Opposition Brief — Connecticut General Life Insurance v. Commissioner

No. 99-258 alpacas

AO

Jn the Supreme Court of the Gnited States

CONNECTICUT GENERAL LIFE INSURANCE

COMPANY, ET AL., PETITIONERS

\ COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

SETH P. WAXMAN

Solicitor General

Counsel of Record

LORETTA C. ARGRETT

Assistant Attorney General

DAVID I. PINCUS

THOMAS J. CLARK

Attorneys

Department of Justice

Washington, D.C. 20580-0001

(202) 514-2217

QUESTION PRESENTED

Whether Section 1.1502-47(m)(3)(vi) of the Treasury

Regulations, 26 C.F.R. 1.1502-47(m)(3)(vi), prescribes

the proper method for determining the amount of net

operating losses of non-life insurance companies that

may not be taken into account in determining taxable

income on consolidated federal income tax returns that

such companies file with life insurance companies.

(I)

TABLE OF CONTENTS

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TABLE OF AUTHORITIES

Cases:

A.E. Staley Mfg. Co. v. Commissioner, 119 F.3d

ETS Se a

Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S.

EEE SEE EY EEE SEE Cae ee a

Auer v. Robbins, 519 U.S. 452 (1997) ............cccesccssscesseess

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

EGR CSA EEO TERRES ER Se OO a RR

Bowles v. Seminole Rock & Sand Co., 325 U.S. 410

EE a CE ES ELS ASL CT a EE TR

Charles Ilfeld Co. v. Hernandez, 292 U.S. 62

a iceniobentvetionmn

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

Defense Council, 467 U.S. 837 (1984) ....ceecccseseeteeecseeenees

Deputy v. DuPont, 308 U.S. 488 (1940) wc ecesesetseseees

Durando v. United States, 70 F.3d 548 (9th Cir.

A LES RR AT SAR PA ee

Hassett v. Welch, 303 U.S. 303 (1938) .............cccccccssscesseeee

Helvering v. Inter-Mountain Life Ins. Co., 294 U.S.

a i ieailiaiabnieteeiniibenivenes

INDOPCO, Inc. v. Commissioner, 503 U.S. 79

FRE CR ee

Ladner v. United States, 358 U.S. 169 (1958) «0.0.0...

Martin v. Occupational Safety & Health Review

SE Oi, GUI AIA RO CR OEEED seceicrvenssrereeveresserrenemeseeneonvennes

National Muffler Dealers Ass’n v. United States,

I a anh iinealineetiondinnndabenionnineninntesied

(III)

IV

Cases—Continued: Page

New Colonial Ice Co. v. Helvering, 292 U.S. 435

ID eeiisedecarsicseteiintbiriinsnlidiehianniiensiaban a 13

Reno v. Koray, 515 U.S. 50 (1995) ........ccccccssssscsssccssecesseseess 13

Smith v. United States, 508 U.S. 223 (1993) coe 13

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

bE RRBs Renna ee EE DT PAO EEN RE PRE Ne LENE APS CWT BS CSCO RR 12

UNUM Corp. v. United States, 130 F.3d 501

(1st Cir. 1997), cert. denied, 119 S. Ct. 42 (1998) wo. 13

Weingarden v. Commissioner, 825 F.2d 1027

GRRE TA, UD cacetitivcitenbdtcnennnaabistacbanigie eo: 13

White v. United States, 305 U.S. 281 (1988) oo... eeeeee 12.14

Statutes and regulations:

Internal Revenue Code (26 U.S.C.):

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OD I eabiciteciciechciensacnineh scanned ee 2

I saisachatheccectiietectetianobinsiieetadateiaiaaiiliadiecicntticie: 2,4, 5, 7,8

Tax Reform Act of 1976, Pub. L. No. 94-455, § 1507,

is IIE sectittinn utidditacieiigtscnieacbicbinigadelicbidaatniaaeitatcsaes 2

26 C.F.R.:

SEE RAPER Re aren Cer OeL Mae vIn A ONE NR 7

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RR Be secctcbcitntvieccunicitniiacsiniileiconiatinateniis 3

Re SS iniethicicccnstcebiiitaneciteititanintninintiien sasbad 2

I Bet .caireneecctedceentpnnebicicnnibternidiiatdepaiibiinameiions i)

OR ET eieleaitcenintiihiibibtcibeninsetsitecninendnaaialiiaaiaiiians 9

Section 1.1602.47( M1) (MAE). .ccccccorcscececsescsceovsevccevesesenseenes i)

Ee SIRE iaccninistesinesincccenttnetenscimnsnmeniauticinkiaieith )

NN Te IED ce crnitnnccibinirnistnettasictaensiaiciniumsiiniinsiiaiiane 9

Section 1.1502-47(MNMSNM V1) ......cccccccccssecesesecserecesees 3, 5, 6, 7, 11

OI TD hccentincrceennittiesinaidciiiisepeatniindes 6, 7,9

EI SEI ccctescsscttatantncsestecrsceusanostanandandiens 3

Miscellaneous:

S. Rep. No. 938, 94th Cong., 2d. Sess. (1976) .......ssecsseseeseses 8

S. Rep. No. 960, 70th Cong., Ist Sess. (1928) ........cscscseeeeees 8

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Jn the Supreme Court of the Anited States

No. 99-258

CONNECTICUT GENERAL LIFE INSURANCE

COMPANY, ET AL., PETITIONERS

Uv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-23a)

is reported at 177 F.3d 136. The opinion of the Tax

Court (Pet. App. 24a-38a) 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 ex-

tended the time for filing a petition for a writ of

certiorari to August 12, 1999. The petition was filed on

August 12, 1999. The jurisdiction of this Court is

invoked under 28 U.S.C. 1254(1).

(1)

STATEMENT

1. Prior to 1981, life insurance companies were not

permitted to file consolidated federal income tax re-

turns with corporations that were not life insurance

companies. For tax years beginning after December 31,

1980, Congress changed this rule, and permitted “life-

nonlife consolidation.”' In Section 1503(c) of the In-

ternal Revenue Code, 26 U.S.C. 1503(¢), however, Con-

gress placed two limitations on the extent to which the

net operating losses (NOLs) of nonlife companies may

be used to reduce the taxable income reported on the

consolidated return. One of those limitations, set forth

in Section 1503(c)(2), is that an NOL of a nonlife com-

pany “shall not be taken into account” in determining

the taxable income of the affiliated group unless the

nonlife company has been a member of the group for

the five years preceding the year the loss was incurred.

Regulations promulgated by the Secretary of the

Treasury prescribe the method for determining the

NOLs that, under Section 1503(c)(2), “shall not be taken

into account.” As pertinent here, the regulations re-

quire all nonlife companies within the group to set off

their gains and losses against each other, and thereby

determine whether the “nonlife subgroup” had a con-

solidated net operating loss (CNOL). 26 C.F.R. 1.1502-

47(h)(2)(ii). The amount of the CNOL that could be

used to offset the income of life companies in the group

was to be “reduced by the ineligible NOL,” i.e., “the

amount of the separate net operating loss * * * of any

! Tax Reform Act of 1976, Pub. L. No. 94-455, § 1507, 90 Stat.

1739-1741.

Eee

nonlife member that is ineligible in that year.” 26

C.F.R, 1.1502-47(m)(3)(vi) (emphasis added).

2. Before March 31, 1982, Connecticut General Cor-

poration was the parent corporation of Connecticut

General Life Insurance Company (CG Life) and more

than 40 other corporations. CG Life was the sole life

insurance company in this group. Pursuant to the

new rules permitting life-nonlife consolidation, CG

Life joined with the other subsidiaries of Connecticut

General Corporation in the filing of consolidated federal

income tax returns for the period ending March 31, 1982

(Pet. App. 3a, 25a).

Prior to March 31, 1982, INA Corporation was the

common parent of more than 160 affiliated non-life

corporations that engaged primarily in the sale~under-

writing, and servicing of property and casualty

insurance. INA Corporation had filed consolidated

federal income tax returns on behalf of itself and its

subsidiaries (Pet. App. 4a). On March 31, 1982,

Connecticut General Corporation and INA Corporation

(the two parent companies) merged to form CIGNA

Corporation. The merger was a “reverse acquisition”

within the meaning of 26 C.F.R. 1.1502-75(d)(3), pur-

suant to which CIGNA succeeded Connecticut General

as the common parent of the CG group, which continued

to exist for tax purposes. CIGNA also became the

common parent of each of the former members of the

INA group, which group ceased to exist for tax

* The regulations define an “ineligible” corporation as a cor-

poration that is not eligible. 26 C.F.R. 1.1502-47(d)(13). An

“eligible” corporation is defined, in part, as a corporation that has

been a member of the affiliated group for at least five years

preceding the taxable year for which the consolidated return and

the determination of eligibility are made. 26 C.F.R. 1.1502-

47(d)(12).

dq

purposes. Thus, in effect, the CG group, which became

the CIGNA group, acquired the former INA subsidiar-

ies individually.

On November 20, 1984, a subsidiary of CIGNA ac-

quired Preferred Health Care, Inc. (PHC) and its affili-

ated corporations, none of which were life insurance

companies. Before the acquisition, the PHC group had

filed consolidated federal income tax returns. All

members of the PHC group immediately before the

acquisition became separate members of the CIGNA

group upon the acquisition, and the PHC group ceased

to exist (Pet. App. 4a).

3. The consolidated federal income tax returns filed

by CIGNA for 1982 through 1985 included the corpora-

tions that had been members of the former INA group,

and the returns filed for 1984 and 1985 included the

corporations that had been members of the former PHC

group. CG Life was the only life insurance company

included in these consolidated returns, and it had

taxable income during each of these taxable periods.

Some of the corporations that had formerly been

members of the INA group and the PHC group had

taxable income during these years, and others had tax

losses (Pet. App. 7a).

In calculating the amount of the NOLs for the 1982

through 1985 consolidated returns that, under Section

1503(¢c)(2), “shall not be taken into account,” CIGNA

treated all corporations that were formerly members of

the INA group as a single entity. Under this “single

entity method,” petitioners set off the losses of those

former INA corporations that had losses against the

income of those that had income. The result was a net

loss for each taxable period. Petitioners did the same

with respect to the former PHC companies, and the

result was a net loss for the 1985 taxable year. It was

5

the resulting net losses calculated in this manner that

CIGNA treated as the NOLs that “shall not be taken

into account” under Section 1503(c)(2) (Pet. App. 7a-8a).

4. On audit, the Commissioner determined that

CIGNA used an incorrect method to calculate the

NOLs that shall not be taken into account. The Com-

missioner concluded that Section 1.1502-47(m)(3)(vi) of

the Treasury Regulations does not permit CIGNA to

treat all former members of the INA group as a single

entity, and all former members of the PHC group as

a single entity. The Commissioner determined that the

regulation instead requires CIGNA to treat each

corporation that had formerly been in the INA group

and the PHC group as a separate member of the newly-

constituted CIGNA group. Under this “separate entity

method,” the entire NOL of each corporation that had

formerly been in the INA group and the PHC group is

ineligible and is therefore to be disregarded (Pet. App.

8a-9a). Under this method, these NOLs are not to be

“taken into account” at any time in the calculation of the

taxable income reported on the consolidated returns.

5. Petitioners filed a petition in the Tax Court to

challenge the Commissioner’s determination. On cross-

motions for summary judgment, the Tax Court ruled in

favor of the Commissioner. The court observed that

the regulations adopted under Section 1503(c)(2) are

substantive legislative rules which require “each nonlife

company that constitutes a member of the consolidated

group [to be] treated as a separate entity” (Pet. App.

32a). It follows, the court said, that the consolidated

NOL of all of the nonlife companies included in the

consolidated federal income tax return “is reduced by

the separate ‘ineligible NOL’ of each ineligible nonlife

company that constitutes a member of the consolidated

group” (ibid.). The court emphasized that (id. at 33a):

6

[njo provision is made in the above legislative

regulations to treat a company that prior to acquisi-

tion had been a member of a group that had filed a

consolidated income tax return as part of a single,

aggregate group of companies and to net within that

group losses of ineligible nonlife companies against

income of other nonlife companies of the same

acquired group.

6. Concluding “that the applicable Treasury regula-

tion, as interpreted by the Commissioner, is a per-

missible interpretation of the statute” (Pet. App. la-2a),

the court of appeals affirmed: The court of appeals first

rejected petitioners’ primary contention that the regu-

lation is not even applicable to this case. Petitioners

had claimed that the regulation applies only to acquired

stand-alone corporations and not to acquired groups,

such as its acquisitions of the INA corporations and the

PHC corporations. In support of their argument,

petitioners relied primarily on Section 1.1502-47(m)(4)

of the Treasury Regulations which reads, in its en-

tirety, “Acquired Groups. |Reserved].” 26 C.F.R.

1.1502-47(m)(4). Petitioners argued that this reserved

section in the regulations shows that the Commissioner

intended to except acquired groups from the general

rule of Section 1.1502-47(m)(3)(vi). Petitioners argued

that, in the absence of any specific rule applicable to

acquired groups, they were entitled to use any reason-

able means to calculate the amount of their ineligible

NOLs.

The court of appeals concluded, however, that the

Commissioner’s interpretation of the Treasury Regula-

tions to apply in this situation is entitled to deference.

The court found that “nothing in Regulation [1.1502]-

47(m)(4) contradicts the Commissioner’s interpretation

7

of Regulation [1.1502]-47(m)(3)(vi) as applying to ac-

quired groups.” Because Regulation 1.1502-47(m)(3)(vi)

makes no distinction between acquired stand-alone

companies and acquired groups and, “by its own terms,

applies to” the facts of this case (Pet. App. 17a-18a), the

court of appeals concluded that it was proper to defer to

the interpretation of the regulation by the agency that

Congress charged with the enforcement of the statute

and the adoption of the legislative rule (id. at 12a-14a,

18a) .’

ARGUMENT

The court of appeals held that petitioners must

calculate the NOLs of their affiliates that “shall not

be taken into account” (26 U.S.C. 1503(c)(2)) in deter-

mining taxable income on their consolidated federal

income tax returns in the manner prescribed by Section

1.1502-47(m)(3)(vi) of the Regulations. This holding is

correct and does not conflict with any decision of this

Court or any other court of appeals. Indeed, the issue

has never been addressed by this Court or any other

court of appeals. Further review is therefore not

warranted.

1. Section 1501 of the Internal Revenue Code, 26

U.S.C. 1501, grants affiliated groups of corporations the

“privilege” of filing consolidated federal income tax

returns. The privilege is available, however, only when

each corporation in the affiliated group consents to all

% The court of appeals also rejected petitioners’ contention

that the preamble to the Section 1.1502-47 regulations supports

their argument that no rule was promulgated with respect to ac-

quired groups. The court observed that the preamble “suggests

that applying a rule other than that annunciated in [1.1502]-

47(m)(3)(vi) would contradict ‘the ordinary reading of section

1503(c)(2)’” of the Code (Pet. App. 17a).

8

consolidated return regulations issued by the Secretary

of the Treasury. See Charles Ilfeld Co. v. Hernandez,

292 U.S. 62, 65 (1934). Congress did not set forth de-

tailed rules in the statute prescribing how the con-

solidated taxable income of an affiliated group of

corporations is to be determined. In Section 1502 of the

Code, Congress charged the Secretary with prescribing

“such regulations as he may deem necessary” to en-

sure that the tax liability of an affiliated group of

corporations is properly determined. 26 U.S.C. 1502.

See S. Rep. No. 960, 70th Cong., Ist Sess. 15 (1928)

(“delegatling] power to the commissioner to prescribe

regulations legislative in character”).

When Congress enacted the statutory provisions

permitting life-nonlife consolidation, it did not prescribe

detailed rules on how the group’s income was to be

determined. As pertinent here, the only rule it pro-

vided was that the NOL of a nonlife member of the

group “shall not be taken into account in determining

the taxable income” of a life insurance company in the

group unless the life and nonlife members have been in

the same affiliated group for at least five years. 26

U.S.C. 1503(c)(2). The report of the Senate Finance

Committee emphasized that, under this statute, “the

details of the computation of the tax liability of an

affiliated group which includes life or other mutual

insurance companies is to be determined under regu-

lations issued by the Treasury Department”. S. Rep.

No. 938, 94th Cong., 2d Sess. 456 (1976).

2. On June 8, 1982, the Secretary issued proposed

regulations prescribing rules for filing life-nonlife con-

solidated returns (Pet. App. 4a). The proposed regula-

tions made no distinction between acquired stand-alone

companies and acquired groups. After the proposed

regulations were issued, CIGNA wrote to the Com-

9

missioner suggesting that the Secretary adopt by

regulation a special rule for acquired groups such as the

one that petitioners have advocated in this lawsuit—

that “separate nonlife members be treated as one entity

if they are acquired in a single transaction by one group

but were members of a different group prior to their

acquisition” (id. at 5a). When the final regulations were

ultimately issued, however, they did not include a

special rule for acquired groups. In a letter sent to

CIGNA after the final regulations were issued, the

Chief Counsel of the IRS, Kenneth W. Gideon, specifi-

cally informed CIGNA that the “final life-nonlife con-

solidated return regulations * * * do not adopt your

suggestion” (id. at 6a).

The final regulations differed from the proposed

regulations by adding the “reserved” paragraph at

Section 1.1502-47(m)(4).4 The preamble to the final

regulations states that “notwithstanding the ordinary

reading of section 1503(c)(2) [of the Code],” the Trea-

sury Department intended to study further whether to

adopt an exception from the rule such as the one that

CIGNA had proposed. The preamble stated that the

agency would consider whether it would “be consistent

with the intent of section 1503(c)(2), or correct as a

matter of policy,” to adopt a rule such as the one sug-

gested by CIGNA (Pet. App. 6a).

Internal Treasury and Internal Revenue Service

memoranda that petitioners relied upon below (C.A.

App. 199-216) show that during the three year period

after the issuance of the final regulations, the Treasury

4 The “reservation” of a paragraph of the regulations is not

unique to Section 1.1502-47(m)(4). For example, eight other para-

graphs or subparagraphs of Section 1.1502-47 alone are marked

“reserved.” See 26 C.F.R. 1.1502-47(i), (j), (k)(1)-(k)(4), (1)(1), (1)(2).

10

did, in fact, study the possibility of issuing a special rule

for “acquired groups” similar to the rule suggested by

CIGNA. These memoranda discuss the advantages and

disadvantages of such a rule, and reveal that there were

differences of opinion within the Treasury and IRS as

to whether a special rule for acquired groups would be

appropriate. Despite this lengthy and in-depth study of

the CIGNA proposal, however, the agency has declined

to promulgate the special rule for acquired groups

sought by petitioners.

The internal Treasury and IRS memoranda that

CIGNA relied upon repeatedly refer to the issue raised

in this case as the “CIGNA issue” (C. A. App. 199, 201,

204, 215). Despite its vigorous efforts before the

agency, CIGNA never succeeded in persuading the

Treasury to adopt the rule it advocated. Undeterred,

CIGNA has decided in this lawsuit to “wag[e] in a

judicial forum a specific policy battle which [it] ulti-

mately lost in the agency.” Chevron U.S.A Ine. v.

Natural Resources Defense Council, 467 U.S. 837, 864

(1984). This battle is misguided. “When a challenge to

an agency construction of a statutory provision, fairly

conceptualized, really centers on the wisdom of the

agency’s policy, rather than whether it is a reasonable

choice within a gap left open by Congress, the challenge

must fail.” Jd. at 866.

3. The NOLs involved in this case were incurred by

members of the former INA group after the merger.

Because these losses took place after the merger, they

could not be considered losses of the INA group, which

ceased to exist upon the merger. The losses were,

instead, losses of separate members of the newly-

constituted CIGNA group. Because the former mem-

bers of the INA group had been members of the

CIGNA group for less than five years, they were

11

“ineligible” corporations and, under the plain language

of Treasury Regulation 1.1502-47(m)(3)(vi), their sepa-

rate NOLs therefore had to be subtracted from the

nonlife consolidated NOL to determine the “offsetable

nonlife consolidated net operating loss.” 26 C.F.R.

1.1502-47(m)(3)(vi).

Petitioners’ primary contention is that the court of

appeals erred in deferring to the Commissioner’s inter-

pretation of the straightforward text of the regulations.

Although petitioners purport to acknowledge the

settled rule that courts are to defer to an agency’s

interpretation of its own regulations, see Bowles v.

Seminole Rock & Sand Co., 325 U.S. 410, 413-414

(1945), they assert that the agency’s interpretation is

not entitled to deference when it is first advanced in

litigation. That contention, however, is based on a false

premise. Contrary to petitioners’ assumption, the posi-

tion advanced by the Commissioner in this case—that

the ineligible NOLs had to be calculated under

Regulation 1.1502-47(m)(3)(vi)—was unquestionably

not the invention of the IRS counsel who represented

the Commissioner in the Tax Court. As we have just

described, the Treasury determined at the time that it

issued the final regulations not to adopt the special

“CIGNA rule” espoused by petitioners. Moreover,

although the Treasury and the Internal Revenue Ser-

vice further studied the “CIGNA issue” for several

years after the final regulations were issued, the special

rule espoused by petitioners has not been adopted. In

these circumstances, the agency’s announced interpre-

tation of its own legislative regulations plainly

“reflect(s] the agency’s fair and considered judgment on

the matter in question” and was properly accorded

deference by the court of appeals. Awer v. Robbins, 519

12

U.S. 452, 462 (1997).° See also Thomas Jefferson Univ.

v. Shalala, 512 U.S. 504, 512 (1994).

Moreover, as the court of appeals emphasized (Pet.

App. 8a-9a), the interpretation of the regulation ad-

vanced by the Commissioner in this litigation is

precisely the same that the agency has asserted

throughout the lengthy audit of petitioners’ con-

solidated returns. This Court has consistently con-

cluded that an agency’s interpretation of its regulations

is entitled to deference even if the interpretation is first

adopted during administrative proceedings. As the

Court stated in Martin v. Occupational Safety and

Health Review Commission, 499 U.S. 144, 158 (1991),

“the Secretary’s interpretation is not undeserving of

deference merely because the Secretary advances it for

the first time in an administrative adjudication.”

4. Petitioners err in contending (Pet. 21) that the

decision of the court of appeals conflicts with decisions

holding that the rule of lenity may require ambiguous

tax provisions to be construed in favor of the taxpayer.

The most recent of the decisions of this Court cited by

petitioners for this proposition is Hassett v. Welch, 303

U.S. 303, 314 (1938). In the subsequent decision of

White v. United States, 305 U.S. 281, 292 (1938), how-

ever, the Court stated:°

5 In this case, as in Auer v. Robbins, supra, the Commis-

sioner’s position “is in no sense a ‘post hoc rationalizatio[n]’

advanced by an agency seeking to defend past agency action

against attack.” 519 U.S. at 462. Contrary to petitioners’ un-

supported assertion (Pet. 20), the decision in this case thus does

not “threaten[] to eviscerate” this Court’s decision in Bowen v.

Georgetown University Hospital, 488 U.S. 204 (1988).

6 Petitioners also err in their understanding of how the rule of

lenity applies to the interpretation of ambiguous statutes. “The

rule of lenity applies only if, ‘after seizing everything from which

eee

13

We are not impressed by the argument that, as

the question here decided is doubtful, all doubts

should be resolved in favor of the taxpayer. It is

the function and duty of courts to resolve doubts.

We know of no reason why that function should be

abdicated in a tax case more than in any other

where the rights of suitors turn on the construction

of a statute and it is our duty to decide what that

construction fairly should be.

It is, in any event, an elementary rule in tax law that

deductions from income are matters of legislative grace

that must be “strictly construed and allowed only ‘as

‘there is a clear provision therefor.’” INDOPCO, Inc. vy.

Commissioner, 503 U.S. 79, 84 (1992), quoting New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

See also Deputy v. DuPont, 308 U.S. 488, 493 (1940);

A.E. Staley Mfg. Co. v. Commissioner, 119 F.3d 482,

486 (7th Cir. 1997) (deductions from income are “strictly

construed”); UNUM Corp. v. United States, 130 F.3d

501, 509 (1st Cir. 1997) (same), cert. denied, 119 S. Ct.

42 (1998); Durando v. United States, 70 F.3d 548, 550

(9th Cir. 1995) (same); Weingarden v. Commissioner,

825 F.2d 1027, 1029 (6th Cir. 1987) (same). Because the

aid can be derived,’ Smith v. United States, 508 U.S. 223, 239 (1993)

(internal quotation marks and brackets omitted), we can make ‘no

more than a guess as to what Congress intended.’ Ladner v.

United States, 358 U.S. 169, 178 (1958).” Reno v. Koray, 515 U.S.

50, 64-65 (1995). One of the principles “from which aid can be

derived” in the interpretation of statutes and legislative regu-

lations is the principle that deference is to be given to reasonable

interpretations adopted by the Treasury—the agency that Con-

gress has charged with enforcement of these complex provisions.

See, e.g., Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. 382,

389-390 (1998); National Muffler Dealers Ass'n v. United States,

440 U.S. 472, 477 (1979).

14

statutory and regulatory provisions that govern this

case allow deductions from income that would other-

wise be subject to tax, they are to be strictly construed.

The Court long made clear, even prior to its decision in

White v. United States, supra, that, in a deduction case,

“[t]he rule that ambiguities in statutes imposing taxes

are to be resolved in favor of taxpayers does not apply.

Deductions are allowed only when plainly authorized.”

~ Helvering v. Inter-Mountain Life Ins. Co., 294 U.S.

686, 689 (1935).

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

SETH P. WAXMAN

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

DAVID I. PINCUS

THOMAS J. CLARK

Attorneys

OCTOBER 1999

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