Connecticut General Life Insurance Company v. Commissioner , 109 T.C. No. 5 ( 1997 )

109 T.C. No. 5UNITED STATES TAX COURT
CONNECTICUT GENERAL LIFE INSURANCE COMPANY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
CIGNA CORPORATION AND CONSOLIDATED SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 21212-92, 21213-92. Filed August 12, 1997.
Held: In consolidating nonlife insurance
companies with life insurance companies and for
purposes of calculating the amount of net operating
losses of nonlife insurance companies that, under sec.
1503(c)(1) and (2), I.R.C., may reduce income of the
life insurance companies, companies that constituted
members of a “recently acquired” affiliated group of
nonlife insurance companies that previously filed
consolidated Federal income tax returns are to be
treated as separate entities.
- 2 -
A. Duane Webber, Leonard B. Terr, C. David Swenson, and
Christopher R. Loomis, for petitioners.
John A. Guarnieri, Richard H. Gannon, and Richard L.
Osborne, for respondent.
OPINION
SWIFT, Judge: These consolidated cases are before the Court
under Rule 121 on the parties’ cross-motions for summary
judgment. Petitioners contend that if their motion for summary
judgment is not granted, a certain factual matter remains in
dispute that precludes summary judgment in favor of respondent.
The issue for decision is whether, in consolidating nonlife
insurance companies (sometimes referred to as nonlife companies)
with life insurance companies (sometimes referred to as life
companies) and for purposes of calculating, under section
1503(c)(1) and (2), the amount of net operating losses of nonlife
companies that may reduce income of life companies, companies
that constituted members of a “recently acquired” affiliated
group of nonlife companies that previously filed consolidated
Federal income tax returns are to be treated as a single
aggregate entity, as petitioners contend, or as separate
entities, as respondent contends.
The issue presented in these cross-motions for summary
judgment involves deficiencies determined by respondent in the
Federal income taxes of petitioners Connecticut General Life
- 3 -
Insurance Co. (ConnLife) and CIGNA Corp. and their consolidated
subsidiaries (CIGNA) as follows:
Petitioner Year Deficiency
ConnLife 1980 $ 3,360,873
CIGNA 1982 15,080,878
CIGNA 1983 1,916,121
CIGNA 1984 41,066,157
CIGNA 1985 752,636
Total $62,176,665
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
For 1981 and through March 31, 1982, Connecticut General
Corp. (CG), ConnLife, and CG's over 40 affiliates (the CG Group)
joined in filing consolidated Federal income tax returns, with CG
as the common parent of the affiliated group. ConnLife
constituted the sole life insurance company in the CG Group.
Members of the CG Group were engaged primarily in selling,
underwriting, and servicing various types of insurance (namely,
individual and group life, health and annuity insurance, and
personal and commercial property and casualty (P&C) insurance).
Acquisition of INA
On March 31, 1982, the CG Group and INA Corp. (INA) and its
over 160 affiliated companies (the INA Group) combined for
- 4 -
substantial business reasons by way of a tax-free reorganization
under section 368. As the culmination of the reorganization,
CIGNA was incorporated on March 31, 1982, as the holding company
for the surviving affiliated business entities.
In years prior to the combination of the CG and the INA
Groups, INA and its affiliates had filed consolidated Federal
income tax returns, with INA as the common parent corporation of
the affiliated INA Group. Members of the INA Group were engaged
primarily in selling, underwriting, and servicing P&C insurance.
The reorganization involving the CG and the INA Groups was
treated as a reverse acquisition under section 1.1502-75(d)(3),
Income Tax Regs. After the reorganization and for Federal income
tax purposes, the CG Group was treated as continuing in existence
and the INA Group was treated as ceasing to exist. CIGNA was
treated as the common parent corporation of the continuing CG
Group (the CIGNA Group), and companies that constituted members
of the former INA Group became members of the CIGNA Group.
Acquisition of PHC
On November 20, 1984, an affiliate of CIGNA acquired 89.9
percent of the stock of Preferred Health Care, Inc. (PHC), in a
taxable transaction. As a result of this transaction, PHC and
its subsidiary companies (the PHC Group) terminated, and
companies that constituted members of the former PHC Group became
members of the CIGNA Group.
- 5 -
In years prior to the acquisition by CIGNA of PHC and its
subsidiary companies, PHC and its subsidiaries had filed
consolidated Federal income tax returns, with PHC as the common
parent corporation of the affiliated PHC Group. The PHC Group
operated prepaid dental programs in Florida, New Jersey, and
eastern Pennsylvania.
Consolidated Federal Income Tax Returns of the CIGNA Group
For 1982 through 1985, the consolidated Federal income tax
returns that were filed on behalf of the CIGNA Group included the
companies that constituted members of the former INA Group.
For 1984 and 1985, the consolidated Federal income tax
returns that were filed on behalf of the CIGNA Group also
included the companies that constituted members of the former PHC
Group.
For 1982 through 1985, under a special rule set forth in
section 1504(c) allowing life insurance companies to file
consolidated Federal income tax returns with nonlife affiliated
companies, ConnLife was included as the sole life insurance
company in the above consolidated Federal income tax returns of
the CIGNA Group.
For 1982 through 1985, all of the nonlife companies that
constituted members of the CIGNA Group incurred the following
consolidated net operating losses (CNOL’s), and ConnLife, the
- 6 -
only life insurance company in the CIGNA Group, earned the
following income:
CNOL’s of Nonlife Income
Year Companies of ConnLife
1982 ($ 197,385,675) $116,294,363
1983 ( 244,963,449) 82,316,221
1984 ( 553,077,555) 331,452,903
1985 ( 1,229,220,860) 274,458,803
The above CNOL’s of the nonlife companies consisted of
CNOL’s of both eligible companies under section 1503(c)(2)
(namely, nonlife companies that had been members of the prior CG
Group and the CIGNA Group for at least 5 years) and ineligible
companies under section 1503(c)(2) (namely, nonlife companies
that had not been members of the prior CG Group and the CIGNA
Group for at least 5 years). Because they had not been members
of the prior CG Group and the CIGNA Group for at least 5 years,
all of the companies that constituted members of the former INA
and PHC Groups constituted ineligible nonlife companies.
On the consolidated Federal income tax returns for 1982
through 1985 -- in order to calculate the amount of net operating
losses (NOL’s) attributable to the nonlife companies that had
previously constituted members of the former INA and PHC Groups
and that therefore constituted losses of ineligible companies
that could not be used to reduce income of ConnLife (the sole
life company in the consolidated CIGNA Group) -- the CIGNA Group
treated all of the companies that constituted members of the
- 7 -
former INA and PHC Groups as two single, aggregate, respective
entities, and the net aggregate respective losses of the
companies that constituted members of the former INA Group and
the former PHC Group were netted against the respective taxable
income of the other companies that constituted members of the
former INA Group and the former PHC Group (single entity method).
In other words, for purposes of calculating the portion of
the net operating losses of the nonlife companies that
constituted members of the former INA Group that, on the CIGNA
Group’s consolidated Federal income tax returns for 1982 through
1985, were not allowed to reduce income of ConnLife, all
companies that constituted members of the former INA Group were
treated as a single aggregate entity, and losses of the
ineligible companies that constituted members of the former INA
Group were reduced by income earned by other companies that
constituted members of the former INA Group.
Further, for purposes of calculating the portion of the net
operating losses of the nonlife companies that constituted
members of the former PHC Group that, on the CIGNA Group’s
consolidated Federal income tax returns for 1984 and 1985, were
not allowed to reduce the income of ConnLife, all of the
companies that constituted members of the former PHC Group were
treated as a single aggregate entity, and losses of the companies
that constituted members of the former PHC Group were reduced by
- 8 -
income earned by other companies that constituted members of the
former PHC Group.
On audit, for 1982 through 1985, in order to calculate the
amount of net operating losses attributable to the nonlife
companies that had previously constituted members of the former
INA and PHC Groups and that therefore constituted losses of
"ineligible" companies that could not be used to reduce income of
ConnLife, respondent determined that each of the companies that
constituted members of the former INA and PHC Groups should be
treated as a separate entity (separate entity method), rather
than merely as a part of the respective former INA and PHC
Groups.
The difference between petitioners' single entity method and
respondent's separate entity method is that under petitioners’
single entity method losses of the ineligible nonlife companies
of the former INA and PHC Groups were, in effect, indirectly made
available to reduce income of ConnLife, the life company. Under
respondent’s separate entity method losses of ineligible nonlife
companies of the former INA and PHC Groups are not, to any
extent, made available to reduce income of ConnLife.
The following schedule reflects for each of the years 1982
through 1985 petitioners’ and respondent’s respective
calculations of the amount of nonlife CNOL’s that they claim
should be available under section 1503(c)(1) and (2) and the
regulations thereunder to reduce ConnLife's income:
- 9 -
Nonlife CNOL’s Eligible To Reduce Income Of ConnLife*
Petitioners' Respondent's
Year Single Entity Method Separate Entity Method
1982 ($ 34,888,309) ($10,225,979)
1983 ( 28,810,677) ( 8,351,216)
1984 ( 116,008,516) ( 26,734,260)
1985 ( 96,060,581) ( 94,424,416)
* These figures reflect CNOL’s after application
of certain percentage limitations contained in
sec. 1503.
Discussion
Summary judgment may be granted if the pleadings and other
materials demonstrate that no genuine issue exists as to any of
the material facts and that a decision may be rendered as a
matter of law. Rule 121(b); Colestock v. Commissioner, 102 T.C.
380, 381 (1994); Sundstrand Corp. v. Commissioner, 98 T.C. 518,
520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).
Under section 1504(c)(2) and subject to certain limitations
not here relevant, an affiliated group of companies that includes
nonlife and life companies may elect to file consolidated Federal
income tax returns and to include the life companies in the
consolidated income tax returns. Sec. 1504(c)(2).
The above election to consolidate on a limited basis nonlife
and life companies was added to the Code as part of the Tax
Reform Act of 1976, Pub. L. 94-455, sec. 1507(a), 90 Stat. 1739,
in order that nonlife companies (such as P&C insurance companies,
which P&C industry had been experiencing losses and a diminished
- 10 -
capacity to write insurance) could use nonlife losses to reduce
income of affiliated life companies. Congress anticipated that
the option to consolidate nonlife and life companies would, in
particular, improve the financial condition of P&C insurance
companies. See S. Rept. 94-938, at 454-455 (1976), 1976-3 C.B.
(Vol. 3) 49, 492-493.
Congress, however, in order to minimize trafficking by
profitable life insurance companies in unprofitable P&C insurance
companies, provided certain rules and limitations on the use in
consolidated Federal income tax returns of nonlife losses to
reduce life income. See S. Rept. 94-938, supra at 454-455, 1976-
3 C.B. (Vol. 3) at 492-493; 122 Cong. Rec. 24680-24685 (1976).
Section 1503(c)(1) provides generally that where an election
is made under section 1504(c)(2) to include both nonlife and life
companies in a consolidated Federal income tax return, certain
losses of nonlife companies may be taken into account and may
reduce income of the life companies included in the return but
only pursuant to regulations prescribed by the Secretary. Sec.
1503(c)(1).
Section 1503(c)(1) also provides that nonlife losses must
first be carried back against prior year income of the particular
nonlife companies that incurred the losses, and nonlife losses
that are not absorbed as carrybacks against prior year income of
the nonlife companies may be applied against income of the life
companies to the extent of only 35 percent of the nonlife CNOL or
- 11 -
35 percent of the income of the life companies, whichever is
less.1 Section 1503(c)(1) provides in part as follows:
(1) In general--If an election under section
1504(c)(2) is in effect for the taxable year and the
consolidated taxable income of the * * * [nonlife
members of the group] results in a consolidated net
operating loss for such taxable year, then under
regulations prescribed by the Secretary, the amount of
such loss which cannot be absorbed in the applicable
carryback periods against the taxable income of such
* * * [nonlife members of the group] shall be taken
into account in determining the consolidated taxable
income of the affiliated group for such taxable year to
the extent of 35 percent of such loss or 35 percent of
the taxable income of the * * * [life members of the
group], whichever is less. * * *
Section 1503(c)(2) provides a further specific limitation on
the use of nonlife losses to reduce life income where the
particular nonlife losses that are involved are realized by
companies that were not, for the immediately preceding 5 years,
part of the same affiliated group that is now filing a
consolidated Federal income tax return. Section 1503(c)(2)
provides in pertinent part as follows:
a net operating loss for a taxable year of a * * *
[nonlife member of the group] shall not be taken into
account in determining the taxable income of a * * *
[life member of the group] if such taxable year
precedes the sixth taxable year such members have been
members of the same affiliated group * * *.
1
For 1982, sec. 1503(c)(1) limits the losses that are
allowed to reduce life income to 30 percent of the income of the
life companies or 30 percent of the nonlife CNOL, whichever is
less.
- 12 -
Under legislative regulations promulgated under sections
1502 and 1503, for purposes of calculating the amount of nonlife
losses that are allowed to reduce life income pursuant to section
1503(c)(2), each nonlife company that constitutes a member of the
consolidated group is treated as a separate entity, and the CNOL
of all of the nonlife companies included in the consolidated
Federal income tax return (after allowable carrybacks) is reduced
by the separate “ineligible NOL” of each ineligible nonlife
company that constitutes a member of the consolidated group.
Sec. 1.1502-47(m)(3)(vi), Income Tax Regs. Section 1.1502-
47(m)(3)(vi)(A), Income Tax Regs., provides, in pertinent part,
as follows:
the “ineligible NOL” is in the year the loss arose the
amount of the separate net operating loss * * * of any
nonlife member that is ineligible in that year * * *.
No 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.
Petitioners note, however, that the legislative regulations
under sections 1502 and 1503 provide a “reserved” subparagraph
for “acquired groups”. Sec. 1.1502-47(m)(4), Income Tax Regs.
- 13 -
That reserved subparagraph states merely as follows: “Acquired
Groups. [Reserved.]”.
Petitioners note further that in the preamble accompanying
section 1.1502-47, Income Tax Regs., a comment is made to the
effect that applying petitioners' single entity method to
ineligible nonlife companies that in prior years constituted
members of a consolidated group may be appropriate in certain
situations.
The preamble states in relevant part:
Finally, the Treasury Department will study
further whether it is appropriate to aggregate the
income and losses of ineligible members in certain
cases. For instance, notwithstanding the ordinary
reading of section 1503(c)(2), it may be consistent
with the intent of section 1503(c)(2), or correct as a
matter of policy, to aggregate the income and losses of
ineligible members that filed a consolidated return
prior to their acquisition by * * * another group that
files a consolidated return. [T.D. 7877, 1983-1 C.B.
207, 212.]
Due primarily to the presence of the above reserved
subparagraph for acquired consolidated groups and due to the
above language from the preamble to the regulations, petitioners
argue that the separate entity treatment for ineligible nonlife
companies that is provided in section 1503(c)(2) and section
1.1502-47(m)(3)(vi), Income Tax Regs., should itself be limited
and should not apply to ineligible nonlife companies that
previously constituted an affiliated group and that filed
- 14 -
consolidated Federal income tax returns (e.g., the companies that
constituted members of the former INA and PHC Groups).
Petitioners cite portions of the Department of the Treasury
(Treasury) administrative files under section 1.1502-47(m)(3) and
(4), Income Tax Regs., that suggest that the insurance industry
in general and petitioners in particular were engaged with
respondent and the Treasury over a period of years in extensive
discussions regarding whether a separate or a single entity
method should be adopted and reflected in the regulations with
regard to the treatment of losses of ineligible nonlife companies
that constituted part of a previously affiliated and consolidated
group. Portions of the referenced administrative files also
reflect positions or recommendations of various Government
officials about the separate or single entity method and indicate
that some Government officials at one time or another favored a
single entity method.
Petitioners argue that the administrative files establish
that, in the regulations, the Treasury and respondent never
adopted a final decision as to how to treat losses of ineligible
nonlife companies that constituted part of a previously
affiliated and consolidated group and that the “reserved”
subparagraph (4) under section 1.1502-47(m), Income Tax Regs.,
was intended to preserve this issue until that subparagraph was
promulgated.
- 15 -
Petitioners further argue that in the absence of a rule
under the regulations as to how to treat losses of ineligible
nonlife companies that constituted part of a previously
affiliated and consolidated group, the statutory and regulatory
provisions are unclear and ambiguous, and petitioners should be
entitled to treat losses of the respective ineligible nonlife
companies that constituted members of the former INA and PHC
Groups under any reasonable interpretation of the statute.
Petitioners then argue that treating members of the former INA
Group and members of the former PHC Group as two single nonlife
entities constitutes a reasonable approach.
Additionally, if we agree with respondent's interpretation
of section 1.1502-47(m)(3)(vi), Income Tax Regs., with regard to
the companies that constituted members of the former INA and PHC
Groups, petitioners argue that the regulation should be
invalidated.
Petitioners also argue that a calculation of the ineligible
CNOL's using respondent’s separate entity method would cause an
increased overall tax liability for the CIGNA Group, as compared
to the collective tax liabilities of the CIGNA Group and the
former INA and PHC Groups, assuming the former INA and the PHC
Groups had never been acquired. Petitioners thus conclude that
any such calculation would constitute an improper, punitive
calculation.
We disagree with each of petitioners’ arguments.
- 16 -
We agree with respondent's interpretation of the statutory
and regulatory provisions involved in these cases. As indicated,
section 1503(c)(1) provides generally that losses of ineligible
nonlife companies may be used to reduce income of life companies
but only pursuant to regulations promulgated by the Treasury and
subject to the limitations contained in section 1503(c)(1) and
(2). Also as indicated, the legislative regulations that were
promulgated by the Treasury generally reflect a separate entity
method when calculating, under section 1503(c)(2), the amount of
nonlife losses that are to be attributed to ineligible nonlife
companies and therefore that may not be used to reduce income of
life companies. The statute and the regulations do not reflect
any special treatment for losses of ineligible nonlife companies
that previously constituted an affiliated and consolidated group.
We regard the “reserved” subparagraph (4) under section
1.1502-47(m), Income Tax Regs., as a neutral factor. That
provision simply reserves a space for regulations that may be
promulgated at a later date and that may provide a special rule
with regard to losses of ineligible nonlife companies that
previously constituted an affiliated and consolidated group.
We regard the preamble language to the regulations as merely
reflecting the Treasury’s willingness to study whether a special
rule should be promulgated for acquired previously affiliated and
consolidated groups. That language is not to be construed as
indicating that section 1.1502-47(m)(3)(vi), Income Tax Regs.,
- 17 -
and the separate entity method reflected therein do not apply to
ineligible nonlife companies that previously constituted an
affiliated and consolidated group.
Petitioners’ arguments that are based on certain material in
the Treasury’s administrative files under section 1.1502-47(m)(3)
and (4), Income Tax Regs., are not persuasive. The documents
from the administrative files are not compelling, consistent, or
clear as to the intended treatment of losses of ineligible
nonlife companies that constituted part of a previously
affiliated and consolidated group. Also, the relied-upon
material from the administrative files reflects generally only
personal views of various government representatives, not
official statements of respondent or of the Treasury. See Armco,
Inc. v. Commissioner, 87 T.C. 865, 867-868 (1986).
In any event, personal views of such government
representatives would not be able to overcome the particular
statutory and regulatory scheme before us in these cases. In
light of this statutory and regulatory scheme, petitioners’
alleged factual matter in dispute (namely, the intent of such
government representatives) is simply not sufficiently relevant
to the resolution of the issue to give rise to a genuine issue of
material fact. Rule 121(b).
We emphasize that section 1503(c)(1) provides that nonlife
losses may be taken into account only “under regulations
prescribed by the Secretary”. Assuming arguendo that the above
- 18 -
reserved subparagraph (4) of section 1.1502-47(m), Income Tax
Regs., was intended and should be construed as petitioners would
have us construe it (namely, as exempting from the general
separate entity method of the regulations ineligible nonlife
companies that previously had been members of an affiliated and
consolidated group), petitioners arguably would be left without
any specific regulatory provision that would support their single
entity method for such nonlife companies. Because section
1503(c)(1) provides that nonlife losses may be taken into account
only as provided in regulations, the absence of any such
regulation might preclude petitioners from taking into account
any of the losses of the ineligible nonlife companies that
previously constituted members of the former INA and PHC Groups.
See Estate of Neumann v. Commissioner, 106 T.C. 216, 219-221
(1996); H Enters. Intl., Inc. v. Commissioner, 105 T.C. 71, 81-83
(1995); Alexander v. Commissioner, 95 T.C. 467, 473 (1990), affd.
without published opinion sub nom. Stell v. Commissioner, 999
F.2d 544 (9th Cir. 1993).
We simply are not persuaded by petitioners' arguments. As
indicated, the regulations in question are legislative in nature.
Pursuant to sections 1502 and 1503(c)(1), the Treasury was given
an express delegation of regulatory authority. Respondent's
interpretation of the legislative regulations in these cases is
sufficiently consistent with section 1503(c)(2) and its
legislative purpose to restrict the use of ineligible nonlife
- 19 -
losses against life income. Also, respondent’s interpretation is
not so clearly inconsistent with the statute or its purpose as to
be arbitrary and capricious and invalid. See Chevron, U.S.A.,
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837,
844 (1984).
Finally, petitioners' argument as to the punitive effect of
the separate entity method does not justify a different result.
Under the separate entity method, the CIGNA Group still obtains
benefits in consolidating nonlife and life companies (i.e., the
ability to offset some nonlife losses against life income).
Also, as indicated, section 1.1502-47(m)(3)(vi), Income Tax
Regs., is consistent with congressional intent to place some
limits on the use of ineligible nonlife losses to reduce income
of life companies. Further, under the regulations, ineligible
losses of nonlife companies are not completely lost, and such
losses may be carried back or forward and used to reduce
consolidated taxable income of nonlife companies in other years.
Sec. 1.1502-47(m)(3)(vii), Income Tax Regs.
For the reasons stated, we conclude that, for the years in
issue, section 1.1502-47(m)(3)(vi), Income Tax Regs., applies to
the companies that previously constituted members of the former
INA and PHC Groups for purposes of calculating the amount of
losses of the nonlife companies of the CIGNA Group that may be
used to reduce the income of ConnLife. The CIGNA Group is
required to treat each of the nonlife companies that previously
- 20 -
constituted members of the former INA and the former PHC Groups
as a separate entity.
We also conclude that no factual matter remains in dispute
that precludes our granting summary judgment in favor of
respondent.
We have considered petitioners' other arguments and find
them unpersuasive.
To reflect the foregoing,
Appropriate orders and
decisions will be entered for
respondent.