IRS Chief Counsel - “Home/Host” issue in calculating the section 833(b) special deduction 

September 16: The IRS posted a field advice memorandum* prepared by attorneys in the IRS Chief Counsel Office in which the effects of payments of “Host” transactions and the calculation of a taxpayer’s special deduction under section 833(b) are addressed when there is a “Home/Host” program under a licensing agreement with the Blue Cross and Blue Shield Association. 20133701F (posted September 13, 2013, and dated March 7, 2013).


The issue is referred to in the IRS memo as the “Home/Host” issue, and involves the following questions:

  • Which Blue Cross and Blue Shield (BCBS) plan may include in its special deduction calculation under section 833(b) the amounts paid to satisfy provider claims for services provided to a member outside of the service area of the BCBS plan that issued the policy to the member?
  • Does the Home/control licensee, or the Host/par licensee, include that expense in the section 833(b) calculation?

The IRS position was that only the Home/control licensee properly includes the expense in the special deduction calculation under section 833(b).

The taxpayer position was because the taxpayer has included both its Home expenses and Host expenses to arrive at its claimed special deductions under section 833(a), both the Home/control licensee and the Host/par licensee may include these expenses in their respective special deduction calculations under section 833(b).

The conclusion announced in the redacted IRS memo [PDF 244 KB] is that the Host transactions are not properly included in the calculation of the taxpayer’s special deduction under section 833(b) because payment of the Host transactions does not reflect claims, liabilities, or expenses incurred by the taxpayer in the administration of cost-plus contracts.

The IRS memo follows Chief Counsel Field Attorney Advice (FAA), 2010 IRS NSAR 1502F (February 4, 2010), which concluded that only claims and liabilities processed by a BCBS organization as a "Home Plan," and not those processed as a "Host Plan," may be considered claims incurred and liabilities incurred for purposes of calculating the special deduction under section 833, and concludes that:

  • The Host transactions were not paid by the taxpayer as a result of a benefit policy or cost-plus contract with a member, an employer group, or a national account.
  • The taxpayer’s contractual reimbursement arrangements with its network of providers were not cost-based contracts, but were service contracts which do not constitute obligations imposed upon the taxpayer under a cost-plus contract.

*Chief Counsel Advice documents are legal advice, signed by executives in the National Office of the IRS Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The documents are issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. However, they are not to be used or cited as precedent.

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