119 T.C. 342 (T.C. 2002), 1859-01, State Farm Mutual Automobile Insurance Co. v. Commissioner of Internal Revenue
|Citation:||119 T.C. 342, 119 T.C. No. 21|
|Opinion Judge:||COHEN, Judge:|
|Party Name:||STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Jerome B. Libin, James V. Heffernan, and Mary E. Monahan, for petitioner. Jan E. Lamartine, for respondent.|
|Judge Panel:||Cohen, Mary Ann|
|Case Date:||December 19, 2002|
|Court:||United States Tax Court|
Decision entered under Rule 155.
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.
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.
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.
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 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 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 Taxable income of nonlife subgroup /$ 1,538,315,230 /($ 691,736,003) Partial taxable income of life subgroup /214,881,622 /261,624,770 Amount subtracted under sec. 815 0 0
Under the regular tax regime, all of the 1989 nonlife subgroup net operating loss of $ 691,736,003 is required by section 1503(c) Page 345 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:
AMT Adjustments and Preference Items 1987 1989 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 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 Page 346 company's investment income" . S. Rept...
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