Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-30-1999

CT General Life v. Comm IRS
Precedential or Non-Precedential:

Docket 97-7612




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Filed April 30, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

NO. 97-7612

CONNECTICUT GENERAL LIFE INSURANCE COMPANY,

       Appellant

v.

COMMISSIONER OF INTERNAL REVENUE
(Tax Court No. 92-21212)

NO. 97-7619

CIGNA CORPORATION AND CONSOLIDATED
SUBSIDIARIES,

       Appellants

v.

COMMISSIONER OF INTERNAL REVENUE
(Tax Court No. 92-21213)

On Appeal from the
United States Tax Court
Tax Court Judge: Hon. Stephen J. Swift

Argued September 14, 1998

Before: SLOVITER, SCIRICA and ALITO, Circuit Judges

(Filed April 30, 1999)
       A. Duane Webber (Argued)
       Leonard B. Terr
       C. David Swenson
       Baker & McKenzie
       Washington, D.C. 2006-4078

       Of Counsel:
       Judith E. Soltz
       D. Timothy Tammany
       Christopher R. Loomis
       CIGNA Corporation

       Alfred W. Putnam, Jr.
       Gregg R. Melinson
       Drinker Biddle & Reath, LLP
       Philadelphia, PA 19107

        Counsel for Appellants,
       Connecticut General Life
       Insurance Company and CIGNA
       Corporation and Consolidated
       Subsidiaries

       Loretta C. Argrett
        Assistant Attorney General
       Charles Bricken
       David I. Pincus
       Thomas J. Clark (Argued)
       Department of Justice
       Tax Division
       Washington, D.C. 20044

        Counsel for Appellee

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Connecticut General Life Insurance Company, appellant
in No. 97-7612, and CIGNA Corporation and Consolidated
Subsidiaries ("the CIGNA Group"), appellants in No. 97-
7619, appeal from the judgment of the United States Tax

                               2
Court upholding notices of deficiency issued against them
by the Commissioner of Internal Revenue in the amount of
$62,176,665. For convenience, we will refer to the
appellants collectively as "CIGNA." CIGNA complains that
the Tax Court improperly deferred to the Commissioner's
restrictive interpretation of the section of the Internal
Revenue Code that limits the ability of affiliated insurance
companies to file consolidated federal income tax returns.
Because we conclude that the applicable Treasury
regulation, as interpreted by the Commissioner, is a
permissible interpretation of the statute, we will affirm.

I.

BACKGROUND

Traditionally, life insurance companies ("life companies")
have been profitable, whereas companies writing property
or casualty insurance (P&C) have often been unprofitable.
Nonlife insurance companies ("nonlife companies") have
long been permitted to file consolidated federal income tax
returns with their affiliated nonlife companies, but not with
their affiliated life insurance companies. Life companies
were required to file separate returns or returns
consolidated with other affiliated life companies.

The restrictions on life-nonlife consolidation were
loosened when Congress enacted the Tax Reform Act of
1976. Pub. L. No. 94-455, 90 Stat. 1520. That Act modifies
the Internal Revenue Code to permit life companies to file
consolidated returns with nonlife companies, subject to
certain exceptions (the "life-nonlife consolidation
provisions"), for all taxable years beginning after December
31, 1980. See 26 U.S.C. SS 1501, 1503-1504. At issue in
this case is the interpretation of one of these statutory
provisions, specifically the provision that limits certain
setoffs between affiliated insurance companiesfiling
consolidated returns.

                               3
A.

The Statute

Section 1501 grants affiliated groups the privilege of
making consolidated returns with their affiliated
companies. If the affiliated group contains both life and
nonlife members, S 1504 requires that a company belong to
the group for at least five years before it is treated as
affiliated therewith. Section 1503 then limits the extent to
which losses incurred by nonlife members may be set off
against gains realized by life members. Subsection (c)(1), in
particular, caps the amount of nonlife setoff at a percentage
of either nonlife loss or life income, whichever is less. It
states:

       (1) In general--If . . . the consolidated taxable income
       of the [nonlife members] results in a consolidated net
       operating loss for such taxable year, then . . . the
       amount of such loss which cannot be absorbed in the
       applicable carryback periods against the taxable
       income of such [nonlife members] 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 [30 percent in 1982] of such
       loss or 35 [30 percent in 1982] percent of the taxable
       income of the [life members], whichever is less.

26 U.S.C. S 1503(c)(1).

Subsection 1503(c)(2), the provision at issue here, further
limits a group's ability to set nonlife losses off against life
profits, providing: "Notwithstanding the provisions of
paragraph [1503(c)(1)], 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 . . . ." (emphasis added). Resolution of
the instant dispute requires us to determine the scope of
this latter limitation.

                               4
B.

The Acquisitions

The facts of this case are not in dispute. See First
Stipulation of Facts, App. at 71-88; Second Stipulation of
Facts, App. at 89-104. On March 30, 1982, Connecticut
General Corporation (Connecticut General), was the
common parent of more than forty affiliated subsidiaries
(the CG Group), one of which was a life company,
Connecticut General Life Insurance Company (CGL). The
CG Group met the definition of an affiliated group under
S 1504 and had filed a consolidated tax return following the
Code revision. Thereby, the CG Group was able to offset
some of CGL's income with a portion of the CG Group's
nonlife loss. App. at 75-76.

At that time, INA Corporation (INA) was parent to over
160 affiliated nonlife subsidiaries (the INA Group), which
subsidiaries met the requirements of S 1504 and filed
consolidated returns under S 1501. The INA Group's
strength was in property and casualty insurance, while the
CG Group's strength was in the areas of life, health and
annuity, and personal and commercial property insurance.
App. at 75-78.

The following day, March 31, 1982, Connecticut General
and INA (the two parent companies) merged to form a new
company, CIGNA Corporation (CIGNA Corp.). The merger
was a "reverse acquisition" within the meaning of 26 C.F.R.
S 1.1502-75(d)(3), pursuant to which CIGNA Corp.
succeeded Connecticut General as the common parent of
the CG Group, which continued to exist for tax purposes.
CIGNA Corp. also became the common parent of each of
the former members of the INA Group, which group ceased
to exist for tax purposes. App. at 73-74. Thus, in effect, the
CG Group, which became the CIGNA Group, acquired the
former INA subsidiaries individually.

Subsequently, on November 20, 1984, a subsidiary of
CIGNA Corp. acquired Preferred Health Care, Inc. (PHC).
Like INA and Connecticut General before the merger, PHC
was itself common parent to a group of affiliated
corporations (the PHC Group) (all nonlife companies), which

                                5
qualified under S 1504 and filed consolidated returns under
S 1501. All members of the PHC Group became members of
the CIGNA Group upon acquisition and the PHC Group
itself ceased to exist. App. at 75, 79-80.

C.

The Promulgation of Regulations

On June 8, 1982, approximately two months after the
Connecticut General/INA merger, the Commissioner,
pursuant to 26 U.S.C. S 1502, promulgated proposed rules
relating to the filing of life-nonlife consolidated returns. See
Filing of Life-Nonlife Consolidated Returns, 47 Fed. Reg.
24,737 (1982). The proposed regulations adopted a
subgroup method for computing a life-nonlife group's
consolidated taxable income. In effect, they treated the
members of the group as two separate subgroups, with the
life members as one subgroup and the nonlife members as
another. Each subgroup was required to set off the gains
and losses of members within that subgroup to determine
whether the subgroup incurred a consolidated net
operating loss (CNOL) or a gain. Only after the gains from
within the nonlife subgroup were set off by losses from
within that subgroup could such losses be used to reduce
the life subgroup's income.

The regulations further limited the portion of a nonlife
subgroup's consolidated net operating loss (nonlife CNOL)
that could be set off (up to the statutorily prescribed
percentage) against net operating gains generated by the
life subgroup: "The offsetable nonlife consolidated net
operating loss that arises in any consolidated return year
. . . is the [nonlife CNOL] reduced by the amount of the
separate net operating loss . . . of any nonlife member that
is ineligible in that year." 

(to be codified at 26
C.F.R. S 1.1502-47(m)(3)(vi)(A)) (emphasis added). The
proposed rules thus distinguished between "eligible"
companies -- those that had been members of the group for
at least five years -- and "ineligible" companies -- those
that had not been members for at least five years.

                                  6
CIGNA wrote to the Commissioner on February 28, 1983,
suggesting that proposed regulation S 1.1502-47(m)(3)(vi)(A)
not be adopted with respect to acquired groups. CIGNA
suggested instead 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." Letter from Kenneth W.
Gideon, Chief Counsel, IRS, to Judith Soltz, Senior
Counsel, CIGNA Corp. 1 (March 22, 1983), App. at 197.
Under CIGNA's suggested approach, the losses of one
ineligible acquired member would be used to offset the
income of other ineligible acquired members, before the
losses of eligible members were used for that purpose. The
effect would be to increase the amount of eligible nonlife
loss remaining after all nonlife gains had been offset, and
thus to increase the nonlife offset the group could claim
against life income.

Final regulations had to be issued by March 14, 1983 to
be effective for the 1982 taxable year. App. at 197; see also
26 U.S.C. S 1503(a). The Commissioner did not adopt
CIGNA's suggestion before issuing these regulations, but
after the final regulations were issued, Kenneth W. Gideon,
Chief Counsel to the IRS, sent CIGNA a letter, stating:
"[The] final life-nonlife consolidated return regulations . . .
do not adopt your suggestion but the preamble to the final
regulation indicates that it will be given further study."
App. at 197. Gideon also noted that "a lack of time [had]
prevented a complete and thoughtful analysis of [CIGNA's]
proposed solution." App. at 197-98.

The final regulations and preamble did differ from the
proposed regulations in three respects: (1) a new S 1.1502-
47(m)(4) was added, which states in its entirety, "Acquired
groups. [Reserved]"; (2) S 1.1502-47(m)(3)(vi)(A) was
amended to note that its definition of ineligible NOL applies
only "for purposes of . . . subparagraph (3)"; and (3) the
preamble was amended to state:

       [T]he 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

                               7
       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 (and includibility in) another group that
       files a consolidated return.

Filing of Life-Nonlife Consolidated Returns, 48 Fed. Reg.
11,436, 11,447-48, 11,440 (1983).

D.

CIGNA's Consolidated Returns

In 1981, as soon as the Tax Reform Act of 1976 became
effective, Connecticut General elected to take advantage of
the opportunity the Act presented and treated CGL, its sole
life insurance company affiliate, as an includible member of
the CG Group, thereby setting off a portion of the CG
Group's nonlife losses against CGL's income. For the years
ending December 31, 1982 (which was after the INA
acquisition) through December 31, 1985, CIGNA continued
to file life-nonlife consolidated income tax returns. CGL, the
only life company involved, had income throughout this
period. The nonlife companies, which included, inter alia,
those companies that were former members of the INA
Group (for the 1982-85 returns) and the former members of
the PHC Group (for the 1984-85 returns), had both income
and loss. App. at 76, 80-81.

CIGNA computed its taxable income as follows:

       1. It consolidated (netted out) the income and los ses of
       all nonlife companies to arrive at the consolidated net
       operating loss or income.

       2. It consolidated (netted out) the losses (all in eligible)
       and income of the former INA group members to
       calculate the net operating loss attributable to those
       companies as a group.

       3. It consolidated (netted out) the losses (all in eligible)
       and income of the former PHC group members to
       calculate the net operating loss attributable to those
       companies as a group.

                               8
       4. It aggregated the operating losses of other non life
       companies acquired within less than five years of the
       return (and hence ineligible).

       5. It added 2, 3, and 4 above to calculate the ine ligible
       net operating loss.

       6. It subtracted the ineligible net operating loss from 1
       above to calculate the eligible net operating loss.

App. at 85-86.

This treatment of the individual member companies of a
former group as if they were a single company has been
called the single entity method. Under CIGNA's approach,
the losses of the former group members were reduced by
the income of the members of that group, and that reduced
loss was the figure treated as ineligible and deducted from
the consolidated net operating loss of all the members of
the CIGNA Group.

As calculated by CIGNA, the acquisition of the INA Group
had no effect on its tax liability, and the overall taxable
income of the CIGNA Group (including the INA and PHC
Groups) in the years 1982 through 1985 was equal to the
sum of what would have been these three groups' separate
taxable incomes had the groups not combined. See
Appellants' Br. at 12, 20.

E.

The Commissioner's Audit

On June 23, 1992, the Commissioner of Internal Revenue
issued notices of deficiency to CGL for its taxable year
ending December 31, 1980, and to CIGNA Group for its
taxable years ending December 31, 1982 through December
31, 1985. App. at 28-31, 45-53.

Following the mode of analysis set forth in 26 C.F.R.
S 1.1502-47(m)(3)(vi)(A), the Commissioner calculated
CIGNA's ineligible loss in the following manner:

       1. The income and losses of all nonlife companies were
       consolidated (netted out) to arrive at the consolidated
       net operating loss or income.

                               9
       2. The losses of each of the companies acquired wi thin
       less than five years of the return were aggregated to
       calculate the ineligible net operating loss.

       3. The ineligible net operating loss was subtracte d
       from the figure arrived at after the calculation in 1
       above to calculate the eligible net operating loss.

App. at 87.

The Commissioner thus applied the separate entity
method under which each of the former members of the INA
and PHC Groups (all nonlife companies) was treated as a
separate entity whose loss, if any, was subtracted from the
consolidated net operating loss because the member was
affiliated less than five years. Because each acquired
company is treated as a separate entity, the fact that it was
part of a group acquisition or that the group, prior to being
acquired, had previously filed a consolidated return is not
taken into account or relevant to its tax treatment after the
acquisition.

The contrasting methods made a substantial difference in
the amount of net operating loss of the nonlife companies
that could be taken into account in determining CIGNA's
taxable income for 1982 through 1988. The following shows
the result of the Commissioner's approach and that used
by CIGNA in filing its returns with respect to the nonlife net
operating loss eligible to reduce CGL's taxable income.

Eligible Nonlife Net Operating Loss

       Year CIGNA Commissioner
       Calculation Calculation

       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 numbers are undisputed and reflect the appropriate
30% or 35% limitation set forth in S 1503(c)(1)).

Thus, under the Commissioner's approach, because of
the reduction in the eligible nonlife net operating loss, the
CIGNA Group had $136,032,212 more consolidated taxable

                                   10
income than under CIGNA's approach. App. at 42, 54. The
Commissioner assessed the following deficiencies
accordingly:

       Petitioner            Year             Deficiency

       CGL                   1980           $ 3,360,8731
       CIGNA   Group         1982            $15,080,878
       CIGNA   Group         1983           $ 1,916,121
       CIGNA   Group         1984            $41,066,157
       CIGNA   Group         1985            $   752,636

       Total Tax Deficiency (exclusive of interest and
       penalties): $62,176,6652

On September 21, 1992, the CIGNA Group and CGL
petitioned the Tax Court for a redetermination of the
deficiencies set forth in the Commissioner's Notices of
Deficiency. App. at 23-31, 38-53. The cases were
subsequently consolidated. On February 23, 1996 and
February 26, 1996, respectively, the Commissioner and
CIGNA filed motions for summary judgment before the Tax
Court. App. at 57-66. That court found in favor of the
Commissioner. Connecticut Gen. Life Ins. Co. v.
Commissioner, 

(1997). The CIGNA Group and
CGL each filed a Notice of Appeal on November 21, 1997.
App. at 2, 5.

The sole issue before the Tax Court was the proper
calculation of the offsetable consolidated net operating loss
of recently acquired nonlife companies (INA and PHC) when
the group by which they were acquired (ultimately CIGNA)
files a life-nonlife consolidated return under the auspices of
S 1503(c)(1) and (2). The Tax Court found that "under
[CIGNA's] 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
_________________________________________________________________

1. The deficiency determined against CGL flows indirectly from the
Commissioner's disallowance of a portion of the nonlife loss setoffs the
CIGNA Group claimed on its returns. Resolution of CIGNA's claim
regarding these setoffs will determine what, if any, deficiency is
properly
assessed against CGL. App. at 72-73.

2. In CIGNA's appellate brief, it reported that interest on the deficiency
was more than $150 million at that time. Appellants' Br. at 3.

                               11
[CGL], the life company." Connecticut Gen. Life Ins. Co., 

. Because it also found the Commissioner's
interpretation of the legislative regulations to be
"sufficiently consistent with section 1503(c)(2) and its
legislative purpose" to merit Chevron deference, see
Chevron, U.S.A., Inc. v. Natural Resources Defense Council,

(1984), the court upheld the notices of
deficiency. Connecticut Gen. Life Ins. Co., 

-
12. The Tax Court had jurisdiction under 26 U.S.C.
SS 6213(a), 6214(a) and 7442. We have jurisdiction to
review that court's grant of summary judgment under 26
U.S.C. S 7482. Our review is plenary. See Lerner v.
Commissioner, 

, 46 (3d Cir. 1991).

II.

DISCUSSION

CIGNA contends that it was error for the Tax Court to
uphold the deficiency assessments because the method
CIGNA used in calculating its tax liability complied with all
applicable laws and regulations. CIGNA's primary argument
is that because none of the regulations adopted by the
Commissioner in 1983 explicitly covers a group acquisition,
it was free to follow any reasonable method to calculate the
net operating loss of the members of the acquired INA and
PHC Groups. See Gottesman & Co. v. Commissioner, 

(1981) (holding that, after Commissioner
proposed two conflicting regulations but adopted neither,
leaving no regulation in place, the taxpayer's choice of one
of the proposals was reasonable and would be sustained).
It disagrees with the Commissioner's position that 26
C.F.R. S 1.1502-47(m)(3)(vi)(A) applies to acquired groups of
nonlife companies, and it argues that the regulation is
limited to acquisition of stand alone companies. As an
alternative, CIGNA argues that if Regulation -47(m)(3)(vi)(A)
is interpreted to govern the group acquisitions at issue,
then that regulation is arbitrary, capricious, and therefore
unenforceable.

When Congress enacted the Internal Revenue Code
revisions on consolidated returns, it gave the Secretary of

                               12
the Treasury broad authority to promulgate necessary
regulations with respect thereto. See 26 U.S.C. S 1502.
Pursuant to this authority, the Secretary promulgated the
regulations at issue here, which are deemed legislative in
character. See Tate & Lyle, Inc. v. Commissioner, 

, 104 (3d Cir. 1996).

Ordinarily, our review of an agency's construction of the
statute it has been charged with executing is deferential. In
Sekula v. FDIC, 

(3d Cir. 1994), we summarized
our standard of review as follows:

       When reviewing an agency's construction of a statute,
       if the intent of Congress is clear, then we must give
       effect to that intent. If the statute is silent or
       ambiguous with respect to a specific issue, then a
       deference standard applies, and the question for the
       court becomes whether the agency's answer is based
       on a reasonable construction of the statute. In
       determining whether an agency's regulation complies
       with its congressional mandate, we look to see whether
       the regulation harmonizes with the plain language of
       the statute, its origin, and its purpose. So long as the
       regulation bears a fair relationship to the language of
       the statute, reflects the views of those who sought its
       enactment, and matches the purpose they articulated,
       it will merit deference.

(citations omitted).

To merit deference, an agency's interpretation of the
statute must be supported by "regulations, rulings, or
administrative practice." Bowen v. Georgetown Univ. Hosp.,

, 212 (1988). We will not defer to "an agency
counsel's interpretation of a statute where the agency itself
has articulated no position on the question." 

agency has adopted regulations interpreting the
statute, the agency's consistent interpretation of its own
regulation will also be accorded substantial deference. We
"must defer to the [agency's] interpretation unless an
`alternative reading is compelled by the regulation's plain
language or by other indications of the [agency's] intent at
the time of the regulation's promulgation.' " Thomas
Jefferson Univ. v. Shalala, 

, 512 (1994)

                                13
(quoting Gardebring v. Jenkins, 

, 430 (1988));
accord Shell Oil Co. v. Babbitt, 

, 176 (3d Cir.
1997).

Nonetheless, "[t]he responsibility to promulgate clear and
unambiguous standards is upon the Secretary." Director,
Office of Workers' Compensation Programs, U.S. Dept. of
Labor v. Eastern Associated Coal Corp., 

, 147
(3d Cir. 1995) (internal quotation marks omitted). Thus our
deference to an agency's interpretation of its own
regulations is "tempered by our duty to independently
insure that the agency's interpretation comports with the
language it has adopted." Director, Office of Workers'
Compensation Programs, U.S. Dept. Of Labor v. Gardner,

, 70 (3d Cir. 1989).

A.

Whether an Applicable Regulation Has Been Adopted

In order for CIGNA to prevail on its primary argument, it
must convince us that no regulation governs the manner in
which consolidated net operating loss of acquired groups
must be treated. At the outset, CIGNA faces a major hurdle
because the Commissioner concededly did promulgate a
regulation, -47(m)(3), which deals with the treatment of
acquired nonlife members. CIGNA concedes that Regulation
-47(m)(3) governs the treatment of acquired stand-alone
nonlife members, but it argues that it does not cover the
treatment of "acquired groups" of nonlife members. As to
those, CIGNA asserts, there was no regulation promulgated
by the Commissioner, who instead reserved that question
for another day under Regulation -47(m)(4).

The Internal Revenue Service (IRS) interprets these
regulations differently. It insists that Regulation -47(m)(3)
applies to all ineligible nonlife companies, whether they are
acquired individually or as part of a group. It interprets
Regulation -47(m)(4) as doing no more than reserving a
place in the Code of Federal Regulations for the
Commissioner to insert a regulation requiring different
treatment of acquired groups should the Commissioner
later determine that such different treatment is appropriate.

                                14
CIGNA argues that, under 

, the
interpretation the Commissioner advances in this case is
not entitled to deference because it is a "mere" litigating
position. CIGNA's reliance on Bowen is misplaced. Bowen,
which concerned the amount of deference due an
administrative agency's informal interpretation of a statute,
does not address what deference we should accord an
agency's interpretation of its own regulations, such as is at
issue here. Indeed, the Supreme Court has deferred to an
agency's interpretation of its own regulations, even when
that interpretation was proffered for the first time in
litigation, see Gardebring v. Jenkins, 

, 430
(1988), as have we, see Elizabeth Blackwell Health Ctr. for
Women v. Knoll, 

, 183 & n.9 (3d Cir. 1995).

Thus, we will defer to the IRS's interpretation unless that
"alternative reading is compelled by the regulation's plain
language or by other indications of the [agency's] intent at
the time of the regulation's promulgation." 

.

1. The Text of -47(m)(4)

CIGNA insists that unless subsection 26 C.F.R. S 1.1502-
47(m)(3)(vi) applies only to the acquisition of individual
companies, the heading "Acquired groups" on -47(m)(4)
would be without significance. CIGNA emphasizes the
designation of "[Reserved]" on that regulation and points to
various definitions which equate the terms "reserved" and
"reserve" with notions of setting aside or apart and of
deferring a determination. CIGNA then further claims that
this interpretation of "reserved" accords with both the
Commissioner's past administrative practice and the
understanding of former high-ranking treasury officials.

We are not convinced. We agree that use of the term
"reserved" implies that something has been set aside.
CIGNA, however, assumes that what was set aside was "the
subject matter of the regulation" and further that the
subject matter of the regulation was "the treatment of the
loss of nonlife members acquired as a group." Appellant's
Br. at 24. It is equally likely that what was set aside was
the numerical subsection -47(m)(4) and the space in the
regulation it demarcates.

                               15
CIGNA further attempts to establish that the
"Commissioner's customary administrative practice[was to]
interpret[ ] `reserved' in a regulation as a signal that there
is no regulatory rule to govern the referenced subject
matter" by identifying some instances in which the
Commissioner used that term to have that meaning.
Appellant's Br. at 24. That is not conclusive. In fact, the
Office of the Federal Register, Document Drafting Handbook
(1991), suggests a different use for the term "reserved." It
describes "reserved" as "a term used to maintain the
continuity of codification in the CFR" or "to indicate where
future text will be added." 

We find nothing in the
precedent that CIGNA cites to preclude the Commissioner
from using the term "reserved" in accordance with the
Document Drafting Handbook, rather than to connote the
absence of a substantive rule.

Finally, we accord little weight to the 1996 recollections
of the several Treasury officials who submitted affidavits
regarding the meaning of the reserved clause for acquired
groups. In the first place, the affidavits are inconsistent:
William McKee states that "reserved" means that no
regulation addresses the treatment of the reserved issue,
App. at 226, but Andrew D. Pike understood that the
general rule would continue to apply until a special rule
was created for acquired groups, App. at 229. Moreover,
reliance upon remembered details from officials who lacked
the ultimate authority to issue any proposed regulation has
little support in the law. See Armco, Inc. v. Commissioner,

, 867 (1987) ("[N]o one's personal views can be
accepted as a pronouncement of the intended meaning of
the regulation."); cf. Western Air Lines, Inc. v. Board of
Equalization, 

, 131 n.* (1987) ("[The] attempt
at the creation of legislative history through the post hoc
statements of interested onlookers is entitled to no weight
. . . .").

In sum, we, like the Tax Court, conclude that nothing in
Regulation -47(m)(4) contradicts the Commissioner's
interpretation of Regulation -47(m)(3)(vi) as applying to
acquired groups. At most, Regulation -47(m)(4) is a"neutral
factor." Connecticut Gen. Life Ins. Co., 

.

                               16
2. The Preamble

CIGNA next contends that the preamble supports its view
that there is no rule governing the acquisition of groups.
We have stated that "the preamble to a regulation may be
used as an aid in determining the meaning of a regulation."
Commonwealth of Pennsylvania v. United States Dept. of
HHS, 

, 944 n.4 (3d Cir. 1996). Here, the
Preamble states, "[T]he 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
S 1503(c)(2), it may be consistent with the intent of
S 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 (and
includibility in) another group that files a consolidated
return." Filing of Life-Nonlife Consolidated Returns, 48 Fed.
Reg. at 11,440.

This passage does not contradict the IRS's interpretation
of Regulation -47(m)(3)(vi) as applying to acquired groups.
Indeed, it suggests that applying a rule other than that
annunciated in -47(m)(3)(vi) would contradict "the ordinary
reading of section 1503(c)(2)." The passage does suggest
that it might be justifiable, nonetheless, to have such a
rule, and it indicates that officials within the Treasury
would consider adopting a different rule for acquired
groups. Significantly, no such special rule was ever
adopted. Under these circumstances, there is nothing
unreasonable about the Commissioner's enforcement of the
rule that did exist, a rule that, by its own terms, applies to
these facts.

Because the interpretation advanced by the IRS is neither
inconsistent with any prior interpretation of these
regulations nor incompatible with their plain text, we defer
to that interpretation. We thus regard -47(m)(3) as
applicable to acquired groups.

                               17
B.

Whether the Regulation is Arbitrary, Capricious,
and Unreasonable

CIGNA's alternative argument is that the regulation,
which is interpreted by the Commissioner to be applicable
to treatment of acquired groups, is not entitled to deference
because it is arbitrary, capricious, and unreasonable.
CIGNA concedes that we must defer to a regulation that is
a reasonable implementation of the congressional mandate,
but it argues that a regulation is only a reasonable
statutory interpretation if it " `harmonizes with the statute's
plain language, origin, and purpose.' " Appellants' Br. at 31-
32 (citing National Muffler Dealers Ass'n v. United States,

, 477 (1979)). Thus, we must review the
legislative history of the Tax Reform Act of 1976 with an eye
toward discerning the origin and purpose of the revision
allowing life-nonlife consolidated tax returns.

In the debates before Congress, it was suggested that
lifting the ban on life-nonlife consolidated returns would
help alleviate the acute shortage of insurance writing
capacity in the property and casualty industry. See, e.g.,
122 Cong. Rec. 24,683 (statement of Sen. Ribicoff), 24,687
(statement of Sen. Curtis); S. Rep. No. 94-938, at 456,
reprinted in 1976 U.S.C.C.A.N. 3439, 3882. The Senate
Report noted that P&C companies affiliated with other
nonlife companies had long been permitted to file
consolidated returns whereas P&C companies that
happened to be affiliated with life companies had not been
able to do so. See S. Rep. No. 94-938, at 454, reprinted in
1976 U.S.C.C.A.N. at 3881. The Report states: "[T]he
present ban on life-nonlife consolidations has been a
hardship for casualty companies which are affiliated with
life companies," and explains that "[t]he committee
amendment deals with this problem." 

same time, the legislators recognized that the
then-existing ban on consolidated returns had assured that
life insurance companies paid tax at the regular rate on an
amount approximately equal to their taxable investment
income. They sought to retain that result in drafting the

                               18
new life-nonlife provisions, presumably by limiting the
permissible offset to a percentage of life income
incorporated in S 1503(c)(1). See id.; Staff of the Joint
Committee on Taxation, General Explanation of the Tax
Reform Act of 1976 (H.R. 10612, 94th Congress, Public Law
94-455) at 435-36 (1976) ("[C]ongress adopted a provision
which preserves the concept that some tax be paid with
respect to the life insurance company's investment income
. . . but which at the same time provides substantial relief
in the future for casualty companies with losses.").3

Shortly before the bill was enacted, the Conference
Committee added S 1503(c)(2), the section at the center of
the CIGNA-IRS dispute. That section provides that the net
operating loss of a member of the group of affiliated
companies "shall not be taken into account" unless that
member has been a member of that group for five years.
The Conference Report does not suggest a reason for this
amendment. The slim legislative history reveals merely that,
during the hearings relating to the life-nonlife consolidation
provisions, Senator Kennedy in particular had expressed
some concern that the largest life insurance companies
might seek to enlarge the tax benefit provided by the new
provisions by acquiring small loss-ridden P&C companies
for the purposes of generating nonlife losses and setting
these losses off against their taxable income. See 

("Those [life insurance companies] who have
substantial profits can go out and purchase other
companies with tax losses in order to be able to write these
losses off."). Section 1503(c)(2), as enacted, thus appears to
have been designed to discourage tax-motivated
acquisitions by insurance companies.

CIGNA argues that the Commissioner's approach runs
counter to the origins and purposes of the Tax Reform Act
of 1976 "because it exacerbates the very problem that
Congress sought to address by enacting the life-nonlife
_________________________________________________________________

3. The Senate Report estimated that these provisions would "result in a
decrease in revenues of $25 million in the fiscal year 1978, $55 million
in the fiscal year 1979, $49 million in the fiscal year 1980, and $40
million in the fiscal year 1981." S. Rep. No. 94-938, at 457, reprinted in
1976 U.S.C.C.A.N. at 3884.

                               19
consolidation provisions." Appellants' Br. at 31. CIGNA
notes that although, collectively, the former INA Group
members suffered net losses in each of the four years
following their acquisition, under the Commissioner's
calculation the combined group's taxable income increased
by $136 million and its tax liability increased by
approximately $60 million over the same four-year period,
thereby reducing the group's capacity to write insurance.
CIGNA characterizes the Commissioner's interpretation of
Regulation -47(m)(3)(vi) as thus "penaliz[ing] the P&C
industry contrary to the purpose of the life-nonlife
consolidation provisions." Appellants' Br. at 33.

CIGNA's assessment of the congressional purpose is
overly narrow. Congress did have an interest in increasing
the capacity of the industry to write P&C insurance, which
it effected through S 1501, which enables P&C companies to
offset (partially) their losses against the income of their life
affiliates by filing consolidated returns. Nothing in the
regulations promulgated by the Commissioner prevented
the former CG Group from taking full advantage of this
opportunity by filing a consolidated tax return for its
affiliated companies and offsetting the P&C losses against
life income, which it did beginning in 1981.

But, Congress apparently also had another subsidiary
goal -- to limit tax-induced shopping for acquisitions. And
when the former CG Group chose, within a year of the
statute's effective date, to affiliate with the INA Group to
form CIGNA, it ran into S 1503, the section Congress
enacted to effectuate that subsidiary goal. Although CIGNA
could continue to have the advantage of offsetting P&C
losses within its historic group after the acquisition, it
could not take advantage in any way of the losses of the
INA Group. And CIGNA's protests notwithstanding, that is
precisely what it seeks to do.

If none of the INA companies had income, S 1503 would
be irrelevant, as the methods proffered by both CIGNA and
the Commissioner would arrive at the same result; the
same is true if all of the INA companies had income, as
their income would be added to the income of the other
affiliated companies. However, CIGNA proposes to permit
the INA companies to offset income within the group by

                               20
losses within the group before that income is added to that
of the other now affiliated companies. In terms that may be
too simplistic for the hundreds of millions of dollars at
issue, this reduces the amount of income that could be
added to the total CIGNA income. As the Commissioner
explains, the net operating loss of a company that has not
been a member of the group for five years is thus being
"taken into account" by reducing the total income.

Perhaps recognizing that S 1503 serves a goal other than
that of increasing P&C capacity, CIGNA describes the
purpose of that section narrowly: "Section 1503(c)(2) had a
narrow[ ], targeted purpose, and was intended only to
address the specific concern that life companies might have
a tax incentive to acquire nonlife companies to take
advantage of additional future loss offset benefits."
Appellants' Br. at 36. CIGNA insists that S 1503(c)(2) "was
intended only to limit the incremental consolidation benefit
that might be derived from the acquisition of additional
nonlife companies." 

argues that the
Commissioner's approach contradicts the statute by
denying CIGNA more than this incremental benefit.

CIGNA points to nothing in the scant legislative history of
this provision that compels such a narrow reading of
S 1503(c)(2)'s purpose. Moreover, the statute contains no
language that limits its effect to the denial of the
incremental consolidation benefit. It says nothing more
than that losses of companies that affiliated with the group
less than five years ago shall not be taken into account.

CIGNA's argument that the Commissioner has
interpreted S 1503(c)(2) too broadly focuses too narrowly on
the short-term. Section 1503 only limits offsets forfive
years following an acquisition. After that time, group
insurance companies such as CIGNA can offset the losses
of acquired companies as permitted, thereby effecting an
increase in P&C capacity. There is no indication that
Congress focused, in the final stages of enactment of the
Tax Reform Act of 1976, on the situation of group
companies acquiring group companies. Even if it had, there
is even less reason to think that it would have been swayed
by the potential short-term disadvantage to some
companies. More likely is that Congress was interested in

                               21
the long-run solution. After all, it was Congress that
imposed the five-year limitation in the first place.

Finally, CIGNA makes a policy argument that the INA
companies should be permitted to offset losses against
income because they had been permitted to do so before
the acquisition. It contends that the Commissioner's
regulation, as interpreted, is unfair because it requires that
the income of profitable members of the acquired group be
taken into account, but not the loss of acquired members.
The simple answer, obviously unsatisfactory to CIGNA, is
that the Commissioner, who has the delegated authority to
promulgate legislative regulations, did not provide for initial
offsets within the group. And there is no language in the
statute that requires the offset CIGNA seeks. In fact, there
was disagreement within the IRS as to whether the
Commissioner could have provided for such initial offsets
without contradicting the statute. Before us, the IRS
continues to characterize that question as arguable.
Inasmuch as the Commissioner did not adopt CIGNA's
approach, the issue is not before us and we make no
comment.

We do note, however, that if CIGNA's approach were
adopted, it would create a distinction between nonlife
companies acquired as a group and those very same
companies acquired individually that is hard to justify. Had
CIGNA acquired only INA's profitable nonlife companies in
1981, there is no question that the acquisition would have
increased its overall taxable income. And, as CIGNA
presumably concedes, had CIGNA subsequently acquired
the remainder of the INA Group, S 1503(c)(2) would have
precluded offsetting that increase in taxable income with
the losses of the later-acquired members. CIGNA has
offered no justification for requiring the Commissioner to
treat the instant case differently, merely because both
acquisitions occurred on the same day.

The overriding determinant is that the Commissioner's
regulation is authorized by the statute, and his
interpretation of that regulation is not so unreasonable as
to be declared invalid by this court on policy grounds. That
is not our function or our decision. As the Supreme Court
has emphasized, "[w]hen Congress . . . has delegated

                               22
policymaking authority to an administrative agency, the
extent of judicial review of the agency's policy
determinations is limited." Pauley v. BethEnergy Mines, Inc.,

, 696 (1991).

III.

CONCLUSION

For the reasons set forth, we agree with the Tax Court,
and will affirm its judgment.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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