                       109 T.C. No. 5



                   UNITED STATES TAX COURT



  CONNECTICUT GENERAL LIFE INSURANCE COMPANY, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent

CIGNA CORPORATION AND CONSOLIDATED SUBSIDIARIES, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket Nos. 21212-92, 21213-92.      Filed August 12, 1997.



        Held: In consolidating nonlife insurance
   companies with life insurance companies and for
   purposes of calculating the amount of net operating
   losses of nonlife insurance companies that, under sec.
   1503(c)(1) and (2), I.R.C., may reduce income of the
   life insurance companies, companies that constituted
   members of a “recently acquired” affiliated group of
   nonlife insurance companies that previously filed
   consolidated Federal income tax returns are to be
   treated as separate entities.
                               - 2 -

     A. Duane Webber, Leonard B. Terr, C. David Swenson, and

Christopher R. Loomis, for petitioners.

     John A. Guarnieri, Richard H. Gannon, and Richard L.

Osborne, for respondent.


                              OPINION

     SWIFT, Judge:   These consolidated cases are before the Court

under Rule 121 on the parties’ cross-motions for summary

judgment.   Petitioners contend that if their motion for summary

judgment is not granted, a certain factual matter remains in

dispute that precludes summary judgment in favor of respondent.

     The issue for decision is whether, in consolidating nonlife

insurance companies (sometimes referred to as nonlife companies)

with life insurance companies (sometimes referred to as life

companies) and for purposes of calculating, under section

1503(c)(1) and (2), the amount of net operating losses of nonlife

companies that may reduce income of life companies, companies

that constituted members of a “recently acquired” affiliated

group of nonlife companies that previously filed consolidated

Federal income tax returns are to be treated as a single

aggregate entity, as petitioners contend, or as separate

entities, as respondent contends.

     The issue presented in these cross-motions for summary

judgment involves deficiencies determined by respondent in the

Federal income taxes of petitioners Connecticut General Life
                              - 3 -

Insurance Co. (ConnLife) and CIGNA Corp. and their consolidated

subsidiaries (CIGNA) as follows:



       Petitioner             Year               Deficiency

        ConnLife              1980              $ 3,360,873
        CIGNA                 1982               15,080,878
        CIGNA                 1983                1,916,121
        CIGNA                 1984               41,066,157
        CIGNA                 1985                  752,636

             Total                              $62,176,665


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     For 1981 and through March 31, 1982, Connecticut General

Corp. (CG), ConnLife, and CG's over 40 affiliates (the CG Group)

joined in filing consolidated Federal income tax returns, with CG

as the common parent of the affiliated group.   ConnLife

constituted the sole life insurance company in the CG Group.

     Members of the CG Group were engaged primarily in selling,

underwriting, and servicing various types of insurance (namely,

individual and group life, health and annuity insurance, and

personal and commercial property and casualty (P&C) insurance).


Acquisition of INA

     On March 31, 1982, the CG Group and INA Corp. (INA) and its

over 160 affiliated companies (the INA Group) combined for
                               - 4 -

substantial business reasons by way of a tax-free reorganization

under section 368.   As the culmination of the reorganization,

CIGNA was incorporated on March 31, 1982, as the holding company

for the surviving affiliated business entities.

      In years prior to the combination of the CG and the INA

Groups, INA and its affiliates had filed consolidated Federal

income tax returns, with INA as the common parent corporation of

the affiliated INA Group.   Members of the INA Group were engaged

primarily in selling, underwriting, and servicing P&C insurance.

     The reorganization involving the CG and the INA Groups was

treated as a reverse acquisition under section 1.1502-75(d)(3),

Income Tax Regs.   After the reorganization and for Federal income

tax purposes, the CG Group was treated as continuing in existence

and the INA Group was treated as ceasing to exist.   CIGNA was

treated as the common parent corporation of the continuing CG

Group (the CIGNA Group), and companies that constituted members

of the former INA Group became members of the CIGNA Group.


Acquisition of PHC

     On November 20, 1984, an affiliate of CIGNA acquired 89.9

percent of the stock of Preferred Health Care, Inc. (PHC), in a

taxable transaction.   As a result of this transaction, PHC and

its subsidiary companies (the PHC Group) terminated, and

companies that constituted members of the former PHC Group became

members of the CIGNA Group.
                              - 5 -

     In years prior to the acquisition by CIGNA of PHC and its

subsidiary companies, PHC and its subsidiaries had filed

consolidated Federal income tax returns, with PHC as the common

parent corporation of the affiliated PHC Group.   The PHC Group

operated prepaid dental programs in Florida, New Jersey, and

eastern Pennsylvania.


Consolidated Federal Income Tax Returns of the CIGNA Group

     For 1982 through 1985, the consolidated Federal income tax

returns that were filed on behalf of the CIGNA Group included the

companies that constituted members of the former INA Group.

     For 1984 and 1985, the consolidated Federal income tax

returns that were filed on behalf of the CIGNA Group also

included the companies that constituted members of the former PHC

Group.

     For 1982 through 1985, under a special rule set forth in

section 1504(c) allowing life insurance companies to file

consolidated Federal income tax returns with nonlife affiliated

companies, ConnLife was included as the sole life insurance

company in the above consolidated Federal income tax returns of

the CIGNA Group.

     For 1982 through 1985, all of the nonlife companies that

constituted members of the CIGNA Group incurred the following

consolidated net operating losses (CNOL’s), and ConnLife, the
                               - 6 -

only life insurance company in the CIGNA Group, earned the

following income:


                    CNOL’s of Nonlife      Income
         Year           Companies        of ConnLife

         1982       ($ 197,385,675)      $116,294,363
         1983       (   244,963,449)       82,316,221
         1984       (   553,077,555)      331,452,903
         1985       ( 1,229,220,860)      274,458,803


     The above CNOL’s of the nonlife companies consisted of

CNOL’s of both eligible companies under section 1503(c)(2)

(namely, nonlife companies that had been members of the prior CG

Group and the CIGNA Group for at least 5 years) and ineligible

companies under section 1503(c)(2) (namely, nonlife companies

that had not been members of the prior CG Group and the CIGNA

Group for at least 5 years).   Because they had not been members

of the prior CG Group and the CIGNA Group for at least 5 years,

all of the companies that constituted members of the former INA

and PHC Groups constituted ineligible nonlife companies.

     On the consolidated Federal income tax returns for 1982

through 1985 -- in order to calculate the amount of net operating

losses (NOL’s) attributable to the nonlife companies that had

previously constituted members of the former INA and PHC Groups

and that therefore constituted losses of ineligible companies

that could not be used to reduce income of ConnLife (the sole

life company in the consolidated CIGNA Group) -- the CIGNA Group

treated all of the companies that constituted members of the
                              - 7 -

former INA and PHC Groups as two single, aggregate, respective

entities, and the net aggregate respective losses of the

companies that constituted members of the former INA Group and

the former PHC Group were netted against the respective taxable

income of the other companies that constituted members of the

former INA Group and the former PHC Group (single entity method).

     In other words, for purposes of calculating the portion of

the net operating losses of the nonlife companies that

constituted members of the former INA Group that, on the CIGNA

Group’s consolidated Federal income tax returns for 1982 through

1985, were not allowed to reduce income of ConnLife, all

companies that constituted members of the former INA Group were

treated as a single aggregate entity, and losses of the

ineligible companies that constituted members of the former INA

Group were reduced by income earned by other companies that

constituted members of the former INA Group.

     Further, for purposes of calculating the portion of the net

operating losses of the nonlife companies that constituted

members of the former PHC Group that, on the CIGNA Group’s

consolidated Federal income tax returns for 1984 and 1985, were

not allowed to reduce the income of ConnLife, all of the

companies that constituted members of the former PHC Group were

treated as a single aggregate entity, and losses of the companies

that constituted members of the former PHC Group were reduced by
                              - 8 -

income earned by other companies that constituted members of the

former PHC Group.

     On audit, for 1982 through 1985, in order to calculate the

amount of net operating losses attributable to the nonlife

companies that had previously constituted members of the former

INA and PHC Groups and that therefore constituted losses of

"ineligible" companies that could not be used to reduce income of

ConnLife, respondent determined that each of the companies that

constituted members of the former INA and PHC Groups should be

treated as a separate entity (separate entity method), rather

than merely as a part of the respective former INA and PHC

Groups.

     The difference between petitioners' single entity method and

respondent's separate entity method is that under petitioners’

single entity method losses of the ineligible nonlife companies

of the former INA and PHC Groups were, in effect, indirectly made

available to reduce income of ConnLife, the life company.    Under

respondent’s separate entity method losses of ineligible nonlife

companies of the former INA and PHC Groups are not, to any

extent, made available to reduce income of ConnLife.

     The following schedule reflects for each of the years 1982

through 1985 petitioners’ and respondent’s respective

calculations of the amount of nonlife CNOL’s that they claim

should be available under section 1503(c)(1) and (2) and the

regulations thereunder to reduce ConnLife's income:
                                  - 9 -


                    Nonlife CNOL’s Eligible To Reduce Income Of ConnLife*
                       Petitioners'                      Respondent's
     Year          Single Entity Method             Separate Entity Method

     1982             ($ 34,888,309)                      ($10,225,979)
     1983             ( 28,810,677)                       ( 8,351,216)
     1984             ( 116,008,516)                      ( 26,734,260)
     1985             ( 96,060,581)                       ( 94,424,416)

             *   These figures reflect CNOL’s after application
                 of certain percentage limitations contained in
                 sec. 1503.


Discussion

     Summary judgment may be granted if the pleadings and other

materials demonstrate that no genuine issue exists as to any of

the material facts and that a decision may be rendered as a

matter of law.     Rule 121(b); Colestock v. Commissioner, 102 T.C.

380, 381 (1994); Sundstrand Corp. v. Commissioner, 98 T.C. 518,

520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).

     Under section 1504(c)(2) and subject to certain limitations

not here relevant, an affiliated group of companies that includes

nonlife and life companies may elect to file consolidated Federal

income tax returns and to include the life companies in the

consolidated income tax returns.       Sec. 1504(c)(2).

     The above election to consolidate on a limited basis nonlife

and life companies was added to the Code as part of the Tax

Reform Act of 1976, Pub. L. 94-455, sec. 1507(a), 90 Stat. 1739,

in order that nonlife companies (such as P&C insurance companies,

which P&C industry had been experiencing losses and a diminished
                               - 10 -

capacity to write insurance) could use nonlife losses to reduce

income of affiliated life companies.    Congress anticipated that

the option to consolidate nonlife and life companies would, in

particular, improve the financial condition of P&C insurance

companies.    See S. Rept. 94-938, at 454-455 (1976), 1976-3 C.B.

(Vol. 3) 49, 492-493.

     Congress, however, in order to minimize trafficking by

profitable life insurance companies in unprofitable P&C insurance

companies, provided certain rules and limitations on the use in

consolidated Federal income tax returns of nonlife losses to

reduce life income.    See S. Rept. 94-938, supra at 454-455, 1976-

3 C.B. (Vol. 3) at 492-493; 122 Cong. Rec. 24680-24685 (1976).

     Section 1503(c)(1) provides generally that where an election

is made under section 1504(c)(2) to include both nonlife and life

companies in a consolidated Federal income tax return, certain

losses of nonlife companies may be taken into account and may

reduce income of the life companies included in the return but

only pursuant to regulations prescribed by the Secretary.     Sec.

1503(c)(1).

     Section 1503(c)(1) also provides that nonlife losses must

first be carried back against prior year income of the particular

nonlife companies that incurred the losses, and nonlife losses

that are not absorbed as carrybacks against prior year income of

the nonlife companies may be applied against income of the life

companies to the extent of only 35 percent of the nonlife CNOL or
                              - 11 -

35 percent of the income of the life companies, whichever is

less.1   Section 1503(c)(1) provides in part as follows:


          (1) In general--If an election under section
     1504(c)(2) is in effect for the taxable year and the
     consolidated taxable income of the * * * [nonlife
     members of the group] results in a consolidated net
     operating loss for such taxable year, then under
     regulations prescribed by the Secretary, the amount of
     such loss which cannot be absorbed in the applicable
     carryback periods against the taxable income of such
     * * * [nonlife members of the group] shall be taken
     into account in determining the consolidated taxable
     income of the affiliated group for such taxable year to
     the extent of 35 percent of such loss or 35 percent of
     the taxable income of the * * * [life members of the
     group], whichever is less. * * *


     Section 1503(c)(2) provides a further specific limitation on

the use of nonlife losses to reduce life income where the

particular nonlife losses that are involved are realized by

companies that were not, for the immediately preceding 5 years,

part of the same affiliated group that is now filing a

consolidated Federal income tax return.   Section 1503(c)(2)

provides in pertinent part as follows:


     a net operating loss for a taxable year of a * * *
     [nonlife member of the group] shall not be taken into
     account in determining the taxable income of a * * *
     [life member of the group] if such taxable year
     precedes the sixth taxable year such members have been
     members of the same affiliated group * * *.


1
      For 1982, sec. 1503(c)(1) limits the losses that are
allowed to reduce life income to 30 percent of the income of the
life companies or 30 percent of the nonlife CNOL, whichever is
less.
                              - 12 -

     Under legislative regulations promulgated under sections

1502 and 1503, for purposes of calculating the amount of nonlife

losses that are allowed to reduce life income pursuant to section

1503(c)(2), each nonlife company that constitutes a member of the

consolidated group is treated as a separate entity, and the CNOL

of all of the nonlife companies included in the consolidated

Federal income tax return (after allowable carrybacks) is reduced

by the separate “ineligible NOL” of each ineligible nonlife

company that constitutes a member of the consolidated group.

Sec. 1.1502-47(m)(3)(vi), Income Tax Regs.   Section 1.1502-

47(m)(3)(vi)(A), Income Tax Regs., provides, in pertinent part,

as follows:


     the “ineligible NOL” is in the year the loss arose the
     amount of the separate net operating loss * * * of any
     nonlife member that is ineligible in that year * * *.


     No provision is made in the above legislative regulations to

treat a company that prior to acquisition had been a member of a

group that had filed a consolidated income tax return as part of

a single, aggregate group of companies and to net within that

group losses of ineligible nonlife companies against income of

other nonlife companies of the same acquired group.

     Petitioners note, however, that the legislative regulations

under sections 1502 and 1503 provide a “reserved” subparagraph

for “acquired groups”.   Sec. 1.1502-47(m)(4), Income Tax Regs.
                             - 13 -

That reserved subparagraph states merely as follows:   “Acquired

Groups.   [Reserved.]”.

     Petitioners note further that in the preamble accompanying

section 1.1502-47, Income Tax Regs., a comment is made to the

effect that applying petitioners' single entity method to

ineligible nonlife companies that in prior years constituted

members of a consolidated group may be appropriate in certain

situations.

     The preamble states in relevant part:


          Finally, the Treasury Department will study
     further whether it is appropriate to aggregate the
     income and losses of ineligible members in certain
     cases. For instance, notwithstanding the ordinary
     reading of section 1503(c)(2), it may be consistent
     with the intent of section 1503(c)(2), or correct as a
     matter of policy, to aggregate the income and losses of
     ineligible members that filed a consolidated return
     prior to their acquisition by * * * another group that
     files a consolidated return. [T.D. 7877, 1983-1 C.B.
     207, 212.]


     Due primarily to the presence of the above reserved

subparagraph for acquired consolidated groups and due to the

above language from the preamble to the regulations, petitioners

argue that the separate entity treatment for ineligible nonlife

companies that is provided in section 1503(c)(2) and section

1.1502-47(m)(3)(vi), Income Tax Regs., should itself be limited

and should not apply to ineligible nonlife companies that

previously constituted an affiliated group and that filed
                              - 14 -

consolidated Federal income tax returns (e.g., the companies that

constituted members of the former INA and PHC Groups).

     Petitioners cite portions of the Department of the Treasury

(Treasury) administrative files under section 1.1502-47(m)(3) and

(4), Income Tax Regs., that suggest that the insurance industry

in general and petitioners in particular were engaged with

respondent and the Treasury over a period of years in extensive

discussions regarding whether a separate or a single entity

method should be adopted and reflected in the regulations with

regard to the treatment of losses of ineligible nonlife companies

that constituted part of a previously affiliated and consolidated

group.   Portions of the referenced administrative files also

reflect positions or recommendations of various Government

officials about the separate or single entity method and indicate

that some Government officials at one time or another favored a

single entity method.

     Petitioners argue that the administrative files establish

that, in the regulations, the Treasury and respondent never

adopted a final decision as to how to treat losses of ineligible

nonlife companies that constituted part of a previously

affiliated and consolidated group and that the “reserved”

subparagraph (4) under section 1.1502-47(m), Income Tax Regs.,

was intended to preserve this issue until that subparagraph was

promulgated.
                             - 15 -

     Petitioners further argue that in the absence of a rule

under the regulations as to how to treat losses of ineligible

nonlife companies that constituted part of a previously

affiliated and consolidated group, the statutory and regulatory

provisions are unclear and ambiguous, and petitioners should be

entitled to treat losses of the respective ineligible nonlife

companies that constituted members of the former INA and PHC

Groups under any reasonable interpretation of the statute.

Petitioners then argue that treating members of the former INA

Group and members of the former PHC Group as two single nonlife

entities constitutes a reasonable approach.

     Additionally, if we agree with respondent's interpretation

of section 1.1502-47(m)(3)(vi), Income Tax Regs., with regard to

the companies that constituted members of the former INA and PHC

Groups, petitioners argue that the regulation should be

invalidated.

     Petitioners also argue that a calculation of the ineligible

CNOL's using respondent’s separate entity method would cause an

increased overall tax liability for the CIGNA Group, as compared

to the collective tax liabilities of the CIGNA Group and the

former INA and PHC Groups, assuming the former INA and the PHC

Groups had never been acquired.   Petitioners thus conclude that

any such calculation would constitute an improper, punitive

calculation.

     We disagree with each of petitioners’ arguments.
                               - 16 -

       We agree with respondent's interpretation of the statutory

and regulatory provisions involved in these cases.    As indicated,

section 1503(c)(1) provides generally that losses of ineligible

nonlife companies may be used to reduce income of life companies

but only pursuant to regulations promulgated by the Treasury and

subject to the limitations contained in section 1503(c)(1) and

(2).    Also as indicated, the legislative regulations that were

promulgated by the Treasury generally reflect a separate entity

method when calculating, under section 1503(c)(2), the amount of

nonlife losses that are to be attributed to ineligible nonlife

companies and therefore that may not be used to reduce income of

life companies.    The statute and the regulations do not reflect

any special treatment for losses of ineligible nonlife companies

that previously constituted an affiliated and consolidated group.

       We regard the “reserved” subparagraph (4) under section

1.1502-47(m), Income Tax Regs., as a neutral factor.    That

provision simply reserves a space for regulations that may be

promulgated at a later date and that may provide a special rule

with regard to losses of ineligible nonlife companies that

previously constituted an affiliated and consolidated group.

       We regard the preamble language to the regulations as merely

reflecting the Treasury’s willingness to study whether a special

rule should be promulgated for acquired previously affiliated and

consolidated groups.    That language is not to be construed as

indicating that section 1.1502-47(m)(3)(vi), Income Tax Regs.,
                                - 17 -

and the separate entity method reflected therein do not apply to

ineligible nonlife companies that previously constituted an

affiliated and consolidated group.

     Petitioners’ arguments that are based on certain material in

the Treasury’s administrative files under section 1.1502-47(m)(3)

and (4), Income Tax Regs., are not persuasive.       The documents

from the administrative files are not compelling, consistent, or

clear as to the intended treatment of losses of ineligible

nonlife companies that constituted part of a previously

affiliated and consolidated group.       Also, the relied-upon

material from the administrative files reflects generally only

personal views of various government representatives, not

official statements of respondent or of the Treasury.       See Armco,

Inc. v. Commissioner, 87 T.C. 865, 867-868 (1986).

     In any event, personal views of such government

representatives would not be able to overcome the particular

statutory and regulatory scheme before us in these cases.        In

light of this statutory and regulatory scheme, petitioners’

alleged factual matter in dispute (namely, the intent of such

government representatives) is simply not sufficiently relevant

to the resolution of the issue to give rise to a genuine issue of

material fact.   Rule 121(b).

     We emphasize that section 1503(c)(1) provides that nonlife

losses may be taken into account only “under regulations

prescribed by the Secretary”.     Assuming arguendo that the above
                             - 18 -

reserved subparagraph (4) of section 1.1502-47(m), Income Tax

Regs., was intended and should be construed as petitioners would

have us construe it (namely, as exempting from the general

separate entity method of the regulations ineligible nonlife

companies that previously had been members of an affiliated and

consolidated group), petitioners arguably would be left without

any specific regulatory provision that would support their single

entity method for such nonlife companies.   Because section

1503(c)(1) provides that nonlife losses may be taken into account

only as provided in regulations, the absence of any such

regulation might preclude petitioners from taking into account

any of the losses of the ineligible nonlife companies that

previously constituted members of the former INA and PHC Groups.

See Estate of Neumann v. Commissioner, 106 T.C. 216, 219-221

(1996); H Enters. Intl., Inc. v. Commissioner, 105 T.C. 71, 81-83

(1995); Alexander v. Commissioner, 95 T.C. 467, 473 (1990), affd.

without published opinion sub nom. Stell v. Commissioner, 999

F.2d 544 (9th Cir. 1993).

      We simply are not persuaded by petitioners' arguments.    As

indicated, the regulations in question are legislative in nature.

Pursuant to sections 1502 and 1503(c)(1), the Treasury was given

an express delegation of regulatory authority.   Respondent's

interpretation of the legislative regulations in these cases is

sufficiently consistent with section 1503(c)(2) and its

legislative purpose to restrict the use of ineligible nonlife
                              - 19 -

losses against life income.   Also, respondent’s interpretation is

not so clearly inconsistent with the statute or its purpose as to

be arbitrary and capricious and invalid.   See Chevron, U.S.A.,

Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837,

844 (1984).

     Finally, petitioners' argument as to the punitive effect of

the separate entity method does not justify a different result.

Under the separate entity method, the CIGNA Group still obtains

benefits in consolidating nonlife and life companies (i.e., the

ability to offset some nonlife losses against life income).

Also, as indicated, section 1.1502-47(m)(3)(vi), Income Tax

Regs., is consistent with congressional intent to place some

limits on the use of ineligible nonlife losses to reduce income

of life companies.   Further, under the regulations, ineligible

losses of nonlife companies are not completely lost, and such

losses may be carried back or forward and used to reduce

consolidated taxable income of nonlife companies in other years.

Sec. 1.1502-47(m)(3)(vii), Income Tax Regs.

     For the reasons stated, we conclude that, for the years in

issue, section 1.1502-47(m)(3)(vi), Income Tax Regs., applies to

the companies that previously constituted members of the former

INA and PHC Groups for purposes of calculating the amount of

losses of the nonlife companies of the CIGNA Group that may be

used to reduce the income of ConnLife.   The CIGNA Group is

required to treat each of the nonlife companies that previously
                             - 20 -

constituted members of the former INA and the former PHC Groups

as a separate entity.

     We also conclude that no factual matter remains in dispute

that precludes our granting summary judgment in favor of

respondent.

     We have considered petitioners' other arguments and find

them unpersuasive.

     To reflect the foregoing,


                                        Appropriate orders and

                                   decisions will be entered for

                                   respondent.
