                  NOTE: Pursuant to Fed. Cir. R. 47.6, this disposition
                    is not citable as precedent. It is a public record.

 United States Court of Appeals for the Federal Circuit
                                        04-5028

                       BLUE CROSS & BLUE SHIELD UNITED OF
                            WISCONSIN & SUBSIDIARIES,

                                                      Plaintiff-Appellant,

                                           v.

                                   UNITED STATES,
                                                 Defendant-Appellee.
                           __________________________

                           DECIDED: November 19, 2004
                           __________________________

Before NEWMAN, LINN, and PROST, Circuit Judges.

PROST, Circuit Judge.

      Blue Cross & Blue Shield United of Wisconsin & Subsidiaries (BCW) appeals

from a decision of the United States Court of Federal Claims, Case No. 98-CV-727, in

which the court granted summary judgment to the United States regarding the meaning

of a provision in a Closing Agreement that settled a prior tax dispute between BCW and

the United States. In particular, BCW appeals the court’s decision that the Closing

Agreement did not allow BCW to use its actual 1987 data, rather than the estimate it

computed at the beginning of 1987, to calculate its “unpaid loss reserve” for 1987. We

reverse the court’s grant of summary judgment and remand for consideration of

extrinsic evidence.1


      1
               On remand, the Court of Federal Claims may, of course, continue to
consider intrinsic evidence in conjunction with the extrinsic evidence.
                                    BACKGROUND

      In 1993, BCW and the Internal Revenue Service (IRS) settled a tax dispute by

entering into the Closing Agreement that is now before this court. The details of the

dispute resolved by the Closing Agreement are discussed in the Court of Federal

Claims’ opinion. See Blue Cross & Blue Shield United of Wisc. & Subsidiaries v. United

States, 56 Fed. Cl. 697, 698-99 (2003).

      The Closing Agreement contains the following paragraph, with the language

most relevant to this appeal underlined:

             (3)    As of January 1, 1987, the taxpayer was an “Existing
             Blue Cross or Blue Shield organization” as this term is
             defined in subparagraph (c)(2) of section 833, Subtitle A,
             IRC. As such, the following attributes apply to the taxpayer
             as of that date:
                    (a)    if otherwise in compliance with the terms of
             THE TREG, the taxpayer may participate in the filing of the
             “new group election” cited in subparagraph (d)(5)(v) of THE
             TREG;
                    (b)    the taxpayer’s taxable income will be computed
             pursuant to the provisions of section 833, Subtitle A, IRC,
             and the “special rules for Existing Blue Cross or Blue Shield
             organizations” stated in section 1012(C)(3) of the TRA;
                    (c)    the taxpayer’s taxable income will be computed
             without the reduction in “unearned premium reserves”
             otherwise required by section 832, Subtitle A, IRC;
                    (d)    the taxpayer is not – solely because of its
             becoming, on January 1, 1987, an “Existing Blue Cross or
             Blue Shield organization” as this term is defined in
             subparagraph (c)(2) of section 833, Subtitle A, IRC – subject
             to the adjustments set forth in section 481, Subtitle A, IRC;
                    (e)    the taxpayer’s January 1, 1987 loss reserve for
             incurred-but-not-paid claims will be determined in
             accordance with actual claims paid data for 1987; and
                    (f)    for the purposes of section 1011, Subtitle A,
             IRC, the adjusted bases of all the taxpayer’s assets shall be
             the respective fair market value of the individual assets as of
             January 1, 1987.




04-5028                                    2
(emphases added). Further, paragraph (4) of the Closing Agreement states that BCW

was “deemed to have the following net operating loss carryovers, no elements of which

are deemed to be attributable to any specific loss or deduction”; the enumerated net

operating loss carryovers for 1984, 1985, and 1986 sum to $25,000,000.

       Pursuant to its interpretation of the Closing Agreement, BCW computed its

unpaid loss reserve2 for 1987 to be $42,267,000, based on the claims it actually paid

out during that year. The use of actual claims paid figures was a departure from what

the Government contends is the ordinary practice, in which Blue Cross organizations

use the estimate generated at the start of a given year to calculate their deductions.

See I.R.C. § 846(b)(1) (2000). (For purposes of this appeal, BCW does not challenge

the Government’s claim that the Internal Revenue Code ordinarily mandates the use of

the estimate.)   At the beginning of 1987, BCW had overestimated its unpaid loss

reserve by a considerable margin in comparison with the amount it ultimately paid out

during that year. Therefore, BCW’s deduction derived from the actual claims paid data

was approximately $37,000,000 greater than it would have been based on the estimate.

The IRS ultimately ordered BCW to pay the larger amount derived from the use of the

estimate.

       BCW filed suit in the Court of Federal Claims, seeking, inter alia, a refund of the

difference between its tax liability calculated using the estimate and its liability derived

       2
              “Unpaid loss reserve” refers to the amount of money the company will
need to satisfy its incurred-but-not-paid claims, plus an estimate of the administrative
costs to process these claims. At the end of each year, BCW generates an actuarial
estimate of its unpaid loss reserve. “Incurred-but-not-paid claims” are claims that have
been reported to the insurer as of a certain date but not paid, plus claims that have
been incurred but not yet reported. Insurance companies are allowed a tax deduction
for losses incurred, which include the change in unpaid losses during the taxable year.
See I.R.C. §§ 832(b)(5)(A)(ii), 832(c)(4) (2000).


04-5028                                      3
from the actual claims paid figures. Both parties moved for partial summary judgment

regarding the method that BCW should use to calculate its losses incurred deduction.

       In support of their motions, the parties advanced their respective interpretations

of the Closing Agreement. BCW asserted that the Closing Agreement unambiguously

permitted the company to use its actual claims paid data to calculate its 1987 deduction

under § 832(c)(4). The Government contended that the Closing Agreement had to be

viewed in the context of the negotiations that led to its signing, which show that the IRS

never agreed to any change in BCW’s § 832(c)(4) deduction.

       Holding that the language of the agreement had an unambiguous meaning, the

court declined to rely on the extrinsic evidence put forth by the parties. In the court’s

view, the provisions of paragraph (3) were a laundry list of characteristics that applied to

BCW under § 833 because it was, as the agreement declared, an “existing Blue Cross

or Blue Shield organization” as of January 1, 1987. The court reasoned that the words

“[a]s such,” which appear after “existing Blue Cross or Blue Shield organization, as this

term is defined in subparagraph (c)(2) of section 833, Subtitle A, IRC[,]” indicate that the

information that follows is simply a list of attributes of such an organization. According

to the court, “[‘as such’] can only be interpreted to mean that, as an entity qualifying

under IRC § 833, the plaintiff has the following attributes.” Blue Cross, 56 Fed. Cl. at

714. Moreover, § 833 is the only code section that is mentioned in the introduction to

paragraph (3), and, in the court’s view, the other provisions of paragraph (3) all relate to

§ 833 or Tax Reform Act § 1012, which is the public law that enacted § 833. Thus, the

use of “[a]s such,” the mention of § 833 alone in the introduction to paragraph (3), and

the apparent relationship of all the other provisions of paragraph (3) to § 833 convinced




04-5028                                      4
the Court of Federal Claims that paragraph (3)(e) must have referred to § 833. The

court further explained that, specifically, paragraph (3)(e) referred to the “special

deduction” available to Blue Cross and Blue Shield organizations under § 833(b).3




      3
               Id. at 717-18.
       I.R.C. § 833, “Treatment of Blue Cross and Blue Shield organizations, etc.,”
reads in pertinent part:
       (a) General rule.--In the case of any organization to which this section
       applies--
       (1) Treated as stock company.--Such organization shall be taxable under
       this part in the same manner as if it were a stock insurance company.
       (2) Special deduction allowed.--The deduction determined under
       subsection (b) for any taxable year shall be allowed.
       ...
       (b) Amount of deduction.--
       (1) In general.--Except as provided in paragraph (2), the deduction
       determined under this subsection for any taxable year is the excess (if
       any) of--
       (A) 25 percent of the sum of--
       (i) the claims incurred during the taxable year and liabilities incurred during
       the taxable year under cost-plus contracts, and
       (ii) the expenses incurred during the taxable year in connection with the
       administration, adjustment, or settlement of claims or in connection with
       the administration of cost-plus contracts, over
       (B) the adjusted surplus as of the beginning of the taxable year.
       (2) Limitation.--The deduction determined under paragraph (1) for any
       taxable year shall not exceed taxable income for such taxable year
       (determined without regard to such deduction).
       (3) Adjusted surplus.--For purposes of this subsection--
       (A) In general.--The adjusted surplus as of the beginning of any taxable
       year is an amount equal to the adjusted surplus as of the beginning of the
       preceding taxable year--
       (i) increased by the amount of any adjusted taxable income for such
       preceding taxable year, or
       (ii) decreased by the amount of any adjusted net operating loss for such
       preceding taxable year.
       (B) Special rule.--The adjusted surplus as of the beginning of the
       organization's 1st taxable year beginning after December 31, 1986, shall
       be its surplus as of such time. For purposes of the preceding sentence
       and subsection (c)(3)(C), the term "surplus" means the excess of the total
       assets over total liabilities as shown on the annual statement.
I.R.C. § 833(a)-(b) (2000).


04-5028                                    5
       The court entered final judgment against BCW after the company stipulated to

dismissal of the remaining issues. BCW filed a timely appeal to this court. We have

jurisdiction under 28 U.S.C. § 1295(a)(3).

                                      DISCUSSION

       BCW appeals the Court of Federal Claims’ grant of summary judgment in favor of

the United States, which was based on the court’s interpretation of the Closing

Agreement.

                                 A. Standard of Review

       Contract interpretation is an issue of law that this court reviews de novo. Giove

v. Dep’t of Transp., 230 F.3d 1333, 1340 (Fed. Cir. 2000); Metric Constructors, Inc. v.

Nat’l Aeronautics & Space Admin., 169 F.3d 747, 751 (Fed. Cir. 1999). The court also

reviews a grant of summary judgment by the Court of Federal Claims de novo. Berkley

v. United States, 287 F.3d 1076, 1083 (Fed. Cir. 2002).            Summary judgment is

appropriate if there is “no genuine issue as to any material fact and . . . the moving party

is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).

                                      B. Arguments

       BCW argues that the Court of Federal Claims erred in holding that

paragraph (3)(e) of the Closing Agreement unambiguously refers to I.R.C. § 833(b). It

asserts that the record clearly establishes that neither party intended that paragraph to

refer to § 833(b), and that therefore such an interpretation is impermissible.        BCW

further claims that the only reasonable conclusion to draw from the extrinsic evidence is

that the IRS, like BCW, understood (or should have understood) paragraph (3)(e) to




04-5028                                      6
refer to the § 832(c)(4) losses incurred deduction. Likewise, BCW says, the Closing

Agreement on its face unambiguously implicates § 832(c)(4).

       The Government defends the Court of Federal Claims’ view that the contractual

language of paragraph (3)(e), on its face, cannot reasonably be understood to refer to

§ 832(c)(4) and must instead refer to § 833. Alternatively, the Government contends,

extrinsic evidence of negotiations establishes that paragraph (3)(e) concerns § 833, not

§ 832(c)(4). These negotiations were directed toward resolving whether BCW was tax-

exempt in 1985 and 1986.        According to the Government, the subject of “losses

incurred” deductions never came up in those negotiations.             And, although the

Government apparently concedes that BCW intended paragraph (3)(e) to refer to

§ 832(c)(4), it argues that BCW kept that understanding secret from the IRS in an effort

to “hornswoggle” the agency.

                                       C. Analysis

       This case is principally a matter of contract interpretation. Closing agreements

are interpreted pursuant to general principles of contract law.      Marathon Oil Co. v.

United States, 42 Fed. Cl. 267, 274 (1988).

                                    1. Plain Meaning

       Where contractual language is unambiguous, extrinsic evidence plays no role in

determining the contract’s meaning. Coast Fed. Bank, FSB v. United States, 323 F.3d

1035, 1037 (Fed. Cir. 2003). “A contract is ambiguous only when it is susceptible to two

reasonable interpretations.” A-Transport Northwest Co., Inc. v. United States, 36 F.3d

1576, 1584 (Fed. Cir. 1994). In the event that a contract has two or more reasonable

interpretations, extrinsic evidence can be relied upon to determine the parties’ intentions




04-5028                                       7
at the time of contract formation. See Sylvania Elec. Prods., Inc. v. United States, 458

F.2d 994, 1005 (Ct. Cl. 1972).

      We hold that the contractual language at issue here is ambiguous.                We

understand the Court of Federal Claims’ reliance on the phrase “[a]s such,” but we are

unable to accord it the same level of clarity—in our view, this phrase is commonly, but

not always, used to introduce a series of characteristics that necessarily apply to a

previously mentioned thing (here, an “existing Blue Cross or Blue Shield organization”)

simply because it is that thing. Occasionally, the phrase is used in a way that does not

introduce necessarily applicable characteristics. It can be used in a manner akin to

“bearing that in mind,” or similar phrases, to indicate that what follows happens to be a

characteristic of the previously mentioned thing, but is not necessarily so simply by

virtue of being that thing. It can also be used as an essentially generic transitional

phrase.4 Thus, the phrase may have the meaning the court gave it, or it may not—it is

ambiguous and does not mandate a particular interpretation of paragraph (3)(e).

Moreover, reasonable minds could disagree with the court’s construction of paragraph

(3)(e)’s reference to “incurred-but-not-paid claims” as connected to § 833(b), because

the concept of “incurred-but-not-paid claims” is clearly, albeit indirectly, involved in



      4
               For example, the Supreme Court has used “as such” as a generic
transitional phrase in recent cases. See Scarborough v. Principi, 124 S. Ct. 1856, 1872
(2004) (“The EAJA requirement for filing a timely fee application with the statutorily
prescribed content is a condition on the United States’ waiver of sovereign immunity in
§ 2412(d)(1)(A). As such, the scope of the waiver must be strictly construed.” (internal
citations omitted)); United States v. Galletti, 124 S. Ct. 1548, 1551 (2004) (“The Court of
Appeals held that since respondents are ‘taxpayers’ under § 7701(a)(14), which defines
‘taxpayer’ to mean ‘any person subject to any internal revenue tax,’ they are also
‘taxpayers’ under §§ 6203 and 6501. As such, the Court of Appeals held that ‘[t]he
assessment against the Partnership extended the statute of limitations only with respect
to the Partnership.’”).


04-5028                                     8
§ 832. See I.R.C. § 832(c) (2000) (“In computing the taxable income of an insurance

company subject to the tax imposed by section 831, there shall be allowed as

deductions . . . losses incurred, as defined in subsection (b)(5) of this section . . . .”); id.

§ 832(b)(5) (defining “losses incurred” to include discounted unpaid losses outstanding

at the end of the taxable year minus discounted unpaid losses outstanding at the end of

the previous taxable year); id. § 846 (providing that “discounted unpaid losses” are

derived from “undiscounted unpaid losses,” which are “the unpaid losses shown in the

annual statement”—i.e., the estimate of incurred-but-not-paid claims, adjusted for

expenses).

       On the other hand, we also are not persuaded by BCW’s contention that

paragraph (3)(e) unambiguously empowers it to calculate its unpaid loss reserve for its

§ 832(c)(4) deduction based on actual claims paid data. Paragraph (3) mentions § 833

and describes several of the statute’s provisions, while it makes no mention of § 832

and is arguably at odds with both the “[a]s such” language and the specified

$25,000,000 deduction in paragraph (4). In fact, even BCW suggests the need to turn

to extrinsic evidence when it asserts that “[t]he language of the contract ‘must be given

that meaning that would be derived from the contract by a reasonably intelligent person

acquainted    with    the   contemporaneous        circumstances.’”      (Emphasis     added.)

Nonetheless, our opinion is not based on BCW’s present belief about the clarity of the

agreement, whatever it may be, but on the agreement itself. For the reasons indicated

above, we hold that the agreement is facially unclear and must be construed in light of

extrinsic evidence.




04-5028                                        9
                                   2. Extrinsic Evidence

       On remand, one issue before the court will be the meaning that should be

attributed to the Closing Agreement in light of the extrinsic evidence. Both parties have

presented a considerable amount of extrinsic evidence to this court in their briefs. For

example, BCW points out that it insisted on the inclusion of paragraph (3) during the

negotiations. However, if paragraph (3)(e) referred to I.R.C. § 833(b), then that contract

provision would have decreased BCW’s deduction, and BCW would never have

pressed for a provision that had such an effect. The Government, meanwhile, offers the

correspondence between BCW and the IRS during negotiations to show that the IRS

negotiator was never given reason to think that paragraph (3)(e) referred to § 832(c)(4).

Our point here is not to give credence to the extrinsic evidence of one side or the other;

that is not our role in this type of appeal. Instead, we simply hold that the contract is

ambiguous and that the matter must be remanded for consideration of the extrinsic

evidence by the trier of fact. See, e.g., Beta Sys., Inc. v. United States, 838 F.2d 1179,

1183 (Fed. Cir. 1988); 4 S. Williston, Williston on Contracts § 616 (3d ed. 1961) (“The

general rule is that interpretation of a writing is for the court. . . . Where, however, the

meaning of a writing is uncertain or ambiguous, and parol evidence is introduced in aid

of its interpretation, the question of its meaning should be left to the jury.”);

3 A.L. Corbin, Corbin on Contracts § 554 (1960) (“The question of interpretation of

language and conduct—the question of what is the meaning that should be given by a

court to the words of a contract, is a question of fact, not a question of law.”).

       In interpreting the Closing Agreement on remand, the court may also wish to

consider whether BCW knew or should have known of the IRS’s interpretation of the




04-5028                                      10
agreement when it was concluded. The meaning the IRS assigns to paragraph (3)(e)

could prevail if, at the time the agreement was made, BCW knew or should have known

how the IRS understood the provision and did nothing to correct that misunderstanding.

Perry & Wallis, Inc. v. United States, 427 F.2d 722, 725 (Ct. Cl. 1970); Restatement

(Second) of Contracts § 201(2) (1981); see also HPI/GSA 3C, LLC v. Perry, 364 F.3d

1327, 1335 (Fed. Cir. 2004) (characterizing the rule that “a party that enters without

objection into a contract with knowledge of the other party’s reasonable interpretation is

bound by that interpretation” as “an unassailable rule of contract law”).             Some

information presented by the IRS suggests that this may have been the case. However,

based on the evidence before us, we are unable to determine what BCW knew or

should have known when the closing agreement was signed. That determination is for

the Court of Federal Claims to make on remand.

       It is also possible that, on remand, the extrinsic evidence will show neither that

the parties shared a common understanding of the Closing Agreement nor that BCW

had reason to know of the IRS’s interpretation of it and did nothing to correct that

understanding.     In such a case, the Restatement prescribes that neither side’s

interpretation controls. Restatement (Second) of Contracts § 201(3). “The result may

be an entire failure of agreement or a failure to agree as to a term. There may be a

binding contract despite failure to agree as to a term, if the term is not essential or if it

can be supplied.” Id. § 201, cmt. (d).

       In the event that the evidence on remand shows that there was a failure of

assent regarding paragraph (3)(e), there are three possible outcomes. If paragraph

(3)(e) is not essential, the remainder of the agreement stands. If it is essential, either




04-5028                                      11
the court can supply a term that is “reasonable in the circumstances[,]” id. § 204, or, if

that is not feasible, then the entire agreement fails.

                                      CONCLUSION

       For the reasons stated above, we reverse the Court of Federal Claims’ grant of

summary judgment for the United States and remand for consideration of extrinsic

evidence.




04-5028                                      12
