Conn. Gen. Life Ins. Co. v. Comm'r of Internal Revenue, 21212–92
| Decision Date | 12 August 1997 |
| Docket Number | No. 21212–92,21213–92.,21212–92 |
| Citation | 109 T.C. No. 5,109 T.C. 100 |
| Parties | CONNECTICUT GENERAL LIFE INSURANCE COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
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.
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 Insurance Co. (ConnLife) and CIGNA Corp. and their consolidated subsidiaries (CIGNA) as follows:
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).
On March 31, 1982, the CG Group and INA Corp. (INA) and its over 160 affiliated companies (the INA Group) combined for 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.
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.
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.
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 only life insurance company in the CIGNA Group, earned the following income:
The above CNOL's of the nonlife companies consisted of CNOL's of both eligible companies under section 1503(c)(2) () and ineligible companies under section 1503(c)(2) (). 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 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 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'...
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