                        T.C. Memo. 1996-75



                      UNITED STATES TAX COURT



 ATLANTIC MUTUAL INSURANCE COMPANY AND INCLUDIBLE SUBSIDIARIES,
  Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25767-93.              Filed February 22, 1996.



     John S. Breckinridge, Jr., and James H. Kenworthy, for

petitioners.

     Phillip A. Pillar and Maureen Nelson, for respondent.



                        MEMORANDUM OPINION


     FOLEY, Judge:   Respondent determined a deficiency of

$519,987 in petitioners' Federal income tax for the 1987 taxable

year as a result of alleged "reserve strengthening".   Under the
                               - 2 -

Tax Reform Act of 1986 (TRA '86), Pub. L. 99-514, sec. 1023, 100

Stat. 2085, 2404, any increases in the loss reserves maintained

by property and casualty insurance companies that constitute

"reserve strengthening" do not qualify for a one-time tax

benefit.   In this case, respondent contends that the term

"reserve strengthening" refers to all increases in loss reserves,

while petitioners maintain that the term refers to only those

increases in loss reserves that are attributable to changes in

computation methods or assumptions.    Respondent's interpretation

of the term "reserve strengthening" is set forth in section

1.846-3(c), Income Tax Regs.   The deficiency in this case is

based on that regulation.   In light of this Court's decision in

Western Natl. Mut. Ins. Co. v. Commissioner, 102 T.C. 338 (1994),

affd. 65 F.3d 90 (8th Cir. 1995), we hold for petitioners.

                            Background

     The facts have been fully stipulated under Rule 122 of the

Tax Court Rules of Practice and Procedure and are so found.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue.

     Atlantic Mutual Insurance Co. (Atlantic) is the common

parent of an affiliated group of corporations within the meaning

of section 1504(a).   Atlantic filed consolidated income tax

returns on behalf of the group for all relevant years.   At the

time the petition in this case was filed, Atlantic's principal

place of business was in Madison, New Jersey.
                               - 3 -

     Atlantic was organized in 1842 under the laws of the State

of New York as a mutual marine insurer.   Over the years, Atlantic

has expanded its insurance underwriting activities to include

most lines of insurance business available to a property and

casualty (P&C) insurer.   Centennial Insurance Co. (Centennial), a

wholly owned subsidiary of Atlantic, is a P&C insurance company

included in Atlantic's consolidated return.   Because respondent's

notice of deficiency relates to the activities of both Atlantic

and Centennial, we will refer to the two corporations together as

petitioner.

     From 1985 through 1993, petitioner filed an annual statement

with the insurance department of each State in which petitioner

was licensed to conduct insurance business.   Each annual

statement was prepared in the format prescribed by the National

Association of Insurance Commissioners (NAIC).   A primary purpose

of the annual statement is to provide State insurance

commissioners with information concerning a P&C insurer's

financial condition.   The accounting principles on which the

NAIC-prescribed annual statement is based generally have been

incorporated into the Internal Revenue Code sections applicable

to P&C insurers.

     On the annual statement, P&C insurers are required to report

estimates of amounts they expect to pay to cover losses that have

already occurred.   These estimates are commonly referred to as

"loss reserves" (or simply "reserves").   Petitioner maintained
                               - 4 -

three categories of loss reserves:     (1) Case reserves, which

reflect estimates of amounts to be paid to resolve claims that

have been reported to petitioner; (2) incurred but not yet

reported (IBNR) reserves, which reflect estimates of amounts to

be paid to resolve claims statistically presumed to have been

incurred but not yet reported to petitioner; and (3) loss

adjustment expense (LAE) reserves, which reflect estimates of

administrative costs to be paid in settling or otherwise

resolving claims.   For the years in issue, case reserves

constituted the majority of petitioner's loss reserves.

     Petitioner established its case reserves by assigning a

claims adjuster to examine each reported claim and estimate the

ultimate amount, if any, that would be paid to resolve it.     Case

reserves simply comprised the aggregate of those estimates.

Overall, petitioner's case reserves totaled $255,655,141 at

yearend 1985 and $277,705,661 at yearend 1986.

     Petitioner established its IBNR reserves by applying a

"counts and averages" methodology to each line of insurance

business.   Under this method, petitioner computed its IBNR

reserves by multiplying (1) the number of claims that it presumed

would be reported after the accident year by (2) the average cost

it projected to resolve each late-reported claim.     Petitioner

based its estimate of these numbers on its experience in prior

accident years and then adjusted the results to reflect actuarial

quarterly reviews of the loss reserves for the preceding year.
                               - 5 -

Senior management had discretion in determining the size of the

adjustments.   Management made downward adjustments to

petitioner's IBNR reserves of $1,200,000 for 1985 and $100,000

for 1986.   Overall, petitioner's IBNR reserves totaled

$93,713,687 at yearend 1985 and $111,708,986 at yearend 1986.

     Petitioner established its LAE reserves through a

combination of individual case estimates, formulas, and

judgmental factors.   To arrive at an estimate of LAE reserves,

petitioner calculated the ratio of LAE it paid during a preceding

3-year period to total losses it paid during the same period and

used that ratio as a component in certain formulas.   Petitioner

maintained two categories of LAE reserves:   (1) Allocated loss

adjustment expenses (ALAE), which consisted of expenses

assignable to individual claims (e.g., legal fees and costs), and

(2) unallocated loss adjustment expenses (ULAE), which consisted

of expenses not assignable to individual claims (e.g., rent

allocable to the claims department).   Petitioner used different

formulas to compute each category of its LAE reserves.

Petitioner's management then adjusted the ALAE (but not the ULAE)

estimate based on quarterly loss and LAE reviews.   Overall,

petitioner's LAE reserves totaled $72,317,450 at yearend 1985 and

$84,066,519 at yearend 1986.

     Respondent tested for "reserve strengthening" by applying

the formula set forth in section 1.846-3(c)(3), Income Tax Regs.,

to each of petitioner's lines of insurance business for pre-1986
                               - 6 -

accident years.   Under the formula, petitioner's reserves at

yearend 1985 were reduced by the claims and the LAE paid in 1986

with respect to those reserves.   To the extent that, at yearend

1986, a reserve was greater than the amount determined under the

formula, the excess was treated as a net increase to that reserve

account (i.e., "reserve strengthening").    To the extent that, at

yearend 1986, a reserve was less than the amount determined under

the formula, the difference was treated as a net decrease to that

reserve account (i.e., "reserve weakening").

     Respondent determined that, at yearend 1986, petitioner's

"reserve strengthening" totaled the following amounts:

                                        Reserve Strengthening
  Line of Business                           (Weakening)

Auto liability ......................      ($10,559,423)
Other liability .....................        (1,279,374)
Workers' compensation ...............         4,691,659
Multiple peril ......................        15,585,877
Schedule O1 (1985) ..................        (3,870,000)
Schedule O (pre-1985) ...............         1,984,000
  Net total ........................          6,552,739
     1
      Schedule 0, a part of the annual statement filed with the
National Association of Insurance Commissioners, contains
combined loss data on several lines of insurance business with
respect to which claims are filed and settled within a relatively
short period.

     Respondent then discounted, pursuant to section 846, the

amount determined as "reserve strengthening" in order to

calculate the effect on petitioner's gross income.1    After

     1
      For a discussion of sec. 846 and discounting generally, see
sec. I.A., "The Change from Undiscounted to Discounted Reserve
Accounting", in the Discussion section of this opinion.
                                - 7 -

discounting the amounts shown in the foregoing chart, respondent

determined that petitioner understated its 1987 income as

follows:




  Line of Business                        Income Adjustment

Auto liability ......................       ($1,211,842)
Other liability .....................          (309,970)
Workers' compensation ...............         1,211,652
Multiple peril ......................         1,783,897
Schedule O (1985) ...................          (239,446)
Schedule O (pre-1985) ...............           104,748
  Net total ........................          1,339,039

Respondent further determined that this $1,339,039 understatement

of petitioner's 1987 income resulted in a $519,987 understatement

of petitioner's 1987 income tax liability.

                             Discussion

I.   Overview

      TRA '86 substantially revised the rules that govern the

taxation of P&C insurance companies by requiring P&C insurers to

discount loss reserves for purposes of section 832(b)(5)

(discussed below).    The change from undiscounted to discounted

methodology eliminated a tax benefit attributable to the time

value of money.   It also required taxpayers to change their

accounting methods.    To facilitate a smooth transition to the new
                                - 8 -

rules, Congress included two relief provisions in the

legislation--the "transition rule" and the "fresh start".

     A.   The Change From Undiscounted to Discounted Reserve
          Accounting

     Section 832(c)(4) permits P&C insurers to deduct "losses

incurred", as defined in section 832(b)(5), in each taxable year.

Under section 832(b)(5), losses incurred are defined as the

excess of (1) the sum of (a) losses paid during the current tax

year and (b) yearend reserves in the current tax year over

(2) yearend reserves in the preceding tax year.   Prior to 1986,

section 832 provided P&C insurers with a significant tax benefit.

It permitted them to take current deductions for future payments

without requiring them to make any adjustments for the time value

of money.   To eliminate this benefit, TRA '86 added section 846.

Section 846 requires reserves for taxable years beginning after

December 31, 1986, to be discounted and thus reduces the losses

incurred deduction (as calculated under section 832(b)(5)) to

reflect the time value of money.

     Without a relief provision, section 846 would have required

P&C insurers to compare undiscounted 1986 reserves with

discounted 1987 reserves for purposes of computing their losses

incurred deductions for 1987.   Such an "apples-to-oranges"

comparison would have significantly reduced the losses incurred

deduction for the 1987 tax year.   To illustrate, assume a P&C

insurer had loss reserves of $100 million at the end of 1986 and
                               - 9 -

$125 million at the end of 1987.   But for section 846, the losses

incurred deduction attributable to unpaid losses would have been

$25 million (i.e., $125 million - $100 million).    If pursuant to

section 846 the $125 million of reserves at the end of 1987 were

discounted to $110 million, the P&C insurer's losses incurred

deduction would have been reduced from $25 million to $10 million

(i.e., $110 million - $100 million).

     To address this problem, Congress included a transition rule

in TRA '86.   The transition rule provided that, for purposes of

computing the losses incurred deduction at yearend 1987, 1986

reserves also would be discounted.     TRA '86 sec. 1023(e)(2), 100

Stat. 2404.   As a result of this transition rule, discounted 1987

reserves were compared with discounted 1986 reserves in computing

the losses incurred deduction for the 1987 taxable year.

     B.   The Application of Section 481

     Even with the transition rule described above, P&C insurance

companies remained subject to adverse tax consequences due to the

application of section 481.   When a taxpayer changes its method

of accounting, section 481 generally requires that the taxpayer

make adjustments to prevent amounts from being duplicated in or

omitted from its taxable income.   Compliance with the requirement

that P&C insurers change the basis for computing their losses

incurred deductions from an undiscounted to a discounted

methodology constituted a change in accounting method.    Thus,

section 481 would have required P&C insurers to recognize as
                                 - 10 -

income the difference between (1) the undiscounted amount of loss

reserves, as of yearend 1986, included in the computation of the

losses incurred deduction for 1986 and (2) the discounted amount

of such loss reserves.

       To avoid triggering section 481 adjustments, Congress

provided P&C insurers with a "fresh start" pursuant to section

1023(e)(3) of TRA '86.      TRA '86 sec. 1023(e)(3)(A), 100 Stat.

2404.    This section provides as follows:

       (3) Fresh start.--

            (A) In general.--Except as otherwise provided in
       this paragraph, any difference between--

                 (i) the amount determined to be the unpaid
       losses and expenses unpaid for the year preceding the
       1st taxable year of an insurance company beginning
       after December 31, 1986, determined 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.

In essence, the fresh start provision overrode section 481 by

excluding from taxable income the difference between the amount

of the yearend 1986 undiscounted loss reserves and the discounted

amount of such reserves.      In its report, the Committee of

Conference (conference committee) described the effect of the

fresh start provision as a "forgiveness of income".      H. Conf.

Rept. 99-841 (Vol. II), at II-367 (1986), 1986-3 C.B. (Vol. 4) 1,

367.
                               - 11 -

      The fresh start provision, however, created the potential

for abuse.   Because the difference between the undiscounted and

discounted loss reserves as of yearend 1986 is excluded from

taxation, P&C insurers could manipulate the fresh start provision

by inflating their reserves.   To prevent this abuse, Congress

excluded "reserve strengthening" from the fresh start.

      TRA '86, however, did not define "reserve strengthening".

Generally, a P&C insurer's loss reserves may increase due to

either of two factors:   (1) Additions required to fund existing

and increasing obligations under policies in force, or

(2) additions required when a method or assumption used in

calculating reserves is changed to produce higher reserves.    As

discussed in more detail below, respondent argues that "reserve

strengthening" encompasses both types of additions, while

petitioner contends that the term refers solely to additions

resulting from changes in reserving methods or assumptions.

II.   The Statute, Legislative History, and Regulations

      The House of Representatives initiated the provision

requiring P&C insurers to discount their loss reserves.   H.R.

3838, 99th Cong., 1st Sess. secs. 1021-1027 (1985).   The Senate

amended the House's proposal to include both (1) the fresh start

provision and (2) the exclusion of "reserve strengthening" from

the fresh start.   See S. Rept. 99-313, at 510 (1986), 1986-3 C.B.

(Vol. 3) 1, 510.   Ultimately, the conference committee

substantially revised the "reserve strengthening" language
                               - 12 -

contained in both the Senate bill and in the accompanying Senate

Finance Committee report.

       The Senate bill contained the following provision:

            (B) Reserve Strengthening After March 1, 1986.--
       * * * [the fresh start provision] 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
       strengthening 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 such reserves are set up. [H.R. 3838,
       99th Cong., 2d Sess., sec. 1022(e)(3)(B), as reported
       by the Senate Finance Committee on May 29, 1986.]

       The Finance Committee report stated that "reserve

strengthening" consisted of "any adjustments to reserves that are

attributable to changes in reserves on account of changes in the

basis for computing reserves (i.e., reserve strengthening or

reserve weakening) in a taxable year beginning before January 1,

1987".    S. Rept. 99-313, supra at 510, 1986-3 C.B. (Vol. 3) at

510.

       The differences between the House and Senate versions of

H.R. 3838 were reconciled by the conference committee.      The final

bill adopted by the conference committee and enacted into law did

not define "reserve strengthening".     It provided as follows:

            (B) Reserve Strengthening In Years After 1985.--
       * * * [the fresh start provision] shall not apply to
       any reserve strengthening in a taxable year beginning
       in 1986, and such strengthening shall be treated as
       occurring in the taxpayer's 1st taxable year beginning
                             - 13 -

     after December 31, 1986. [H. Conf. Rept. 99-841 (Vol.
     I), at I-338 (1986), 1986-3 C.B. (Vol. 1) 1, 321.]

     The conference committee report accompanying the final bill,

however, did provide a definition of "reserve strengthening" and,

in fact, provided a more expansive definition of the term than

that contained in the Finance Committee report.   The conference

committee report stated:

     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
     unspecified or unallocated additions to loss reserves.
     This provision is intended to prevent taxpayers from
     artificially increasing the amount of income that is
     forgiven under the fresh start provision. [H. Conf.
     Rept. 99-841 (Vol. II), supra at II-367, 1986-3 C.B.
     (Vol. 4) at 367.]

     In 1992, the U.S. Treasury Department issued regulations

under section 846 that are based upon the definition of "reserve

strengthening" contained in the conference committee report.

Section 1.846-3(c), Income Tax Regs., provides in relevant part:

          (c) Rules for determining the amount of reserve
     strengthening (weakening).--(1) In general. 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
     * * * [the fresh start], the amount of reserve
     strengthening (weakening) must be determined 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
                                  - 14 -

       taxpayer's discretion, or lack thereof, in establishing
       the amount of the unpaid loss reserve. The amount of
       reserve strengthening for an unpaid loss reserve may
       not exceed the amount of the reserve, including any
       undiscounted strengthening amount, as of the end of the
       last taxable year beginning before January 1, 1987.
       For purposes of this section, an "unpaid loss reserve"
       is the aggregate of the unpaid loss estimates for
       losses (whether or not reported) incurred in an
       accident year of a line of business.

          *       *         *       *       *       *       *

                 (3) Accident years before 1986. (i) In
       general. 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 exceeds (is less than)--

                      (A) The reserve at the end of the
       immediately preceding taxable year; 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. * * *




III.    The Western National Decision

       In Western Natl. Mut. Ins. Co. v. Commissioner, 102 T.C. 338

(1994), a Court-reviewed decision, this Court considered facts

virtually identical to those presented in this case.      The Court

ruled for the taxpayer, holding that section 1.846-3(c), Income

Tax Regs., is invalid to the extent that it treats all net

additions in 1986, to pre-1986 loss reserves, as "reserve

strengthening".       As in the present case, the taxpayer in Western

National had a higher loss reserve balance, for pre-1986 years,
                              - 15 -

at yearend 1986 than at yearend 1985, but had not changed its

reserve assumptions or methodology in computing that balance.

The Commissioner argued that all increases in reserves

constituted "reserve strengthening" and that the taxpayer's

increase therefore should have been excluded from the fresh

start.   In rejecting the Commissioner's position, the Court cited

the following six factors:

     (1) The statute is not ambiguous and uses a term of art
     in a portion of the Internal Revenue Code which has
     been specially designed for a particular industry and
     generally contains industry jargon; (2) the legislative
     history materials are internally contradictory in that
     there are references to all increases to reserves and
     explanations regarding artificial increases or a
     specific type of increase; (3) the regulatory
     definition of the term "reserve strengthening" does not
     comport with insurance industry usage; (4) the
     regulatory definition of the term "reserve
     strengthening" does not harmonize with its
     congressional use 2 years earlier in related and
     parallel statutes involving life, rather than PC,
     insurance companies; (5) the regulatory approach would
     result in anomalous results; and (6) the traditional
     industry definition of the term comports with the
     concept that Congress was attempting to limit any
     attempts by taxpayers to take advantage of the fresh-
     start provisions by means of artificial increases to
     reserves. * * * [Id. at 360-361.]

     The Court placed particular emphasis on several of these

factors.   It stated that subchapter L, which sets forth rules

governing the taxation of insurance companies, "is a highly

specialized portion of the Internal Revenue Code which is replete

with the unique nomenclature of the insurance industry."   Id. at

342-343.   The Court acknowledged that the statute did not provide

a definition of "reserve strengthening" but found that the term
                                - 16 -

refers to "a change in the formula or mechanism for calculating a

reserve".   Id. at 352.   Moreover, the Court noted, Congress had

defined the term as including only changes in assumptions or

methodology when it enacted certain life insurance rules and a

fresh start provision in the Deficit Reduction Act of 1984, Pub.

L. 98-369, sec. 216(b), 98 Stat. 494, 758.     Id. at 353.   In

rejecting the Commissioner's argument that "reserve

strengthening" has a different meaning in the P&C insurance

industry than in the life insurance industry, the Court concluded

that "Congress could not have expected a different quantitative

or qualitative meaning for the term" depending on the type of

insurer.    Id. at 354.

      Although section 1.846-3(c), Income Tax Regs., provided a

definition of "reserve strengthening" consistent with the

conference committee report, the Court in essence concluded that

priority must be accorded to the statute, which "contains a term

of art used in an unconditional manner."     Id. at 355.   Moreover,

the Court noted, the conference committee report states that the

fresh start was "intended to prevent taxpayers from artificially

increasing the amount of income that is forgiven".     Id. at 356

n.19 (quoting H. Conf. Rept. 99-841 (Vol. II), supra at II-367,

1986-3 C.B. (Vol. 4) at 367).    The Court concluded that the word

"artificially" refers to changes in assumptions or methodology.

Id.   By contrast, the taxpayer in Western National merely had
                              - 17 -

made routine adjustments to its loss reserves based on its past

reserving practices.   Id. at 357.

      The Court of Appeals for the Eighth Circuit affirmed the Tax

Court's decision in Western National.   It concluded that the term

"reserve strengthening" when used in the life insurance industry

refers to reserve increases attributable to changes in

computational methods or assumptions.   Western Natl. Mut. Ins.

Co. v. Commissioner, 65 F.3d 90, 92-93 (8th Cir. 1995).     The

court rejected the Commissioner's argument that the term's

meaning in the P&C insurance industry is ambiguous.      Id. at 93.

Having decided that the meaning of "reserve strengthening" is

clear in the industry, the court further concluded that the

legislative history underlying the provision is not controlling.

Id.   Nevertheless, the court stated that it had reviewed the

legislative history "out of an abundance of caution" and found

"'no persuasive rationale for interpreting the statutory term

"reserve strengthening" in a manner different from industry

usage.'"   Id. (quoting Western Natl. Mut. Ins. Co. v.

Commissioner, 102 T.C. at 355).

IV.   Respondent's Position

      Respondent urges this Court to reconsider its holding in

Western National.   Respondent in the present case, as in Western

National, maintains that "reserve strengthening" encompasses all

net additions in 1986 to pre-1986 loss reserves.   Respondent

acknowledges that, in the life insurance industry, the term
                                - 18 -

"reserve strengthening" has the meaning petitioner ascribes to

it.   Respondent continues to contend, however, that the term's

meaning in the P&C insurance industry is ambiguous.

      Respondent has presented expert testimony which indicates

that the term is subject to more than one interpretation.     One

expert opined that the regulation's definition provided a valid

measurement of "reserve strengthening".    Another expert opined

that the regulation's definition, while not technically accurate,

was consistent with a common usage of the term in nonactuarial

reporting.   Moreover, respondent notes that the conference

committee report's definition of "reserve strengthening" is fully

consistent with her position.    The report stated:

      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 * * * and all additions to reserves resulting from
      a change in the assumptions * * * as well as all
      unspecified or unallocated additions to loss reserves.
      * * * [H. Conf. Rept. 99-841 (Vol. II), supra at II-
      367, 1986-3 C.B. (Vol. 4) at 367; emphasis added.]

      Respondent also addresses two points made in Western

National regarding the legislative history of "reserve

strengthening".   First, respondent argues that the Court's view--

that the conference committee report "conflicts" with other

portions of the legislative history--does not take into account

the evolution of the statute.    Conference committees reconcile

differences between House and Senate versions of legislation and

write the final legislation that is enacted into law.    In
                               - 19 -

respondent's view, therefore, the decision of the conference

committee to reject the language contained in the Senate report

does not create a "conflict" but instead provides the rationale

for the final legislation.

     Second, respondent addresses the Court's concern that the

conference committee's definition of "reserve strengthening" is

internally contradictory.    The Court found that the conference

committee's definition of the term is "broader than necessary to

accomplish the stated purpose of preventing abuse from artificial

increases".    Western Natl. Mut. Ins. Co. v. Commissioner, 102

T.C. at 350.   Respondent contends that this point does not

undermine her position, because Congress sometimes finds it

expedient to adopt bright-line rules that do not in every case

effectuate congressional intent precisely.

     Because respondent believes that the statute is ambiguous

and the regulations in issue effectively implement the conference

committee's definition of "reserve strengthening", she maintains

that the regulations reflect a reasonable and permissible

construction of the statute.

     Respondent argues in the alternative that, if we hold that

"reserve strengthening" includes only those increases in reserves

attributable to changes in methodology or assumptions, we should

determine a lesser deficiency, because all or some of

petitioner's additions to its IBNR and LAE reserves resulted from

management's discretionary adjustments.
                                 - 20 -

V.    Petitioner's Position

       Consistent with this Court's holding in Western National,

petitioner maintains that the term "reserve strengthening" is an

insurance industry term of art with a clearly understood

technical meaning.    As used in the insurance industry, petitioner

argues, "reserve strengthening" encompasses only those increases

in loss reserves that are attributable to nonperiodic,

significant changes in the assumptions and/or methodologies used

to establish such loss reserves.     Because the increase in

petitioner's 1986 reserves for pre-1986 accident years occurred

without a change in methodology, petitioner contends that the

increase does not constitute "reserve strengthening".

       Petitioner further argues that there is no need to consider

the legislative history to interpret the term "reserve

strengthening", because the term is unambiguous.     Accordingly,

petitioner argues that the regulatory definition of "reserve

strengthening" is invalid to the extent that it treats all net

additions in 1986, to pre-1986 loss reserves, as "reserve

strengthening".

VI.    Analysis and Conclusion

       Despite respondent's cogent arguments to the contrary, we

hold that petitioner's reserve increases do not constitute

"reserve strengthening".      The facts of Western National are

indistinguishable from the present case.     Therefore, the doctrine

of stare decisis leads us to the same result.     In each case, the
                             - 21 -

taxpayer's reserves, for pre-1986 years, at yearend 1986 exceeded

its reserves at yearend 1985, and that excess reflected routine

adjustments made consistent with past reserving practices.    In

each case, the taxpayer did not change its reserving assumptions

or methodology.

     Respondent attempts to distinguish the present case from

Western National based on the submission of expert testimony.      In

Western National, respondent chose not to submit expert testimony

and instead contended that congressional intent, as expressed in

the conference committee report, was determinative.    Having lost

on that argument, respondent has submitted expert testimony in

the present case in her attempt to establish that the term

"reserve strengthening" is subject to more than one

interpretation.

     The Court's decision in Western National, however, was not

based solely on expert testimony.   In fact, the Court in Western

National acknowledged that the expert testimony submitted in that

case "did not establish a universal and precise definition of

reserve strengthening" but concluded that the testimony did

provide "sufficient guidance to enable our recognition of the

conceptual elements involved in industry jargon."     Western Natl.

Mut. Ins. Co. v. Commissioner, 102 T.C. at 351 n.10.    Moreover,

several of the factors cited by the Court for its decision in

Western National did not depend on expert testimony.    For

example, the Court stated that:   (1) Congress previously had used
                              - 22 -

the term "reserve strengthening" in a life insurance industry

statute in a manner consistent with the taxpayer's

interpretation; (2) respondent's regulation created anomalous

results; and (3) the taxpayer's interpretation of the term

comported with Congress' objective of preventing willful abuse of

the fresh start provision.

     Respondent argues in the alternative that we should

determine a lesser deficiency, because all or some of

petitioner's additions to its IBNR and LAE reserves resulted from

management's discretionary adjustments.   We disagree.   In both

Western National and the present case, case reserves formed the

majority of petitioner's loss reserves and were not adjusted by

management.   Moreover, in both cases senior management retained

some discretion to adjust the reserve amounts arrived at through

formulaic computations, and both taxpayers maintained that the

adjustments were made pursuant to actuarial data to ensure the

adequacy of reserves.   There were no increases to the reserves

for the period in question attributable to changes in underlying

assumptions or methodology.

     To reflect the foregoing,


                                          Decision will be entered

                                    for petitioners.
