State Farm Mutual Automobile Insurance Company and Subsidiaries v. Commissioner

119 T.C. No. 21UNITED STATES TAX COURT
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY AND SUBSIDIARIES,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1859-01. Filed December 19, 2002.
P is an affiliated group of corporations filing a
consolidated Federal income tax return. The group
comprises both life and nonlife insurance companies,
referred to as the life subgroup and the nonlife
subgroup, respectively. P became subject to the
alternative minimum tax (AMT) for 1987 as a result of
events in 1989 generating a nonlife subgroup net
operating loss carryback from 1989 to 1987. For
purposes of determining its AMT liability, P calculated
the book income adjustment on a consolidated basis. R
maintains that the book income adjustment is to be made
on a subgroup basis, with a separate adjustment for
each subgroup.
Held: In the context of a life-nonlife consolidated
return, the AMT book income adjustment is to be made using a
consolidated approach, with a single adjustment for the
entire group.
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Jerome B. Libin, James V. Heffernan, and Mary E. Monahan,
for petitioner.
Jan E. Lamartine, for respondent.
OPINION
COHEN, Judge: Respondent determined a Federal income tax
deficiency in the amount of $1,235,690 with respect to the 1987
taxable year of State Farm Mutual Automobile Insurance Co. and
Subsidiaries (herein collectively petitioner). By answer,
respondent asserted an increased deficiency of $2,827,110. The
principal issue for decision is the computation of petitioner’s
alternative minimum tax (AMT) liability for 1987, which in turn
will involve consideration of the amount of petitioner’s
alternative tax net operating loss (ATNOL) carryback from 1989.
Integral to each of these calculations is the question of how
properly, in the context of the consolidated return of an
affiliated group of life and nonlife insurance companies, to take
into account the alternative minimum tax book income adjustment
of section 56(f).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for relevant years, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Background
All of the facts have been stipulated. The stipulated facts
are incorporated as our findings by this reference.
Petitioner’s Organization and Operations
State Farm Mutual Automobile Insurance Co. (State Farm) is a
mutual insurance company taxed as a corporation, the principal
office of which at all relevant times was located in Bloomington,
Illinois. State Farm is engaged in the business of providing
property and casualty insurance. State Farm is also the common
parent of an affiliated group including domestic life insurance
companies taxed under section 801, domestic nonlife insurance
companies, and other domestic corporations. Pursuant to an
election under section 1504(c), the affiliated group filed
consolidated Federal income tax returns for 1984 and for
subsequent years, including 1986 through 1990.
Petitioner’s Accounting
For financial accounting purposes, State Farm files an
annual statement with State insurance regulators on the form
prescribed by the National Association of Insurance Commissioners
(NAIC). This statement includes only the net book income of the
parent company. Separate NAIC annual statements are required to
be filed for each insurance company in the affiliated group in
every State in which that company is licensed to do business.
Companies in the affiliated group that are not regulated as
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insurance companies also produce financial statements, which
include book income that is not included in the financial
statements of other group members.
For 1987, the total net book income attributable to life
insurance companies of the affiliated group was $199,969,459 and
that attributable to nonlife members was $2,392,675,741. For
1989, the total net book income attributable to life and to
nonlife members was $231,216,351 and a loss of $40,044,428,
respectively.
Petitioner’s 1987 and 1989 Taxable Years
During the 1987 through 1989 period, the affiliated group
comprised 2 first-tier life insurance company subsidiaries
taxable under section 801 (which, for purposes of section 1503(c)
and section 1.1502-47, Income Tax Regs., constituted the “life
subgroup”) and 11 other subsidiary corporations (which, for
purposes of section 1503(c) and section 1.1502-47, Income Tax
Regs., constituted the “nonlife subgroup”).
When petitioner originally filed its 1987 consolidated
Federal income tax return, it was not subject to the AMT imposed
by section 55. Rather, petitioner ultimately became subject to
the AMT for 1987 as a result of occurrences in 1989, namely,
Hurricane Hugo, that adversely affected the property/casualty
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insurance operations of the nonlife subgroup in that year and
generated a nonlife subgroup net operating loss (NOL) carryback
from 1989 to 1987.
For regular tax purposes, items relevant to petitioner’s tax
liability, before any NOL deduction, would include the following:
Tax Item 1987 1989
1 2
Taxable income of nonlife subgroup $1,538,315,230 ($691,736,003)
3 4
Partial taxable income of life subgroup 214,881,622 261,624,770
Amount subtracted under sec. 815 0 0
1
An environmental tax deduction of $2,368,957 is taken into
account in the figure stated. The parties agree that the precise
amount of the deduction will depend upon the resolution of this
case.
2
An environmental tax deduction of $0 is taken into account
in the figure stated.
3
An environmental tax deduction of $259,030 is taken into
account in the figure stated. The parties agree that the precise
amount of the deduction will depend upon the resolution of this
case.
4
An environmental tax deduction of $313,560 is taken into
account in the figure stated.
Under the regular tax regime, all of the 1989 nonlife subgroup
net operating loss of $691,736,003 is required by section 1503(c)
to be carried back to 1987 and cannot be used to offset 1989 life
subgroup partial taxable income.
For AMT purposes, adjustments and preference items under
sections 56, 57, and 58, excluding the book income adjustment and
any ATNOL deduction, are as set forth below:
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AMT Adjustments and Preference 1987 1989
Items
Nonlife subgroup $18,508,088 $70,327,213
Life subgroup 915,175 1,361,584
The parties have also stipulated that the ATNOL deduction for
1987, the total amount of which remains in dispute, will include
($189,367,790) attributable to a nonlife subgroup NOL carryover
from 1986.
Discussion
I. General Rules
A. Life-Nonlife Consolidated Returns
Prior to enactment of the Tax Reform Act of 1976 (TRA 1976),
Pub. L. 94-455, sec. 1507, 90 Stat. 1739, nonlife insurance
companies were prohibited from filing consolidated returns with
life insurance companies. See S. Conf. Rept. 94-1236, at 511
(1976), 1976-3 C.B. (Vol. 3) 807, 915. The restrictions sought
to ensure that life insurance companies, traditionally
profitable, paid income tax commensurate with their investment
income, undiminished by the losses of often unprofitable property
and casualty companies. Nichols v. United States, 260 F.3d 637,
642 (6th Cir. 2001); Conn. Gen. Life Ins. Co. v. Commissioner,
177 F.3d 136, 138 (3d Cir. 1999), affg. 109 T.C. 100 (1997).
Economic considerations, however, led Congress to permit
consolidation for years beginning after 1980 in order to
“provide[] substantial relief in the future for casualty
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companies with losses.” S. Rept. 94-938 (Part 1), at 454-455
(1976), 1976-3 C.B. (Vol. 3) 49, 492-493; see also TRA 1976 sec.
1507(c), 90 Stat. 1740. At the same time, certain limitations
were enacted to “preserve[] the concept sought by Congress in the
past to the effect that some tax will be paid with respect to the
life insurance company’s investment income”. S. Rept. 94-938,
supra at 454, 1976-3 C.B. (Vol. 3) at 492.
In general, section 1501 grants to affiliated groups the
privilege of filing consolidated returns, a privilege in which
groups containing both life and nonlife members may share if an
appropriate election is made under section 1504(c). Section 1503
then addresses the computation and payment of tax for purposes of
such returns, providing in relevant part as follows:
SEC. 1503. COMPUTATION AND PAYMENT OF TAX.
(a) General Rule.--In any case in which a
consolidated return is made or is required to be made,
the tax shall be determined, computed, assessed,
collected, and adjusted in accordance with the
regulations under section 1502 [authorizing the
Secretary to establish regulations regarding
consolidated tax liability] prescribed before the last
day prescribed by law for the filing of such return.
* * * * * * *
(c) Special Rule For Application of Certain Losses
Against Income of Insurance Companies Taxed Under
Section 801.--
(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 members of
the group not taxed under section 801 [applicable
to life insurance companies] results in a
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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 members not
taxed under section 801 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 members
taxed under section 801, whichever is less. The
unused portion of such loss shall be available as
a carryover, subject to the same limitations
(applicable to the sum of the loss for the
carryover year and the loss (or losses) carried
over to such year), in applicable carryover years.
Section 1.1502-47, Income Tax Regs., was promulgated to
govern consolidated returns by life-nonlife groups. The
regulations generally adopt a “subgroup method” for determining
consolidated taxable income. Sec. 1.1502-47(a)(2)(i), Income Tax
Regs. This method divides the affiliated group into a life
subgroup and a nonlife subgroup. Id.; sec. 1.1502-47(d)(8) and
(9), Income Tax Regs. Consolidated taxable income for the group
is then defined as the sum of: (1) Nonlife consolidated taxable
income, as set off by allowable life losses; (2) consolidated
partial life insurance company taxable income (consolidated
partial LICTI), as set off by allowable nonlife losses; and
(3) amounts subtracted under section 815 from life policyholders’
surplus accounts. Sec. 1.1502-47(g), Income Tax Regs.
Nonlife consolidated taxable income, in turn, aggregates the
separate taxable incomes of the nonlife members, with specified
consolidated adjustments, and incorporates reductions for current
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year nonlife consolidated NOL and for nonlife consolidated net
operating and capital loss carrybacks and carryovers. Sec.
1.1502-47(h), Income Tax Regs.; see also secs. 1.1502-11, 1.1502-
12, 1.1502-21A, 1.1502-22A, Income Tax Regs. Consolidated
partial LICTI comprises the separate gross income and deductions
of life members and is reduced by life loss carrybacks and
carryovers from other years. Secs. 801-812, 818(e); sec. 1.1502-
47(k) and (l), Income Tax Regs. Nonlife consolidated taxable
income may then be set off by life losses and consolidated
partial LICTI by nonlife losses in accordance with the rules set
forth, respectively, in section 1.1502-47(n) and (m), Income Tax
Regs. Limitations reflected in section 1.1502-47(m), Income Tax
Regs., implement the mandate of section 1503(c).
The life-nonlife regulations additionally provide that other
consolidated return principles apply unless preempted by
inconsistent provisions in section 1.1502-47, Income Tax Regs.
Sec. 1.1502-47(q), Income Tax Regs. (“The rules in this section
preempt any inconsistent rules in other sections (sec. 1.1502-1
through sec. 1.1502-80) of the consolidated return
regulations.”); sec. 1.1502-47(r), Income Tax Regs. (“The fact
that this section treats the life and nonlife members as separate
groups in computing, respectively, consolidated partial LICTI (or
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LO) and nonlife consolidated taxable income (or loss) does not
affect the usual rules in secs. 1.1502-0--1.1502-80 unless this
section provides otherwise.”).
B. Alternative Minimum Tax
Section 55(a) imposes, in addition to any regular tax owed,
an AMT equal to the excess of the tentative minimum tax over the
regular tax for the taxable year. The tentative minimum tax for
corporate taxpayers is 20 percent of the amount by which
alternative minimum taxable income (AMTI) exceeds the applicable
exemption amount, reduced by the AMT foreign tax credit. Sec.
55(b)(1)(B). AMTI, in turn, is defined as the taxpayer’s taxable
income for the year determined with the adjustments provided in
sections 56 and 58 and increased by the tax preference items
described in section 57. Sec. 55(b)(2).
As pertinent here, one of the adjustments provided in
section 56 is the book income adjustment of section 56(f), as
follows:
SEC. 56(f). Adjustments for Book Income of
Corporations.--
(1) In general.--The alternative minimum
taxable income of any corporation for any taxable
year beginning in 1987, 1988, or 1989 shall be
increased by 50 percent of the amount (if any) by
which--
(A) the adjusted net book income of the
corporation, exceeds
(B) the alternative minimum taxable
income for the taxable year (determined
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without regard to this subsection and the
alternative tax net operating loss
deduction).
(2) Adjusted net book income.--For purposes
of this subsection--
(A) In general.--The term “adjusted net
book income” means the net income or loss of
the taxpayer set forth on the taxpayer’s
applicable financial statement, adjusted as
provided in this paragraph.
* * * * * * *
(C) Special rules for related
corporations.--
(i) Consolidated returns.--If the
taxpayer files a consolidated return for
any taxable year, adjusted net book
income for such taxable year shall take
into account items on the taxpayer’s
applicable financial statement which are
properly allocable to members of such
group included on such return.
(Sec. 56(f) was enacted as part of the Tax Reform Act of 1986,
Pub. L. 99-514, sec. 701(a), 100 Stat. 2320, and repealed by the
Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec.
11801(a)(3), 104 Stat. 1388.)
Additional rules pertaining to the book income adjustment in
the context of consolidated returns are contained in regulations
promulgated under section 56. Section 1.56-1(a)(3), Income Tax
Regs., specifies generally:
In the case of a taxpayer that is a consolidated group,
the book income adjustment equals 50 percent of the
amount, if any, by which its consolidated adjusted net
book income (as defined in paragraph (b)(3)(i) of this
section) exceeds its consolidated pre-adjustment
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alternative minimum taxable income (as defined in
paragraph (b)(3)(iii) of this section). See paragraph
(a)(4), Example (4) of this section. * * *
The referenced definition of consolidated adjusted net book
income provides that the term means consolidated net book income
after taking into account certain enumerated adjustments. Sec.
1.56-1(b)(3)(i), Income Tax Regs. Consolidated net book income,
in turn, “is the income or loss of a consolidated group as
reported on its applicable financial statement”. Sec. 1.56-
1(b)(3)(ii), Income Tax Regs. The applicable financial statement
of a consolidated group “is the financial statement of the common
parent” with the highest priority under ordering rules set forth
in the regulatory section. Sec. 1.56-1(c)(5)(i), Income Tax
Regs. Adjustments made to such financial statement include the
addition of book income attributable to members of the
consolidated group excluded from the applicable financial
statement. Sec. 1.56-1(d)(6)(i), Income Tax Regs.
Consolidated preadjustment AMTI is explained as “the taxable
income of the consolidated group”, determined with the
modifications prescribed in sections 56, 57, and 58 (except for
the book income adjustment and the ATNOL). Sec. 1.56-
1(b)(3)(iii), Income Tax Regs.
Example (4) of section 1.56-1(a)(4), Income Tax Regs.
(hereinafter Example 4), illustrates the foregoing principles as
follows:
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Corporations D and E are a consolidated group for tax
purposes. D and E do not have a consolidated financial
statement. On their separate financial statements D
and E have adjusted net book income of $100 and $50
respectively, and preadjustment alternative minimum
taxable income of $50 and $80 respectively. Assuming
there are no intercompany transactions, DE’s
consolidated adjusted net book income * * * is $150 and
its consolidated pre-adjustment alternative minimum
taxable income * * * is $130. DE must increase its
consolidated pre-adjustment alternative minimum taxable
income by $10 (($150 - $130) x .50).
II. Overview and Positions of the Parties
This controversy involves the intersection between the life-
nonlife consolidated return rules and the AMT book income
adjustment provisions. While each of the foregoing topics is the
subject of a detailed and complex statutory and regulatory
scheme, neither regime directly addresses how the two should be
combined. By focusing on different aspects of the texts enacted
or promulgated and their historical development, the parties here
arrive at conflicting conclusions. To summarize the primary
difference in their respective positions, petitioner maintains
that the book income adjustment is to be computed on a
“consolidated” basis, with a single adjustment for the entire
group; respondent advocates a “subgroup” approach, with a
separate book income adjustment for the life subgroup and for the
nonlife subgroup.
Petitioner approaches the problem at hand by focusing
principally on the specific language of the statute and
regulations addressing the book income adjustment. Therein
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petitioner finds support for a consolidated calculation of the
adjustment. Petitioner further supplements this emphasis with
averments that such single-entity methodology is consistent with
the preemption principles espoused in the life-nonlife
consolidated return regulations, as well as with the historical
development of the AMT regulations.
Respondent, in contrast, begins broadly with the expressed
intent of Congress in enacting the AMT. Respondent alleges that
Congress manifested an intent to have the loss limitations of
section 1503(c) apply in the AMT regime through observance of a
parallel system. Respondent therefore seeks to integrate the
subgroup structure of the calculation directed in the life-
nonlife consolidated return regulations into the AMT context. In
particular, respondent contends that, in view of the relationship
between the book income adjustment and the ATNOL deduction
revealed in section 56, the subgroup method is necessary to
respect the section 1503(c) loss limits.
III. Analysis
A. General Implications of the Book Income Adjustment
Provisions
As a general proposition, we agree with petitioner that the
language employed in section 56(f) and attendant regulations
reflects a consolidated approach to the book income adjustment.
The statutory and regulatory provisions regarding the adjustment
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to be made on consolidated returns are replete with singular
references to “the taxpayer”, “a taxpayer”, “the book income
adjustment”, “its consolidated net book income”, “its pre-
adjustment alternative minimum taxable income”, and so forth.
E.g., sec. 56(f)(2)(C)(i); sec. 1.56-1(a)(3), Income Tax Regs.
The items to be compared in calculating the adjustment, i.e.,
consolidated preadjustment AMTI and consolidated adjusted net
book income, likewise are defined in terms that suggest a unified
treatment.
Consolidated preadjustment AMTI is determined by starting
with “the taxable income of the consolidated group for the
taxable year”. Sec. 1.56-1(b)(3)(iii), Income Tax Regs. This
terminology implies the regular taxable income of the full
consolidated group. Similarly, consolidated adjusted net book
income is derived from the applicable financial statement of the
common parent. Sec. 1.56-1(b)(3)(i) and (ii), and (c)(5)(i),
Income Tax Regs. Again the language points to a single
controlling document, and a subgroup approach could create an
apparent conflict with this inference. Absent an entity standing
in the relation of “common parent” to a particular subgroup, the
subgroup methodology is not analogous to that directed in the
regulations.
Moreover, Example 4 offers a numerical illustration in which
the book income and preadjustment AMTI of D and E are compared on
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a consolidated basis. The result is an adjustment of $10. As
petitioner observes, if D and E were each treated as a subgroup
of companies and a subgroup approach were employed, the
consequent book income adjustment would be $25 ((($100 - $50) x
.50) attributable to D + $0 (i.e., no adjustment) attributable to
E).
The foregoing provisions therefore confirm that the book
income adjustment for an affiliated group filing a consolidated
return is generally to be computed on a consolidated basis. The
question thus becomes whether an exception to this rule applies
in the case of a life-nonlife group.
B. Application to Life-Nonlife Groups
Life-nonlife groups are distinct from other consolidated
groups principally on account of being subject to the loss limits
of section 1503(c). Legislative history accompanying enactment
of the AMT expressly indicates that Congress intended for the
section 1503 limits to be observed in computing AMT liability, as
follows: “It is clarified that, in light of the parallel nature
of the regular and minimum tax systems, any limitations applying
for regular tax purposes to the use by a consolidated group of
NOLs or current year loses (e.g., section 1503) apply for minimum
tax purposes as well.” H. Conf. Rept. 99-841, at II-283 (1986),
1986-3 C.B. (Vol. 4) 1, 283.
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We therefore must consider the relationship between the
operating loss rules in the two tax systems and the book income
adjustment. As described in section 56(f)(1), the book income
adjustment equals 50 percent of the excess of adjusted net book
income over AMTI determined without regard to the book income
adjustment and the ATNOL deduction. Section 56(d), in turn,
defines the ATNOL deduction as the NOL deduction determined for
regular tax purposes under section 172 (i.e., NOL carryovers plus
carrybacks), adjusted as provided in sections 56, 57, and 58, but
not to exceed 90 percent of AMTI. The ATNOL deduction therefore
incorporates, and will be preceded by calculation of, the book
income adjustment of section 56(f).
Two principles thus emerge from the confluence of the
organization and the underlying legislative history of section
56. First, the book income adjustment must be taken into account
in computing the ATNOL arising in a given year and available for
carrying to other years or the amount of AMTI available in a
given year for absorbing amounts carried from other years.
Second, the loss limits of section 1503(c) must be respected in
calculating such ATNOL or AMTI. Neither party disputes these
premises. They differ, however, as to whether actualization of
these concepts demands resort to a subgroup approach for
computing the book income adjustment.
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Respondent contends that the above query must be answered in
the affirmative. In so arguing, respondent relies on the
characterization of ATNOLs by legislative history and caselaw as
originating in a regime parallel to the regular tax system.
Besides the passage previously quoted, the conference report
describing the AMT legislation directs: “Minimum tax NOLs are
carried over under a system separate from but parallel to that
applying for regular tax purposes.” H. Conf. Rept. 99-841, supra
at II-282, 1986-3 C.B. (Vol. 4) at 282. Likewise, this Court in
Allen v. Commissioner, 118 T.C. 1, 16-17 (2002), while rejecting
the idea that the entire AMT construct paralleled the regular tax
system, reiterated that “in the case of AMT NOLs, the rules for
those NOLs did and still run parallel.”
The parties in Allen v. Commissioner, supra at 6 n.4, used
“parallel” in the AMT setting “to mean that the regimes run
independently of each other without ever meeting”, such that “a
taxpayer must first apply the provisions of the Code to compute
regular tax and then ‘start from scratch’ to apply those
provisions to compute AMT.” Respondent similarly contends that
to actualize a parallel ATNOL regime here implies ascertaining
how NOLs of life-nonlife groups are computed for regular tax
purposes and applying that methodology within the context of the
AMT provisions. More specifically, respondent maintains that,
because the regulatory mechanism for implementing the loss limits
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of section 1503(c) is to direct that items of income and
deduction relevant to operating loss be determined on a subgroup
basis, it follows that this framework should be maintained not
only up to (as in petitioner’s computations) but through (as in
respondent’s computations) calculation of the book income
adjustment in order to arrive at separate ATNOL figures that
parallel the separate loss amounts derived under the regular tax
system.
The principal difficulty with this approach, however, is
that it proposes to override the explicit language of the book
income adjustment regulations in absence of any textual
expression of preemption. While legislative history indicates
that the loss limits of section 1503(c) are to apply for AMT
purposes, no methodology for doing so was directly specified or
mandated. Use by Congress of “parallel” in this context is not a
compelling substitute for express rules.
As previously indicated, the life-nonlife consolidated
return regulations contain several provisions addressing the
interaction between those rules in section 1.1502-47, Income Tax
Regs., and other consolidated return regulations promulgated
under section 1502. Secs. 1.1502-47(a)(4), (q), (r), Income Tax
Regs. The life-nonlife sections are expressly declared to
preempt inconsistent rules in sections 1.1502-1 through 1.1502-
80, Income Tax Regs. Sec. 1.1502-47(q), Income Tax Regs. In
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other instances, separate computation of consolidated partial
LICTI (or loss from operations) and nonlife consolidated taxable
income (or loss) “does not affect the usual rules in secs.
1.1502-0--1.1502-80 unless this section provides otherwise.”
Sec. 1.1502-47(r), Income Tax Regs.
Hence, the preemption rules are by their terms limited to
other regulations promulgated under section 1502 and have no
direct applicability here. In this connection, it is noteworthy
that the AMT regulations were promulgated after those for life-
nonlife groups. Yet no provisions were put in place to specify
unique treatment for these insurance entities, although the
Commissioner had been made aware of the issue by a comment
received after issuance of temporary AMT regulations. See Field
Serv. Adv. Mem. TR-45-1815-95 (Apr. 10, 1996) (discussing events
leading up to the issuance of the final AMT regulations). Nor
were the explicit preemption directives in section 1.1502-47,
Income Tax Regs., augmented to bear upon regulations other than
those promulgated under section 1502. Given this scenario, we
find merit in petitioner’s analogy of the present situation
generally to cases such as United Dominion Indus., Inc. v. United
States, 532 U.S. 822 (2001), and Honeywell Inc. v. Commissioner,
87 T.C. 624 (1986).
In United Dominion Indus., Inc. v. United States, supra at
824-825, the Supreme Court held that a single-entity, rather than
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a separate-member, approach should be used in computing product
liability loss for purposes of section 172(j)(1). In that
context, the Supreme Court stated:
Thus, it is true, as the Government has argued,
that “[t]he Internal Revenue Code vests ample authority
in the Treasury to adopt consolidated return
regulations to effect a binding resolution of the
question presented in this case.” * * * To the extent
that the Government has exercised that authority, its
actions point to the single-entity approach as the
better answer. To the extent the Government disagrees,
it may amend its regulations to provide for a different
one. [Id. at 838.]
Honeywell Inc. v. Commissioner, supra at 631-633, involved
the Commissioner’s contention that certain depreciation
regulations were not intended to cover the taxpayer’s sales of
leased computers to the respective lessees. We rejected as
unpersuasive the Commissioner’s reliance on caselaw “as
establishing a ‘concept’ to override the express language of his
regulations”. Id. at 635. Petitioner draws the parallel that
respondent should not be permitted to invoke the “concept” of the
life-nonlife subgroup to defeat the language of the section 56(f)
regulations. We agree that, notwithstanding various factual and
substantive distinctions, these broad principles from United
Dominion Indus., Inc. v. United States, supra, and Honeywell Inc.
v. Commissioner, supra, ring true here.
While it may be said that the loss limits of section 1503(c)
must be respected in calculating the AMT of a life-nonlife group,
it does not follow that the explicit book income adjustment rules
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must be rejected. As petitioner emphasizes, appropriate
allocation of the adjustment, where necessary, can accommodate
these limitations in arriving at ATNOL or AMTI within the context
of the otherwise mandated consolidated approach.
(Although it is unnecessary here to reach the mechanics of
an appropriate allocation, we note that the idea of allocation of
consolidated adjustments is not foreign to the consolidated
return regime. As regards the book income adjustment in
particular, commentators have observed that allocation of the
consolidated adjustment could be required in situations involving
groups other than life-nonlife entities, such as where a member
joins or departs from a consolidated group, and have suggested
possible allocation methods. See Sair & Axelrod, “Issues and
Uncertainties in Consolidated AMT”, 305 PLI/Tax 141, 166-168
(1990) (advancing two potential allocation strategies:
Allocation based on each corporation’s relative book income as
compared to the total net book income and pro rata allocation
based on book income adjustment amounts). With respect to
consolidated adjustments besides that for book income, certain
regulations provide for allocation or attribution to particular
group members. For instance, petitioner cites sections 1.1502-
21(b) and 1.1502-55(h)(4)(iii)(B)(1), Income Tax Regs.,
promulgated after the years relevant here, as prescribing rules
for determining, respectively, the portion of a consolidated NOL
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attributable to particular group members and the contribution of
a member to a consolidated minimum tax credit limitation.)
C. Conclusion
To summarize, there exists both insufficient statutory or
regulatory support for divergence from the consolidated approach
reflected in the book income adjustment provisions and a
reasonable means through allocation to accommodate the section
1503(c) limits without resort to a subgroup approach. In
reaching this conclusion, we have considered all points raised by
the parties and, to the extent not addressed herein, they are
cumulative, irrelevant, or not appropriate for further discussion
because not presented by the facts before us. Accordingly, we
hold that, in the context of a life-nonlife consolidated return,
the AMT book income adjustment is to be made using a consolidated
approach, with a single adjustment for the entire group.
To reflect the foregoing,
Decision will be entered
under Rule 155.