No. 97-147 IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1996 ATLANTIC MUTUAL INSURANCE Co. AND INCLUDIBLE SUBSIDIARIES, PETITIONER v. 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 SETH P. WAXMAN Acting Solicitor General LORRETTA C. ARGRETT Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General KENT L. JONES Assistant to the Solicitor General DAVID I. PINCUS EDWARD T. PERELMUTER Attorneys Department of Justice Washington, D.C. 20530-0001 (202)514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether 26 C.F.R. 1.846-3(c) correctly interprets the term "reserve strengthening" as used in Section 1023(e)(3)(B) of the Tax Reform Act of 1986. (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinions below . . . . 1 Jurisdiction . . . . 1 Statement . . . . 2 Discussion . . . . 7 Conclusion . . . . 21 TABLE OF AUTHORITIES Cases: Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984) . . . . 6 Keene Corp. v. United States, 508 U.S. 200 (1993) . . . . 18 Massachusetts v. Blackstone Valley Electric Co., 67 F.3d 981 (1st Cir. 1995) . . . . 14 Mourning v. Family Publications Services, Inc., 411 U.S. 356 (1973) . . . . 6 National Ass'n of Greeting Card Publishers v. United States Postal Service, 462 U.S. 810 (1983) . . . . 15 National Muffler Dealers Ass'n v. United States, 440 U.S. 472 (1979) . . . . 21 National Railroad Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407 (1992) . . . . 14-15 Rowan Cos. v. United States, 452 U.S. 247 (1981) . . . . 18 Russello v. United States, 464 U.S. 16 (1983) . . . . 17 Western National Mutual Insurance Co. v. Commissioned 102 T.C. 338 (1994), aff'd, 65 F.3d 90 (8th Cir. (1995) . . . . 3, 4, 19 65 F.3d 90 (8th Cir. 1995) . . . . 4, 7, 14, 19 (III) ---------------------------------------- Page Break ---------------------------------------- IV Statutes and regulations: Page Internal Revenue Code (26 U.S.C.): 481(a) . . . . 9, 10 832(b)(5) (1982) . . . . 7 832(b)(5)(A) . . . . 8 832(c)(4) . . . . 7 846 . . . . 8 Tax Reform Act of 1984, Pub. L. No. 98-369, Div. A, 216(b)(3), 98 Stat. 759 . . . . 16 Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085: 1023(c), 100 Stat. 2399 . . . . 8 1023(e)(l), 100 Stat. 2404 . . . . 8 1023(e)(2), 100 Stat. 2404 . . . . 8 1023(e)(3)(A), 100 Stat. 2404 . . . . 10 1023(e)(3)(B), 100 Stat. 2404 . . . . 2, 3, 5, 7, 10, 11, 16, 17, 18 Treas. Regs. (26 C.F.R.): 1.846-3 . . . . 13 1.846-3(c) . . . . 3 1.846-3(c)(3) . . . . 2, 17 1.846-3(c)(3)(ii) . . . . 14 Miscellaneous: 132 Cong. Rec. 16,130-16,131 (1986) . . . . 11 H.R. 3838, 99th Cong., 2d Sess. (1986) . . . . 11 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. (1986) . . . . 5, 12, 15, 18 S. Rep. No. 313, 99th Cong., 2d Sess. (1986) . . . . 8 ---------------------------------------- Page Break ---------------------------------------- IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1996 No. 97-147 ATLANTIC MUTUAL INSURANCE Co. AND INCLUDIBLE SUBSIDIARIES, PETITIONER v. 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 OPINIONS BELOW The opinion of the court of appeals (Pet. App. A1- A25) is reported at 111 F.3d 1056. The opinion of the Tax Court (Pet. App. A26-A47) is unofficially reported at 71 T.C.M. (CCH) 2154. JURISDICTION The judgment of the court of appeals was entered on April 24, 1997. The petition for a writ of certiorari was filed on July 21, 1997. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). (1) ---------------------------------------- Page Break ---------------------------------------- 2 STATEMENT 1. Petitioner is a property and casualty insurance company (Pet. App. A6). Such companies maintain an accounting reserve for their "unpaid losses." The reserve for unpaid losses consists of amounts that each insurer estimates it will ultimately be required to pay (i) on losses already reported ("case reserves"), (ii) on losses not yet reported but estimated to have occurred ("incurred but not reported" loss reserves) and (iii) in connection with the determination and adjustment of such losses ("loss adjustment expense" reserves) (id. at A6 n.4). During the 1986 taxable year, petitioner made net additions to the reserves it maintained for accidents that occurred prior to that year. Those increases in reserves were not attributable to any changes in the methods of estimation (Pet. App. A45). Instead, they were the result of additional experience on the loss claims and "routine adjustments" by claims adjusters (ibid.). Section 1.846-3(c)(3) of the Treasury Regulations defines the term "reserve strengthening," as used in Section 1023(e)(3)(B) of the Tax Reform Act of 1986, generally to include any additions made to net re- serves, even if stemming from routine adjustments. The Commissioner of Internal Revenue therefore determined that the increases to petitioner's reserves for losses occuring prior to 1986 constituted "reserve strengthening" under Section 1023(e)(3)(B) of the Tax Reform Act of 1986 (Pet. App. A7). Based on that de- termination, petitioner was required to recognize additional taxable income of $1,339,039 for 1987, with a resulting deficiency in tax of $519,987 for that year (ibid.). ---------------------------------------- Page Break ---------------------------------------- 3 2. Petitioner commenced this action in Tax Court to contest the deficiency determination of the Com- missioner (Pet. App. A7). a. The issue addressed in this case is whether Section 1.846-3(c) of the Treasury Regulations (26 C.F.R. 1.846-3(c)) correctly defines the term "reserve strengthening: as used in Section 1023(e)(3)(B) of the Tax Reform Act of 1986, to include changes in re- serves attributable to routine claims adjustment. That question was first considered by the Tax Court in Western National Mutual insurance Co. v. Comm- issioner, 102 T.C. 338 (1994), aff'd, 65 F.3d 90 (8th Cir. 1995). In that case, the taxpayer argued that the term "reserve strengthening" is understood in the insurance industry to involve only those increases to reserves that result from changes in the assumptions or methodology used to compute reserves. The tax- payer contended in that case, as here, that the term does not encompass the type of increases to un- paid loss reserves that result from routine claims processing. 102 T.C. at 346-347. The taxpayer in Western National introduced expert testimony that purported to establish the technical meaning of the term "reserve strengthening" in the insurance indus- try. The Commissioner did not offer any opposing expert testimony in that case. Instead, the Commis- sioner relied on the legislative history of Section 1023(e)(3)(B) to support the definition of the term "reserve strengthening" contained in the agency's interpretive regulation. 102 T.C. at 347. In Western National, the Tax Court invalidated the regulation in a reviewed opinion with four judges dissenting. The majority relied on the taxpayer's expert witnesses in concluding that the term "reserve strengthening" has an "industry meaning" ---------------------------------------- Page Break ---------------------------------------- 4 that is narrower than the definition contained in the agency's regulation. 102 T.C. at 360. The court con- cluded that the statute incorporates the "industry usage" of the term and is therefore "neither unambig- uous nor imprecise" (id. at 360 & n.25). Because the interpretive regulation conflicts with the "industry meaning" of the term "reserve strengthening," the court concluded that the regulation conflicts with the statute and is therefore invalid. On appeal, the Eighth Circuit affirmed. 65 F.3d 90 (1995). b. In the present case, both the Commissioner and the taxpayer introduced expert reports at trial that addressed the meaning of "reserve strengthening" in the property and casualty insurance industry. Those expert reports, which are summarized in detail by the court below, "ma[de] clear that the term 'reserve strengthening' as used in section 1023(e)(3)(B) is sub- ject to more than one interpretation" (Pet. App. A9 & n.5). See also id. at A43. The Tax Court nonetheless again concluded that the taxpayer was not liable for the asserted deficiency (Pet. App. A27). The court stated that its prior de- cision "was not based solely on expert testimony" (id. at A46) but also on the legislative history of the provision (id. at A36-A38). The court acknowl- edged that the Conference Committee "substantially revised the 'reserve strengthening' language con- tained in both the Senate bill and in the accompanying Senate Finance Committee Report," which had lim- ited reserve strengthening to changes in reserve practices (id. at A36). The court further noted that the Conference Committee Report "provided a more expansive definition of the term [reserve strengthen- ing] than that contained in the Finance Committee ---------------------------------------- Page Break ---------------------------------------- 5 report" (id. at A38). The court therefore agreed that the agency's regulation "provided a definition of `re- serve strengthening' consistent with the conference committee report" (id. at A41). But, in Western National, the court had emphasized that the Con- ference Committee Report also states that the limita- tion on "reserve strengthening" is designed "to pre- vent taxpayers from artificially increasing" reserves (id. at A42, quoting H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. at II-367 (1986)). The court reasoned that this reference to artificial adjustments refers "to changes in assumptions or methodology" rather than routine loss adjustments (Pet. App. A42). The court ultimately concluded that, despite the Commis- sioner's "cogent arguments to the contrary," princi- ples of stare decisis required it to adhere to the decision in Western National (id. at A45). 3. The court of appeals reversed (Pet. App. A1- A25). The court concluded that there is no plain meaning, or consistent industry usage, of the term "reserve strengthening" as that term is used in Sec- tion 1023(e)(3)(B) of the Tax Reform Act of 1986. To the contrary, the "expert testimony here makes clear that the term 'reserve strengthening' as used in [the statute] is subject to more than one interpretation" (Pet. App. A9 & n.5). In view of the "lack of an explicit statutory definition of reserve strengthening" and "the conflicting definitions of reserve strengthening provided by the expert witnesses: the court held that "the Tax Court erred as a matter of law in holding that the meaning of reserve strengthening in section 1023(e)(3)(B) was plain" (Pet. App. A15). 1. ___________________(footnotes) 1 The court of appeals also stated that the Tax Court erred in Western National by relying on the meaning of the term ---------------------------------------- Page Break ---------------------------------------- 6 Finding the words of the statute to be ambiguous, the court concluded that it is required by Chevron USA. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), "to take a deferential ap- proach to ascertaining whether the agency's inter- predation is a permissible one'' (Pet. App. A15). The court emphasized that "where reasonable minds may differ * * * , courts should defer to the informed experience and judgment of the agency to whom Congress delegated appropriate authority" (id. at A24 n.13, quoting Mourning v. Family Publications Services, Inc., 411 U.S. 356, 371 (1973)). The court held that the broad definition of "reserve strengthen- ing" contained in the regulation satisfies this defer- ential standard because the agency's interpretation is consistent with the language of the statute, its history and its underlying purpose (Pet. App. A15- A25). ___________________(footnotes) "reserve strengthening" as used in the life insurance industry. The court explained that the meaning of "reserve strengthen- ing" in the life insurance industry has no direct relevance to the meaning of that term in the property and casualty insur- ance industry (Pet. App. 12a-13a): [L]ife insurance companies and P & C insurers are taxed in entirely separate manners. Gross income as well as loss reserves are computed on different bases and assumptions. Actuarial assumptions about interest rates and mortality rates are an integral part of computing future losses which form the "basis of the loss reserves in life insurance. On the other hand, P & C loss re- serves are determined primarily based on past claims experience and the judgments of the individual claims adjusters. ---------------------------------------- Page Break ---------------------------------------- 7 DISCUSSION The court of appeals correctly held that the regula- tion establishes a permissible interpretation of See- tion 1023(e)(3)(B) of the Tax Reform Act of 1986. The decision in this case, however, conflicts with the decision of the Eighth Circuit in Western National Mutual Insurance Co. v. Commissioner, 65 F.3d 90 (8th Cir. 1995). The issue addressed in these conflict- ing decisions affects the 1987 tax liability of a signifi- cant portion of the property and casualty insurance industry, with consequences for taxable income in excess of $1 billion. Although it is possible that this conflict could be reconciled in future litigation, we do not oppose the granting of certiorari in this case. 1. Section 832(c)(4) of the Internal Revenue Code authorizes a deduction for "losses incurred" in com- puting the taxable income of a property and casualty insurance company. 26 U.S.C. 832(c)(4). Prior to 1986, the term "losses incurred" was defined by Sec- tion 832(b)(5) of the Code to mean the amount of "losses paid" during the year plus the increase (or minus the decrease) in "unpaid losses." 26 U.S.C. 832(b)(5) (1982). 2. That pre-1986 provision gave an un- warranted benefit to property and casualty compa- nies, for it failed to take the time value of money into account in determining the permissible deduction. ___________________(footnotes) 2 A property and casualty company was permitted to deduct the full amount of the estimated loss in the year the loss occurred, even though the claim might not be paid for several years. When the claim was paid, the company would not re- ceive any additional deduction (assuming that the payment equalled the original loss estimate) because the payment would be offset by a corresponding reduction in its unpaid loss reserve. ---------------------------------------- Page Break ---------------------------------------- 8 See S. Rep. No. 313, 99th Gong., 2d Sess. 499-500 (1986); note 2, supra. Congress attempted to solve this problem by adding Section 846 to the Code as part of the Tax Reform Act of 1986, Pub. L. No. 99-514, 1023(c), 100 Stat. 2399. That Section requires unpaid losses to be discounted to present value when claimed as a deduction. 26 U.S.C. 846. As part of the same legislation, Congress amended Section 832(b)(5)(A) to reflect the new discounting requirements. Under that new Section, the deduction for "losses incurred" is computed by adding to losses paid "all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year" and deducting therefrom "all discounted unpaid losses outstanding at the end of the preceding taxable year." 26 U.S.C. 832(b)(5)(A). Congress enacted a series of transitional rules to implement these new accounting procedures. Section 1023(e)(1) of the Tax Reform Act of 1986 specifies that the new discounting rules "shall apply to taxable years beginning after December 31, 1986." 100 Stat. 2404. As the Tax Court noted (Pet. App. 34a), if no exception had been made to this new requirement, property and casualty companies would have been required to compare "old law" (undiscounted) year- end 1986 reserves with "new law" (discounted) year- end 1987 reserves, thus causing a one-time reduction of the losses incurred deduction in 1987. To avoid that sharp consequence, Congress established a transi- tional rule-Section 1023(e)(2) of the Tax Reform Act of 1986-which specifies that, in computing the 1987 deduction for losses incurred, the year-end 1986 re- serves are also to be discounted to present value. Without any further transitional provision, this special rule would have required property and casu- ---------------------------------------- Page Break ---------------------------------------- 9 alty companies to take into income in 1987 the excess of their undiscounted year-end 1986 reserves over their discounted year-end 1986 reserves. This is be- cause (i) the new requirement of discounting con- stitutes a change of accounting method, (ii) that new accounting method yields a double deduction for property and casualty companies 3. and (iii) Section 481(a) of the Code requires an appropriate adjustment to prevent the taxpayer from obtaining a double deduction created by a change in accounting method. 4. ___________________(footnotes) 3 The double deduction may be illustrated as follows: No discounting. Assume that an automobile accident occurs in Year 1, and the insurance company estimates it will eventually pay a total of $10 in claims stemming from that accident. Assume further that the $10 is in fact paid out in Year 5. The tax treatment is as follows: In Year 1, the company adds $10 to its "unpaid losses," and obtains a deduction of $10. In Year 5, when the company makes the pay- ment, it increases its "losses paid" by $10, but reduces its "unpaid losses" by $10. This is a wash. With discounting. Assume the same facts as above. Assume, in addition, that discounting goes into effect in Year 4, and the company's "unpaid losses" account is reduced in that year, tax-free, to $9. The tax treatment is as follows: The company again gets a Year 1 deduction of $10. In Year 5, however, when the company makes the payment, it increases its "losses paid" by $10, but reduces its "unpaid losses" by only $9, and thus gets a net additional deduction of $1. The company thus gets a total deduction (in Year 1 and Year 5) of $11 for a $10 payment. 4 Under Section 481(a) of the Code, if the taxpayer's taxable income is computed "under a method of accounting different from the method under which the taxpayer's taxable income for the preceding taxable year was computed," then ---------------------------------------- Page Break ---------------------------------------- 10 Congress decided to permit taxpayers to obtain a limited double deduction in this particular situation, however, by enacting a "fresh start" provision in Section 1023(e)(3)(A) of the Tax Reform Act of 1986. Section 1023(e)(3)(A) provides (100 Stat. 2404): (3) FRESH START.- (A) IN GENERAL .- Except as otherwise pro- vided in this paragraph, any difference between- (i) the amount determined to be the unpaid losses and expenses unpaid for the year preced- ing the 1st taxable year of an insurance com- pany beginning after December 31, 1986, deter- mined without regard to paragraph (2) [i. e., without discounting], and (ii) such amount determined with regard to paragraph (2) [i.e., with discounting], shall not be taken into account for purposes of the Internal Revenue Code of 1986- The double deduction provided by the "fresh start" provision gave property and casualty companies an incentive to increase their unpaid-loss reserves dur- ing the 1986 taxable year. Congress addressed that problem by enacting Section 1023(e)(3)(B) of the Tax Reform Act of 1986, which precludes application of the "fresh start" provision-and thus permits the normal application of Section 481(a)-with respect to any ___________________(footnotes) "there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted * * *." 26 U.S.C. 481(a). ---------------------------------------- Page Break ---------------------------------------- 11 "reserve strengthening" that occurred in 1986. Section 1023(e)(3)(B) provides (100 Stat. 2404): 5. (B) RESERVE STRENGTHENING IN YEARS AFTER 1985 Subparagraph (A) [the fresh start provision] shall not apply to any reserve strength- ening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer's 1st taxable year beginning after December 31,1986. ___________________(footnotes) 5 The enacted version of this "reserve strengthening" pro- vision differs from the version contained in the bill approved by the Senate Finance Committee. That bill had explicitly linked reserve strengthening to a change in the insurer's reserve practice. It provided (H.R. 3838, 99th Cong., 2d Sess., 1022(e)(3)(B) (1986), as reported by the Senate Finance Com- mittee, May 29, 1986): (B) Reserve Strengthening After March 1, 1986. * * * [The fresh start adjustment] shall not apply to any reserve strengthening reported for Federal income tax purposes after March 1, 1986, for a taxable year beginning before January 1, 1987, and such strengthen- ing shall be treated as occurring in the taxpayer's 1st taxable year beginning after December 31, 1986. The preceding sentence shall not apply to the computation of reserves on any contract if such computation employs the reserve practice used for purposes of the most recent annual statement filed on or before March 1, 1986, for the type of contract with respect to which reserves are set up. See 132 Cong. Rec. 16,130-16,131 (1986). ---------------------------------------- Page Break ---------------------------------------- 12 The Conference Committee Report explains the application of this provision (H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. at II-367 (1986)) (emphasis added): Fresh start adjustment The conference agreement follows the Senate amendment with respect to providing a fresh start adjustment-i.e., a forgiveness of income- for the reduction in reserves resulting from dis- counting the opening reserves in the first post-effective date taxable year of the provision. The conference agreement modifies the Senate amendment with respect to the treatment of re- serve strengthening under the fresh start income forgiveness provision. Under the conference agreement, reserve strengthening in taxable years beginning after December 31, 1985, is not treated as a reserve amount for purposes of deter- mining the amount of the fresh start. Instead, such reserve strengthening additions to loss re- serves in taxable years beginning in 1986 are treated as changes to reserves in taxable years beginning in 1987, and are subject to discounting. Reserve strengthening is considered to include all additions to reserves attributable to an increase in an estimate of a reserve established for a prior accident year (taking into account claims paid with respect to that accident year), and all additions to reserves resulting from a change in the assumptions (other than changes in assumed interest rates applicable to reserves for the 1986 accident year) used in estimating losses for the 1986 accident year, as well as all unspeci- fied or unallocated additions to loss reserves. ---------------------------------------- Page Break ---------------------------------------- 13 This provision is intended to prevent taxpayers from artificially increasing the amount of income that is forgiven under the fresh start provision. In 1992, the Treasury promulgated a regulation to interpret and implement this transitional rule. Sec- tion 1.846-3 of the Treasury Regulations, 26 C.F.R. 1.846-3, provides (emphasis added): (c) Rules for determining the amount of reserve strengthening (weakening)-(l) In gen- eral. The amount of reserve strengthening (weakening) is the amount that is determined under paragraph (c)(2) or (3) to have been added to (subtracted from) an unpaid loss reserve in a taxable year beginning in 1986. For purposes of section 1023(e)(3)(B) of the 1986 Act, the amount of reserve strengthening (weakening) must be deter- mined separately for each unpaid loss reserve by applying the rules of this paragraph (c). This determination is made without regard to the reasonableness of the amount of the unpaid loss reserve and without regard to the taxpayer's discretion, or lack thereof, in establishing the amount of the unpaid loss reserve. * * * ***** (3) Accident yearn before 1986 (i) In gen- eral. For each taxable year beginning in 1986, the amount of reserve strengthening (weakening) for an unpaid loss reserve for an accident year before 1986 is the amount by which the reserve at the end of the taxable year [i.e., 1986] exceeds (is less than)- ---------------------------------------- Page Break ---------------------------------------- 14 (A) The reserve at the end of the immediately preceding taxable year [i.e., 1985]; reduced by (B) Claims paid and loss adjustment expenses paid ("loss payments") in the taxable year beginning in 1986 with respect to losses that are attributable to the reserve. * * * [6.] 2. The court of appeals correctly held that the definition of "reserve strengthening" under the regu- lation does not conflict with the "plain meaning" of the statute. As the Eighth Circuit acknowledged in Western National, the meaning of the term "reserve strengthening" is not apparent from the face of the statute. See 65 F.3d at 92. And, in the present case, unlike in Western National, the conflicting expert testimony made it clear that there is no consistent industry usage and that "the term 'reserve strength- ening' as used in section 1023(e)(3)(B) is subject to more than one interpretation" (Pet. App. A9 see also id. at A43]. 7. ___________________(footnotes) 6 The regulation provides two exceptions from this rule: (i) an amount added to a reserve in 1986 as a result of a loss reported to the taxpayer from a mandatory state or federal assigned risk pool if the amount of the loss reported is not discretionary with the taxpayer (ii) payments made with respect to reinsurance assumed during 1986 or amounts added to the reserve to take into account reinsurance assumed for a line of business during 1986, but only to the extent the amount does not exceed the amount of a hypothetical reserve for the reinsurance assumed. 26 C.F.R. 1.846-3 (c)(3) (ii). Neither exception applies in this case. 7 In Massachusetts v. Blackstone Valley Electric Co., 67 F.3d 981, 986-987 (lst Cir. 1995), the court concluded that a statutory term is ambiguous when conflicting expert explana- tions reveal an inconsistent usage. See also National Railroad Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407, 418 ---------------------------------------- Page Break ---------------------------------------- 15 The court of appeals correctly concluded in this case that the regulation draws substantial support from the legislative history of the statute. The Con- ference Report, which is entitled to great weight in interpreting the statute (National Ass'n of Greeting Card Publishers v. United States Postal Service, 462 U.S. 810, 832 n.28 (1983)), expressly states, as the regulation provides, that the term "[r]eserve strengthening is considered to include all additions to reserves attributable to an increase in an estimate of a reserve established for a prior accident year" (Pet. App. A17, quoting H.R. Conf. Rep. No. 841, supra, at II-367 (emphasis added)). The court of appeals correctly noted that the Senate amendment, which had explicitly linked the "reserve strengthen- ing" provision to changes in reserve methodologies (see note 5, supra), had been deleted by the Confer- ence Committee and that the Conference Committee Report contains a far more expansive definition of the term "reserve strengthening" than the Senate Fi- nance Committee had provided (Pet. App. A15-A19). The court correctly concluded that the definition of "reserve strengthening" set forth in the regulation must be sustained because it is consistent with the text and history of the statute and advances its purpose of preventing abuses of the "flesh start" provision (id. at A22-A23). 3. Petitioner contends (Pet. 12-15) that the defini- tion of "reserve strengthening" set forth in the regu- lation is inconsistent with the use of that same term in the provisions applicable to life insurance reserves ___________________(footnotes) (1992) ("The existence of alternative dictionary definitions of the word 'required' each making some sense under the statute, itself indicates that the statute is open to interpretation."). ---------------------------------------- Page Break ---------------------------------------- 16 enacted in Section 216(b)(3) of the Tax Reform Act of 1984, Pub. L. No. 98-369, Div. A, 98 Stat. 759. 8. In that provision, enacted two years before the statute involved in this case, Congress provided a fresh start adjustment for life insurance reserves and, in making that adjustment inapplicable to "any reserve strengthening" after 1984, specified that the "reserve strengthening" limitation "shall not apply * * * if [the reserve] computation employs the reserve practice used * * * before * * * for the type of [insurance] with respect to which such reserves are set up." Ibid. As the court of appeals correctly concluded (Pet. App. 14a-15a), the specific exception from the "reserve strengthening" provision applicable to life insurance reserve computations supports the interpretation of that term (as used in Section 1023(e)(3)(B)) contained ___________________(footnotes) 8 The 1984 legislation provided (emphasis added): (3) REINSURANCE TRANSACTIONS, AND RESERVE STRENGTHENING, AFTER SEPTEMBER 27, 1983 (A) IN GENERAL.- Paragraph (1) [i.e., the fresh start adjustment] shall not apply * * * * *** * (ii) to any reserve strengthening reported for Federal income tax purposes after September 27, 1983, for a taxable year ending before January 1, 1984. Clause (ii) shall not apply to the computation of reserves on any contract issued if such computation employs the reserve practice used for purposes of the most recent annual statement filed before September 27, 1983, for the type of contract with respect to which such reserves are set up. ---------------------------------------- Page Break ---------------------------------------- 17 in Section 1.846-3(c)(3) of the Treasury Regulations. 9. In enacting the life insurance provisions, Congress excluded ordinary increases in reserves from the operation of the "reserve strengthening" clause. A similar exclusion was contained in the Senate version of Section 1023(e)(3)(B), which was deleted by the Conference Committee. As the court of appeals cor- rectly observed (Pet. App. 14a), the deletion of this exclusion of ordinary reserve increases from the operation of the "reserve strengthening" clause re- flects, as the express language of the Conference Report indicates, that Congress did not intend to restrict the "reserve strengthening" provision in Section 1023(e)(3)(B) to changes in reserve practices. "Where Congress includes limiting language in an earlier version of a bill but deletes it prior to enact- ment, it may be presumed that the limitation was not intended." Russello v. United States, 464 U.S. 16, 23- 24 (1983). 10. ___________________(footnotes) 9 The court of appeals also correctly distinguished the defi- nition of "reserve strengthening" used in the life insurance industry from the definition of "reserve strengthening" for the property and casualty industry (Pet. App. 12a-14a). As the court explained (ibid.), there are fundamental differences between the reserve-setting process in the life insurance indus- try (which is predicated upon external factors such as mortal- ity tables and interest rates) and the reserve-setting process in the property and casualty industry (which looks to past claims experience and also involves a fact-specific determination by the individual claims adjuster based upon his or her judgment and experience). 10 The Conference Committee Report emphasize that "[t]he conference agreement modifies the Senate amendment with respect to the treatment of reserve strengthening" and pro- vides a more expansive definition of the term (for pre-1986 accident years) than the Senate Finance Committee had ---------------------------------------- Page Break ---------------------------------------- 18 Petitioner thus errs in relying on the untenable proposition that courts should adopt the very version of Section 1023(e)(3)(B) that had been proposed by the Senate but rejected by the Conference. As this Court has emphasized, courts have a "duty to refrain from reading a phrase into the statute when Congress has left it out." Keene Corp. v. United States, 508 U.S. 200,208 (1993). 11. 4. Although the decision of the court of appeals in the present case is correct, we agree with petitioner that the decision in this case conflicts with the ___________________(footnotes) provided. H.R. Conf. Rep. No. 841, supra, at 11-367. The intent of the Conference Committee to expand the definition of "reserve strengthening" was so clear that it provoked criticism from Senator Wallop, an opponent of that action (Pet. App. 18a). 11 Petitioner errs in asserting (Pet. 11) that Rowan Cos. v. United States, 452 U.S. 247 (1981), supports the conclusion that Congress incorporated the life insurance provisions relating to reserve strengthening in enacting Section 1023(e)(3)(B). In Rowan, the Court invalidated a Treasury regulation that gave the term "wages" a different interpretation for purposes of federal employment taxes than the same term had for purposes of income tax withholding. The Court emphasized that (i) the respective statutes contain virtually identical definitions of the term and (ii) the legislative history accompanying the income tax witholding statute indicated that the term was to be con- strued consistently with the federal employment tax statutes. 452 U.S. at 255-257. Section 1023(e)(3) (13), however, does not contain a definition of "reserve strengthening." The language of Section 1023(e)(3)(B) also differs materially from the lan- guage of the life insurance "reserve strengthening" provision. And, as the Third Circuit correctly recognized (Pet. App. 15a- 23a), the legislative history of Section 1023(e)(3)(B) conclu- sively demonstrates that Congress did not intend to restrict the definition of "reserve strengthening" to reserve increases re- sulting from changes in reserve practices. ---------------------------------------- Page Break ---------------------------------------- 19 decision of the Eighth Circuit in Western National Mutual Insurance Co. v. Commission, supra. In Western National, the court of appeals adopted the Tax Court's factual "determination that reserve strengthening has a settled meaning in the property and casualty industry" and that, in industry usage, "reserve strenghtening occurs 'when a method or assumption used in calculating policy reserves is changed so as to produce higher reserves.'" 65 F.3d at 93, quoting Western National Mutual Insurance Co. v. Commissioner, 102 T.C. 338, 351 (1994). The court concluded in Western National "that reserve strenghtening is an example of congressional employ- ment of industry language" and, in view of the "set- tled meaning" of the term in the insurance industry, "reserve strengthening is not an ambiguous term." 65 F.3d at 92, 93. The court reasoned in Western National that the agency's interpretive regulation is invalid because "it adopts a definition of reserve strengthening that is at variance with industry usage." Id. at 93. The Third Circuit correctly observed that the rec- ord of the present case (Pet. App. 9a) differs from the record involved in Western National. In Western National, the Commissioner did not contest the expert testimony that the taxpayer introduced-and on which the court relied-to establish that reserve strengthening "has a settled meaning in the property and casualty industry" (65 F.3d at 93). In the pres- ent case, by contrast, the Commissioner introduced expert testimony that established that the term "reserve strengthening" lacks any precise industry usage and "is subject to more than one interpreta- tion" (Pet. App. A9 & n.5). See also id. at A43. Whether on this different and more complete fac- tual record, the Eight circuit would reach a differ- ent conclusion on the question presented in this case is, of course, impposible to determine in advance with certaintaty. It is possible that proof of the type submit- ted in this case-establishing that the term "reserve strenghtening" lacks a definite usage in the property and casualty industry-would lead that court to reconsider its prior holding. 12. It is certain however, that further litigation of this issue would be required, in both the Eighth Circuit and other circuits as well, in an attempt to bring about a uniform resolution of this question. Although the issue presented in this case involves a transitional rule that affects the calculation of taxes for the property and casualty industry only for the 1987 year, we are advised by the Internal Revenue Service that the identical issue is presented in nu- merous pending cases, with estimated total adjust- ments exceeding $1 billion. The inconsistent results that hace been reached thus may have substantial disparate effects on companies that compete with one another. Review by this Court of this substantial ___________________(footnotes) 12 The court of appeals noted in the present case that, although the Eight Circuit had based its decision in Western National on its understanding of industry usage, that court had "nonetheless proceeded to examine the legislative history * * * and determined that it failed to provide persuasive rationale for interpreting 'reserve strengthening' contrary to industry usage" (Pet. App. A12 n.7). By contrast, on the different record of this case, the Third Circuit found no persuasive evidence of any consistent industry usage and concluded that the legislative history persuasively explained that the agency had correctly interpreted the ambiguity inherent in the text of the provision (id. at A9-A25). ---------------------------------------- Page Break ---------------------------------------- 21 recurring question, on which the courts of appeals have reached inconsistent conclusions, would be appropiate. CONCLUSION The petition for a writ of certiorari should be granted. 13. Respectfully submitted. SETH P. WAXMAN Acting Solicitor General LORETTA C. ARGRETT Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General KENT L. JONES Assistant to the Solicitor General DAVID I. PINCUS EDWARD T. PERELMUTER Attorneys SEPTEMBER 1997 ___________________(footnotes) 13 In light of the support for the Commissioner's position reflected in the legislative history we have recounted and the deference owing to the interpretation set forth in the pertinent Treasure Regulation (see, e.g., National Muffler Dealers Ass'n v. United States, 440 U.S. 472, 448 (1979)), the Court may wish to considered summary affirmance.