Petition for Writ of Certiorari — Connecticut General Life Insurance v. Commissioner

Supreme Court, U.&,

FILED

99 258 auc 1 2 (999

No.

Fal awe + _—

dad tedeieiadiuben diene Peeea i.

Terr

IN THE

Supreme Court of the Gnited States

CONNECTICUT GENERAL LIFE INSURANCE

COMPANY, ef al.,

Petitioners,

V.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Third Circuit

PETITION FOR A WRIT OF CERTIORARI

A. DUANE WEBBER GREGORY G. KATSAS

LEONARD B. TERR Counsel of Record

C. DAVID SWENSON JOHN B. NALBANDIAN

BAKER & MCKENZIE JONES, DAY, REAVIS & POGUE

815 Connecticut Ave., N.W. 51 Louisiana Ave., N.W

Washington, D.C. 20006 Washington, D.C. 20001

(202) 452-7000 (202) 879-3939

D. TIMOTHY TAMMANY ALFRED W. PUTNAM, JR.

JUDITH E. SOLTZ GREGG R. MELINSON

CHRISTOPHER R. LOOMIS DRINKER, BIDDLE & REATH,

CIGNA CORPORATION LLP

1601 Chestnut Street One Logan Square

Philadelphia, PA 19192 Philadelphia, PA 19103

(215) 761-6219 (215) 988-2700

Counsel for Petitioners

QUESTION PRESENTED

Whether an administrative interpretation of an ambiguous

tax regulation, advanced by IRS counse! as a litigating position

in the United States Tax Court, is entitled to deference

il

PARTIES TO THE PROCEEDINGS

The parties below were petitioner Connecticut General Life

Insurance Company (appellant below), petitioner CIGNA

Corporation and Consolidated Subsidiaries (appellant below),

and respondent Commissioner of Internal Revenue (appellee

below).

Connecticut General Life Insurance Company is a wholly-

owned subsidiary of CIGNA Corporation, a publicly held

company with no parent or publicly held company owning 10

percent or more of its stock. All of the other consolidated

subsidiaries at issue are or were wholly-owned subsidiaries of

CIGNA Corporation

TABLE OF CONTENTS

Page

QUESTION PRESENTED .......... ‘batt pie 4

PARTIES TO THE PROCEEDINGS ............... il

TABLE OF AUTHORITIES ........ aS eile Vv

UE es ee rv eerees oo we. |

JURISDICTION ......... ey oy Poe Pee ee |

PERTINENT PROVISIONS ................. ro

STATEMENT OF THE CASE .... Peter aie

REASONS FOR GRANTING THE WRIT ....... 8

I. THE DECISION BELOW CREATES TWO

INDEPENDENT CIRCUIT SPLITS ........ es

A. The Courts Of Appeals Are Divided On Whether

Bowen Applies To Agency Litigating Positions

Interpreting Ambiguous Regulations, As Opposed

ae ews . 9

B. The Courts Of Appeals Are Divided On The

Appropriate Interpretive Principle For Resolving

Ambiguity In The Context Of Tax Law ....._.. 12

C. These Splits Are Exacerbated By The Multi-Track

II.

Scheme For Judicial Enforcement Of Federal Tax

Ct Mee 14

THE DECISION BELOW CONFLICTS WITH

BASIC ADMINISTRATIVE LAW AND TAX

PRINCIPLES ADOPTED BY THIS COURT ..... 16

A. Agency Litigating Positions, Whether Interpreting

Ambiguous Statutes Or Regulations, Are Not

Emutied To Deference .................... 16

Oe ene A a i A a Re ke Re

IV

TABLE OF CONTENTS (cont'd)

B. This Court Has Long Held That Ambiguous Tax

Provisions Must Be Construed In Favor Of The

BEN iS vices ess Arey Goes a |

C. Gardebring Provides No Support For The Court

Of Appeals’ Holding .... ea ir ats aa ae

Iii. IF NOT CORRECTED, THE DECISION BELOW

WILL HAVE SWEEPING AND TROUBLING

CONSEQUENCES ... errr er

CONCLUSION rrr 27

Vv

TABLE OF AUTHORITIES

Page

Cases

Aaams Fruit Co. v. Barrett, 494 U.S. 638 (1990) ..... 17

Allen v. Atlanta Metallic Casket Co , 197 F.2d 460

IN MINED Wie Src iy dl eS be. hs 14

AMP Incorporated and Consolidated Subsidiaries v.

United States, No. 98-5083, 1999 WL587934

(rea. Cw. Ame 2, 1999) go. oe ce. 12

Auer v. Robbins, 519 U.S. 452 (1998) ............. 23

Bowen v. Georgetown University Hosp., 488 U.S. 204

Se tht ee ee yeh me Ae me

Bowles v. Seminole Rock & Sand ( ’o., 325 US. 410

RO ig chet Raa eon | Sake ola te de

Bradberry v. Director, Office of Workers’ C ompensation

Programs, 117 F.3d 1361 (11th Cir. 1997) _..... 1]

Brewster v. Sullivan, 972 F.2d 898 (8th Cir 1992) .... 11

Burnet v. Niagara Falls Brewing Co., 282 U.S. 648

De ey ca ee ee ie eee 22

CIR v. Estate of Hubert, 520 U.S. 93 ( | ne. 24

CSI Hydrostatic Testers, Inc. v. ( TR, 62 F.3d 136

(Sth Cir. 1995) (percuriam) ............. ere

CSI Hydrostatic Testers, Inc. v. CIR, 103 T.C. 398

(1994), aff'd, 62 F.3d 136 (Sth Cir. 1995)

I ooo ss idan rte Co lane ara 10

Chevron U.S.A., Inc. v. Natural Resources Defense

Council, 467 U.S. 837 (1984) ................. 16

City of Chicago v. Environmental Defense Fund,

Pee Oy a. fos Si bi ae ee ek , 24

Cottage Savings Association v. CIR, 499 U.S. 554

Ls GRC ee perenne eRe tanh het arta, eee 18

County of Yakima v. Confederated Tribes & Bands of the

Yakima Indian Nation, 502 U.S. 251 {4 an 2]

Duke Energy Natural Gas Corp. v. CIR, 172 F.3d 1255

tS Ae enn ee ere OS ey

A tM a I ETN i at

Vi

TABLE OF AUTHORITIES (cont’d)

Ford Motor Credit Co. v. Milhollin, 444 U.S. 555

DONE ry Mek ha Sek vee en WAtr isk re 20

Freytag v. CIR, 501 U.S. 868 (1991) ....... ve See

Gardebring v. Jenkins, 485 U.S. 415 (1988) ..... se

Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd,

445 F.2d 985 (10th Cir.), cert. denied,

oe ek gs SEA aaa iy Garena 15

Gould v. Gould, 245 U.S. 151 (1917) ye RO ws 13, 14, 21

Greyhound Corp. v. United States, 495 F.2d 863

CO Ss ea ene S64 ed oe de . 14

Harco Holdings, Inc. v. United States, 977 F.2d 1027

(7th Cir. 1992) Se am te Fe 9,10

Hassett v. Welch, 303 U.S. 303 (1938) | fe Mee

Lilly v. United States, 238 F.2d 584 (4th Cir. 1956) ... 14

Longhi v. Animal & Plant Health Inspection Service,

165 F.3d 1057 (6th Cir. 1999) ............. ioe

Martin v. Occupational Safety & Health Review

Commission, 499 U.S. 144(1991) ........... 17, 18

McCulloch v. Maryland, \7 U.S. (4 Wheat.) 316

SUR hn gs Cndih sols sk Ree aR eee TA 21

McKee v. Sullivan, 903 F 2d 1436 (11th Cir. 1990) ... 11

Metropolitan Stevedore Co. v. Rambo, 521 U.S. 121

Se eee oe iy te a ee ea ee eee 24

Ocean Drilling & Exploration Co. v. United States,

988 F.2d 1135 (Fed. Cir. 1993) ............... 14

Pauley v. Bethenergy Mines, Inc., 501 U.S. 680

DP ei cme fla tes ee ete re renre S 17

Reinecke v. Northern Trust Co., 278 U.S. 339 (1929) .. 21

Security Bank Minnesota v. CIR, 994 F.2d 432

Se OE Cc Gece ae eee cece nes es 13

Shalala v. Guernsey Memorial Hospital, 514 U.S. 87

gel Bee SIAR PRCT nit nc A thr th Balai Leann a Eee 24

Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735

CE a nae toe Oe ree oa eee ce 17

a el a aca a SR a ee Aes ae ee

Vil

TABLE OF AUTHORITIES (cont’d)

Stinson v. United States, 508 U.S. 36 (1993) ........ 23

Stutson v. United States, 516 U.S. 163 (1996) ....... 18

Thomas Jefferson University v. Shalala, 512 U.S. 504

Ae Perr Pete ea ier Cara) ar ae a

Union Pacific Corp. v. United States, 5 F.3d 523

SG SE tn ou See eek 14

United States v. Larionoff, 431 U.S. 864 (1977) ...... 23

United States v. Merriam, 263 U.S. 179 (1923) ...... 22

United States v. Trident Seafoods Corp., 60 F.3d 556

i ee eee ee ee ale er 1}

United Transportation Union v. Dole, 797 F.2d 823

SN SUI son's ov es Caw core: ed 2. 12

Weingarden v. CIR, 825 F.2d 1027 (6th Cir. 1987) .... 13

White v. Aronson, 302 U.S. 16 (1937) .......... _» ae

William Brothers, Inc. v. Pate, 833 F.2d 261

SOU IE isis ce oe ee eeaes vas ben’ 10, 20

Xerox Corp. v. United States, 41 F.3d 647

(Fed. Cir. 1994), cert. denied, 516 U.S. 817

DU OSs cere be ce bet eek ule. 14

Statutes

EE nS ro Rea ae es see eueutiae 10

I is Viens Wy weak oor ovis 2,9

7 i, en a ea ee re ee 7

en, IG A hah G sd va eae bes eho lee eS

cool 5 SPEER ESE Arai oereteanaar bh 13

ST EN So) on Rs 8 5 Sha eee HL 1,2

ee eine koe ok Peel 1,2, 19,2

a ee ee passim

ee EE, id EG) cy SPR Ounce: 1,2

ee ne IS? 8s Sc ts a erg ote a l

ye a LL Se ee eer ee 6, 15

Pe NE hie Oui Sako ea eee. eee em >. e

Mee Ot oe. ce 19

Viil

TABLE OF AUTHORITIES (cont’d)

ae a EE wre ose we wae eee Pell be ane

et a es Se

Ee fh. spi aaa

yk me os | re ee ae re 13

28 U.S.C. § 1346(a(1) ......... a lck eee 15

Rules and Regulations

20C. FR. § 404.721(b) ........ agin’ op spi pena

ead | ee ere ere

CS er er rors rer 18

26 C.F.R. § 1.1502-32 ee Oy on, a Pe ee 10

26 C.F.R. § 1.1502-47_ . | wee he

26 CFR. § 1.801-3(g) (1991) ................ 4

ee ee PE Sow ok oe eee eee 19

26 C.F.R. § 601.601(d)(2)(i)fa) 2.2.22. 12

47 Fed. Reg. 24,737 (1982) ............ ened se

Filing of Life-Nonlife Consolidated Returns,

48 Fed. Reg. 11436 (1983) ................. 4,5

Bae Pe re BF ok v5 ae SR eee de. 7

pee we ye eo | re rE EOE Ss

Miscellaneous

Anthony, /nterpretive Rules, Policy Statements, Guidances,

Manuals and the Like Should Federal Agencies Use

Them To Bind The Public, 41 Duke L.J. 1311

CR eCin ee eee Coed ewe a etes. 24

Anthony, 7he Supreme Court and the APA: Sometimes

They Just Don’t Get It, 10 Admin. L.J. Am. U. 1

CE a LAT eo are ee eA a eo 17

Anthony, Which Agency Interpretations Should Bind

Citizens And The Courts?, 7 Yale J. Reg. 1(1990) . 18

Coverdale, Court Review of Tax Regulations and Revenue

Rulings in the Chevron Era, 64 Geo. Wash. L. Rev.

DOD x ok Sonews sehen eek a ees 19

1X

TABLE OF AUTHORITIES (cont’d)

N. Crimm, 7ax Court Litigation: Practice and

Procedure 4 2.4{2}[g] (1999) ............... 15, 19

Dembitzer, Beyond the IRS Restructuring and Reform

Act of 1998: Perceived Abuses of the Treasury

Department's Rulemaking Authority, 52 Tax

FM be WR re is ass een 25

A. Dubroff et al., Federal Income Taxation of

Corporations Filing Consolidated Returns

SG OE ea gee ree ea soe re

Griswold, 11 ABA Sec. Tax’n Newsl. 56(1992) ..... 24

Griswold, /s The Tax Law Gone To Seed, 11 Am. J.

pg 2) Reng be eee 24

Manning, Constitutional Structure and Judicial

Deference To Agency Interpretations of Agency

Rules, 96 Colum. L. Rev.612 ............... 17, 24

Office of Federal Register, Federal Register Document

Drafting Handbook (rev. ed. 1980) .......... i

Olson, Some Thoughts on Anti-Abuse Rules,

oe fo. 25

Scalia, Judicial Deference To Administrative

Interpretations of Law, 1989 Duke L.J. 511... . 17, 18

Schwidetzky, Hyperlexis and the Loophole,

49 Okla. L. Rev. 403 (1996) .................. 25

Technical Advice Memorandum 8533003

CE eo te er ee ne 7

eS emt a a a i lc

OR i ania 8 r

]

PETITION FOR A WRIT OF CERTIORARI

Connecticut General Life Insurance Company and CIGNA

Corporation and Consolidated Subsidiaries respectfully

petition for a writ of certiorari to review the judgment of the

United States Court of Appeals for the Third Circuit in this

case.

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la) is

reported at 177 F.3d 136. The opinion of the tax court (Pet.

App. 24a) is reported at 109 T.C. 100.

JURISDICTION

The judgment of the court of appeals was entered on April

30, 1999. On July 20, 1999, Justice Souter extended the time

for filing this petition to and including August 12, 1999. This

Court has jurisdiction under 28 U.S.C. § 1254(1).

PERTINENT PROVISIONS

Pertinent provisions of 26 U.S.C. §§ 1501-1505 and 26

C.F.R. § 1.1502-47 are reproduced at Pet. App. 39a.

STATEMENT OF THE CASE

This case involves interpretation of the statutes and

regulations that govern the filing of consolidated federal

income tax returns by affiliated companies. As the court of

appeals acknowledged, these provisions are ambiguous on the

specific question whether a parent company, if it has a life

insurance subsidiary, can offset the income and losses of other

subsidiaries recently acquired as a group. Petitioners filed tax

returns based on a reasonable interpretation of the provisions

at issue to permit such offsetting. During subsequent litigation

against petitioners in the United States Tax Court, counsel for

the Internal Revenue Service (“IRS”) asserted the opposite

interpretation. The question presented is whether, as the court

2

of appeals held, that agency litigating position is entitled to

deference.

1. The Internal Revenue Code generally permits affiliated

corporations to file a single “consolidated” income tax return

on which, in order to reduce overall taxable income, the

income of one affiliated corporation may be offset by the

losses of another. 26 U.S.C. § 1501. The Code authorizes

the Secretary of the Treasury to promulgate regulations under

which the tax liability of an affiliated group of corporations

can be appropriately computed. /d. § 1502. Prior to 1976,

however, the Code specifically prohibited life insurance

companies (“life companies”) from filing consolidated returns

with affiliated other companies (“nonlife companies”). Pet.

App. 2a.

The Tax Reform Act of 1976 substantially loosened the

restrictions against this so-called “life-nonlife” consolidation.

That Act amended the Code to permit affiliated life and nonlife

companies to file consolidated income tax returns for tax years

beginning in 1981. See 26 U.S.C. § 1504(c)(2). However,

the Act also imposed certain restrictions on the extent of

offsetting losses within a group of affiliated life and nonlife

companies. The provision directly at issue here states that the

losses of a nonlife member “shall not be taken into account in

determining the taxable income of a member taxed under

section 801” (i.e., a life member),' if the life member and the

nonlife member have been affiliated for five years or less. /d.

§ 1503(c)(2).’

' Section 801 of the Code, 26 U.S.C. § 801, applies only to life insurance

companies.

? Section 1503(c)(2) provides:

Losses of recent nonlife affiliates. — Notwithstanding the

provisions of paragraph (1), a net operating loss for a taxable year of

a member of the group not taxed under section 801 [i.e., a nonlife

farts eer Fd

3

2. Acting pursuant to § 1502, the Secretary has promul-

gated an elaborate regulation addressing life-nonlife consoli-

dation. 26 C.F.R. § 1.1502-47. One provision of that

regulation defines “[l]osses of a nonlife member” within the

five-year period referred to in § 1503(c)(2) as “ineligible,” and

further provides that such “ineligible” losses “may not be used

under section 1503(c)(2) and paragraph (m) of this section to

set off the income of a life member.” /d. § 1. 1502-47(d)(13).

Paragraph (m) in turn contains two relevant provisions. One

provision, titled “[iJneligible nonlife member,” states in

pertinent part that “ineligible” net operating losses (“NOL”)

may not “be set off against consolidated partial LICTI” (i.e.,

life insurance company taxable income). /d § 1502-

47(m)(3)(vi). It further states that, “[flor purposes of this

subparagraph (3), the ‘ineligible NOL’ is in the year the loss

arose the amount of the separate net operating loss... of any

nonlife member that is ineligible in that year.” Jd. The other

relevant provision states as follows: “Acquired groups.

[Reserved].” Jd. § 1.1502-47(m)(4) (brackets in Original).

As onginally drafted, the proposed regulations contained a

predecessor of the “[i]neligible nonlife member” provision

ultimately codified in paragraph (m)(3)(vi), but omitted the

“[a]cquired groups” provision ultimately codified in paragraph

(m)(4). See 47 Fed. Reg. 24,737, 24,748 ( 1982). In response

to the proposed regulations, commenters (including

member] shall not be taken into account in determining the taxable

income of a member taxed under section 801 [i.e., a life member]

(either for the taxable year or as a Carryover or carryback) if such

taxable year precedes the sixth taxable year such members have been

members of the same affiliated group (determined without regard to

section 1504(b)(2)).

Section 1503(c)(1), 26 U.S.C. § 1503(c)( 1), imposes other restrictions on

the extent of permissible offsetting. Those restrictions are not at issue in

this case.

4

petitioners) noted that paragraph (m)(3)(vi), read in isolation,

might be construed to prohibit not only offsetting nonlife

losses against life income, but also offsetting nonlife losses

against non-life income, even among the members of a

recently-acquired group that had previously filed a

consolidated tax return and, accordingly, had previously

engaged in such offsetting. Pet. App. 5a-6a. In direct

response to that criticism, the proposed regulations were

modified in three distinct ways. First, paragraph (m)(4) was

added to reserve the “[a]cquired groups” issue. Second, the

definition of “ineligible” nonlife losses was restricted to

“subparagraph (3),” which addresses nonlife losses generally,

and thus made inapplicable to subparagraph (4), which

addresses “acquired group[s]” in particular. Third, the

regulatory preamble was amended to record the Secretary’s

deliberate agnosticism on the appropriate treatment of

acquired groups:

[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 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 includability in) another group that

files a consolidated return.

Filing of Life-Nonlife Consolidated Returns, 48 Fed. Reg.

11436, 11440 (1983).

3. Connecticut General Corporation was formerly the

common parent of one life company, petitioner Connecticut

General Life Insurance Company (“CGL”), and more than

forty affiliated nonlife companies (collectively the “CG

Group”). In 1981, the CG Group began to file a single

consolidated income tax return, as permitted by the Tax

Reform Act of 1976. At the same time, INA Corporation was

5

the common parent of over 160 affiliated nonlife companies

(collectively the “INA Group”). The INA Group also filed a

single consolidated income tax return. On March 31, 1982,

the CG and INA Groups combined and organized petitioner

CIGNA Corporation as their parent holding company. Pet.

App. 3a-4a. Subsequently, a CIGNA subsidiary acquired

Preferred Health Care, Incorporated, the common parent of

several affiliated nonlife companies (collectively the “PHC

Group”). Prior to its acquisition by CIGNA, the PHC Group

also had filed a single consolidated income tax return. Pet.

App. 4a. For federal income tax purposes, the CG Group was

deemed to have acquired the INA Group, and CIGNA was

deemed to have acquired the PHC Group. /d.

In preparing its consolidated income tax returns for tax

years 1982 through 1985, CIGNA interpreted paragraph

(m)(3)(vi) and (m)(4) only to prohibit offsetting the nonlife

losses of recently acquired affiliates against the /ife income of

CGL, but not to prohibit offsetting these nonlife losses against

non-life income among companies that constituted the INA

and PHC groups respectively. CIGNA’s interpretation rested

on several considerations: the underlying statutory rule that

“{ljosses of recent nonlife affiliates .. . shall not be taken into

account in determining the taxable income of a member taxed

under section 801” (i.e. a life member), 26 U.S.C.

§ 1503(c)(2); the definitional provision that losses of an

“ineligible” nonlife member cannot be used “to set off the

income of a life member,” 26 C.F.R. § 1.1502-47(d)(i3)

(emphasis added); the references in paragraph (m)(3)(vi) to

nonlife losses as “ineligible” for the specific purpose of being

“set off against consolidated partial LICTT” (i.e., /ife insurance

company taxable income); the explicit reservation in paragraph

(m)(4) of the “[a]cquired groups” issue; and the preamble’s

statement that it might be “correct” to “aggregate the income

and losses of ineligible members that filed a consolidated

return prior to their acquisition,” see 48 Fed. Reg. at 11440.

6

CIGNA followed the offsetting method suggested in the

final regulatory preamble. Because the losses of its INA and

PHC members were ineligible under § 1503(c)(2), CIGNA did

not use even one penny of those losses to determine or offset

the income of its sole /ife member, CGL. On the other hand,

CIGNA did use the nonlife losses of the unprofitable INA and

PHC affiliates to offset the nonlife income of the profitable

INA and PHC affiliates. Pet. App. 7a-8a.

4. On June 23, 1992, the Commissioner of Internal

Revenue filed notices of deficiency alleging that petitioners

owed the federal government $62,176,665 in unpaid income

taxes and what is over $150,000,000 in interest. Pet. App.

10a-l1la.° Petitioners sought a redetermination of the

deficiency in the United States Tax Court pursuant to 26

U.S.C. § 6213(a).* During the ensuing litigation, counsel for

the IRS asserted that paragraph (m)(3)(vi) barred CIGNA

from offsetting the nonlife losses of INA and PHC affiliates

not only against the life income of CGL, but also against the

nonlife income of other INA and PHC affiliates. Prior to the

litigation, the IRS had never before advanced this position in

any regulation, ruling, or administrative practice. On a

stipulated record, the tax court judge endorsed the inter-

pretation of IRS counsel and granted summary judgment to

the Commissioner. Pet. App. 24a-38a.

5. The Third Circuit affirmed.® At the outset of its

analysis, the court of appeals acknowledged the settled rule

that courts do not give any deference to agency litigating

positions that are unsupported by prior “‘regulations, rulings,

> The notice of deficiency involved different tax years, but the same

underlying dispute. Pet. App. 10a & n.1.

* The tax court had original jurisdiction in this case under 26 U.S.C.

§§ 6214(a) and 7442.

> The court of appeals had jurisdiction under 26 U.S.C. § 7482(a)(1).

7

or administrative practice.”” Pet. App. 13a, quoting Bowen v.

Georgetown Univ. Hosp., 488 US. 204, 212 (1988).

However, the court of appeals concluded that Bowen governs

only the question of the “deference due an administrative

agency’s informal interpretation of a statute,” but “does not

address what deference we should accord an agency’s

interpretation of its own regulations.” Pet. App. ISa

(emphases added). On the latter question, the court of appeals

held that Gardebring v. Jenkins, 485 U.S. 415 (1988), man-

dates deference “to an agency’s interpretation of its own

regulations, even when that interpretation was proffered for

the first time in litigation.” Pet. App. 15a. Accordingly, the

court announced that it would “defer” to the IRS’s litigating

position in this case, unless CIGNA’s competing position was

“compelled” by the “‘plain language” of the regulations in

question. /d. (quoting Gardebring, 485 U.S. at 430).

The court then concluded that the competing

interpretations asserted by CIGNA and by IRS counsel were

“equally likely.” Pet. App. 16a. The court reasoned that

paragraph (m)(4) could be construed either to reserve the

“subject matter” of acquired groups, as CIGNA argued, or to

reserve only “space” for some regulation that might

hypothetically be promulgated in the future, as argued by

counsel for the IRS. Pet. App. 15a.° Similarly, the court

° As the court of appeals acknowledged (Pet. App. 16a), the IRS often

uses the term “reserved” to make clear that related regulations are

inapplicable. See, e.g., T.D. 8145, 1987-2 CB. 47, 49, 56 (question

“reserved” in 26 C.7.R. § 1.163-8T(h) “is not addressed” in regulations

because IRS “is still studying” the relevant issues); T.D. 731 1, 1974-1

C.B. 234 (regulations under 26 U.S.C. § 1232 inapplicable to “reserved”

subject matter); Technical Advice Memorandum 8533003 (May 7, 1985)

(same for regulations under 26 U.S.C. § 892 ). In concluding that

paragraph (m)(4) can reasonably be construed to have no substantive

significance, but to reserve only space in a numbering sequence, the court

of appeals relied on a government handbook published in 1991, eight

years after the consolidation regulations were actually promulgated. Pet.

8

concluded that there was “nothing unreasonable” with the

restrictive interpretation of the preamble urged by counsel for

the IRS. Pet. App. 17a. The court therefore deferred to the

IRS’s litigating position: “Because the interpretation ad-

vanced by the IRS is neither inconsistent with any prior

interpretation of these regulations nor incompatible with their

plain text, we defer to that interpretation.” Pet. App. 18a; see

also Pet. App. 23a (IRS “interpretation of that regulation is

not so unreasonable as to be declared invalid by this court’).

REASONS FOR GRANTING THE WRIT

This case turns on the extent of offsetting permitted under

26 U.S.C. § 1503(c)(2) and its implementing regulation, 26

C.F.R. § 1.1502-47(m)(3)(vi) and (m)(4). The court of

appeals did not hold that the IRS’s litigating position

constitutes the on/y reasonable reading of these provisions, or

even the most reasonable reading. Instead, it concluded that

the competing interpretations asserted by IRS counsei and by

CIGNA were “equally likely” (Pet. App. 16a), and it deferred

to the government’s interpretation on the sole ground that it

was not “unreasonable” (Pet. App. 17a, 23a). This Court

should review that deference holding for several reasons: it

creates two independent splits of authority in the courts of

appeals, it is inconsistent with numerous decisions of this

Court, and it addresses administrative law and tax questions

of surpassing practical importance in this and thousands of

other cases.

App. 16a. When those regulations were actually promulgated, however,

the available edition of the same handbook did not discuss the term

“reserved.” See generally Office of Federal Register, Federal Register

Document Drafting Handbook (rev. ed. 1980).

ee ee te

Pe nt le Ar

9

I. THE DECISION BELOW CREATES TWO

INDEPENDENT CIRCUIT SPLITS

The decision below creates circuit splits on important and

related questions of administrative law and taxation. The

administrative law question involves whether agency litigating

positions are entitled to deference. The tax question involves

competing interpretive principles for resolving ambiguity in

the specific context of tax law. This Court should grant

review to resolve those splits.

A. The Courts Of Appeals Are Divided On Whether

Bowen Applies To Agency Litigating Positions

Interpreting Ambiguous Regulations, As Opposed

To Statutes

In Bowen, this Court held that “[dJjeference to what appears

to be nothing more than an agency’s convenient litigating

position would be entirely inappropriate.” 488 US. at 213.

Accordingly, the Court concluded, courts must not defer to

“agency litigating positions that are wholly unsupported by

regulations, rulings, or administrative practice.” /d. at 212-13.

Despite the breadth of this Court’s language, the court of

appeals explicitly restricted Bowen to agency litigating

positions interpreting ambiguous statutes, and explicitly held

Bowen inapplicable to agency litigating positions interpreting

ambiguous regulations. Pet. App. 15a. At least five other

courts of appeals, however, have held that Bowen applies to

both kinds of agency litigating positions.

In Harco Holdings, Inc. v. United States, 977 F.2d 1027

(7th Cir. 1992), the Seventh Circuit applied Bowen to reject

an IRS litigating position interpreting the term “unpaid losses”

as used in 26 U.S.C. § 801(a)(2) and 26 C.F.R. § 1.801-3(g)

(1991). In its analysis, the court specifically noted that there

was “sufficient ambiguity in the statute and the regulations

that we might defer to the Service’s interpretation.” 977 F.2d

at 1035 (emphasis shifted). However, the court concluded,

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such deference “does not apply to ‘agency litigating positions

that are wholly unsupported by regulations, rulings, or

administrative practice.” Jd. (quoting Bowen, 488 U.S. at

212). Applying Bowen, the court held that, because the IRS’s

interpretation “of section 801 and regulation |1.801-3(g)” was

“new and unsupported by agency practice or rulings,” it

“deserve[d] no deference.” See id. at 1035-36.

The Fifth Circuit adopted an identical position in CS/

Hydrostatic Testers, Inc. v. CIR, 62 F.3d 136 (Sth Cir. 1995)

(per curiam). That case applied Bowen to reject an IRS

litigating position interpreting 26 U.S.C. § 312(1) and 26

C.F.R. § 1502-32. The tax court in CS/ Hydrostatic, despite

acknowledging the general rule that “an agency’s

interpretation of its own regulation is entitled to deference,”

concluded that, “in the absence of a contrary published, or at

least longstanding, interpretation of the regulation in question,

deference is not the rule.” 103 T.C. 398, 408-09 (1994) (citing

Bowen, 488 U.S. at 212); see also id. at 409 (“[U]nless an

agency’s interpretation of a statute or a regulation is a matter

of public record and is an interpretation on which the public is

entitled to rely when planning their affairs, it will not be

accorded any special deference.” (emphasis added)). Applying

that principle, the tax court did not give “any deference” to the

IRS’s litigating position. /d. at 409. On appeal, the Fifth

Circuit explicitly “adopt[ed] that opinion.” 62 F.3d at 136

(“We agree with the tax court’s thorough opinion... .”).

The Eleventh Circuit also has refused to defer to agency

litigating positions interpreting ambiguous regulations.

William Brothers, Inc. v. Pate, 833 F.2d 261 (11th Cir. 1987),

involved interpretation of the term “coal mine dust” as used in

the Black Lung Benefits Act and its implementing regulation.

Despite explicitly noting that the regulation in question was

ambiguous (id. at 265 n. 2), the Eleventh Circuit refused to

defer to an agency litigating position broadly construing that

regulation. The court explained: “[W]e do not agree that the

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Director’s mere litigating position is entitled to be given

deference. Common sense tells us that if deference were

always given to the Director’s litigating position, then

claimants would be effectively denied the right to appellate

review.” /d. at 265; accord, e.g., Bradberry v. Director,

Office of Workers’ Compensation Programs, 117 F.3d 1361,

1366 (11th Cir. 1997) (no deference to agency “litigating

position” interpreting ambiguous regulation); McKee v.

Sullivan, 903 F.2d 1436, 1438 n.3 (11th Cir. 1990) (same,

citing Bowen).

Finally, the Eighth and Ninth Circuits also have refused to

give deference to agency litigating positions interpreting

ambiguous regulations. In Brewster v. Sullivan, 972 F.2d

898, 900-02 (8th Cir. 1992), the Eighth Circuit refused to

defer to an administrative interpretation regarding the

elements of proof under 20 C.F.R. § 404.721(b). The court

expressly “acknowledge[d] that as a general rule an agency’s

interpretation of its own regulation is entitled to great

deference,” but held that, nonetheless, “courts do not defer to

an agency’s litigating position.” 972 F.2d at 901. Similarly,

in United States v. Trident Seafoods Corp., 60 F.3d 556, 558-

59 (9th Cir. 1995), the Ninth Circuit refused to defer to an

administrative interpretation of the Clean Air Act and its

implementing regulations, despite explicitly concluding (id. at

558) that the regulation at issue was ambiguous. The court

explained that its conclusion was “not inconsistent with the

proposition that deference is ordinarily owed to an agency’s

interpretation of its own regulations,” because “[n]o deference

is owed when an agency has not formulated an official

interpretation of its regulation, but is merely advancing a

litigating position.” Jd. at 559.’

” The Sixth Circuit also has strongly suggested that courts must not defer

to an “‘agency litigating position’” interpreting “existing regulations.”

Longhi v. Animal & Plant Health Inspection Service, 165 F.3d 1057, 1061

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B. The Courts Of Appeals Are Divided On The

Appropriate Interpretive Principle For Resolving

Ambiguity In The Context Of Tax Law

In the tax context specifically, courts confronted with

ambiguity must choose between two competing interpretive

principles. In this case, the Third Circuit adopted and applied

the principle that IRS litigating positions are entitled to

deference, thus resolving all ambiguity in favor of the

government. Several other courts of appeals, however,

continue to apply the venerable and diametrically opposite

principle that ambiguity should be resolved in favor of the

taxpayer. This Court should grant review to determine which

of these competing principles is appropriate.

In Duke Energy Natural Gas Corp. v. CIR, 172 F.3d 1255,

1259-61 (10th Cir. 1999), the Tenth Circuit recently refused

to defer to an agency litigating position construing ambiguous

terms in a controlling revenue procedure.* The court invoked

and applied the principle that “‘if doubt exists as to the

construction of a taxing [provision], the doubt should be

resolved in favor of the taxpayer.’” /d. at 1260 n. 7 (quoting

Hassatt v. Welch, 303 U.S. 303, 314 (1938)). Finding “no

(6th Cir. 1999) (quoting Bowen, 488 U.S. 212); see also United

Transportation Union v. Dole, 797 F.2d 823, 831-32 (10th Cir. 1986)

(Logan, J., concurring) (no deference to administrative interpretation of

regulation because “there is nothing in the record to suggest that the

agency has taken the position it now advocates before this litigation

arose”). The Federal Circuit has extended these principles even farther.

In AMP Incorporated and Consolidated Subsidiaries v. United States, No.

98-5083, 1999 WL 587934, at *5 (Fed. Cir. Aug. 2, 1999), that court

refused to defer to an IRS interpretation of an ambiguous tax regulation

expressed in a revenue ruling issued “at a time when the IRS is preparing

to litigate” (emphasis added).

* A revenue procedure is a regulatory document “‘published for the

information and guidance’ of taxpayers as well as the IRS.” 172 F.3d at

1259 (quoting 26 C.F.R. § 601.601(d)(2)(i)(a)).

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clear mandate” and no “explicit” support for the IRS’s

litigating position, the court rejected that position and

construed the revenue procedure in favor of the taxpayer. See

id. at 1260-61.

The same interpretive principle was also dispositive in

Security Bank Mimnesota v. CIR, 994 F.2d 432, 436 (8th Cir.

1993), in which the Eighth Circuit invoked and applied the

rule that “when there is a reasonable doubt about the meaning

of a revenue statute, the doubt is resolved in favor of those

taxed.” The court expressly concluded that the operative tax

provision (26 U.S.C. § 1281) was “ambiguous” on the

question presented. /d. at 437. In these circumstances, the

court refused to defer to the IRS’s litigating position:

[B]jecause the application of § 1281 to these loans is

ambiguous, we follow the venerable rule that “[ijn the

interpretation of statutes levying taxes . . . [courts must

not] enlarge their operations so as to embrace matters not

specifically pointed out. In case of doubt, they are

construed most strongly against the Government, and in

favor of the citizen.”

Id. at 441 (quoting Gould v. Gould, 245 U.S. 151, 153 (1917)

(emphasis added; other alterations by the Security Bank

court)).

The Sixth Circuit adopted and applied the same approach

in Weingarden v. CIR, 825 F.2d 1027 (6th Cir. 1987). That

case too confirmed that “[t]he general canon of construction

is that statutes imposing a tax are interpreted liberally (in favor

of the taxpayer).” /d. at 1029. Faced with ambiguity, the

Sixth Circuit applied that principle, and thus rejected the

litigating position of the IRS. See id. (“we construe the

hopeless ambiguity created by this statutory scheme in favor

of the taxpayer”).

Finally, the Federal Circuit, which has exclusive jurisdiction

over all tax cases arising in the Court of Federal Claims (28

14

U.S.C. § 1295(a)(3)), repeatedly has made clear that IRS

litigating positions are not entitled to deference. Like these

other appellate courts, the Federal Circuit has concluded that

ambiguity in tax provisions must be resolved not in favor of

the agency litigating position, but in favor of the taxpayer.

See, e.g., Xerox Corp. v. United States, 41 F.3d 647, 658

(Fed. Cir. 1994) (“As a special rule in tax cases, ‘if doubt

exists as to the construction of a taxing statute, the doubt

must be resolved in favor of the taxpayer.’” (quoting Hassett,

303 U.S. at 314)), cert. denied, 516 U.S. 817 (1995); Union

Pacific Corp. v. United States, 5 F.3d 523, 525 (Fed. Cir.

1993) (“the Supreme Court counsels to construe any

reasonable doubts about the meaning of a tax statute in favor

of the taxpayer” (citing Gould, 245 U.S. at 153)); Ocean

Drilling & Exploration Co. v. United States, 988 F.2d 1135,

1157 (Fed. Cir. 1993) (“if there is a doubt as to the meaning

of the provisions of the Internal Revenue Code, the doubt

‘must be resolved in favor of the taxpayer’” (citation

omitted)).°

C. These Splits Are Exacerbated By The Multi-Track

Scheme For Judicial Enforcement Of Federal Tax

Liabilities

Although circuit splits this deep would warrant the Court’s

attention in any event, the tax context presents two distinctive

* Other courts of appeals have also invoked and applied these principles.

See, e.g., Greyhound Corp. v. United States, 495 F.2d 863, 869 (9th Cir.

1974) (“Here, it is proper to invoke the well known rule of construction

that in cases of doubt, a taxing statute must be construed most strongly in

favor of the taxpayer and against the government.”); Lilly v. United States,

238 F.2d 584, 587 (4th Cir. 1956) (“It is well settled that taxing statutes

are strictly construed against the government and in favor of the

taxpayer.”); Allen v. Atlanta Metallic Casket Co., 197 F.2d 460, 461

(Sth Cir. 1952) (applying “the principle that taxes may not be exacted

unless clearly due, and in case there is doubt, the taxpayer must be given

the benefit of it”).

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features that make review even more essential to the proper

functioning of the federal judicial system.

First, decisions of the tax court are appealable to the

regional courts of appeals in which the taxpayer has its legal

residence or principal place of business. 26 U.S.C. § 7482(b).

The residence of the taxpayer thus determines, in any

particular case, what body of appellate precedent is binding on

the tax court. See Golsen v. Commissioner, 54 T.C. 742,

756-57 (1970), aff'd, 445 F.2d 985 (10th Cir.), cert. denied,

404 U.S. 940 (1971). Therefore, when the courts of appeals

are divided, the consequence is not only disparate results

among different courts, but, even worse, disparate results

within the same court. See, e.g, N. Crimm, Zax Court

Litigation: Practice and Procedure § 2.4[{2][g], at 2-101

(1999) (“[T]he Golsen rule means that cases before the Tax

Court involving similar facts and identical legal issues result in

inconsistent conclusions when the separate circuit courts have

treated the issues in differing manners.”).

Second, taxpayers have a choice from among three possible

judicial fora: if a taxpayer declines to pay an alleged

deficiency, it may seek a “redetermination” of the deficiency

in the tax court (26 U.S.C. § 6213(a)); on the other hand, if a

taxpayer elects to pay the alleged deficiency, it may seek

“recovery” of the disputed amount either in an appropriate

district court or in the Court of Federal Claims (28 U.S.C.

§ 1346(a)(1)). Given the decision below, a shrewd and

affluent Philadelphia taxpayer will pay the deficiency and

litigate for “recovery” in the Court of Federal Claims, thus

purchasing favorable Federal Circuit precedent under which all

ambiguous regulations are construed in favor of the taxpayer.

On the other hand, an unwise or impecunious Philadelphia

taxpayer might still seek (or be forced to seek) a

“redetermination” in the tax court, subject to the unfavorable

precedent that all ambiguous regulations are construed in

16

favor of IRS litigating positions. This Court should not

tolerate circuit splits that invite such law-shopping.

ll. THE DECISION BELOW CONFLICTS WITH

BASIC ADMINISTRATIVE LAW AND TAX

PRINCIPLES ADOPTED BY THIS COURT

The court of appeals concluded that, where a tax regulation

is ambiguous, courts must defer to any minimally reasonable

interpretation asserted by IRS counsel in litigation before the

tax court. Pet. App. 13a-15a. That conclusion conflicts with

scores of this Court’s administrative law and tax cases.

Moreover, the court of appeals erred in asserting that

Gardebring even remotely supports this startling result.

A. Agency Litigating Positions, Whether Interpreting

Ambiguous Statutes Or Regulations, Are Not

Entitled To Deference

Under basic administrative law principles, courts generally

must defer to an agency’s reasonable interpretation of an

ambiguous statute, see, e.g., Chevron U.S.A., Inc. v. Natural

Resources Defense Council, 467 U.S. 837, 842-44 (1984), or

an ambiguous regulation, see, e.g., Bowles v. Seminole Rock

& Sand Co., 325 U.S. 410, 413-14 (1945), that the agency is

entrusted to administer. Under Bowen, however, Chevron

deference is “entirely inappropriate” when the only

administrative interpretation at issue is a “litigating position”

asserted by agency counsel. See 488 U.S. at 212-13. There

is no conceivable reason why the opposite rule should apply

to agency litigating positions asserted to warrant deference

under Seminole Rock.

1. The justifications for Chevron and Seminole Rock are

identical. Chevron reflects an interpretive presumption that,

because of an agency’s relative expertise and political

accountability, “Congress, when it left ambiguity in a statute

meant for implementation by an agency, understood that the

ambiguity would be resolved, first and foremost, by the

17

agency.” Smiley v. Citibank (South Dakota), N.A., 517 U.S.

735, 740-41 (1996); accord, e.g., Adams Fruit Co. v. Barrett,

494 U.S. 638, 649 (1990) (“A precondition to deference

under Chevron is a congressional delegation of administrative

authority.”). The justification for Seminole Rock deference is

essentially identical: “Because applying an agency’s regulation

to complex or changing circumstances calls upon the agency’s

unique expertise and policymaking prerogatives, we presume

that the power authoritatively to interpret its own regulations

is a component of the agency’s delegated lawmaking powers.”

Martin v. Occupational Safety & Health Review Comm'n,

499 US. 144, 151 (1991); accord, e.g., Pauley v. Bethenergy

Mines, Inc., 501 U.S. 680, 696-97 (1991) (Chevron analysis

“informs our determination that deference [under Seminole

Rock] is appropriate”); Manning, Constitutional Structure and

Judicial Deference To Agency Interpretations of Agency

Rules, 96 Colum. L. Rev. 612, 613 (1996) (Chevron and

Seminole Rock doctrines “are functionally similar”); Anthony,

The Supreme Court and the APA: Sometimes They Just Don't

Get It, 10 Admin. L.J. Am. U. 1, 5 (1996) (“there should be

no difference for present purposes between interpretations of

regulations and interpretations of statutes”). Given the

functional and analytical similarities between these deference

doctrines, it is highly implausible that they should apply

differently in the context of agency litigating positions.

In Bowen and its progeny, this Court repeatedly has refused

to defer to agency litigating positions. Several considerations

support these decisions. To begin with, Congress presump-

tively delegates administrative and interpretive power to the

agency itself, and not to its counsel. See Bowen, 488 U.S. at

213. Moreover, the litigating positions asserted by low-level

and partisan agency counsel are unlikely to reflect the views

of the agency at all, much less its considered views. See

Smiley, 517 U.S. at 741 (“The deliberateness of such

positions, if not indeed their authoritativeness, is suspect.”’);

Scalia, Judicial Deference To Administrative Interpretations

18

of Law, 1989 Duke L.J. 511, 519 (“there may be reason to

doubt whether the position taken by a low-level agency

litigator, or perhaps even by the general counsel, has the

approval of the agency head”). Finally, deferring to the

litigating position of a party agency would violate basic norms

of impartial adjudication that the federal courts preserve and

embody. See, e.g., Stutson v. United States, 516 U.S. 163,

187 (1996) (Scalia, J., dissenting) (Bowen reflects “a decent

concern for those litigating against the government”); Scalia,

1989 Duke L.J. at 519-20 (“Whatever else an agency’s choice

among the various interpretive options may be based upon, it

should not be based upon the desire to win a particular

lawsuit.”); Anthony, Which Agency Interpretations Should

Bind Citizens And The Courts?, 7 Yale J. Reg. 1, 60-61

(1990) (“Even the cynical should balk at assuming that

Congress has delegated such a power to judge one’s own

cause.”). Although Bowen on its facts involved a litigating

position interpreting an ambiguous statute, these

considerations are fully applicable to litigating positions

interpreting ambiguous regulations.

Finally, although this Court has not addressed the question

in detail, it has twice stated that Seminole Rock deference

should not extend to agency litigating positions. In Martin v.

OSHRC, the Court, in explaining the rationale for Bowen,

stated that “[b]ecause statutory and regulatory interpretations

furnished [in litigation] occur after agency proceedings have

terminated, they do not constitute an exercise of the agency’s

delegated lawmaking powers.” 499 U.S. at 156-57 (emphasis

shifted). Similarly, in Cottage Savings Association v. CIR,

499 U.S. 554, 562-63 (1991), the Court explained that the

question of what constitutes a “material difference” under 26

C.F.R. § 1.1001-1 “is not one on which we can defer to the

Commissioner,” precisely because “the Commissioner has not

issued an authoritative, prelitigation interpretation of what

property exchanges satisfy this requirement” (emphasis

added).

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2. These principles plainly apply to IRS litigating positions

asserted in the United States Tax Court, which Congress

constituted not as an executive or independent agency, but as

an Article I “court of record” (26 US.C. § 7441).

Accordingly, this Court has stressed its exclusively judicial

nature: “The Tax Court exercises judicial, rather than

executive, legislative, or administrative, power. It was

established by Congress to interpret and apply the Internal

Revenue Code in disputes between taxpayers and the

Government.” Freytag v. CIR, 501 U.S. 868, 890-91 (1991).

Because its “function and role in the federal judicial scheme

closely resemble those of the federal district courts” (id),

deference to agency litigating positions is equally

inappropriate in the tax court as it would be in a district court.

The allocation of authority within the executive branch

further undercuts the argument for extending Seminole Rock

deference to agency litigating positions in tax cases. Congress

delegated rulemaking and therefore interpretive authority to

the Secretary of the Treasury (26 U.S.C. § 1502), who in turn

has delegated that authority to the Commisioner of Internal

Revenue (26 C.F.R. § 301.7805-1(a)) and to the Assistant

Secretary for Tax Policy (see Coverdale, Court Review of Tax

Regulations and Revenue Rulings in the Chevron Era, 64

Geo. Wash. L. Rev. 35, 51 (1995)). On the other hand,

depending on the taxpayer’s litigation strategy, the

government’s litigating positions might be asserted by an

attorney in the Office of District Counsel for IRS (in tax

court), by an attorney in the Department of Justice Tax

Division (in district court), or by an attorney in the

Department of Justice Court of Federal Claims Section. See

N. Crimm, supra, § 2.4[4][c], at 2-111. Given these diffuse

rulemaking and litigation responsibilities, it is particularly

20

implausible that any of the latter staff attorneys can be

presumed to speak for all of the former policymakers."°

3. Apart from its various other legal shortcomings, the

decision below also threatens to eviscerate Bowen itself.

Interpretive questions cannot be neatly categorized as either

statutory or regulatory. Usually, the interpretation at issue

addresses the putative scope of both the statute and its

implementing regulations: for example, what constitutes

“unpaid losses” under the Tax Code and its implementing

regulations (see Harco Holdings, 977 F.2d at 1029-30 & n.5,

1034-36 & n.12); what constitutes “coal mine dust” under the

Black Lung Benefits Act and its implementing regulations (see

William Bros., 833 F.2d at 264-65); or what constitutes a

“default” under the Truth in Lending Act and its implementing

regulations (see Ford Motor Credit Co. v. Milhollin, 444 U.S.

555, 561 (1980)). Similarly, this case involves the related

interpretive questions what constitutes impermissible

offsetting “in determining the taxable income of a [life]

member” under 26 U.S.C. § 1503(c)(2) (Pet. App. 18a-23a)

and what constitutes “ineligible” losses that cannot “be set off

against consolidated partial [life insurance company taxable

income]” under 26 C.F.R. § 1.1502-47(m)(3)(vi) and (m)(4)

(Pet. App. 15a-18a). Under Bowen, an agency litigating

position addressed solely to the former question plainly would

warrant no deference. Under the decision below, however, an

agency litigating position addressed to both questions does

warrant deference, because Bowen is held inapplicable to the

'° In the litigation below, the government insisted that the Assistant

Secretary for Tax Policy has “exclusive authority to make final

determinations of the Treasury’s position” and that this official “expresses

his Department’s institutional views through formally promulgated rules

and regulations.” Brief of Appellee at 33, Connecticut General Life Ins.

Co. v. CIR, No. 97-7612 (3d Cir. May 29, 1998). Those assertions simply

underscore the inappropriateness of deferring to the litigating positions

asserted by a staff attorney in a local IRS office.

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latter question (Pet. App. 14a-15a), and because the former

question is defined not as testing the litigating position against

the statute, but as testing only the implementing regulation (as

“interpreted” by the agency, Pet. App. 18a) against the statute.

Put more bluntly, the court of appeals’ decision permits any

agency to exempt itself from Bowen simply by copying or

paraphrasing its organic statute in any of its implementing

regulations. That cannot be the law.

B. This Court Has Long Held That Ambiguous Tax

Provisions Must Be Construed In Favor Of The

Taxpayer

Recognizing that “the power to tax involves the power to

destroy,” McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316,

431 (1819), this Court has long applied special rules of

construction in the taxation context. See County of Yakima v.

Confederated Tribes & Bands of the Yakima Indian Nation,

502 U.S. 251, 258 (1992). One of those rules is that

ambiguous tax provisions (whether statutes or regulations)

must be construed in favor of the taxpayer.

In Gould v. Gould, 245 U.S. 151, 153 (1917), this Court

unanimously adopted the principle that, “[i]n case of doubt,”

ambiguous tax provisions “are construed most strongly against

the Government, and in favor of the citizen.” Finding

“obscurity” in the governing provision, the Court rejected the

litigating position of the government, and held that the

operative definition of “income” did not include the alimony

payments at issue. See id. Similarly, in Reinecke v. Northern

Trust Co., 278 U.S. 339, 348 (1929), this Court, after finding

it “doubtful” whether or not the governing provision

encompassed the trusts at issue, rejected the litigating position

of the government and held, citing Gould, that “[t]hat doubt

must be resolved in favor of the taxpayer.” Legions of cases

have reaffirmed these principles. See, e.g., Hassett v. Welch,

303 U.S. 303, 314 (1938) (“if doubt exists as to the

construction of a taxing statute, the doubt should be resolved

22

in favor of the taxpayer”); White v. Aronson, 302 U.S. 16, 20

(1937) (“Where there is a reasonable doubt as to the meaning

of a taxing Act it should be construed most favorably to the

taxpayer.”); Burnet v. Niagara Falls Brewing Co., 282 U.S.

648, 654 (1931) (“It is a familiar rule that tax laws are to be

liberally construed in favor of taxpayers.”); United States v.

Merriam, 263 U.S. 179, 188 (1923) (“If the words [of a tax

provision] are doubtful, the doubt must be resolved against the

Government and in favor of the taxpayer.”).

The court of appeals created an opposite interpretive

presumption. It concluded that ambiguity in tax regulations

must be resolved in favor of the government, through

deference to its litigating positions. The court of appeals thus

not only ignored, but in fact inverted, a fundamental rule of

construction embraced by this Court for decades. On that

ground alone, further review is warranted.

C. Gardebring Provides No Support For The Court Of

Appeals’ Holding

Against all of these administrative law and tax decisions,

the court of appeals relied solely on this Court’s decision in

Gardebring v. Jenkins, 485 U.S. 415 (1988), which it

construed as mandating deference to agency litigating

positions interpreting ambiguous regulations. Pet. App. 15a.

Gardebring does not remotely support that holding.

As an administrative law matter, Gardebring falls within a

narrow exception to Bowen that is plainly inapplicable here.

In Gardebring, the agency was not a party to the underlying

litigation, but appeared only in this Court, only as an amicus,

and only at this Court’s request. See 485 US. at 416.

Although Gardebring did not discuss the question of agency

litigating positions in any detail, a subsequent case involving

Supreme Court amicus briefs explained that, in that limited

context, .here is “no reason to suspect that the interpretation

does not reflect the agency’s fair and considered judgment on

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the matter in question.” Auer v. Robbins, 519 U.S. 452, 462

(1998). Like Gardebring, Auer involved the question whether

an agency litigating position interpreting an ambiguous

regulation is entitled to deference. See id. at 461-62. This

Court distinguished Bowen not on the broad ground that

Bowen is inapplicable to administrative interpretations of

ambiguous regulations, as the court of appeals would have it,

but only on the narrow ground that, “in the circumstances” of

an invited Supreme Court amicus brief, the litigating position

might plausibly reflect the “fair and considered judgment” of

the agency itself. See id. at 462. That rationale is plainly

inapplicable to the positions asserted by partisan counsel

representing the IRS as a party in a trial court proceeding.

In any event, neither Gardebring nor Auer was a tax case:

Gardebring involved construction of AFDC regulations by the

Secretary of Health and Human Services (485 U.S. at 427-

30), and Auer involved construction of FLSA regulations by

the Secretary of Labor (519 U.S. at 461-63). Neither decision

can even remotely be read as mandating deference to agency

litigating positions in tax cases, and thus silently overruling the

entire case line of Gould and its progeny.

fil. IF NOT CORRECTED, THE DECISION BELOW

WILL HAVE SWEEPING AND TROUBLING

CONSEQUENCES

The breadth and significance of the decision below are

difficult to overstate. By its terms, the court of appeals’

holding applies to any interpretive dispute regarding any term

that appears in the Code of Federal Regulations. The decision

below thus controls a potentially limitless range of issues,

including not only interpretations of the Tax Code by the IRS,

but also, to name only a few possible examples, interpretations

of Department of Defense regulations by the Navy, see United

States v. Larionoff, 431 U.S. 864, 872 (1977); interpretations

of the Sentencing Guidelines by the United States Sentencing

Commission, see Stinson v. United States, 508 U.S. 36, 45

24

(1993); and interpretations of Medicare regulations by the

Secretary of Health and Human Services, see Shalala v.

Guernsey Memorial Hosp., 514 U.S. 87, 94-95 (1995).

Because there are far more regulations than statutes, Seminole

Rock is at least as important as Chevron, see Manning, 96

Colum. L. Rev. at 696, which makes this case at least as

important as Bowen.

The decision below also effectively decides all Seminole

Rock questions about what informal pre-litigation

interpretations are entitled to deference. This Court has not

made clear the extent to which such informal interpretations

are entitled to deference. See, e.g., Metropolitan Stevedore

Co. v. Rambo, 521 U.S. 121, 138 n.9 (1995) (interpretation

must be “embodied in [a] regulation or similarly binding policy

statement” to warrant deference); City of Chicago v.

Environmental Defense Fund, 511 U.S. 328, 339 n.5 (1994)

(reserving question whether “agency interpretation expressed

in a memorandum” is entitled to deference); see generally

Anthony, /nterpretive Rules, Policy Statements, Guidances,

Manuals and the Like — Should Federal Agencies Use Them

To Bind The Public?, 41 Duke L.J. 1311 (1992). The

decision below, however, effectively moots any Seminole

Rock question about informal pre-litigation interpretations

because, even if no such interpretations exist, the agency

litigating position is itself nonetheless entitled to deference.

The decision below also will exacerbate the problem of

daunting complexity in the tax law. Late in his life, the leading

tax lawyer of this century concluded that tax law had become

“bewildering,” Griswold, 11 ABA Sec. Tax’n Newsl. 56, 57

(1992), and even “monstrous,” Griswold, /s the Tax Law

Gone To Seed, 11 Am. J. Tax Pol’y 1, 9 (1994). Justice

O’Connor has similarly expressed frustration with the “maze

of regulations” promulgated by the IRS. CIR v. Estate of

Hubert, 520 U.S. 93, 122 (1997) (opinion concurring in the

ee

25

judgment).'’ This system has developed even though, under

Gould and its progeny, the IRS properly bears the risk of any

ambiguity in its own regulations. By inverting Gould, the

court of appeals not only eliminated that modest structural

check, but also created affirmative incentives for even more

regulatory vagueness and complexity. As Justice Thomas has

explained: “It is perfectly understandable . . . for an agency to

issue vague regulations, because to do so maximizes agency

power and allows the agency greater latitude to make law

through adjudication rather than through the more

cumbersome rulemaking process.” Thomas Jefferson Univ.

v. Shalala, 512 U.S. 504, 525 (1994) (dissenting opinion). !”

Finally, the decision below will undercut many of the

protections that Congress has afforded to taxpayers. As

explained above, Congress provided for the application of tax

regulations to be determined through independent adjudication

Commentators have frequently noted this problem. See, e.g., A.

Dubroff et al., Federal Income Taxation of Corporations Filing

Consolidated Returns § 2.02, at 2.7 (2d ed. 1999) (tax regulations “have

resulted in complexity that is often unworkable for all but the most

sophisticated taxpayer”); Dembitzer, Beyond the IRS Restructuring and

Reform Act of 1998: Perceived Abuses of the Treasury Department's

Rulemaking Authority, 52 Tax. Law. 501, 518 (1999) (“It is beyond cavil

that many provisions in Treasury Regulations are complicated and

difficult to decipher.”); Schwidetzky, Hyperlexis and the Loophole, 49

Okla. L. Rev. 403, 404 (1996) (“Tax law is, of course, a case of hyperlexis

run extraordinarily amok.”). The life-nonlife consolidation regulations,

which can fairly be characterized as impenetrable provide ample support

for that criticism. See Pet. App. 42a-71a.

'? Recently, the IRS has adopted the tactic of issuing so-called “anti-

avoidance” or “anti-abuse” regulations, which impose liability on

transactions that comply with all applicable laws, but are designed to

“avoid the purposes of underlying regulations.” Dubroff. supra note 11,

§ 2.01, at 2-1; see also Olson, Some Thoughts on Anti-Abuse Rules, 48

Tax Law. 816 (1995). If courts defer to litigating positions interpreting

these regulations, then the IRS’s enforcement powers will be virtually

unbounded.

26

by courts constituted outside the executive branch. See

Freytag, 501 U.S. at 890-91. Moreover, in the consolidated

return context in particular, Congress specifically required tax

regulations to be “clea[r]” (26 U.S.C. § 1502) and to be

promulgated “prior to” the due date for the returns at issue

(id. § 1503(a)). Despite these principles, the court of appeals

upheld a $200 million tax liability (including primarily accrued

interest), based on an interpretation asserted by partisan

agency counsel in litigation conducted seven years after the

tax years in question, and on a bare judicial determination that

counsel’s position was not entirely “unreasonable.” The

patent unfairness of that decision, and its inconsistency with

the controlling principles of tax and administrative law, could

not be more self-evident.

CONCLUSION

The petition for a writ of certiorari should be granted.

A. DUANE WEBBER

LEONARD B. TERR

C. DAVID SWENSON

BAKER & MCKENZIE

815 Connecticut Ave., N.W.

Washington, D.C. 20006

(202) 452-7000

D. TIMOTHY TAMMANY

JUDITH E. SOLTZ

CHRISTOPHER R. LOOMIS

CIGNA CORPORATION

1601 Chestnut Street

Philadelphia, PA 19192

(215) 761-6219

Dated: August 12, 1999

Respectfully submitted,

GREGORY G. KATSAS

Counsel of Record

JOHN B. NALBANDIAN

JONES, DAY, REAVIS &

POGUE

51 Louisiana Ave., N.W.

Washington, D.C. 20001

(202) 879-3939

ALFRED W. PUTNAM, JR.

GREGG R. MELINSON

DRINKER, BIDDLE &

REATH, LLP

One Logan Square

Philadelphia, PA 19103

(215) 988-2700

Counsel for Petitioners