method of Re rtln Inter Discnt on Instllment .nd Other Luns
i CM. wi reto intre on 0 Insllme lo 0 Come

t

~ø~~~ .

ì~-:

Ii:

,. i.'" g..'.... i:.~~

1*

Not applicable. . .-. . . . 0 Yes 0 No 2 Dolnyøfthlocoapeinexøf60mo? . . . . . . . .
If -Yes . pl at an ei. (S Re. Rut. 83 an Rev. Pr
In (disrr) und Rev. Aul. 83-8. se Rev. . .8428.84.29. an 84-30.

lons an 0 Ot lons (exin) ~.....

_.__.------- ----------------_._------------------------------------------------------------_. -------- -------_.. --.-

t'

't~........:..

,..
-.

If yo wih to chng fr th ~m of th mohs digi me ( 5 to th ecnoic KCI of int me for repong .
. Amunt of ume or reliæ int Ca be reed on yor i- as of th en of th ta yer .'

It
ii"

v

4 prthyerof . .. . . . . . . . . . . . . . . . .. . . .. . . . . .'~ Am~of yerofcl:~~~~~~~~~~~~~~~~~~:~6ethod of retin in evnt of pre~nt of loans ~
Seon Go et.e In Meth of Accnting fo Deed8tlon Under Sei:on 167
Applicant deri to chns thir meod of aCCuntng for deprecon undr seon 167 mus coplet this sen. This inforon
be fi wi th Se Cewh yote will be file. Se Re. Pr 14-11 fo

r- .
¡g. '.,.

k~
~..

l; ~~:
~;

mus be suppie for ea acnt fa whic 1 chng is reue. No: Certin cMngme cø. th in me of lIntingto deprti may
2a Ar yo th arnaoworthfn us of th

. 1 Dlofac~ ........ :See' Section H . --. .I.......-.........................-~...-.........~....................
If "Y.... th only ch pe ar und Rela se 1.167(a)-11(cXl)(i).1d th c: on th ta re .
th,. of ctns.

prpe? ................. ~ . 0 Y. ci No

S .. ~ clime und Re sen 1.167(1)-11 (CWR)? . . . . . . . . . . . . . 0 Y. 0 No

. 11 rel pr. did yo li In th ho be re it? ............... 0 Y. 0 No
fo

~. . lib pr puutlitpa? .. . . . ... . . . . . . . . . . . . . . . . . . IJ Y.. 0 No
ir¿' I I. of th pr(eian st)~ ....................................... ............... .......... ....... .............
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~ 10 Esrn nønln usl ~~:. '.~. 11 11

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~1~IJNI~.t ~ $.): 12 Ot'.._..- If ~ ................ -----.. ...............--........----...... ... ........ ........ -.-.. ...... ...... ... I' _..... ._--_.. --..--.. .....-... ---_.-..- _._----_.. ..... ... ....._._._.---_.. _._-- ....._.-..... --_................ ..... ........... ... ... -----.. .-._...-- _.-.. _. --- ..._.- ------ ..._-_.... ...-.. .-....._.- .... ..- ... ....- _... _.- -_.. ._- ..- - -_..-...... .... _..........-. rl. ,.
th deninbalanc me ~ reue sh perc ofst..ln rate ~..-.... ...-.. -- n. ......... ..... ...... ......

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PBS-002321

:f-,_ ¡,o'.

B-28

11111page 740,167

Case 1:05-cv-01030-LSM 87-51 Filed Under Rev. Proc. Document 23-3

Filed 02/15/2007

Page 27 of 30

(J

Fom311S(l.ii-87) "Penni:vlvani.a BJ~e Shield. 12-31-87. 4123-1294723
Section H. Change In Method of Accounting Not Usted Above (See Specific Instructions for Seion H.)

i.6

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Signature-Al Fliers (S instructions.)

Un peie of peur. I clth ,'i--ine ttiUpplic.lninaiipanysdle -i .liienl. an tDtI l- of mr ia in 1i.llls tr. co. an c:. De of pi (atth ap) il i- 0ia1 irdomiati of wh pnre i- an iilil
.--- ......... _... ..... - ... ._... _. .-._...............

e

Pennsyl vánia Blue Shield

J.me.nCA. and .L.egal

Apicl..

Di

Ròbert E. Patterson

9~/:)-'6r; ~Jt:i£~~:~~.~~:~~~~~ .... ...... ...Q...... IItiof otoftl pare cc,lfappic Da

th a"plii:atioii Da

,~~... ........ ..: .... .......... ..... ...... ~~!:...
PBS-002322

B-29
page 740.168 1118I

Case 1:05-cv-01030-LSM

Document 23-3

Filed 02/15/2007

Page 28 of 30

~

l.('
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PENYLVANIA BLUE SHIEL
12-31-87, 123-1294723

f~'

Application for Change in Account:i Method

r:
,

Filed Under Revenue Procedure 87-5 i

br ~_.

Appendix I to Form 3115
~, ~;'
~.' . ;~.::..'..:...

.. Page 1 ,of 1

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'.

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Taxayer is a Blue Slueld organzation to which section 833 of the Intern Revenue Code of 1986 applies. Under special transition rules enacted by Congress no adjustment uner section 481 (or any other provision) of the Code
is to b.e mae on account of a change in the taxayer' s method of accounting

~~ -.

for 1987, its first tale year beginnng after Decemer 31, 1986. 'tax
Reform Act of 1986, Pub. L. No. 99-514, Section 1012

l~-

2085, 2393 (1986).".,'

(c)

(3)

(A)

(i), 100 Stat.

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-_..-._----. -.. -....~.-.

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PBS-002323

B-30

Case 1:05-cv-01030-LSM

Document 23-3

Filed 02/15/2007

Page 29 of 30

(.
l', F:;

PENNSYLVANIA BLUE SHIE
12-31-87. #23-1294723

Application for Change in Accountin Method Filed Under Revenue Procedure 87-51

; , . ~;'i' ;.

~pendix II to Form 3115

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'. Page 1 of 3 . .':';".'
Section a, Page 6

.'

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Prior to 1987, Pemiylvana Blue Shield was tax-exemt uner Section 501

for profit and operated exclusively for the promotion of social welfare. The
Jr.:,":'

(c) (4) of the Internal Revenue Code of 1954 as an organization not organzed

l
l'

Tax Refor Act of 1986 chaned the tax treatmeies of al Blue Cross and Blue Shield organization (Plan). Tax Reform Act of 1986, :Pub. L. No. 99-514, Section 1012, 100 Stat. 2085, 2390 (1986). For tax years beging after

l
ti!:
.; ~".,_.

1986, the Plan 1s table in epe same maer as if it were a stock property and cauaty insurance company. See Secd.en 50l(m) an 833(a)(1) of the
Intern Revenue Code of 1986.

Ll: .\'t.
,~"¡- . "i-,~'," .~..

The startin point for the comutation of the taxable income for a property

an casuaty inurance eompany is the anual statemnt (seetion 832(b) (1)). Anual statement amunts are then modified in several respects to arrive at
taxble income.
Recognizing that Plan may have existin methods of accountin that do not .

I".';

',.
.,'

conorm to the proper tax accounting required of property and casualty

Act of 1986 reflects specific provisions implementing the Congression intent
tht Plan be permtted to change accouting methods as they make the

insurance comanies, the legislative history of Section 1012 of the ~ax Reform

transition from tax-eemt organzations. Conference Report Lage states:
.',-'

I'"
-. .:1 " I';::~',

In addition to this specia deduction (section 833(a) (2)

, deduction). such organzations are given a fresh start
with respect to chanes in accounting methods resulting from the change from tax-eiempt to taxble status. No adjustment is made under Section 481 on account of au

~"
~'i' ~~: ....t....

accounting method chae. ,.- ..\,.. "',
H. R. Con. Rep. No 841, 99th Cong.. 2d Sessa 11-349 (1986).

r" , ,r~~"

. ' -"; . . .' ~.; .'.." .~'. -' . - . The statute imlementing the 'legislative history also recognzes the need for
Plans to change methods of accountin. Legislative Laguge states:

Ii, ,." '

t-,
r.

. .. No adjustment shall be mae uDder Seetion 481 (or
any other provisions) of such Code on account of a change in its method of accounting for its first taxble year

(

beginng after Decemer :31. 1986...

See Section l012(c)(3)(A)(i) of the Tax Reform Act of 1986.

PBS-002324

B-31

- !

Case 1:05-cv-01030-LSM

Document 23-3

Filed 02/15/2007

Page 30 of 30

~

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. Appendix II to Form 3115
Page 2 of 3

t
w:

This applicati.on for change in accounting method is being fi.led under the rues

I. ~.

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C?f Revenue Procedure 87-51, which permts an exiSting Blue Slueld or Blue Cross organzation to file the request for change by the date it files its tax return for the year of change. Revenue Procedure 87-51 exempts the applicant from. the calculation of any section 481 (a) adjustments. the Revenue Procedure requires i:he applicant to describe the accounting methods to which it is changing. The applicant is not required to describe the accounting method from which it is chain. . No user fee is required (see Appendix III).

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The taayer requests permssion to change and to use methods of accounting that are in a comliance with the Congressional requirement that the taxayer be
taxed as a stock property an casualty insurance comany.

The methods of

accounting which the taxayer will use to comply with this. requirement inlude:
;f

1 . Dividend income will be reported as dividend payments are received.

2. Pursuant to the reguations under Internal Revenue Code Section 168, the taxayer will, for tax purposes, treat al assets owed prior to January 1, 1987 as if they were placed in service on Januar 1, 1987. Depreciation expense will be properly computed

('
~~
~~

us1.ng methods prescribed in the Internal Revenue Code of 1986. The basis for depreciation will be the lower of cost net of depreciation taken through Decemer 31 t 1986 for fincial statement . puroses or fair market value at Decemer .31, 1986. For purposes of determning gain or loss, the adjustment basis of any asset held

¡i,

on .Jan 1, 1987 will be its fair market value as of Decemer 31, 1986
less subsequent depreciation taken.

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3. Purchased comuter software costs will be capitaiized and amortized
- over a period of five years or less, in accordance with rules

i ~:.

applicable under the Intern Revenue Code of 1986.

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4. Al costs properly attributable to the development of comuter software will be treated as a current expense in accordace with the
rules under the Internal Revenue Code of 1986.

~?; ¡;¡;

f¡~

5. Deferred comensation exense uner a nonquaified plan for certain
employees will be reported according to rules perscribed in the Internl Revenue Code of 1986.

~.
i",,

6. Miscellaneous unsolicited cash receipts will be recognized as incom of the taxayer in the year received.
~¡. "".l~';

7. Income £rom subsidiaries will be recognized as diVidends are

received.

(

8. Pension expense will be recognized as cash contributions to the pension fund are made, under the rues perscribed in the Intern Revenue Code of 1986.

9. The cost basis for investment securities will be determed using
acceptable methods perscribed in the Internal Revenue Code of 1986.

B-32

PBS-002325