UNITED STATES TAX COURT

119 T.C. No. 21

UNITED 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.

- 2 -

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.

- 3 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

- 4 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

- 5 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:

1987

Tax Item

Taxable income of nonlife subgroup

Partial taxable income of life subgroup

1989

1

$1,538,315,230

3

214,881,622

Amount subtracted under sec. 815

2

($691,736,003)

4

261,624,770

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:

- 6 AMT Adjustments and Preference

Items

1987

1989

Nonlife subgroup

$18,508,088

$70,327,213

915,175

1,361,584

Life subgroup

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

- 7 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

- 8 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.

Regs.

Sec. 1.1502-47(a)(2)(i), Income Tax

This method divides the affiliated group into a life

Id.; sec. 1.1502-47(d)(8) and

subgroup and a nonlife subgroup.

(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

- 9 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, 1.150212, 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

- 10 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.

55(b)(1)(B).

Sec.

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).

Corporations.--

Adjustments for Book Income of

(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

- 11 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

- 12 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.

1.56-1(b)(3)(i), Income Tax Regs.

Sec.

Consolidated net book income,

in turn, “is the income or loss of a consolidated group as

reported on its applicable financial statement”.

1(b)(3)(ii), Income Tax Regs.

Sec. 1.56-

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.

Regs.

Sec. 1.56-1(c)(5)(i), Income Tax

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:

- 13 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

- 14 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 lifenonlife 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

- 15 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 preadjustment 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.

Income Tax Regs.

Sec. 1.56-1(b)(3)(i) and (ii), and (c)(5)(i),

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

- 16 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.

- 17 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.

premises.

Neither party disputes these

They differ, however, as to whether actualization of

these concepts demands resort to a subgroup approach for

computing the book income adjustment.

- 18 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

- 19 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.

Regs.

Secs. 1.1502-47(a)(4), (q), (r), Income Tax

The life-nonlife sections are expressly declared to

preempt inconsistent rules in sections 1.1502-1 through 1.150280, Income Tax Regs.

Sec. 1.1502-47(q), Income Tax Regs.

In

- 20 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 lifenonlife 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

- 21 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

- 22 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

- 23 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.