177 F.3d 136 (3rd Cir. 1999), 97-7612, Connecticut General Life Ins. Co. v. C.I.R.

Docket Nº:97-7612, 97-7619.
Citation:177 F.3d 136
Party Name:CONNECTICUT GENERAL LIFE INSURANCE COMPANY, Appellant, v. COMMISSIONER OF INTERNAL REVENUE (Tax Court No. 92-21212). CIGNA Corporation And Consolidated Subsidiaries, Appellants, v. Commissioner of Internal Revenue (Tax Court No. 92-21213).
Case Date:April 30, 1999
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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177 F.3d 136 (3rd Cir. 1999)




CIGNA Corporation And Consolidated Subsidiaries, Appellants,


Commissioner of Internal Revenue (Tax Court No. 92-21213).

Nos. 97-7612, 97-7619.

United States Court of Appeals, Third Circuit

April 30, 1999

Argued Sept. 14, 1998.

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A. Duane Webber (Argued), Leonard B. Terr, C. David Swenson, Baker & McKenzie, Washington, D.C. 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, 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., for Appellee.

Before: SLOVITER, SCIRICA and ALITO, Circuit Judges


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 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.



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. §§ 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 companies filing consolidated returns.


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, § 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

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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. § 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.


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 § 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 § 1504 and filed consolidated returns under § 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. § 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 qualified under § 1504 and filed consolidated returns under § 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.


The Promulgation of Regulations

On June 8, 1982, approximately two months after the Connecticut General/INA

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merger, the Commissioner, pursuant to 26 U.S.C. § 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." Id. at 24,748 (to be codified at 26 C.F.R. § 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.

CIGNA wrote to the Commissioner on February 28, 1983, suggesting that proposed regulation § 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...

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