Title VII, SEC. 7602. TAX TREATMENT OF TAXABLE ORGANIZATIONS PROVIDING HEALTH INSURANCE AND OTHER PREPAID HEALTH CARE SERVICES. (a) General Rule. Section 833 is amended to read as follows: ``SEC. 833. TREATMENT OF ORGANIZATIONS PROVIDING HEALTH INSURANCE AND OTHER PREPAID HEALTH CARE SERVICES. ``(a) General Rule. Any organization to which this section applies shall be taxable under this part in the same manner as if it were an insurance company other than a life insurance company. ``(b) Organizations To Which Section Applies. This section shall apply to any organization ``(1) which is not exempt from taxation under this subtitle, and ``(2) the primary and predominant business activity of which during the taxable year consists of 1 or more of the following: ``(A) Issuing accident and health insurance contracts or the reinsuring of risks undertaken by other insurance companies under such contracts. ``(B) Operating as a health maintenance organization. ``(C) Entering into arrangements under which ``(i) fixed payments or premiums are received as consideration for the organization's agreement to provide or arrange for the provision of health care services, regardless of how the health care services are provided or arranged to be provided, and ``(ii) such fixed payments or premiums do not vary depending on the amount of health care services provided.'' (b) Conforming Amendments. (1) Subsection (c) of section 56 is amended by striking paragraph (3). (2) The table of sections for part II of subchapter L of chapter 1 is amended by striking the item relating to section 833 and inserting the following: ``Sec. 833. Treatment of organizations providing health insurance and other prepaid health care services.'' (c) Effective Dates. (1) In general. Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1996. (2) Transition rules for blue cross and blue shield organizations. (A) Prior fresh start preserved. The adjusted basis of any asset determined under section 1012(c)(3)(A)(ii) of the Tax Reform Act of 1986 shall not be affected by the amendments made by this section nor by reason of any failure to qualify in taxable years beginning after December 31, 1996, as an existing Blue Cross or Blue Shield organization (as defined in section 833(c)(2) of the Internal Revenue Code of 1986, as in effect on the day before the date of the enactment of this Act). (B) Recoupment of prior reserve benefit. In the case of any organization entitled to the benefits of section 833(a)(3) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act) for such organization's last taxable year beginning before January 1, 1997, the amount determined under paragraph (4) of section 832(b) of such Code for each of such organization's first 6 taxable years beginning after December 31, 1996, shall be increased by an amount equal to 3 \1/3\ percent of its unearned premiums on outstanding business as of the close of such organization's last taxable year beginning before January 1, 1997. (C) Phase-out of special deduction for certain organizations. (i) In general. In the case of an organization which meets the requirements of clause (ii) (I) such organization shall continue to be entitled to the deduction provided under section 833(b) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act) for its first 2 taxable years beginning after December 31, 1996, except that (II) the amount of such deduction for such organization's taxable year beginning in 1997 shall be 67 percent of the amount which would have been determined under such section 833(b) as so in effect, and the amount of such deduction for organization's taxable year beginning in 1998 shall be 33 percent of the amount which would have been so determined. Notwithstanding the amendment made by subsection (b)(1), any deduction under the preceding sentence shall not be allowable in computing alternative minimum taxable income. (ii) Requirements. An organization meets the requirements of this clause if, for each of its taxable years beginning in 1995 and 1996, such organization (I) was an organization to which section 833 of such Code (as so in effect) applied, and (II) met the requirements of subparagraph (A) of section 833(c)(3) of such Code (as so in effect). (3) Transitional rules for other companies. (A) Organizations to which paragraph applies. This paragraph shall apply to any organization to which section 833 of the Internal Revenue Code of 1986 (as amended by subsection (a)) applies for such organization's first taxable year beginning after December 31, 1996; except that this paragraph shall not apply if such organization treated itself as an insurance company taxable under part II of subchapter L of chapter 1 of such Code on its original Federal income tax return for its taxable year beginning in 1992 and for all of its taxable years thereafter beginning before January 1, 1997. (B) Treatment of currently taxable companies. Except as provided in subparagraph (C), in the case of any organization to which this paragraph applies (i) the amendments made by this section shall be treated as a change in the method of accounting, and (ii) all adjustments required to be taken into account under section 481 of the Internal Revenue Code of 1986, shall be taken into account for such company's first taxable year beginning after December 31, 1996. (C) Treatment of currently tax exempt companies. In the case of any organization to which this paragraph applies and which was exempt from tax under chapter 1 of the Internal Revenue Code of 1986 for such organization's last taxable year beginning before January 1, 1997 (i) no adjustment shall be made under section 481 (or any other provision) of such Code on account of a change in its method of accounting required by this section for its first taxable year beginning after December 31, 1996, and (ii) for purposes of determining gain or loss, the adjusted basis of any asset held by such organization on the first day of such taxable year shall be treated as equal to its fair market value as of such day.