COLONIAL AMERICAN LIFE INSURANCE COMPANY, PETITIONER V.
COMMISSIONER OF INTERNAL REVENUE

   No. 88-396

   In The Supreme Court Of The United States

   October Term, 1988

   On Writ Of Certiorari To The United States Court Of Appeals For The
Fifth Circuit

   Brief For The Respondent

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statutory and regulatory provisions involved
   Statement
   Summary of argument
   Argument:
      I. Fundamental principles of taxation require
         capitalization and amortization of ceding commissions
         A. Ceding commissions in both indemnity reinsurance
            and assumption reinsurance transactions are paid to
            acquire an interest in insurance policies that is
            expected to produce income over future periods
         B. The tax treatment of ceding commissions paid by an
            indemnity reinsurer is governed by the rule that
            costs incurred to acquire an economic interest
            expected to produce income for substantially more
            than one year may not be expensed in the year of
            payment but must be capitalized and amortized over
            the interest's useful life
     II. No provision of the Code overrides the general
         capitalization principle to permit the current deduction
         of ceding commissions
         A. The ceding commissions payable to Transport under
            the coinsurance agreements cannot be used to reduce
            gross premiums under Section 809(c)(1) of the Code
         B. The ceding commissions are not "ordinary and
            necessary" expenses deductible under Section
            809(d)(12) of the Code
         C. The NAIC methods of accounting for ceding
            commissions are not controlling under Section
            818 of the Code because they are inconsistent
            with the accrual method of accounting, which
            takes precedence over the NAIC-approved method of
            computation
   Conclusion

                            OPINOINS BELOW

   The opinion of the court of appeals (Pet. App. 1a-9a) is reported
at 843 F.2d 201.  The opinion of the Tax Court (Pet. App. 11a-22a) is
unofficially reported at 51 T.C.M. (CCH) 1123.

                             JURISDICTION

   The judgment of the court of appeals was entered on April 26, 1988.
 A petition for rehearing was denied on May 25, 1988 (Pet. App. 23a).
The petition for a writ of certiorari was filed on August 22, 1988.
The jurisdiction of this Court rests upon 28 U.S.C. 1254(1).

             STATUTORY AND REGULATORY PROVISIONS INVOLVED

   Sections 809 and 818 of the Internal Revenue Code of 1954 (26
U.S.C.) and Section 1.809-4 of the Treasury Regulations on Income Tax
(26 C.F.R.), as in effect for 1975 and 1976, are set forth in
pertinent part in a statutory appendix (App., infra, 1a-3a).

                          QUESTION PRESENTED

   Whether "ceding commissions" payable by a reinsurer to the initial
insurer as consideration for the right to share in the future income
stream from a block of life insurance policies reinsured under
contracts of indemnity reinsurance are fully deductible in the year
paid, or, instead, whether such payments must be capitalized and
amortized over the estimated life of the reinsurance agreements.

                               STATEMENT

   1. Petitioner is a Louisiana corporation engaged in the business of
writing and reinsuring life, accident, and health insurance contracts.
 During the years at issue, it qualified for federal income taxation
as a "life insurance company" under Section 801 of the Internal
Revenue Code.  /1/ In 1975 and 1976, petitioner entered into four
indemnity reinsurance agreements with respect to a block of life
insurance policies written by Transport Life Insurance Company.  In
these agreements, petitioner agreed to reinsure the aggregate total of
76.6% of Transport's liabilitys under that block of policies by
indemnifying Transport for that portion of its losses.  /2/ Some of
the reinsurance was accomplished by means of conventional coinsurance
agreements, while the bulk of the reinsurance was accomplished by
means of modified coinsurance agreements.  /3/ Under both forms of
reinsurance, petitioner became entitled to 76.6% of the future
premiums (less expenses) received on the policies.  Pet. App. 2a,
4a-5a.  Transport had the right to reacquire portions of the ceded
business at scheduled intervals (id. at 6a).

   The agreements provided that Transport was to pay "reinsurance
premiums" to petitioner equal to the amount of the reserves required
to be established by petitioner to cover the conventional coinsurance
liability for this block of policies.  /4/ These reinsurance premiums
were $675,762 for the 1975 agreements, and $851,398 for the 1976
agreements.  The agreements separately provided that petitioner was to
pay "ceding commissions" to Transport of $680,000 for the 1975
agreements and $852,000 for the 1976 agreements, in consideration for
the future premium income acquired.  These offsetting obligations were
netted against each other before payment, with the result that
petitioner paid Transport $4,238 in 1975 and $602 in 1976.  In
addition, petitioner paid a finder's fee of $13,600 in 1975.  Pet.
App. 4a-5a.

   On its federal income tax returns for 1975 and 1976, petitioner
sought to deduct the full amount of the "ceding commissions," as well
as the finder's fee, in the years of payment.  Thus, petitioner
reported tax losses of $693,600 for 1975 and $852,000 for 1976 as a
result of the reinsurance transactions, although petitioner had
entered into those transactions fully expecting that they would be
profitable.  /5/ The Commissioner disallowed the deductions claimed
for the ceding commissions and finder's fee.  The Commissioner
determined that these amounts represented the acquisition costs for
economic benefits having a useful life beyond the year of payment --
namely, the right to petitioner's share of the future income stream
earned from the reinsured policies.  Accordingly, the Commissioner
concluded that the ceding commissions should be capitalized and
amortized over the period of indemnification (which was later
stipulated to be seven years (Pet. App. 9a n.6)).  Id. at 2a, 6a, 16a.

   2. Petitioner filed a petition in the Tax Court seeking
redetermination of the resulting deficiencies, and the Tax Court ruled
in its favor (Pet. App. 11a-22a).  Relying on its prior decision in
Beneficial Life Ins. Co. v. Commissioner, 79 T.C. 627 (1982), the
court held that ceding commissions paid to the reinsured company in
indemnity reinsurance transactions may be deducted in full in the year
of payment (Pet. App. 16a-22a).  The court viewed an indemnity
reinsurance transaction not as a sale of intangible assets, but as the
initial insurer's purchase of insurance from the reinsuring company.
On that view, the court reasoned, petitioner could reduce its income
by the amount of the ceding commissions under the Code's allowance for
"return premiums, and premiums and other consideration arising out of
reinsurance ceded" (see Section 809(c)(1)).  /6/ Pet. App. 17a-18a.
The Tax Court acknowledged that ceding commissions paid in connection
with an assumption reinsurance transaction would have to be
capitalized and amortized over the estimated life of the policies
involved, but it justified this apparent inconsistency as being
required by the Code itself on the ground that the Code "treats an
assumption reinsurance transaction as a sale by the initial insurer to
the reinsuring company" (id. at 17a).

   3. The court of appeals reversed (Pet. App. 1a-9a).  Agreeing with
the Eighth Circuit's decisions in Modern American Life Ins. Co. v.
Commissioner, 830 F.2d 110 (1987), and Prairie States Life Ins. Co. v.
United States, 828 F.2d 1222 (1987), the court held that the ceding
commissions reflected petitioner's acquisition costs for the
intangible right to future income obtained under the indemnity
reinsurance agreements, and therefore were not fully deductible in the
year of payment.  The court found controlling the "fundamental rule
that an amount expended to acquire an asset or economic interest,
benefit or advantage with an income producing life extending
substantially beyond the current taxable year may not be (expensed) in
the year of payment but must be depreciated or amortized over its
useful life" (id. at 7a-8a).  Applying that rule to the transactions
here, the court concluded, required that the ceding commissions be
amortized over the useful life of the policies (ibid.).

   The court of appeals specifically rejected the Tax Court's view
that indemnity reinsurance should be treated differently from
assumption reinsurance with respect to ceding commissions (id. at 9a).
 In particular, the court criticized the view that indemnity
reinsurance is more analogous to the issuance of new insurance, in
which underwriting expenses are currently deductible.  The court found
its earlier analysis in the assumption reinsuranc context to be
equally applicable here, concluding that the ceding commission "'in no
way represents the cost of putting the business on the books of the
company.  It represents instead, an estimate of the current value to
the taxpayer that is represented by having these policies on its books
with the expectation of the continuing premiums to be paid in the
future.'" Pet. App. 9a (quoting Southwestern Life Life Ins. Co. v.
United States, 560 F.2d 627, 640-641 (5th Cir. 1977), cert. denied,
435 U.S. 995 (1978)).  The court also determined that neither Section
809(c)(1) nor any other section of the Code overrode the basic
capitalization rules that otherwise control this case and that require
amortization of ceding commissions (Pet. App. 8a).  /7/

                          SUMMARY OF ARGUMENT

   The ceding commissions paid by petitioner represent its acquisition
costs for an intangible asset -- namely, a future income stream
generated by the reinsured policies.  Any other taxpayer, in any other
setting, would have to capitalize that expense as the acquisition cost
of an intangible asset or interest with an income-producing life
extending substantially beyond the current tax year, and would have to
amortize that cost over the appropriate period.  The same result is
also required in this case.

   1. Indemnity reinsurance of the sort involved here is a vehicle by
which one insurance company shifts some of the risks on policies it
has written to another insurance company -- the reinsurer.  In that
transaction, the reinsured company gives up a share of the future
income from all or part of a block of policies, and the reinsurer
agrees to indemnify the reinsured company for the same percentage of
losses incurred on the block.  To acquire that future income, the
reinsurer pays the initial insurer an up-front "ceding commission."
Under long established tax principles, that acquisition cost must be
capitalized and amortized over the indemnification period.

   It is undisputed that ceding commissions payable by a reinsurer to
a reinsured company in the case of assumption reinsurance must be
capitalized as the cost of acquiring intangible assets.  The same
result should follow here.  Indemnity reinsurance differs in some
respects from assumption reinsurance, but none of those distinctions
is germane to the tax treatment of ceding commissions.  The pivotal
fact that is common to both is that the reinsurer makes a payment to
acquire the right to a future stream of income from the reinsured
policies.  The purpose of paying up-front ceding commissions in either
case, quite simply, is to purchase that profitable right.

   Permitting a current deduction of ceding commissions would grossly
distort petitioner's income by mismatching the income to be derived
from the reinsured policies over future years and the current costs of
acquiring that income.  There is no reason to believe that Congress
intended to permit indemnity reinsurers to distort their income in
this way, which would drastically depart from basic tax principles
applicable to all other taxpayers (including assumption reinsurers)
who make current expenditures for future benefits.

   2. The specific provisions of the Code that govern life insurance
companies in no way override the basic rules of capitalization and
amortization of acquisition expenses as applied to ceding commissions.
 Contrary to petitioner's argument, Section 809(c)(1), which allows
the subtraction from "gross premiums" of "return premiums, and
premiums and other consideration arising out of reinsurance ceded,"
does not permit the immediate deduction of the ceding commissions
here.  When read in context, it is apparent that Section 809(c)(1) was
designed only to ascertain an insurance company's true premium income.
 It does this by allowing appropriate adjustments to gross premium
receipts for amounts that ultimately do not "belong" to the company
that receives them, but instead must be returned to the policyholder
or paid over to another company.  Section 809(c)(1) therefore does not
apply to ceding commissions, which are paid for the right to share in
the ceding company's future premium income.

   Ceding commissions are not "return premiums" within the meaning of
Section 809(c)(1) or its associated regulation.  A ceding commission
is paid contemporaneously with the closing of the reinsurance
transaction, and there is no sense in which this up-front capital
outlay is being "returned" to the ceding company.  Nor are ceding
commissions "consideration arising out of reinsurance ceded." That
branch of Section 809(c)(1) permits only the ceding company to deduct
from its gross premiums amounts it pays to a reinsurer to obtain
indemnity reinsurance.  The subtraction of ceding commissions from
gross premiums that petitioner seeks is thus incompatible with the
language and purposes of Section 809(c)(1).

   3. Petitioner is also wrong in arguing that Congress intended
ceding commissions to be deductible under Section 809(d)(12) as
"ordinary and necessary" expenses, just as agent's commissions are
currently deductible upon the sale of a single insurance policy.
Section 809(d)(12) of the Act embraces only the usual range of
"ordinary and necessary" deductions, and that provision in no way
comprehends the capital payments embodied in a ceding commission.  A
ceding commission has no kinship to an agent's commission, other than
the colloquial designation of both as "commissions." A ceding
commission does not compensate anyone for personal services in selling
a policy, but is paid for the right to share in future income from an
intangible asset -- a block composed of thousands, perhaps hundreds of
thousands, of insurance policies.  Indeed, the ceding commission is
paid not to an agent or employee, but to the ceding company, which
stands in the place of the policyholder in its relationship to the
reinsurer.

   4. Section 818(a) of the Act also affords no grounds for deduction
of the ceding commissions.  That provision specifies that federal
income tax computations for life insurance companies shall be
consistent with those prescribed for annual statement purposes by the
National Association of Insurance Commissioners (NAIC), except when
the rules of accrual accounting dictate a contrary result.  This
exception is directly applicable here because accrual accounting
mandates the amortization of the acquisition costs of a capital asset.

                               ARGUMENT

   I. FUNDAMENTAL PRINCIPLES OF TAXATION REQUIRE CAPITALIZATION AND
AMORTIZATION OF CEDING COMMISSIONS

   Reinsurance transactions like the ones involved here are commonly
employed in the life insurance industry, and they serve useful
purposes for both the initial insurer and the reinsurer.  From the
initial insurer's perspective, reinsurance reduces or eliminates the
risk associated with a block of policies it has issued by passing on
part or all of the initial insurer's liability to the reinsurer.
Reinsurance can also serve a financing purpose for the initial insurer
by reducing the drain on its surplus from the expenses of writing new
policies (see Pet. App. 2a n.2).  From the reinsurer's perspective,
however, the transaction serves one basic economic purpose.
Reinsurance allows the reinsurer to acquire a future stream of income
from the block of policies reinsured, consisting largely of future
premiums to be paid on those policies.  Because reinsurers anticipate
a future profit from the policies they agree to reinsure, they are
willing to make a sizeable up-front payment to the initial insurer for
the right to share in the income.

   The tax treatment of that payment, called a "ceding commission," is
at issue in this case.  It is undisputed that petitioner is entitled
to deduct this payment;  the issue is essentially one of timing.
Petitioner asserts that the ceding commission can be deducted in full
in the year of payment, even though that deduction would generate a
substantial immediate tax loss on the reinsurance transaction.  The
court of appeals, on the other hand, sustained the IRS's position that
the ceding commission must be capitalized and amortized over the
income-producing life of the block of policies reinsured (see I.R.C.
Section 167).

   Though the Code contains many special provisions applicable to life
insurance companies, this case is controlled by principles that govern
all taxpayers.  It is hornbook law that a taxpayer cannot deduct in
the year of payment the cost of acquiring an income producing
interest, tangible or intangible, with a useful life extending
substantially beyond the taxable year.  Instead, the acquisition cost
must be capitalized and amortized over an appropriate period.
Application of that principle compels the conclusion that ceding
commissions, which represent the acquisition cost of an intangible
right to income stretching many years into the future, must be
capitalized and amortized over the life of the policies reinsured --
both in the assumption reinsurance context, where the issue is well
settled, and in the indemnity reinsurance context involved here.

   A. Ceding Commissions in Both Indemnity Reinsurance and Assumption
Reinsurance Transactions Are Paid to Acquire an Intangible Right in a
Block of Policies, Which Is Expected To Produce Income Over Future
Periods

   There are several varieties of reinsurance transactions, all of
which share the common element of allowing the reinsured to pass on
all or part of the liability on its policies to the reinsurer.  These
transactions are generally divided into two broad categories:
assumption reinsurance and indemnity reinsurance.

   In assumption reinsurance, the reinsurer takes over all or part of
the insurance business of the reinsured or ceding company and becomes
directly liable to the policyholders involved for the liabilities it
has assumed.  In return for being relieved of liability, the initial
insurer ordinarily transfers to the reinsurer a commensurate portion
of the assets backing the reserves it has established out of past
premiums, and the reinsurer sets up its own reserves to cover the
payment of future policy benefits.  See D. McGill, Life Insurance
431-432 (1967).  /8/ Thereafter, the reinsurer treats the policies as
its own, earning income from premium receipts and the investment
interest on the assets backing the reserves, and ultimately
recapturing any excess reserves not needed to pay benefits.

   Assumption reinsurers compensate the ceding company for the right
to obtain the future income from the block of policies.  The
consideration paid in such a transaction depends upon the maturity of
the policies in question and the parties' perception of their future
profitability.  When the parties believe that future premiums are
likely to be more than sufficient to cover projected liabilities, the
reinsurer ordinarily will not insist on the full transfer of the
assets corresponding to the reinsured's reserves, but will agree to
pay the initial insurer consideration for the opportunity to receive
the projected profits on those policies.  See Southwestern Life Ins.
Co. v. United States, 560 F.2d 627, 640 (5th Cir. 1977), cert. denied,
435 U.S. 995 (1978).  The payment from the reinsurer to the initial
insurer is called a ceding commission.  It is well settled that this
ceding commission is not immediately deductible, but rather must be
amortized over the period during which the policies are expected to
produce future income.  See note 12, infra.  In sum, an assumption
reinsurance transaction takes the initial insurer out of the picture
entirely on a block of insurance business, and the reinsurer pays a
ceding commission that represents the price of obtaining that
business.

   The broad category of indemnity reinsurance consists of several
different types of transactions.  All of them differ from assumption
insurance in one respect -- the reinsurer does not become directly
liable to policyholders with respect to the reinsured liability, but
agrees only to indemnify the ceding company for all or part of its
losses on a block of policies.  The initial insurer remains as a
conduit between the policyholders and the reinsurer (by continuing to
service the policies, collect premiums, and pay benefits).  The
initial insurer may also have the right to recapture all or part of
the reinsured risks.  See generally McGill, supra, at 432-434.  In
other respects, however, indemnity insurance may be similar to
assumption reinsurance.

   The simplest form of indemnity reinsurance is risk premium (or
"yearly renewable term") reinsurance, which is similar to a
traditional insurance contract.  The initial insurer simply pays a
premium to the reinsurer for protection against identified losses
under policies it has directly written, and the reinsurer sets up its
own reserves to cover the reinsured risks.  See S. Rep. No. 291, 86th
Cong., 1st Sess. 39 (1959);  D. McGill, supra, at 435-437.  There is
no apparent reason for the payment of a "ceding commission" by the
reinsurer in this type of transaction, and hence it does not involve
the tax question at issue here.

   The type of indemnity insurance involved in this case, coinsurance,
is much more analogous to assumption reinsurance.  Conventional
coinsurance involves a kind of sharing arrangement under which the
initial insurer and the reinsurer share in the liabilities and profits
generated by the reinsured policies.  Apart from the differences in
the duration and form of the transactions -- namely, that the
reinsurer does not become directly liable to the policyholders or
collect premiums directly from them -- the assumption reinsurer and
the coinsurance reinsurer have essentially the same financial benefits
and obligations.  In both cases, the reinsurer must carry the reserves
to cover its specified share of the liabilities and ordinarily
acquires the right to a concomitant share of the future premiums to be
paid on the reinsured policies.  And in both cases, a ceding
commission is paid by the reinsurer to the reinsured for the right to
share in the future income stream.  /9/

   The taxation of life insurance companies is governed by the
intricate provisions of Sections 801-820 of the Code.  In 1959, those
provisions were amended to tax life insurance companies, not only on
investment income, but also on underwriting gains derived from premium
income.  See Commissioner v. Standard Life & Accident Ins. Co., 433
U.S. 148, 152-154 (1977).  The provisions establish a complex,
three-phase system for calulating a company's income.  See generally
United States v. Atlas Life Ins. Co., 381 U.S. 233, 235 n.2 (1965).
This case does not implicate the details of that calculation.  The
question here concerns the treatment of ceding commissions in
connection with the reinsurer's "gain from operations," specifically,
the calculation of its adjusted gross premium income under Section
809(c)(1).  That Section provides for the inclusion in gain from
operations of "(t)he gross amount of premiums and other considerations
* * * less return premiums, and premiums and other consideration
arising out of reinsurance ceded."

   Petitioner contends that it is entitled to deduct its ceding
commissions under this provision as offsets against gross premiums in
the years of payment.  That would entitle it to immediate tax
deductions of $693,600 in 1975 (including the finder's fee) and
$852,000 in 1976, even though these amounts were paid to obtain
valuable economic interests with useful lives of seven years.  The
claimed deductions would generate substantial tax losses on these
reinsurance transactions that would be available to offset
petitioner's income from other underwriting activities.  The court of
appeals rejected petitioner's contention and correctly held that
ceding commissions paid by indemnity reinsurers represent the
acquisition costs of intangible assets that, under general tax
principles, must be capitalized and amortized over the period of
indemnification.

   B. The Tax Treatment of Ceding Commissions Paid by an Indemnity
Reinsurer Is Governed by the Rule that Costs Incurred To Acquire an
Economic Interest Expected To Produce Income for Substantially More
than One Year May Not Be Expensed in the Year of Payment but Must Be
Capitalized and Amortized over the Interest's Useful Life

   1. A fundamental premise of the tax law is that an amount expended
to acquire an asset or economic interest, benefit, or advantage with
an income-producing life extending substantially beyond the current
taxable year may not be deducted in the year of payment but must be
capitalized and amortized over its useful life.  See I.R.C. Section
263;  Commissioner v. Idaho Power Co., 418 U.S. 1, 12 (1974);
Commissioner v. Lincoln Savings & Loan Assn., 403 U.S. 345 (1971);
Commissioner v. Tellier, 383 U.S. 687, 689-690 (1966);  See generally
1 B. Bittker, Federal Taxation of Income, Estates and Gifts,
Paragraphs 20.4, 23.1.1, 23.2.6 (1981).  That rule of law applies
equally to the acquisition of any interest -- tangible or intangible
-- that is expected to contribute to income in future taxable periods.
 See, e.g., Woodward v. Commissioner, 397 U.S. 572 (1970)
(professional fees expended in the appraisal of stock must be
capitalized).  /10/

   The ceding commissions here clearly fall within the scope and
rationale of this principle.  As petitioner's own expert witness
essentially admitted at trial (Tr. 56-57), petitioner paid its ceding
commissions to acquire an economic benefit that it fully expected to
contribute to its income in future periods.  In all four indemnity
reinsurance transactions here, the ceding commissions paid by
petitioner represented a capital investment in the reinsured policies
and, therefore, are properly amortizable over the indemnification
period.  Departing from the basic capitalization rules, as petitioner
urges, would grossly distort its income.  A current deduction would
mismatch the future income to be derived from the reinsured policies
with the current costs of acquiring the right to that income.  Such an
accelerated deduction of expenses incurred to obtain future income
would undermine the basic purpose of capitalization rules -- to
"mak(e) a meaningful allocation of the cost entailed in the use * * *
of the asset to the periods to which it contributes (income)." Massey
Motors, Inc. v. United States, 364 U.S. 92, 104 (1960).

   The courts of appeals that have considered this issue generally
have recognized that an indemnity insurer's ceding commission is
inherently capital in nature.  In Modern American Life Ins. Co. v.
Commissioner, 830 F.2d 110, 112 (8th Cir. 1987), the court explained
that "(i)t is apparent that taxpayer, in paying $450,000 in return for
the right to a percentage of the future earnings on the reinsured
policies, acquired an economic benefit that it fully expected to
contribute to its income in future periods." See also Prairie States
Life Ins. Co. v. United States, 828 F.2d 1222, 1231 (8th Cir. 1987)
(reinsurer took on the transaction to acquire an "intangible asset"
with future benefit).  The court of appeals in the present case also
correctly recognized that the ceding commission is an expense
reflecting "an estimate of the current value to the taxpayer that is
represented by having these policies on its books with the expectation
of continuing premiums ot be paid in the future" (Pet. App. 9a).  See
also Southwestern Life Ins. Co. v. United States, 560 F.2d 627,
640-641 (5th Cir. 1977), cert. denied, 435 U.S. 995 (1978);  but see
Merit Life Ins. Co. v. Commissioner, 853 F.2d 1435, 1441-1442 (7th
Cir. 1988), petition for cert. pending, No. 88-955.  That is precisely
the kind of expense that must be capitalized, rather than immediately
written off.  Indeed, this conclusion is confirmed by a published
independent accounting guide for auditing insurance companies, which
states that a ceding commission "should be treated as an acquisition
expense to be amortized over the premium-paying period" (The Industry
Audit Guide of Stock Life Insurance Companies, prepared by the
Committee on Insurance Accounting and Auditing of the American
Institute of Certified Public Accountants, 92 (1972)).

   Petitioner seeks (Br. 21 n.28) to explain away the ceding
commissions as merely a form of reimbursement to the initial insurer
for expenses it incurred in selling the underlying policies.  But the
motives that impel the initial insurer to seek the payment of a ceding
commission cannot account for the willingness of the indemnity
reinsurer to pay it.  There is no adequate explanation for
petitioner's paying a ceding commission -- and thus taking on future
liability far in excess of the net assets it received from Transport
-- except to purchase the share of future profits from the block of
policies reinsured.  Thus, regardless of whether the ceding company
views the commissions as a partial reimbursement of its selling
expenses, the critical fact here is that to the reinsurer, such ceding
commissions represent the cost of an intangible right to a share of
the future income from the reinsured policies.  /11/

   2. It is now well settled that capitalization and amortization are
required for ceding commissions that the reinsuring company expressly
agrees to pay in an assumption reinsurance transaction.  /12/ Because
there is essentially no economic difference between a ceding
commission paid in an assumption reinsurance transaction and one paid
in an indemnity reinsurance transaction, the same capitalization rule
should apply here.  See Idaho Power, 418 U.S. at 14 (rejecting
capitalization rule that would "lead to disparate treatment among
taxpayers" who incur comparable expendes).  Indeed, even the Tax Court
acknowledged in Beneficial Life Ins. Co. v. Commissioner, 79 T.C. at
646-647, that it might "seem strange at first for * * * (assumption
and indemnity reinsurance transacions) to have such different tax
consequences when they are, at heart, so similar."

   While there are some variations between the forms of assumption
reinsurance and indemnity reinsurance, those differences have no
bearing on the economic substance or purpose of their common element
-- the payment of a ceding commission -- and they do not justify
different tax treatment.  We fully recognize that assumption
reinsurers take on direct liability to the policyholders (while
indemnity reinsurers do not), that assumption reinsurers will
typically assume 100 percent of the liabilities on the policies (while
indemnity reinsurers may reinsure all or part of the liability), and
that assumption reinsurers take permanent possession of the reinsured
business (while indemnity reinsurers may allow the initial insurer to
recapture the reinsured business).  See McGill, supra at 435-440.
These differences, however, do not alter the essential characteristics
of ceding commissions.  It is entirely immaterial which company is
"directly" liable to policyholders;  /13/ the issue here concerns only
the taxation of the price of shifting the income stream under the
block of reinsured policies from the ceding company to the reinsurer.
/14/ Moreover, assumption reinsurance cannot be distinguished from
indemnity reinsurance on the ground that an entire block of policies
is shifted to the reinsurer, rather than only some percentage of it.
The percentage of policies reinsured in an indemnity agreement can
easily represent the bulk of the interest in the policies, as it did
in this case.  But even a lesser percentage of reinsurance would
provide the reinsurer with a share in a future income stream, for
which the reinsurer pays an acquisition cost in the form of a ceding
commission.  Finally, the duration of an indemnity reinsurance
transaction may be shorter than that of an assumption transaction, but
the length of the agreement bears only on the appropriate amortization
period, not on whether the acquisition cost is capital in nature.  The
fact that the indemnity insurer acquires only a portion of future
income rights (rather than all of the rights) cannot spare it from
capitalizing its acquisition costs, any more than the purchaser of a
life estate in property can avoid capitalizing its acquisition costs
because it did not purchase the fee simple.  /15/

   Petitioner argues (Br. 16) that because Congress in 1959 wrote
several provisions into the Code that apply exclusively to assumption
reinsurance (Sections 806(a) and 809(d)(7), for example), it follows
that assumption and indemnity reinsurance should also be accorded
different treatment here.  But those provisions respond to specific
issues relating to the differences in the forms of the transactions
that we identified above (and that are irrelevant to the tax treatment
of ceding commissions).  None of those provisions suggest that the
1959 Congress viewed assumption reinsurance purely as a "sale of
assets" and indemnity reinsurance purely as the issuance of new
"insurance," thus justifying vastly different tax treatment of the
essentially similar ceding commissions.  /16/ In fact, both kinds of
transactions partake of elements of a sale and of an insurance
transaction;  the ceding commission aspect of both, however, requires
amortization tax treatment, regardless of how the transaction is
characterized.

   Petitioner errs in contending that the legislative history
establishes that Congress "intend(ed) to treat indemnity reinsurance
and assumption reinsurance differently for tax purposes" (Pet. Br. 17,
23 n.32).  Read in context, the legislative history says nothing that
supports the deductibility of ceding commissions.  As petitioner
notes, the Senate Committee report stated in passing that, "as
distinct from assumption reinsurance, the initial risk in (indemnity
reinsurance) remains with the insurer but he covers this risk by
reinsuring part or all of a contract with another insurance company."
S. Rep. No. 291, supra, at 38.  But, contrary to petitioner's
suggestion (Br. 17), the Committee's purpose was not to discuss the
tax treatment of assumption reinsurance as compared to indemnity
reinsurance, or to deal with ceding commissions in either type of
transaction.  Rather, that language introduced the Committee's
analysis of modified coinsurance transactions only with respect to one
item:  the potential double taxation of investment income paid to the
reinsurer with respect to the reserves retained by the initial
insurer.  /17/ The only reasonable conclusion to be drawn from this
discussion is that Congress paid careful attention to the details of
life insurance company taxation and adverted to the problems it sought
to solve.  Yet nowhere in the legislative history did Congress ever
articulate a desire to relieve indemnity reinsurers from the
capitalization rules otherwise applicable to taxpayers who make
current expenditures for future economic benefits.

   It is true that capitalization of ceding commissions paid by
assumption reinsurers is specifically required by Treas. Reg. Section
1.817-4(d)(2)(ii)(B), while there is no analogous regulation
addressing the treatment of ceding commissions paid in indemnity
transactions.  But, while this regulation does not by its terms apply
to indemnity reinsurers, the principles underlying it most certainly
do.  It would read far too much into the absence of a parallel
regulation with respect to indemnity reinsurance to find, as
petitioners contend (Br. 18-20), that the IRS intended indemnity
reinsurers to take a current deduction of their ceding commissions.
/18/ As the Eight Circuit recognized, "the inapplicability of the
regulation to taxpayer's indemnity transaction does not mean that the
transaction is not governed, under the applicable statutory
provisions, by principles similar to those illustrated in the
regulation." Prairie States, 828 F.2d at 1232.  /19/ "Rather," the
court explained, "the regulation is silent as to their treatment"
(ibid.), and the gap must be filled by application of fundamental tax
principles.  /20/

   Petitioner argues at length (Br. 2, 10-13, 15, 21, 24-25) that
indemnity reinsurance is just a form of "insurance." Despite
petitioner's insistence on this characterization, at bottom it makes
no difference to the tax treatment of ceding commissions whether
indemnity insurance is called "insurance" for one purpose or another,
for the name used cannot alter the underlying, long-term financial
benefits for which the reinsurer pays a ceding commission.  As an
industry representative explained to the Senate Finance Committee in
its 1959 hearings, "(t)he original insurer, desiring indemnity, is
content to share its policies' earning potentials;  the reinsure(r),
willing to accept a risk under a collateral indemnity contract, can
rightfully name its price in terms of a share in the earnings and
profits of the contractual adventure." Hearings on H.R. 4245, 86th
Cong., 1st. Sess. 607 (1959) (statement of Henry F. Rood).  Quite
simply, "reinsurance has the effect of dividing a single source of
income into segments" (id. at 610).  /21/ The segment of future income
acquired by the indemnity reinsurer is paid for by the negotiated
ceding commission.  There is no reason to treat the expenditure as
other than an intrinsically capital outlay.

   II. NO PROVISION OF THE CODE OVERRIDES THE GENERAL CAPITALIZATION
PRINCIPLE TO PERMIT THE CURRENT DEDUCTION OF CEDING COMMISSIONS

   The capitalization rules that generally apply to payments for
future benefits, such as the ceding commission here, are controlling
unless Congress specifically withdrew the application of those rules
from taxpayers in petitioner's situation.  Such an exception would
depart from the tax principles generally applicable to all other
taxpayers, and an intent to create that sort of disparity should not
lightly be imputed to Congress.  Although petitioner relies on three
sections of the Code to support the deduction of ceding commissions in
the year paid, none of those provisions provides the dispensation from
the basic rules of capitalization that petitioner seeks.

   A. The Ceding Commissions Payable to Transport Under the
Coinsurance Agreements Cannot Be Used to Reduce Gross Premiums Under
Section 809(c)(1) of the Code

   Section 809(c)(1) requires that life insurance companies compute
their actual premiums as a preliminary step in determining taxable
"gain from operations." The first sentence of that Section requires
life insurance companies to include in income "(t)he gross amount of
premiums and other consideration (including * * * consideration in
respect of assuming liabilities under contracts not issued by the
taxpayer) * * * less return premiums, and premiums and other
consideration arising out of reinsurance ceded." The second sentence
excludes certain types of payments from "return premiums." It states,
"(e)xcept in the case of amounts of premiums or other consideration
returned to another life insurance company in respect of reinsurance
ceded, amounts returned where the amount is not fixed in the contract
but depends on the experience of the company or the discretion of
management shall not be included in return premiums."

   Petitioner erroneously contends (Br. 22-23) that Section 809(c)(1)
and Treas. Reg. Section 1.809-4(a)(1)(ii) mandate the inclusion of
"ceding commissions" in "return premiums," with the necessary effect
of reducing gross premium income in the year that ceding commissions
are paid.  This contention ascribes to Congress and the IRS an
affirmative intent to require reinsurers to reduce their current
income by the amount of payments made to acquire future benefits.
There is no plausible basis for that conclusion.  Rather, the manifest
purpose of Section 809(c)(1) is far narrower in scope.  Read in
context, Section 809(c)(1) permits the deduction only of "illusory"
premium income that, with the benefit of hindsight, would never have
been included in premium income in the first place.  For example,
amounts returned to a policyholder (under a provision fixed in the
policy), amounts refunded by a reinsurer to the initial insurer
pursuant to experience-based formulas or for similar reasons, or
amounts paid by an initial insurer to obtain reinsurance are all
payments that are legitimately subtracted from gross premium income
under Section 809(c)(1).  But that Section was never intended to
provide a deduction for large, up-front payments that entitle
reinsurers to a share of future profits from a block of policies.

   Section 809(c)(1), on its face, is focused on the determination of
premium income.  Thus, it first provides for taking the "gross amount
of premiums and other consideration" into account and then for
elimination from such "gross premiums" two items, viz. "return
premiums" and "premiums and other consideration arising out of
reinsurance ceded." As expressed by the Eighth Circuit, both types of
adjustments were intended "to eliminate from the 'gross amount of
premiums and other consideration' those portions of premiums received
which do not, in the end, 'belong' to the company in question, but
which must be returned to the policy holder or turned over to or
shared with another company under an indemnity reinsurance contract."
Modern American Life Insurance Co. v. Commissioner, 830 F.2d at 114;
Prairie States Life Ins. Co. v. United States, supra, 828 F.2d at
1233.  Ceding commissions in no way constitute "portions of premiums
received which do not, in the end, 'belong' to the company in
question" (Modern American, 830 F.2d at 114);  rather, they represent
consideration paid at the outset of a reinsurance transaction to
acquire a profitable stream of premium income.

   To begin with, ceding commissions are not "return premiums."
Petitioner argues (Br. 22-23) that Treas. Reg. 1.809-4(a)(1)(ii)
brings ceding commissions within the ambit of return premiums, but
that regulation provides no assistance to petitioner.  The regulation
defines "return premiums" to include "amounts of premiums or other
consideration returned to another life insurance company in respect of
reinsurance ceded." Ibid. (emphasis added).  The ceding commissions in
this case are not "consideration returned" to the initial insurer.
The true nature of a ceding commission is a payment made
contemporaneously with the closing of the transaction in order to
acquire valuable future rights to premium income.  The up-front ceding
commissions are not being "returned" to the initial insurer, and there
is no reason to strain the language of the regulation to include them.

   The legislative materials confirm that the words "return premiums"
were never meant to cover ceding commissions in indemnity reinsurance
transactions.  The legislative history identifies only one situation
in which an indemnity reinsurer can rely on Section 809(c)(1) to
reduce its premium income by sums paid to the initial insurer -- and
that situation is not the payment of ceding commissions.  The Senate
Finance Committee observed that if the indemnity reinsurer must pay a
portion of premiums "ceded" back to the initial insurer pursuant to an
experience rated refund clause, the reinsurer can reduce its gross
premium income by that amount.  See S. Rep. No. 291, supra, at 39
("the experience refunds paid by the reinsurer to the initial insurer
are treated as reductions in premium income of the reinsurer").  /22/
"Experience refunds," however, are nothing like the ceding commissions
here.  Experience refunds simply readjust the amounts of premiums paid
to the reinsurer to reflect the fact that fewer benefits had to be
paid on the reinsured risks than had been projected, or that other
unanticipated savings materialized.  McGill, supra, at 445.  That type
of payment is properly viewed as a "return" to the initial insurer of
a portion of the premiums the reinsurer previously received.  /23/ But
it cannot seriously be contended that a "ceding commission," paid to
obtain the future profits to be generated by the reinsured policies,
is like an "experience refund," or any other permissible adjustment to
premium income under Section 809(c)(1)'s provision for return
premiums.  /24/

   Likewise, there is no basis for subtracting ceding commissions from
income under the branch of Section 809(c)(1) allowing a deduction for
"premiums and other consideration arising out of reinsurance ceded."
Indeed, petitioner does not even contend that that language is
applicable to the ceding commissions here (see Br. 22-24).  It is
evident that Section 809(c)(1)'s allowance for "premiums and other
consideration arising out of reinsurance ceded" permits only the
ceding company to reduce its premium income by amounts paid to a
reinsurer arising out of indemnity reinsurance agreements.  Properly
construed, that deduction is simply the indemnity insurance analogue
to Section 809(d)(7), which permits the ceding company in assumption
reinsurance to deduct consideration paid to the reinsurer (see note
16, supra).  /25/

   The structure of the Code confirms that Section 809(c)(1) has a
limited focus that in no way was designed to alter the usual rules of
capitalization.  Section 809(c)(1) is one of three items grouped under
the heading "Gross Amounts," each of which is designed to capture
sources of income.  In contrast, the "Deductions" from income are in a
separate subsection, Section 809(d).  There, Congress provided for
twelve deductions specially tailored for life insurance companies.  If
it had intended to do so, subsection (d) was the obvious place for
Congress to have provided for the deduction of such a major item as a
reinsurance ceding commission.

   Nor does the somewhat sparse legislative history of Section
809(c)(1) justify construing it as a significant departure from
settled capitalization rules that do not permit the deduction of
ceding commissions paid in indemnity reinsurance transactions.
Although petitioner struggles to find support in the legislative
history (Br. 10, 11, 14 n.17, 17-18, 23 n.32, 26), there is simply no
indication that Congress actually intended Section 809(c)(1) to allow
premium income to be adjusted by subtracting ceding commissions.  The
Committee reports make no reference to ceding commissions in the
explanations of the proposed language that became Section 809(c)(1),
or elsewhere.  /26/ Given the extensive consideration by Congress of
the intricacies of life insurance taxation, it is not plausible to
believe that the extraordinary income tax benefit petitioner now
seeks, which is incompatible with tax treatment for other taxpayers
who incur present outlays for future benefits, somehow "slipped
through" the process without any legislative consideration at all.

   Indeed, that point is confirmed by the attention to detail
evidenced in the legislative history.  The Senate Committee report
took the trouble to note that an adjustment was appropriate for
"amounts rebated * * * due to policy cancellations or to erroneously
computed premiums." S. Rep. No. 291, supra, at 54.  Likewise, as we
have noted, the report mentions that reinsurers could subtract from
their gross premiums "experience refunds" paid to the ceding company.
See id. at 39.  The same Congress that expressly tinkered with the
details of "gross premiums" by carving out "erroneously computed
premiums" and "experience refunds" as items of adjustment cannot
reasonably be thought to have altered basic taxation rules for
capitalizing acquisition costs, without any comment at all.  Cf.
Church of Scientology v. IRS, 108 S. Ct. 271, 276 (1987).  Indeed, it
would be highly incongruous for Congress to remark on the relatively
minor payment item of "experience refunds," but totally ignore the
much more economically significant "ceding commissions." The only
rational explanation is that Congress framed Section 809(c)(1) to
measure "premium income" fairly -- in light of the practice of
insurers to relinquish or return some premiums to others and therefore
not enjoy their benefit -- but did not intend to create a new type of
deduction for the capital expense of a ceding commission.  /27/

   B. The Ceding Commissions Are Not "Ordinary and Necessary" Expenses
Deductible Under Section 809(d)(12) of the Code

   Petitioner makes the alternative argument (Br. 24-26) that ceding
commissions are ordinary and necessary expenses of its reinsurance
business, and are therefore deductible in the year incurred under
Section 809(d)(12).  /28/ Petitioner reasons that just as commissions
paid to agents who sell policies to the public are deductible in the
year incurred, so should ceding commissions paid by reinsurers to the
reinsured company be deductible.  But the argument rests on a false
analogy.  The ceding commissions a reinsurer pays the ceding company
are not remotely similar to the commissions that an insurance company
pays to its agents for personal services rendered in writing new
policies.  Indeed, virtually the only point of similarity is that both
sorts of payments are commonly referred to as "commissions."

   First, in the case of a single policy, the insurer does not pay the
policyholder for agreeing to purchase life insurance.  That, however,
is exactly what happens with a ceding commission.  A reinsurer pays a
ceding commission, not to compensate its agent for selling a policy,
but to induce the initial insurer to transfer to it -- via a
reinsurance transaction -- a valuable future income stream in a block
of policies.  A payment to another party to induce it to assign
contract rights expected to produce future profits would not typically
be regarded as an "ordinary and necessary" business expense.  It
certainly cannot be equated with standard agent's commissions that are
basically a form of salary expenses.  See Southwestern Life Ins. Co.
v. United States, 560 F.2d at 641.  The ceding commission paid for the
reinsurer's share is thus no more akin to ordinary agent's commissions
than is the similar ceding commission paid to acquire policies in an
assumption transaction.

   The fact that Congress intended to allow a current deduction for
the routine expenses incurred by a company in connection with the
writing of new insurance policies is made clear in the legislative
history of the 1959 Act.  See S. Rep. No. 291, supra, at 7, 9;  H.R.
Rep. No. 34, 86th Cong., 1st Sess. 4 (1959).  But a ceding commission
bears none of the "ordinary and necessary" attributes of agent's
commissions and the other expenses of writing new policies (medical
examinations, administrative overhead, etc.) that are currently
deductible.  And there is no indication at all in the legislative
history that Congress viewed ceding commissions as analogous to those
routine expenses or as deserving of similar tax treatment.

   In short, petitioner simply has not incurred "a sales expense" in
paying a ceding commission to place new business on its books, and
thus the ceding commissions are not deductible as such under Code
Sections 162 and 809(d)(12).  Rather, as in the case of assumption
reinsurance, ceding commissions in indemnity transactions simply
reflect the current value to the reinsurer of the rights acquired with
respect to the reinsured policies themselves.  See Modern American
Life Ins. Co. v. Commissioner, supra;  Prairie States Life Ins. Co.,
supra.

   C. The NAIC Methods of Accounting for Ceding Commissions Are Not
Controlling Under Section 818 of the Code Because They Are
Inconsistent with the Accrual Method of Accounting, Which Takes
Precedence over the NAIC-Approved Method of Computation.

   Petitioner argues (Br. 5-6, 26-30) that because ceding commissions
are currently deductible for purposes of the National Association of
Insurance Commissioners (NAIC) annual statement, if follows that the
ceding commissions must be currently deductible for income tax
purposes as well.  That argument is unpersuasive.  Section 818(a)
requires life insurance companies to make "computations entering into
the determination of taxes imposed by this part * * * in a manner
consistent with" the annual statement approved by the NAIC, except
when that would be inconsistent with accrual accounting rules.  26
U.S.C. 818(a);  Standard Life, 433 U.S. at 158-159.  Thus, when the
"rules of accrual accounting dictate a contrary result," id. at 159,
the NAIC procedures must yield.  That is the case here with respect to
ceding commissions.

   Accrual accounting requires the acquisition costs of a future
benefit to be capitalized, rather than written off in the year paid.
Section 1.461-1(a)(2) of the Treasury Regulations on Income Tax
embodies that rule as follows (emphasis added):

         Taxpayer using an accrual method. -- Under an accrual method
      of accounting, an expense is deductible for the taxable year in
      which all the events have occurred which determine the fact of
      the liability and the amount thereof can be determined with
      reasonable accuracy.  However, any expenditure which results in
      the creation of an asset having a useful life which extends
      substantially beyond the close of the taxable year may not be
      deductible, or may be deductible only in part, for the taxable
      year in which incurred.

See also 4 B. Bittker, supra, at 105-69.  That regulation forbids the
complete deduction, under an accrual accounting method, of outlays
that serve to create identifiable economic benefits extending over
more than one year.  In mandating that an accrual method of accounting
take precedence over NAIC computational procedures when they are
inconsistent with each other, Congress made this capitalization
principle controlling for life insurance companies, just as it is for
all other accrual method taxpayers.  /29/

   It is not surprising that accrual accounting should diverge from
NAIC procedures.  The two approaches have strikingly different
purposes and different intended audiences.  As one court of appeals
explained, "there 'are several areas where differences exist between
the accrual basis used for the annual statement and the general rules
of accrual for tax purposes' because 'the emphasis of the annual
statement has been on the solvency of the company.'" Jefferson
Standard Life Insurance Co. v. United States, 408 F.2d 842, 849-850
(4th Cir. 1969) (quoting R. Denney and A. Rua, Federal Income Taxation
of Insurance Companies at 9.3 (1961)), cert. denied, 396 U.S. 828
(1969);  see also Liberty Life Insurance Co. v. United States, 594
F.2d 21, 25 (4th Cir. 1979).  The approach to writing off
expenditures, such as the ceding commissions here, presents a good
example of the differences between annual statement and tax
accounting.  It is consistent with a conservative approach to
measuring an insurance company's resources -- in line with preserving
an institution's solvency -- to write down income immediately by the
amount paid by an indemnity reinsurer to acquire future income from a
block of policies.  But that same accounting philosophy skews the
proper measurement of taxable income by creating an imaginary present
day loss from a transaction fully expected to produce future gains.
Compare United States v. General Dynamics Corp., 481 U.S. 239, 246
(1987) (financial accounting);  Thor Power Tool Co. v. Commissioner,
439 U.S. 522, 538-544 (1979) (same).  Thus, Congress understandably
protected federal revenue by prohibiting the use of the NAIC
methodology when it transgresses standard accrual accounting rules.

   Indeed, industry accounting guides, other than the NAIC, recognize
that indemnity reinsurers are buying a future stream of income from a
block of policies, which requires the ceding commission to be
capitalized and amortized.  The Industry Audit Guide of Stock Life
Insurance Companies (1972), prepared by the Committee on Insurance
Accounting and Auditing of the American Institute of Certified Public
Accountants, has recognized (at 92) that a ceding commission is in the
nature of an "acquistion expense" for the purchase of business.  Thus,
the guide states:

         Under generally accepted accounting principles for special
      reinsurance agreements which are constructed so as the shift a
      significant part of the economic risk from one company to
      another * * * (t)he net cost to the assuming company should be
      treated as an acquisition expense to be amortized over the
      premium-paying period on a basis consistent with that used for
      acquisition expenses of other business.

Ibid.  The generally accepted accounting principles reflected in the
guide provide a clear indication that accrual accounting methods do
not permit the current deduction of ceding commissions, even for
ordinary financial statement purposes.  Thus, petitioner's contention
that this Court must recognize a current deduction for ceding
commissions to "give effect to the NAIC accounting" requirements (Br.
30) has no application to this context.

                      * * *

   This case clearly illustrates the abuses that petitioner's position
would invite in the taxation of reinsurance transactions.  As
petitioner's expert witness acknowledged, profitable insurance
companies could utilize such reinsurance agreements each year to defer
taxation indefinitely on all of their underwriting gains (Tr. 58).
Indeed, the combination of coinsurance and modified coinsurance
agreements used here to create "wash" transactions with little cash
changing hands would enable petitioner to manufacture such "tax
losses" without incurring any substantial net out-of-pocket cash
outlays at all.  Thus, the only limitations on a life insurance
company's ability to offset all of its underwriting gains in this
manner would be the amount of its surplus and the willingness of
potential ceding companies to share their policies' future profits at
a commensurate present-day price.  In short, the more such potentially
profitable transactions an indemnity reinsurer enters, the less its
tax liability would become.  Nothing in the Code authorizes what would
amount to a reinsurance shell game, in which the premium income from
indemnity reinsurance would continually be advanced from year to year,
but never be recognized for purposes of federal income taxation.

   Amici American Council of Life Insurance, et al. suggest (Br.
23-26) that denying an indemnity reinsurer the benefit of an immediate
write-off of ceding commissions will "disadvantage" direct writers
that depend on reinsurance to grow.  That argument stands the issue in
this case on its head.  Treating indemnity reinsurers consistently
with all other taxpayers who incur present outlays for future benefits
cannot fairly be characterized as penalizing the reinsurance industry
or its clients.  As in the case of assumption reinsurance, the effect
of requiring the reinsurer to capitalize and amortize these ceding
commissions over the projected life of the reinsurance agreement is
simply to match the annual revenues generated under the agreement
against the cost of acquiring the right to such revenues.  It is not
punitive to deny the reinsurer the benefit of the huge initial "tax
losses" claimed in such cases where, in fact, the reinsurer fully
expects to enjoy a long-term profit on the transactions, and, indeed,
may not even be required to disburse any substantial funds of its own
in acquiring such rights.  /30/

   In sum, the court of appeals was correct in recognizing that ceding
commissions in indemnity reinsurance are inherently capital outlays,
and that neither Section 809(c)(1) nor any other provision of the Code
allows them to be currently deducted.  Under well established tax
principles, the amount paid to acquire the right to future income from
reinsured policies in indemnity reinsurance must be capitalized an
damortized over the period of indemnification.

                              CONCLUSION

   The judgment of the court of appeals should be affirmed.

   Respectfully submitted.

   WILLIAM C. BRYSON

      Acting Solicitor General

   JAMES I.K. KNAPP

      Acting Assistant Attorney General

   LAWRENCE G. WALLACE

      Deputy Solicitor General

   ALAN I. HOROWITZ

   MICHAEL R. DREEBEN

      Assistants to the Solicitor General

   GARY R. ALLEN

   DAVID ENGLISH CARMACK

   NANCY G. MORGAN

      Attorneys

   MARCH 1989

   /1/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as in effect in 1975 and
1976, the years at issue (the Code or I.R.C.).

   /2/ In indemnity reinsurance of the types involved here, the
initial insurer and the reinsurer agree to share the premiums,
expenses, and liabilities on a block of existing policies.  The
reinsurer in "indemnity reinsurance" does not become directly liable
to policyholders, but agrees only to indemnify the initial insurer for
its losses;  the initial insurer continues to receive premiums and to
pay expenses and benefits to the policyholders.  This method of
reinsurance contrasts with "assumption reinsurance," in which the
reinsurer, in effect, steps into the shoes of the issuing company with
respect to the policies, becoming directly liable to the policyholders
and directly entitled to premium payments made by them.  See generally
Pet. App. 2a-4a;  Modern American Life Ins. v. Commissioner, 830 F.2d
110, 110 n.2 (8th Cir. 1987).

   /3/ Under the "conventional coinsurance" agreements, which covered
6.6% of the policies, petitioner established its own reserves to cover
the reinsured liability and Transport reduced its reserves
accordingly.  Under the "modified coinsurance" agreements, covering
70% of the policies, Transport continued to maintain the required
reserves and was required to collect and pay over to petitioner the
investment income derived from the assets supporting those reserves.

   /4/ Initial reinsurance premiums were provided for only in the
conventional coinsurance agreements (covering 6.6% of the block).
There were no reinsurance premiums called for in the modified
coinsurance agreements (covering 70% of Transport's rights and
liabilities on the block), because Transport retained all assets
corresponding to the reserve liabilities reinsured under those
agreements.  The combined effect of the conventional and modified
coinsurance agreements was simply to allow a netting of payments so
that virtually no cash changed hands.  See Tr. 35.  The parties,
however, elected to have the modified coinsurance transactions treated
for tax purposes as if they were conventional coinsurance agreements
(see Section 820 of the Code (repealed in 1984)).  Therefore,
petitioner was treated for tax purposes as having received reinsurance
premiums under those agreements also, in the amount of the reserve
liabilities attributable to the reinsured risks.  See Pet. App. 6a.

   /5/ The other aspects of the reinsurance transactions generated no
taxable gain or loss to petitioner.  The reinsurance premiums received
by petitioner from Transport were reported as income, but those
amounts were exactly offset by deductions allowed for the concomitant
increase in petitioner's reserve liabilities for the reinsured
policies.  Pet. App. 6a.

   /6/ The provisions of the Code pertaining to the taxation of life
insurance companies were substantially revised by Section 211 of the
Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 720.
Section 809(c)(1) is carried forward in the revised provisions in
substantially the same form in Section 803(a)(1) and (b) of the
amended Code, which applies to tax years beginning after December 31,
1983.  The question presented in this case was not addressed by
Congress in the revision and does not appear to have been affected.

   /7/ The court of appeals further held that the $13,600 finder's fee
must also be capitalized and amortized over the life of the policies
(Pet. App. 9a).  The Tax Court had upheld the immediate deduction of
the finder's fee, mistakenly stating that the Commissioner had
conceded that the finder's fee should be currently deductible if the
ceding commissions were held to be currently deductible (id. at 22a).

   /8/ In transferring assets covering its reserves, the initial
insurer may very well be relinquishing a built-in profit to the
reinsurer.  The profit element in the reserves arises from the fact
that state law generally requires insurance companies to make
conservative assumptions about mortality and investment gains.  See,
e.g., Tr. 49-50.  This has the effect of inflating the reserves beyond
what is actually necessary to pay the future benefits covered by the
reserves.  Insurance companies recapture this "hidden profit" when the
liability for benefits associated with the reserves is extinguished.
The Eighth Circuit recognized this point in discussing the potential
financial rewards for a reinsurer (there, in an indemnity
transaction):  "The block of reinsurance acquired by taxpayer has
positive economic value precisely because the required reserves exceed
the true economic liabilities on the underlying policies." Prairie
States, 828 F.2d at 1231.  "As the policies mature and benefits are
paid," the court explained, "there will be excess funds remaining in
the reserve when all of taxpayer's obligations with respect to the
reinsured policies have been fully performed" (ibid.).

   /9/ Some of the transactions in this case were "modified
coinsurance" transactions in which the ceding company continues to
maintain the entire reserve, though it is entitled to indemnification
for a specified percentage of losses and obligated to remit to the
reinsurer a corresponding share of investment and premium income (see
note 3, supra).  See D. McGill, supra, at 438-440.  Since the parties
availed themselves of the Section 820 election, the transactions were
treated for tax purposes as though each was a conventional coinsurance
transaction.  See note 4, supra;  United States v. Consumer Life Ins.
Co., 430 U.S. 725, 747-748 (1977).

   /10/ See also Frantz v. Commissioner, 784 F.2d 119, 123 (2d Cir.
1986), cert. denied, 107 S. Ct. 3262 (1987);  Sears Oil Co. v.
Commissioner, 359 F.2d 191, 197 (2d Cir. 1966) ("The test for
determining whether items should be treated as a current expense or a
capital expenditure is whether utility of expenditure survives the
accounting period.");  Falstaff Beer, Inc. v. Commissioner, 322 F.2d
744, 747 (5th Cir. 1963);  United States v. Wheeler, 311 F.2d 60,
61-64 (5th Cir. 1962);  cert. denied, 375 U.S. 818 (1963);
Darlington-Hartsville Coca-Cola Bottling Co. v. United States, 393
F.2d 494, 496 (4th Cir. 1968), cert. denied, 393 U.S. 962 (1968);
Encyclopeadia Britannica, Inc. v. Commissioner, 685 F.2d 212, 217 (7th
Cir. 1982);  Wells-Lee v. Commisisoner, 360 F.2d 665, 669-670 (8th
Cir. 1966);  United States v. Akikn, 248 F.2d 742, 744 (10th Cir.
1957), cert. denied, 355 U.S. 956 (1958).

   /11/ The situation is analogous to the purchase of a typewriter, a
manufacturing plant, or, for that matter, an intangible asset such as
a patent, by a business.  The seller may reasonably view the price as
reimbursement for his deductible expenses incurred to produce the
asset, but there can be no doubt that the purchaser has paid for an
asset with a useful life in excess of one year and it must capitalize,
not immediately deduct, the cost of the asset.  Petitioner essentially
admits the capital nature of the transaction when it acknowledges (Br.
25) that "the reinsurer, like the primary insurer, expects to realize
a profit from the (indemnity) insurance it issues." Petitioner's
attempted qualification of this point -- noting that it may actually
experience an unanticipated loss (id. at 25 n.34) -- is unavailing.
That there is an element of risk or that the reinsurer may misjudge
the benefits of the transaction is entirely irrelevant to
understanding its business purpose at the outset when it pays for the
right to share the benefits from the block of policies.

   /12/ See Southwestern Life Ins. Co. v. United States, 560 F.2d at
640-641 (requiring capitalization of payment that reinsurer agrees to
pay to the reinsured company);  Standard Life & Accident Ins. Co. v.
Commissioner, 525 F.2d 786, 791 (10th Cir. 1975) (same), rev'd on
other grounds, 433 U.S. 148 (1977);  Mutual Savings Life Ins. Co. v.
United States, 488 F.2d 1142, 1146-1147 (5th Cir. 1974) (the Florida
Life transaction) (same));  Oxford Life Ins. Co. v. United States, 790
F.2d 1370, 1376 (9th Cir. 1986) (requiring capitalization of payment
to ceding company that reinsurer agreed to net against a greater
amount of consideration payable by the ceding company);  Kentucky
Central Life Ins. Co. v. Commissioner, 57 T.C. 482 (1972) (same).
Such treatment is required by Section 1.817-4(d) of the Treasury
Regulations on Income Tax.  Some courts have, incorrectly in our view,
reached a different result when, unlike the agreements in question
here, the reinsurer did not expressly agree to pay any such "ceding
commission," but simply agreed to accept, as consideration for
assuming liabilities on the reinsured policies, an amount that was
less than the required reserves.  See and compare Section 1.817-4(d),
Examples (1) and (3), of the Treasury Regulations on Income Tax, with
Mutual Savings Life Ins. Co. v. United States, 488n F.2d at 1145-1146
(th Georgia life transaction) and Security Benefit Life Ins. Co. v.
United States, 726 F.2d 1491 (10th Cir. 1984).  We believe the latter
cases were erroneously decided, but they are plainly distinguishable
from this case (and, in any event, both relied on an example given in
an earlier version of Section 1.817-4(d) of the Regulations that has
since been changed).  See Oxford Life Ins. Co. v. United States, 790
F.2d at 1374-1375.

   /13/ Indeed, the fact that the indemnity reinsurer is not
"directly" liable to the policy holder is irrelevant, as a practical
matter, to its ultimate liability to cover the benefits payable under
the reinsured policies.  Indemnity reinsurance agreements generally
provide (and indeed, are often required by law to provide) that the
insolvency of the ceding company will not release the reinsurer from
its obligation to pay unsatisfied claimants its share of the benefits
payable.  See McGill, supra, at 444.  A provision generally to this
effect was set forth in the agreements at issue here.  Thus, just as
in assumption reinsurance, the indemnity reinsurer stands essentially
in the shoes of the initial insurer from the vantage point of both its
finacial rewards and its financial obligations.

   /14/ It could no be contended, for example, that, if an assumption
reinsurer simultaneously entered into a management agreement with the
intial insurer for the latter to continue to collect premiums, pay
benefits, and so forth (for a fee), the assumption reinsurer would be
any less the "owner" of the income-producing interests under the
policies.  By the same token, the indemnity reinsurer is no less the
"owner" of an intangible in future income simply because if does not
pay benefits to, or receive premiums directly from, policy-holders.

   /15/ Petitioner relies (Br. 11, 15 n.19, 23 n.30, 26 n.35) on
Oxford Life Ins. Co. v. United States, supra, 790 F.2d 1370, 1376 (9th
Cir. 1988), in which the court suggested in passing that assumption
reinsurers and indemnity reinsurers may be accorded different tax
treatment with respect to ceding commissions.  But the proper
treatment of indemnity reinsurance was not at issue in that case,
since the taxpayer in Oxford had undertaken only an assumption
reinsurance transaction.  Moreover, in a more recent decision
involving the same taxpayer, this time concerning an indemnity
reinsurance transaction, a district court in the Ninth Circuit
declined to rely on the dicta cited above, but instead adopted the
reasoning and holding of the Eighth Circuit's decision in Prairie
States.  Oxford Life Ins. Co. v. United States, No. CIV 84-959 PHX RGS
(D. Ariz. Oct. 15, 1987), appeal pending (9th Cir. No. 88-2955).  The
district court thus held that ceding commissions in indemnity
transactions must be capitalized and amortized, just as ceding
commissions in assumption transactions must be capitalized and
amortized.

   /16/ Petitioner merely cites (Br. 14-16) Sections 809(d)(7) and
806(a) without explaining how those provisions fit its theory about
ceding commissions.  Those sections are completely unrelated to
payments of such commissions.  Section 809(d)(7) allows a deduction
for amounts paid by a reinsured company under an assumption
reinsurance agreement.  That provision illustrates only that Congress
intended to maintain tax parity between indemnity and assumption
reinsurance.  In indemnity reinsurance the initial insurer continues
to receive premiums that are includible in its own income under
Section 809(c)(1), but can then use that provision to subtract from
its income premiums paid to reinsurers.  In assumption reinsurance the
initial insurer ceases to receive premiums included in income under
Section 809(c)(1), and therefore cannot subtract its payments to the
reinsurer from its gross premium income under that section, even
though a deduction is obviously appropriate.  Section 809(d)(7) thus
fills a gap by allowing initial insurers in assumption reinsurance a
deduction already available in indemnity transactions under Section
809(c)(1).

   Similarly, petitioner points (Br. 16) to Section 806(a) of the Code
(which provides for allocation of reserves in assumption reinsurance
and specifies that it does not apply to indemnity reinsurance).  That
Section reflects Congress's recognition that assumption reinsurance
and indemnity reinsurance generally differ in their duration.  In
assumption reinsurance, the reinsurer assumes the reserves for the
life of the policies, while in indemnity reinsurance, the reinsurer
assumes liability for the reserves for a period of time that may be
less than the life of the policies.  This difference accounts for the
two types of reinsurance being treated differently with respect to
reserve allocation.  But petitioner never explains how the different
treatment of assumption and indemnity reinsurance under Section 806(a)
has anything to do with ceding commissions.

   /17/ After analyzing the problem in this area, the Committee
proposed a solution, which was embodied in Section 820.  S. Rep. 291,
supra, at 39.

   /18/ Treas. REg. 1-817-4(d)(2)(ii) was promulgated in the wake of a
transitional rule for assumption reinsurance transactions (Section
817(e)) that lapsed beginning in 1959.  The transitional rule related
to capital gains or losses in assumption transactions in 1958, and
provided that the policies sold in such an assumption transaction
would be treated as the sale of a capital asset.  This rule meant that
the initial insurer's gains from 1958 transactions would not be taxed,
because life insurance companies' capital gains were not taxable until
1959.  S. Rep. No. 291, supra, at 29-30.  "Following the expiration of
that transitional rule, the Code left open the tax treatment of such
transactions, and the regulation is intended to govern transactions
after December 31, 1957." Prairie States, 828 F.2d at 1230 n.7
(citation omitted).  See also Beneficial Life Ins. Co. v.
Commissioner, 79 T.C. at 645 n.22.  The regulations provide that after
1958, the initial insurer in an assumption transaction cannot receive
favorable capital gains treatment for the transfer of policies.  The
regulations go on to clarify, however, that the assumption reinsurers'
interest in the policies acquired is still capital in nature (thus
requiring the ceding commission to be amortized).  The particular need
for the IRS to clarify the capital gains issue for initial insurers in
assumption transactions may explain why it promulgated a regulation
for assumption transactions, but not indemnity transactions.  Contrary
to petitioner's suggestion (Br. 19 n.26), however, nothing in this
history has the slightest significance for determining how to treat
the ceding commissions paid by the reinsuring company in this case.

   /19/ The Tax Court in Beneficial Life, 79 T.C. 627, 645, and in
this case, Pet. App. 17a, apparently felt compelled to draw a negative
implication from the assumption regulation, even though it recognized
that its holding led to a "strange" result (id. at 19a).  But the
regulation on its face does not prescribe anything about indemnity
reinsurers, and it need not be read to imply anything on that subject.
 Surely, the IRS, when it needs to deal with a particular type of
transaction by regulation, is not required to deal at the same time
with all other transactions that might be comparable to the one being
specifically addressed, in order to avoid the risk that implications
for similar transactions will be read into the regulation.

   /20/ Petitioner also erroneously suggests (Br. 13 n.14) that the
IRS formerly took the view that ceding commissions in indemnity
transactions are deductible in the year of payment, citing Rev. Rul.
70-552, 1970-2 C.B. 141, 142.  In that ruling, the IRS was asked to
consider the tax treatment, not of the kind of up-front ceding
commissions involved here, but of a very different kind of payment,
albeit one referred to as a "ceding commission." The ceding
commissions there (on casualty reinsurance) were paid annually to
cover expenses incurred by the initial insurer.  Thus, the situation
addressed in the ruling did not present a capitalization issue, and it
bears no relevance whatever to the question here of an "up-front"
ceding commission paid to obtain income in future periods.  When the
IRS did address that issue for the first time in a Revenue Ruling, it
distinguished its earlier handling of the annual ceding commissions
and concluded that "the 'up-front ceding commission' is paid with
respect to the acquisition of an agreement or contract with a readily
determinable useful life." Rev. Rul. 82-69, 1982-1 C.B. 102, 103.
Accordingly, it ruled that such a ceding commission "must be amortized
over the term of the agreement." Ibid.

   /21/ The statement was made to urge Congress to recognize the risk
of double taxation in the modified coinsurance context.  See Consumer
Life, 430 U.S. at 747.  There is no mention of ceding commissions --
and certainly no suggestion that they should be deductible -- in that
statement.

   /22/ The original House proposal was somewhat unclear on the
deductibility of such payments by the reinsurer, but amendments made
by the Senate (including the addition of the first clause of the
second sentence of Section 809(c)(1)) served to clarify that they
would be deductible by the reinsurer under Section 809(c)(1), even
though similar refunds made to policyholders by the original insurer
might be treated only as dividends (which are deductible under Section
809(d)(3) only within certain specified limits).  See S. Rep. No. 291,
supra, at 39;  Prairie States, 828 F.2d at 1226-177.

   /23/ On the same basis, a reinsurer could reduce its gross premium
income under Section 809(c)(1) if a portion of the premiums it
received from the ceding company must be returned, for example, to
cover the latter's "return premiums" to policy holders.  Again, that
would be an adjustment that is necessary to reflect accurately the
true premium income of the reinsurer.  In addition, modified
coinsurance agreements typically provide for the payment back to the
reinsurer of a specified portion of the premiums received at the
outset, and for the subsequent return of amounts necessary to cover
specified expenses and additions to reserves.  See, McGill, supra at
438-440.  Those payments might also be regarded as the type that would
appropriately be considered "return premiums" subtracted from income
under Section 809(c)(1).

   /24/ Similarly, there is no basis for treating the payment of a
"finder's fee" as an adjustment to gross premiums, as petitioner
advocates (Br. 7 n. 5).  As we have noted (note 7, supra), the Tax
Court was in error in asserting that the Commissioner had conceded
that if the ceding commissions were deductible under Section
809(c)(1), then the finder's fee would also be deductible on the same
basis.  Indeed, there is not even a colorable basis under Section
809(c)(1) for allowing such a deduction.  It is well settled that such
finder's fees in connection with the acquisition of assets must be
capitalized as part of the cost basis of such assets.  See, 1 B.
Bittker, supra, Paragraph 20.4.2, at 20-59;  2 id. Paragraph 41.2-3,
at 41-12.  The finder's fee, of course, represents an insignificant
portion of the deduction claimed by petitioner.  Our principal point
is that there is no more reason to allow an immediate deduction for
the amounts paid directly to acquire the future benefits provided by
these agreements (the ceding commission) than there is to allow such a
deduction for amounts paid to a third party for bringing this
opportunity to petitioner's attentin (the finder's fee).

   /25/ Section 809(d)(7) provides for the deduction of "consideration
(other than consideration arising out of reinsurance ceded) in respect
of the assumption by another person of liabilities under insurance or
annuity contracts * * *." Id. (emphasis added).  The use of the
identical language -- "consideration arising out of reinsurance ceded"
-- in the two neighboring Sections (809(c)(1) and (d)(7)) suggests
that Congress intended the same meaning to control in each.  Since the
words "consideration arising out of reinsurance ceded" in Section
809(d)(7) refer only to payments by the reinsured company (see S. Rep.
291, supra, at 55;  H.R. Rep. No. 34, 86th Cong., 1st Sess. 30
(1959)), the same construction is appropriate for the identical
language in Section 809(c)(1), which thus cannot cover ceding
commissions paid by the reinsurer.

   /26/ Relevant portions of the Committee reports contain no
reference to ceding commissions, although they cover numerous other
(dissimilar) types of adjustments.  For example, the Senate
Committee's technical analysis explained Section 809(c)(1) this way:

         Subsection (c) specifies three categories of receipt items
      which are taken into account in determining whether there is a
      gain or loss from operations under Section 809.  Under paragraph
      (1) the gross amount of all premiums and other consideration on
      insurance and annuity contracts (including supplementary
      contracts) is taken into account;  less return premiums, and
      premiums and other consideration arising out of reinsurance
      ceded.  The premiums and other consideration taken into account
      include advance premiums, deposits, fees, assessments, and
      consideration in respect of assuming liabilities under contracts
      not issued by the taxpayer.  In excluding return premiums,
      amounts returned (by whatever name called) where the amount is
      not fixed in the contract but depends on the experience of the
      company or the discretion of the management are not to be
      treated as return premiums, except in the case of return
      premiums or other consideration returned to another life
      insurance company under an indemnity reinsurance contract.
      Furthermore, amounts rebated or rendered due to policy
      cancellations or to erroneously computed premiums are to be
      treated as return premiums.

S. Rep. No. 291, supra, at 54;  see also id. at 21.  The House
Committee report contains a similar discussion.  H.R. Rep. No. 34,
supra, at 29-30.  The floor debate on the bill did not touch on issues
relating to "reinsurance ceded."

   /27/ Petitioner relies heavily (Br. 17-18, 25 n.33) on the comments
of the staff of the Joint Committee on Taxation, twenty-five years
after the fact.  Those comments could not conceivably shed any light
on the intent of the 86th Congress that wrote Section 809(c)(1), cf.
Weinberger v. Rossi, 456 U.S. 25, 35 (1981) ("post hoc statements of a
Congressional Committee are not entitled to much weight"), but, in any
event, they do not aid petitioner on their merits.  The staff report
remarked, in passing, that assumption reinsurance is treated as the
"sale of a block of business," while indemnity reinsurance "describes
a continuing insurance relationship between the ceding company and the
reinsurer." Report of the Staff of the Joint Committee on Taxation,
General Explanation of the Revenue Provisions of the Deficit Reduction
Act of 1984, 98th Cong., 1st. Sess 633 (Joint Comm. Print 1984).  The
staff never spoke to the tax treatment of ceding commissions, and its
comments may very well have been prompted by a reading of the Code
provisions regarding the two types of reinsurance that we have noted
-- and distinguished from the present issue (note 16, supra).
Similarly, Technical Advice Memorandum (TAM) 8742004, IRS Letter Rul.
Rep. (CCH) (June 30, 1987) (see Pet. Br. 18), which in any event may
not be cited as precedent (I.R.C. Section 6110(j)(3)), in no way
suggests that the costs of acquiring indemnity reinsurance policies
are any less subject to capitalization than the costs of acquiring
assumption reinsurance policies.

   /28/ Section 809(d)(12) "implicitly incorporat(es) I.R.C. Section
162(a), which provides a deduction for 'ordinary and necessary
expenses' in conducting a business." Prairie States, 828 F.2d at 1233.
 (Section 809(d)(12) was renumbered Section 809(d)(11) by the Tax
Reform Act of 1976, Pub. L. No. 94-455, Section 1901(a)(98)(B)(i), 90
Stat. 1520.)

   /29/ The Tax Court (which ruled in petitioner's favor on the
question presented here) has never suggested that Section 818(a) had
any bearing whatsoever on the resolution of this question.  And, of
course, neither the Fifth Circuit here nor the Eighth Circuit in
Prairie States and Modern American accepted such an argument.  The
only court to express a contrary view is the Seventh Circuit in Merit
Life, and we submit that that court erred from the outset when it
accepted the Tax Court's premise that indemnity reinsurance is
comparable to direct insurance.  Indeed, petitioner's argument that
NAIC accounting procedures are controlling ultimately proves too much,
for the NAIC procedures on which it relies appear equally to requrie a
first-year write off, not only of ceding commissions paid in indemnity
reinsurance, but also of those paid in assumption reinsurance as well
(contrary to accrual accounting principles, Treas. Reg. Section
1.817-4(d)(2)(ii)(B), and the settled authority (see note 12, supra)).
 See G.K. Patterson, Reinsurance, at 539 (R. Strain 1980);  C.M.
Beardsley, Life Company Annual Statement Handbook, at 4-1 (1974);
Oxford Life Ins. Co. v. United States, 574 F. Supp. 1417, 1421 (D.
Ariz. 1983), aff'd, 790 F.2d 1370 (9th Cir. 1986).

   /30/ Amici predict dire consequences for the industry and consumers
if this Court were to rule for the IRS (Br. 25).  Amici raise the
specter that reinsurers would not be willing to pay such large ceding
commissions as they do now to enter indemnity reinsurance agreements
unless they can enjoy similarly large tax benefits, and that smaller
or newer insurance companies, which have a greater need for
reinsurance, would thus have to charge the public higher premiums to
make up for this lost income.  In the first place, that speculative
argument rests on a shaky empirical premise, since even smaller and
newer companies operate in a competitive environment and cannot simply
raise their premiums at will.  At bottom, however, amici's policy
argument only recognizes that the direct impact of this case falls on
the reinsurance industry, and that the consequences for other parties
are simply guesswork.  Indeed, it seems far more likely that the only
significant impact of a decision affirming the judgment below (other
than on tax revenues) would be to discourage reinsurance transactions
when the dominant purpose is simply tax avoidance, rather than an
independent business reason.  In any event, amici's contentions
concerning desirable policy should be presented to Congress, rather
than to this Court.

   APPENDIX