No. 99-258
In the Supreme Court of the United States
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY, ET AL., PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
BRIEF FOR THE RESPONDENT IN OPPOSITION
SETH P. WAXMAN
Solicitor General
Counsel of Record
LORETTA C. ARGRETT
Assistant Attorney General
DAVID I. PINCUS
THOMAS J. CLARK
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTION PRESENTED
Whether Section 1.1502-47(m)(3)(vi) of the Treasury Regulations, 26 C.F.R.
1.1502-47(m)(3)(vi), prescribes the proper method for determining the amount
of net operating losses of non-life insurance companies that may not be
taken into account in determining taxable income on consolidated federal
income tax returns that such companies file with life insurance companies.
In the Supreme Court of the United States
No. 99-258
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY, ET AL., PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
BRIEF FOR THE RESPONDENT IN OPPOSITION
OPINIONS BELOW
The opinion of the court of appeals (Pet. App. 1a-23a) is reported at 177
F.3d 136. The opinion of the Tax Court (Pet. App. 24a-38a) is reported at
109 T.C. 100.
JURISDICTION
The judgment of the court of appeals was entered on April 30, 1999. On July
20, 1999, Justice Souter extended the time for filing a petition for a writ
of certiorari to August 12, 1999. The petition was filed on August 12, 1999.
The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).
STATEMENT
1. Prior to 1981, life insurance companies were not permitted to file consolidated
federal income tax returns with corporations that were not life insurance
companies. For tax years beginning after December 31, 1980, Congress changed
this rule, and permitted "life- nonlife consolidation."1 In Section
1503(c) of the Internal Revenue Code, 26 U.S.C. 1503(c), however, Congress
placed two limitations on the extent to which the net operating losses (NOLs)
of nonlife companies may be used to reduce the taxable income reported on
the consolidated return. One of those limitations, set forth in Section
1503(c)(2), is that an NOL of a nonlife company "shall not be taken
into account" in determining the taxable income of the affiliated group
unless the nonlife company has been a member of the group for the five years
preceding the year the loss was incurred.
Regulations promulgated by the Secretary of the Treasury prescribe the method
for determining the NOLs that, under Section 1503(c)(2), "shall not
be taken into account." As pertinent here, the regulations require
all nonlife companies within the group to set off their gains and losses
against each other, and thereby determine whether the "nonlife subgroup"
had a consolidated net operating loss (CNOL). 26 C.F.R. 1.1502-47(h)(2)(ii).
The amount of the CNOL that could be used to offset the income of life companies
in the group was to be "reduced by the ineligible NOL," i.e.,
"the amount of the separate net operating loss * * * of any nonlife
member that is ineligible in that year."2 26 C.F.R. 1.1502-47(m)(3)(vi)
(emphasis added).
2. Before March 31, 1982, Connecticut General Corporation was the parent
corporation of Connecticut General Life Insurance Company (CG Life) and
more than 40 other corporations. CG Life was the sole life insurance company
in this group. Pursuant to the new rules permitting life-nonlife consolidation,
CG Life joined with the other subsidiaries of Connecticut General Corporation
in the filing of consolidated federal income tax returns for the period
ending March 31, 1982 (Pet. App. 3a, 25a).
Prior to March 31, 1982, INA Corporation was the common parent of more than
160 affiliated non-life corporations that engaged primarily in the sale,
underwriting, and servicing of property and casualty insurance. INA Corporation
had filed consolidated federal income tax returns on behalf of itself and
its subsidiaries (Pet. App. 4a). On March 31, 1982, Connecticut General
Corporation and INA Corporation (the two parent companies) merged to form
CIGNA Corporation. The merger was a "reverse acquisition" within
the meaning of 26 C.F.R. 1.1502-75(d)(3), pursuant to which CIGNA succeeded
Connecticut General as the common parent of the CG group, which continued
to exist for tax purposes. CIGNA also became the common parent of each of
the former members of the INA group, which group ceased to exist for tax
purposes. Thus, in effect, the CG group, which became the CIGNA group, acquired
the former INA subsidiaries individually.
On November 20, 1984, a subsidiary of CIGNA acquired Preferred Health Care,
Inc. (PHC) and its affiliated corporations, none of which were life insurance
companies. Before the acquisition, the PHC group had filed consolidated
federal income tax returns. All members of the PHC group immediately before
the acquisition became separate members of the CIGNA group upon the acquisition,
and the PHC group ceased to exist (Pet. App. 4a).
3. The consolidated federal income tax returns filed by CIGNA for 1982 through
1985 included the corporations that had been members of the former INA group,
and the returns filed for 1984 and 1985 included the corporations that had
been members of the former PHC group. CG Life was the only life insurance
company included in these consolidated returns, and it had taxable income
during each of these taxable periods. Some of the corporations that had
formerly been members of the INA group and the PHC group had taxable income
during these years, and others had tax losses (Pet. App. 7a).
In calculating the amount of the NOLs for the 1982 through 1985 consolidated
returns that, under Section 1503(c)(2), "shall not be taken into account,"
CIGNA treated all corporations that were formerly members of the INA group
as a single entity. Under this "single entity method," petitioners
set off the losses of those former INA corporations that had losses against
the income of those that had income. The result was a net loss for each
taxable period. Petitioners did the same with respect to the former PHC
companies, and the result was a net loss for the 1985 taxable year. It was
the resulting net losses calculated in this manner that CIGNA treated as
the NOLs that "shall not be taken into account" under Section
1503(c)(2) (Pet. App. 7a-8a).
4. On audit, the Commissioner determined that CIGNA used an incorrect method
to calculate the NOLs that shall not be taken into account. The Commissioner
concluded that Section 1.1502-47(m)(3)(vi) of the Treasury Regulations does
not permit CIGNA to treat all former members of the INA group as a single
entity, and all former members of the PHC group as a single entity. The
Commissioner determined that the regulation instead requires CIGNA to treat
each corporation that had formerly been in the INA group and the PHC group
as a separate member of the newly-constituted CIGNA group. Under this "separate
entity method," the entire NOL of each corporation that had formerly
been in the INA group and the PHC group is ineligible and is therefore to
be disregarded (Pet. App. 8a-9a). Under this method, these NOLs are not
to be "taken into account" at any time in the calculation of the
taxable income reported on the consolidated returns.
5. Petitioners filed a petition in the Tax Court to challenge the Commissioner's
determination. On cross-motions for summary judgment, the Tax Court ruled
in favor of the Commissioner. The court observed that the regulations adopted
under Section 1503(c)(2) are substantive legislative rules which require
"each nonlife company that constitutes a member of the consolidated
group [to be] treated as a separate entity" (Pet. App. 32a). It follows,
the court said, that the consolidated NOL of all of the nonlife companies
included in the consolidated federal income tax return "is reduced
by the separate 'ineligible NOL' of each ineligible nonlife company that
constitutes a member of the consolidated
group" (ibid.). The court emphasized that (id. at 33a):
[n]o provision is made in the above legislative regulations to treat a company
that prior to acquisition had been a member of a group that had filed a
consolidated income tax return as part of a single, aggregate group of companies
and to net within that group losses of ineligible nonlife companies against
income of other nonlife companies of the same acquired group.
6. Concluding "that the applicable Treasury regulation, as interpreted
by the Commissioner, is a permissible interpretation of the statute"
(Pet. App. 1a-2a), the court of appeals affirmed. The court of appeals first
rejected petitioners' primary contention that the regulation is not even
applicable to this case. Petitioners had claimed that the regulation applies
only to acquired stand-alone corporations and not to acquired groups, such
as its acquisitions of the INA corporations and the PHC corporations. In
support of their argument, petitioners relied primarily on Section 1.1502-47(m)(4)
of the Treasury Regulations which reads, in its entirety, "Acquired
Groups. [Reserved]." 26 C.F.R. 1.1502-47(m)(4). Petitioners argued
that this reserved section in the regulations shows that the Commissioner
intended to except acquired groups from the general rule of Section 1.1502-47(m)(3)(vi).
Petitioners argued that, in the absence of any specific rule applicable
to acquired groups, they were entitled to use any reasonable means to calculate
the amount of their ineligible NOLs.
The court of appeals concluded, however, that the Commissioner's interpretation
of the Treasury Regulations to apply in this situation is entitled to deference.
The court found that "nothing in Regulation [1.1502]-47(m)(4) contradicts
the Commissioner's interpretation of Regulation [1.1502]-47(m)(3)(vi) as
applying to acquired groups." Because Regulation 1.1502-47(m)(3)(vi)
makes no distinction between acquired stand-alone companies and acquired
groups and, "by its own terms, applies to" the facts of this case
(Pet. App. 17a-18a), the court of appeals concluded that it was proper to
defer to the interpretation of the regulation by the agency that Congress
charged with the enforcement of the statute and the adoption of the legislative
rule (id. at 12a-14a, 18a) .3
ARGUMENT
The court of appeals held that petitioners must calculate the NOLs of their
affiliates that "shall not be taken into account" (26 U.S.C. 1503(c)(2))
in determining taxable income on their consolidated federal income tax returns
in the manner prescribed by Section 1.1502-47(m)(3)(vi) of the Regulations.
This holding is correct and does not conflict with any decision of this
Court or any other court of appeals. Indeed, the issue has never been addressed
by this Court or any other court of appeals. Further review is therefore
not warranted.
1. Section 1501 of the Internal Revenue Code, 26 U.S.C. 1501, grants affiliated
groups of corporations the "privilege" of filing consolidated
federal income tax returns. The privilege is available, however, only when
each corporation in the affiliated group consents to all consolidated return
regulations issued by the Secretary of the Treasury. See Charles Ilfeld
Co. v. Hernandez, 292 U.S. 62, 65 (1934). Congress did not set forth detailed
rules in the statute prescribing how the consolidated taxable income of
an affiliated group of corporations is to be determined. In Section 1502
of the Code, Congress charged the Secretary with prescribing "such
regulations as he may deem necessary" to en- sure that the tax liability
of an affiliated group of corporations is properly determined. 26 U.S.C.
1502. See S. Rep. No. 960, 70th Cong., 1st Sess. 15 (1928) ("delegat[ing]
power to the commissioner to prescribe regulations legislative in character").
When Congress enacted the statutory provisions permitting life-nonlife consolidation,
it did not prescribe detailed rules on how the group's income was to be
determined. As pertinent here, the only rule it provided was that the NOL
of a nonlife member of the group "shall not be taken into account in
determining the taxable income" of a life insurance company in the
group unless the life and nonlife members have been in the same affiliated
group for at least five years. 26 U.S.C. 1503(c)(2). The report of the Senate
Finance Committee emphasized that, under this statute, "the details
of the computation of the tax liability of an affiliated group which includes
life or other mutual insurance companies is to be determined under regulations
issued by the Treasury Department". S. Rep. No. 938, 94th Cong., 2d
Sess. 456 (1976).
2. On June 8, 1982, the Secretary issued proposed regulations prescribing
rules for filing life-nonlife consolidated returns (Pet. App. 4a). The proposed
regulations made no distinction between acquired stand-alone companies and
acquired groups. After the proposed regulations were issued, CIGNA wrote
to the Commissioner suggesting that the Secretary adopt by regulation a
special rule for acquired groups such as the one that petitioners have advocated
in this lawsuit- that "separate nonlife members be treated as one entity
if they are acquired in a single transaction by one group but were members
of a different group prior to their acquisition" (id. at 5a). When
the final regulations were ultimately issued, however, they did not include
a special rule for acquired groups. In a letter sent to CIGNA after the
final regulations were issued, the Chief Counsel of the IRS, Kenneth W.
Gideon, specifically informed CIGNA that the "final life-nonlife consolidated
return regulations * * * do not adopt your suggestion" (id. at 6a).
The final regulations differed from the proposed regulations by adding the
"reserved" paragraph at Section 1.1502-47(m)(4).4 The preamble
to the final regulations states that "notwithstanding the ordinary
reading of section 1503(c)(2) [of the Code]," the Treasury Department
intended to study further whether to adopt an exception from the rule such
as the one that CIGNA had proposed. The preamble stated that the agency
would consider whether it would "be consistent with the intent of section
1503(c)(2), or correct as a matter of policy," to adopt a rule such
as the one suggested by CIGNA (Pet. App. 6a).
Internal Treasury and Internal Revenue Service memoranda that petitioners
relied upon below (C.A. App. 199-216) show that during the three year period
after the issuance of the final regulations, the Treasury did, in fact,
study the possibility of issuing a special rule for "acquired groups"
similar to the rule suggested by CIGNA. These memoranda discuss the advantages
and disadvantages of such a rule, and reveal that there were differences
of opinion within the Treasury and IRS as to whether a special rule for
acquired groups would be appropriate. Despite this lengthy and in-depth
study of the CIGNA proposal, however, the agency has declined to promulgate
the special rule for acquired groups sought by petitioners.
The internal Treasury and IRS memoranda that CIGNA relied upon repeatedly
refer to the issue raised in this case as the "CIGNA issue" (C.
A. App. 199, 201, 204, 215). Despite its vigorous efforts before the agency,
CIGNA never succeeded in persuading the Treasury to adopt the rule it advocated.
Undeterred, CIGNA has decided in this lawsuit to "wag[e] in a judicial
forum a specific policy battle which [it] ultimately lost in the agency."
Chevron U.S.A Inc. v. Natural Resources Defense Council, 467 U.S. 837, 864
(1984). This battle is misguided. "When a challenge to an agency construction
of a statutory provision, fairly conceptualized, really centers on the wisdom
of the agency's policy, rather than whether it is a reasonable choice within
a gap left open by Congress, the challenge must fail." Id. at 866.
3. The NOLs involved in this case were incurred by members of the former
INA group after the merger. Because these losses took place after the merger,
they could not be considered losses of the INA group, which ceased to exist
upon the merger. The losses were, instead, losses of separate members of
the newly-constituted CIGNA group. Because the former members of the INA
group had been members of the CIGNA group for less than five years, they
were "ineligible" corporations and, under the plain language of
Treasury Regulation 1.1502-47(m)(3)(vi), their separate NOLs therefore had
to be subtracted from the nonlife consolidated NOL to determine the "offsetable
nonlife consolidated net operating loss." 26 C.F.R. 1.1502-47(m)(3)(vi).
Petitioners' primary contention is that the court of appeals erred in deferring
to the Commissioner's interpretation of the straightforward text of the
regulations. Although petitioners purport to acknowledge the settled rule
that courts are to defer to an agency's interpretation of its own regulations,
see Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413-414 (1945),
they assert that the agency's interpretation is not entitled to deference
when it is first advanced in litigation. That contention, however, is based
on a false premise. Contrary to petitioners' assumption, the position advanced
by the Commissioner in this case-that the ineligible NOLs had to be calculated
under Regulation 1.1502-47(m)(3)(vi)-was unquestionably not the invention
of the IRS counsel who represented the Commissioner in the Tax Court. As
we have just described, the Treasury determined at the time that it issued
the final regulations not to adopt the special "CIGNA rule" espoused
by petitioners. Moreover, although the Treasury and the Internal Revenue
Service further studied the "CIGNA issue" for several years after
the final regulations were issued, the special rule espoused by petitioners
has not been adopted. In these circumstances, the agency's announced interpretation
of its own legislative regulations plainly "reflect[s] the agency's
fair and considered judgment on the matter in question" and was properly
accorded deference by the court of appeals. Auer v. Robbins, 519 U.S. 452,
462 (1997).5 See also Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512
(1994).
Moreover, as the court of appeals emphasized (Pet. App. 8a-9a), the interpretation
of the regulation advanced by the Commissioner in this litigation is precisely
the same that the agency has asserted throughout the lengthy audit of petitioners'
consolidated returns. This Court has consistently concluded that an agency's
interpretation of its regulations is entitled to deference even if the interpretation
is first adopted during administrative proceedings. As the Court stated
in Martin v. Occupational Safety and Health Review Commission, 499 U.S.
144, 158 (1991), "the Secretary's interpretation is not undeserving
of deference merely because the Secretary advances it for the first time
in an administrative adjudication."
4. Petitioners err in contending (Pet. 21) that the decision of the court
of appeals conflicts with decisions holding that the rule of lenity may
require ambiguous tax provisions to be construed in favor of the taxpayer.
The most recent of the decisions of this Court cited by petitioners for
this proposition is Hassett v. Welch, 303 U.S. 303, 314 (1938). In the subsequent
decision of White v. United States, 305 U.S. 281, 292 (1938), however, the
Court stated:6
We are not impressed by the argument that, as the question here decided
is doubtful, all doubts should be resolved in favor of the taxpayer. It
is the function and duty of courts to resolve doubts. We know of no reason
why that function should be abdicated in a tax case more than in any other
where the rights of suitors turn on the construction of a statute and it
is our duty to decide what that construction fairly should be.
It is, in any event, an elementary rule in tax law that deductions from
income are matters of legislative grace that must be "strictly construed
and allowed only 'as there is a clear provision therefor.'" INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992), quoting New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934). See also Deputy v. DuPont, 308 U.S.
488, 493 (1940); A.E. Staley Mfg. Co. v. Commissioner, 119 F.3d 482, 486
(7th Cir. 1997) (deductions from income are "strictly construed");
UNUM Corp. v. United States, 130 F.3d 501, 509 (1st Cir. 1997) (same), cert.
denied, 119 S. Ct. 42 (1998); Durando v. United States, 70 F.3d 548, 550
(9th Cir. 1995) (same); Weingarden v. Commissioner, 825 F.2d 1027, 1029
(6th Cir. 1987) (same). Because the statutory and regulatory provisions
that govern this case allow deductions from income that would otherwise
be subject to tax, they are to be strictly construed. The Court long made
clear, even prior to its decision in White v. United States, supra, that,
in a deduction case, "[t]he rule that ambiguities in statutes imposing
taxes are to be resolved in favor of taxpayers does not apply. Deductions
are allowed only when plainly authorized." Helvering v. Inter-Mountain
Life Ins. Co., 294 U.S. 686, 689 (1935).
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
SETH P. WAXMAN
Solicitor General
LORETTA C. ARGRETT
Assistant Attorney General
DAVID I. PINCUS
THOMAS J. CLARK
Attorneys
OCTOBER 1999
1 Tax Reform Act of 1976, Pub. L. No. 94-455, § 1507, 90 Stat. 1739-1741.
2 The regulations define an "ineligible" corporation as a corporation
that is not eligible. 26 C.F.R. 1.1502-47(d)(13). An "eligible"
corporation is defined, in part, as a corporation that has been a member
of the affiliated group for at least five years preceding the taxable year
for which the consolidated return and the determination of eligibility are
made. 26 C.F.R. 1.1502-47(d)(12).
3 The court of appeals also rejected petitioners' contention that the preamble
to the Section 1.1502-47 regulations supports their argument that no rule
was promulgated with respect to acquired groups. The court observed that
the preamble "suggests that applying a rule other than that annunciated
in [1.1502]-47(m)(3)(vi) would contradict 'the ordinary reading of section
1503(c)(2)'" of the Code (Pet. App. 17a).
4 The "reservation" of a paragraph of the regulations is not unique
to Section 1.1502-47(m)(4). For example, eight other paragraphs or subparagraphs
of Section 1.1502-47 alone are marked "reserved." See 26 C.F.R.
1.1502-47(i), (j), (k)(1)-(k)(4), (l)(1), (l)(2).
5 In this case, as in Auer v. Robbins, supra, the Commissioner's position
"is in no sense a 'post hoc rationalizatio[n]' advanced by an agency
seeking to defend past agency action against attack." 519 U.S. at 462.
Contrary to petitioners' unsupported assertion (Pet. 20), the decision in
this case thus does not "threaten[] to eviscerate" this Court's
decision in Bowen v. Georgetown University Hospital, 488 U.S. 204 (1988).
6 Petitioners also err in their understanding of how the rule of lenity
applies to the interpretation of ambiguous statutes. "The rule of lenity
applies only if, 'after seizing everything from which aid can be derived,'
Smith v. United States, 508 U.S. 223, 239 (1993) (internal quotation marks
and brackets omitted), we can make 'no more than a guess as to what Congress
intended.' Ladner v. United States, 358 U.S. 169, 178 (1958)." Reno
v. Koray, 515 U.S. 50, 64-65 (1995). One of the principles "from which
aid can be derived" in the interpretation of statutes and legislative
regulations is the principle that deference is to be given to reasonable
interpretations adopted by the Treasury-the agency that Congress has charged
with enforcement of these complex provisions. See, e.g., Atlantic Mut. Ins.
Co. v. Commissioner, 523 U.S. 382, 389-390 (1998); National Muffler Dealers
Ass'n v. United States, 440 U.S. 472, 477 (1979).