
USCA1 Opinion

	




                            United States Court of Appeals                            United States Court of Appeals                                For the First Circuit                                For the First Circuit                                 ____________________            No.  96-1877                            UNUM CORPORATION AND UNUM LIFE                            INSURANCE COMPANY OF AMERICA,                                 Plaintiff-Appellant,                                          v.                              UNITED STATES OF AMERICA,                                 Defendant-Appellee.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                              FOR THE DISTRICT OF MAINE                      [Hon. Gene F. Carter, U.S. District Judge]                                            ___________________                                 ____________________                                        Before                                Torruella, Chief Judge,                                           ___________                             Aldrich, Senior Circuit Judge,                                      ____________________                              and Lynch, Circuit Judge.                                         _____________                                 ____________________                William J. Kayatta, Jr., with whom Jared S.  des Rosiers,                _______________________            _____________________            Pierce  Atwood, Barbara H.  Furey, Barry W.  Larman, and UNUM            ______________  _________________  ________________      ____            Corporation and UNUM  Life Insurance Company of  America were            ________________________________________________________            on brief for appellant.                Edward  T.  Perelmuter,   Tax  Division,  Department   of                ______________________            Justice,  with whom  Loretta  C. Argrett,  Assistant Attorney                                 ___________________            General, and  David I.  Pincus, Tax  Division, Department  of                          ________________            Justice, were on brief for appellee.                                 ____________________                                   December 2, 1997                                 ____________________                                         -2-                      LYNCH,  Circuit Judge.   The need to  raise capital                      LYNCH,  Circuit Judge.                              _____________            and to compete in increasingly  diversified financial markets            has led a number of American mutual life insurance  companies            to convert to being stock  companies.  This process, known as            "demutualization,"  often involves a conversion of the mutual            policyholders'  ownership interest  in the  old  company into            ownership interest in the form of stock in the new company.                      This appeal  raises important  questions about  the            proper tax treatment of one form of demutualization:  whether            stock and cash  distributed to policyholders in  exchange for            their  mutual  ownership  interests as  part  of  a statutory            demutualization  constitute  "policyholder  dividends"  under              808  of the Internal Revenue Code.   If so, the insurer may            take   a  deduction   for   "policyholder  dividends"   under              805(a)(3).  Whether the  "policyholder dividends" deduction            is available has great financial consequences for the company            and   for  the   public  fisc.      This  question   involves            consideration  of the  scope  of the  "policyholder dividend"            under    808, as well as the broader relationship between the            general  corporate tax provisions  of the Code  (contained in            Subchapter  C)  and  the   Code's  insurance  tax  provisions            (contained in Subchapter L).                        In this case, UNUM Corp. ("UNUM"), the demutualized            successor   to  Union  Mutual   Life  Insurance  Co.  ("Union            Mutual"),  seeks  a  tax  refund  based  on  a  "policyholder                                         -2-                                          2            dividends" deduction of  over $652 million.  This  sum, which            UNUM was required to distribute to its policyholders by state            law,  represents  the  value  of  Union Mutual's  accumulated            surplus.   See Me.  Rev. Stat. Ann.  tit. 24-A,    3477 (West                       ___            1996).                        UNUM's  principal  argument  is that  the  cash and            stock  distributed  during   the  demutualization  constitute            "policyholder dividends" under the plain language of   808(b)            and thus are  deductible under    805.   UNUM further  argues            that,  beyond the statute's  plain language,  the legislative            history and public policy behind the Code's treatment of life            insurance companies support this result.                      The   IRS  argues   that   general  corporate   tax            provisions apply  to insurance  companies in  the absence  of            specific provisions to  the contrary in the  Code's insurance            tax  section, and that, under those corporate tax provisions,            UNUM is not entitled to any deduction for its reorganization.            The  IRS  argues that  nothing  in   808  or  its legislative            history   indicates  that   Congress  envisioned      808  as            encompassing    capital   transactions    such   as    UNUM's            demutualization.   Rather, placed in proper context,   808 is            not  relevant to the value-for-value exchanges for which UNUM            seeks a deduction.                                         -3-                                          3                      The  district   court  entered  judgment   for  the            government  in UNUM's  suit  for  a refund.    We affirm  the            judgment of the district court.                                          I                                          I                      This  appeal  involves only  questions  of law;  we            exercise  de  novo  review.   Alexander  v.  Internal Revenue                      ________            _______________________________            Service, 72  F.3d 938, 941 (1st Cir. 1995).  The parties have            _______            agreed on the facts.            A.  Background                __________                      Demutualization has  become increasingly  common in            the insurance industry.  More  than 200 mutual life insurance            companies  have  demutualized  since 1930.    See  S. Preston                                                          ___            Ricardo,  The Deductibility  of Policyholder  Dividends: UNUM                      ___________________________________________________            Corp. v. United States, 50 Tax Law. 265, 265 (1996).  Between            ______________________            1954 and 1981,  the number of  mutual insurers declined  from            171  to  135; during  the  same  time,  the number  of  stock            insurers increased from 661 to 1,823.  Edward X. Clinton, The                                                                      ___            Rights of  Policyholders in an  Insurance Demutualization, 41            _________________________________________________________            Drake L. Rev.  657, 659 n. 13  (1992).  Today, fewer  than 80            mutual  insurers  have assets  of  over  $100 million.    See                                                                      ___            William   B.   Dunham,   Jr.,  et   al.,   Introduction,   in                                                       ____________    __            Demutualization  of Life Insurers, 648 PLI/Comm 9, 16 (1993).            _________________________________            These  figures  suggest  that  mutual  insurers  are  rapidly            demutualizing,  and that new  insurance companies  prefer the            stock form at the outset.                                         -4-                                          4                      State    legislatures    have    facilitated   this            demutualization process  by passing statutes  permitting such            conversions.    Presently,  at  least  forty-one states  have            specific statutes that provide for demutualization of  mutual            life  insurers.  Alexander M. Dye, Distributing Consideration                                               __________________________            to Policyholders,  in Demutualization  of Life Insurers,  648            ________________   __ _________________________________            PLI/Comm 75,  78  (1993).   Only Hawaii  and Idaho  expressly            prohibit  direct mutual  to stock  conversion, although  they            still permit demutualization through the  alternate method of            bulk reinsurance conversion.   See Clinton, supra, at  673 n.                                           ___          _____            116.    Every  state,  including  those  that  lack  specific            demutualization statutes,  permits  at  least  some  form  of            demutualization.  See id.                                ___ ___                      There  are three  usual types  of  mutual to  stock            conversions:  a  statutory  conversion  whereby  the  insurer            directly converts its form of  business, merger with a  stock            insurer,  and  bulk  reinsurance  of  the   mutual  company's            policies.   See id. at 660-61.   This case  only concerns the                        ___ ___            first  type of conversion: a statutory conversion, in which a            mutual company  alters its  organizational form  to become  a            stock insurer by redistributing all the mutual policyholder's            ownership interest in the mutual insurer into shares of stock            in a new stock corporation.  "This type of reorganization may            properly  be  regarded  as a  reorganization  of  the company                                         -5-                                          5            because the  policyholders are  exchanging membership  in the            mutual for shares in the new corporation."  Id. at 660.                                                        ___                      By  demutualizing,   mutual  insurers   can  obtain            certain  advantages  available  to  stock  insurers.    Stock            corporations  are better able  to raise capital  because they            may sell  stock on the  equity markets.  See  id. at 666-671.                                                     ___  ___            Stock companies can more easily diversify their operations by            creating   upstream   holding   companies   which   can   own            subsidiaries engaged in other businesses.  See id. at 671-72.                                                       ___ ___            They  can  also  create  incentives  for superior  management            performance through stock  option plans.  See  id. at 672-74.                                                      ___  ___            Mutual  insurers can only raise capital by retaining earnings            or charging  excess premiums,  and are  generally subject  to            comprehensive  regulation   by  state  authorities.     These            limitations can hinder  their ability to grow  and diversify.            See id. at 666.            ___ ___                      Much is at stake in this process.  Mutual insurance            companies have  historically lagged behind  stock insurers in            growth of assets and capital.  Demutualization and subsequent            stock sales may  improve a mutual insurer's  capital position            and competitive  standing with  other insurers  and financial            institutions.  Mutual  insurers naturally want to  contend in            the  increasingly   competitive  and   deregulated  financial            services   markets.       Many    mutual   insurers    regard                                         -6-                                          6            demutualization as an important  step toward bolstering their            financial strength and flexibility.            B.  Facts                _____                      Union  Mutual, based in  Maine, was organized  as a            mutual  insurance company in  1848.  Union  Mutual's business            was  selling various types of insurance and annuity products.            As a  mutual company, Union Mutual had no stock and was owned            by   its   participating   policyholders.1      Policyholders            contributed to Union Mutual's surplus by paying premiums that            exceeded the actuarial cost of their policy coverage.                        In  1984,  Union  Mutual's  management  decided  to            reorganize the company  as a stock  insurer.  The  management            decided that the  company would gain four  principal business            advantages from  this conversion:   an  increased ability  to                                            ____________________            1.  Mutual life  insurance companies  do not  raise money  by            issuing capital stock, but rather by charging policyholders a            "redundant  premium"  that  exceeds  the  amount  actuarially            anticipated to pay the  policy's benefits and expenses.   The            excess portions of these premiums are  accumulated, retained,            and invested as "surplus".                 A mutual insurer's  accumulated surplus is the  excess of            assets over  liabilities.   Such an excess  results from  the            accumulation of  redundant premiums  and investment  earnings            over the life  of the company.  Surplus  generally belongs to            the  mutual   insurer's  members   in  proportion  to   their            contributions,  and  is generally  returned  to policyholders            through policyholder dividends.                 Mutual insurers  are thus owned  by their  policyholders.            Policyholders in mutual  companies are denominated  "members"            of the  company; their ownership  rights in  the company  are            their "membership interests".   Members  of mutual  insurance            companies have  many of  the same  rights as stockholders  in            corporations, including  the right to  vote and the  right to            residual surplus upon liquidation.                                          -7-                                          7            raise  capital, greater  flexibility  to  diversify into  new            markets, an increased accountability for company  performance            by management, and an enhanced ability to attract and  retain            key personnel.                      Under  Maine law, Union Mutual was not permitted to            implement its conversion  plan until the plan was approved by            the  Maine Superintendent of  Insurance.  See  Me. Rev. Stat.                                                      ___            Ann.  tit.  24-A,    3477 (West  1996).    Maine  law imposes            several conditions that  a demutualization plan must  satisfy            in  order to receive  approval by the  Superintendent.  These            include, inter alia, (1) that the company pay policyholders a                     _____ ____            "fair  and equitable" amount for their ownership interests in            the company, (2) that the "equity share" of each policyholder            be determined under a fair and reasonable formula  based upon            the  insurer's  entire  surplus  as  stated  in  a  financial            statement  filed  with  the  Superintendent,   (3)  that  the            conversion plan give each member of the demutualizing insurer            a preemptive right to  acquire his or her  proportionate part            of the proposed  capital stock of the new  stock company, (4)            that the plan  provide for payment  to each member of  his or            her entire equity  share in the insurer, with  the payment to            be made  in cash or stock of the  stock company, and (5) that            policyholders entitled to  receive stock or cash  include all            policyholders  within three years prior  to the date the plan            was submitted for approval to the Superintendent.  See id.                                                                 ___ ___                                         -8-                                          8                      On December 14, 1984, Union Mutual submitted a plan            of  recapitalization and  conversion  to the  Superintendent.            Union Mutual amended  the plan several  times in response  to            rulings  by the  Superintendent.   On  July  11, 1986,  Union            Mutual submitted its fourth and final amended plan, which was            approved by the Superintendent on August 8, 1986.                      The approved  plan of  conversion may  be generally            described as  follows.  A  holding company was formed  to own            all the  stock of  the  new stock  company.   Those who  were            "eligible  policyholders"2   transferred  their   "membership            interests" in Union Mutual to the holding company in exchange            for stock  in the  holding company.   "Membership  interests"            were defined in the conversion plan as:                       [A]ll  the rights  or  interests of  each                      policy  and  contract   holder  of  Union                      Mutual including, but not limited to, any                      right to vote, any rights which may exist                      with  regard  to  the  surplus  of  Union                      Mutual not apportioned  by the Board  for                      policyholder dividends, and any rights in                      liquidation  or  reorganization  of Union                      Mutual, but shall  not include any  other                      right    expressly    conferred    by   a                      policyholder's   insurance    policy   or                      contract.                                            ____________________            2.  "Eligible policyholders"  were generally  defined in  the            conversion  plan as all Union Mutual policyholders during the            three years prior to December 31, 1984.                                          -9-                                          9                      Eligible  policyholders  who   qualified  as  "cash            option eligible policyholders"3 could elect to exchange their            membership interests for cash instead of stock.  The  holding            company,  after obtaining 100% of the membership interests in            Union  Mutual, exchanged the membership interests for 100% of            the shares  of the newly  formed stock insurer.   The holding            company  sold stock not  issued to policyholders  to insiders            and the general public.  At  the conclusion of the Plan, UNUM            Life Insurance Co. ("UNUM Life"), the  new stock company, was            a wholly owned subsidiary of UNUM, the holding company.  UNUM            was  in  turn  owned by  former  Union  Mutual policyholders,            insiders, and members of the general public.                      The approved plan included an actuarial formula for            calculating the consideration to be paid to each policyholder            in  exchange  for his  or  her membership  interest  in Union            Mutual.  This figure, denominated each policyholder's "equity            share" in Union Mutual, was  defined as "the dollar amount of            that part of Union Mutual's Adjusted Surplus attributable to"            the  particular policyholder.    Each policyholder's  "equity            share"  comprised two components:   a "minimum  equity share"            and the individual's "contribution to statutory surplus".  On            December  31,  1985,  the  day  Union  Mutual  presented  its            consolidated   balance   sheet  for   final  review   by  the                                            ____________________            3.  "Cash  option  eligible   policyholders"  were  generally            defined in the  conversion plan as policyholders  with equity            of less than $2,500 in Union Mutual.                                          -10-                                          10            Superintendent,   Union   Mutual's   adjusted   surplus   was            $652,050,097.4    Based   on  that  figure,  Union   Mutual's            management determined that each policyholder should receive a            per capita amount  of $612.25 as the  "minimum equity share".            The  "contribution to statutory surplus" varied by individual            policyholder.   The  formula for  computing  a policyholder's            "equity share" that is referred  to in the plan of conversion            reveals this two-component scheme.                      The plan of  conversion also provided for  creation            of  an accounting  mechanism known  as  a Participation  Fund            Account ("PFA").   The PFA created the  functional equivalent            of a  closed block5 and was allocated  assets which, together                                            ____________________            4.  Surplus can be  measured by  either statutory  accounting            principles  or   generally  accepted   accounting  principles            ("GAAP").     The  difference  between  the  two  methods  is            primarily one of  timing:  the costs of  selling policies are            fully  charged  when  incurred   under  statutory  accounting            principles, but are  amortized over the expected  life of the            policies   under  GAAP.     UNUM's  accumulated   surplus  of            $652,050,097 was calculated under GAAP.                 In UNUM's  demutualization plan, "surplus" was defined as            "the  amount of the  surplus of Union Mutual  as shown by its            financial  statement  as  of   the  Computation  Record  Date            (December 31, 1985) filed with the Superintendent, as  may be            confirmed or adjusted  in the event of an  examination by the            Superintendent, including all voluntary  reserves but without            taking into  account the  value of  nonadmitted assets  or of            insurance business in force."              5.  Some states protect the policyholders by requiring that a            mutual insurer  establish a "closed  block" of business  as a            condition of  demutualization.   See N.Y.  Ins. Laws.    7312                                             ___            (West 1997);  40 Pa. Cons.  Stat. Ann.    915-A (West  1997).            Such statutes generally require the mutual insurer's policies            and contracts in  force at the time of  the reorganization be            placed by the reorganized insurer  into a "closed block" into            which  the insurer must  allocate assets that,  together with                                         -11-                                          11            with   premiums  from   the   participating  policies,   were            actuarially sufficient to pay policy  claims and policyholder            dividends.   Under the  conversion  plan, the  amount of  the            assets in the PFA could not be distributed to stockholders of            the demutualized insurer.  As with  a closed block, it had to            be  invested  and used  for  the  exclusive  benefit  of  the            policyholders.  The PFA was  designed with the aim that Union            Mutual's policyholders would continue to receive policyholder            dividends  after the  demutualization at  the  same level  as            before, even though policyholders and stockholders would have            competing claims on  the earning and profits  of the company.            The  PFA thus  was meant to  assure policyholders  that their            reasonable expectations about the  investment value of  their            policies would continue to be met.                       The   creation  of   the  PFA   was  an   important            consideration in the Superintendent's decision to approve the            demutualization plan.  In  his Final Decision and Order,  the            Superintendent discussed  the PFA at  some length,  observing            that Union  Mutual policyholders  had  bought their  policies                                            ____________________            revenue, are sufficient to pay policy claims and policyholder            dividends.   Thereafter, the  insurer may not  distribute any            earnings   or  proceeds  developed   within  that   block  to            stockholders.   The closed  block must  be  operated for  the            exclusive  benefit of  the  included policies  and contracts,            distributions being for policyholder  dividend purposes only.            See id.; Dye, supra at 115-116.              ___ ___       _____                A PFA may  be required as a condition  of demutualization            in states  which do not  require a closed  block.  The  Maine            demutualization statute does not require a closed block.  See                                                                      ___            Me. Rev. Stat. Ann. tit. 24-A,   3477 (West 1996).                                         -12-                                          12            with  an understanding that policy costs would be continually            adjusted through  dividends reflecting Union  Mutual's actual            experience.    The  Superintendent  also  noted   that,  when            purchasing their policies, policyholders based their dividend            expectations on dividend illustrations shown to them by Union            Mutual that were  in turn based on the  dividends the company            had  been paying pursuant  to the dividend  scales current at            the time of purchase.  The Superintendent concluded:                      Even  though  these  "illustrations" were                      not  guarantees that  dividends would  be                      paid,   Union   Mutual,    in   practice,                      typically  paid  dividends  in accordance                      with these  scales.    Based  upon  these                      illustrations and  upon actual  practice,                      policyholders  expect   that  they   will                      continue  to receive  these dividends  as                      long  as  their  policies are  in  force.                      Therefore, I find it appropriate that the                      Plan, by creating a mechanism such as the                      PFA,  supports   these  expectations   of                      future dividends.            That the PFA would maintain these expectations was, according            to the Superintendent,  critical to the acceptability  of the            conversion plan.                      Union  Mutual implemented its plan of conversion on            November 14, 1986.  To the 105,098 Eligible Policyholders who            selected   the   Cash   Option,   Union  Mutual   distributed            $129,129,082.       To   the   remaining    58,561   Eligible            Policyholders, Union Mutual distributed 20,489,072 shares  of            UNUM stock.  This  stock was assessed as having a fair market            value of $25.20 per share, making the total value of the UNUM                                         -13-                                          13            stock  distributed  under  the Plan  equal  to  $522,471,336.            Union  Mutual also distributed an additional $609,396 in cash            to  compensate  policyholders  for  the  value of  fractional            shares created  by the conversion  formula.  In  total, Union            Mutual distributed $652,209,814 to the Eligible Policyholders            during the demutualization.                      Prior to the demutualization,  on October 12, 1984,            Union Mutual's  tax counsel had  asked the IRS for  a private            letter  ruling  on  the  tax  treatment  of  the  conversion.            Contrary to the position taken by UNUM now, Union Mutual then            sought  to convince  the IRS  that the  stock distributed  to            policyholders in exchange  for their membership  interests in            Union  Mutual would constitute tax free exchanges under   351            of the Code.  UNUM also  sought to persuade the IRS that  the            exchange  of the membership interests received by the holding            company for  common  stock of  the  new stock  company  would            constitute a tax free recapitalization under   368(a)(1)(E).                      In  support of these positions, Union Mutual made a            submission to  the IRS  on March 25,  1985 stating  that "the            equity interest  of Union Mutual's policyholders resemble the            rights  of stockholders in a corporation and have substantial            value."    The  submission further  stated  that  the Supreme            Court, in Helvering v. Southwest Consolidated Group, 315 U.S.                      _________________________________________            194  (1942),  had  characterized  a  recapitalization   as  a            "reshuffling of a  capital structure within the  framework of                                         -14-                                          14            an  existing corporation," Id. at 202, and argued that "[t]he                                       ___            exchange of evidences  of ownership interest in  Union Mutual                        _________            argues  for the exchange being treated as a recapitalization"            under the Supreme Court's characterization.  Id. (emphasis in                                                         ___            original).                      Union  Mutual made another submission to the IRS on            November  8, 1985,  discussing whether  the  exchange of  the            membership interests  for cash or  stock would be  treated as            nondeductible  redemptions  of   stock  under    302  or   as            deductible  "policyholder dividends"  under   808  and   805,            although UNUM did not specifically ask for a letter ruling on            that subject at that time.                      On  December 16, 1986,  the IRS issued  its private            letter  ruling to  Union  Mutual  regarding  the  proper  tax            treatment of the demutualization.  See Priv. Ltr. Rul. 87-11-                                               ___            121 (December 16,  1996).  The letter ruling  stated that the            exchange  between   the   policyholders  and   UNUM  of   the            policyholders' membership interests in Union Mutual for  UNUM            stock was  a tax-free  exchange under    351.   See id.   The                                                            ___ ___            ruling also  stated that the  exchange between UNUM  and UNUM            Life, the  stock insurer that would succeed  Union Mutual, of            the  Union Mutual membership  interests for UNUM  Life voting            common   stock   was  a   tax  free   recapitalization  under              368(a)(1)(E).  See id.   The ruling further stated that the                             ___ ___            cash  distributed  to  policyholders  in  exchange  for their                                         -15-                                          15            membership  interests  constituted  value-for-value transfers            and    were,   accordingly,    properly   characterized    as            nondeductible   redemptions  under     302,  not   deductible            "policyholder dividends"  under    808 and    805.   See id.6                                                                 ___ ___            The IRS  viewed the stock-for-membership  interest exchanges,            in  contrast, as non-recognition  exchanges subject to    351            (no gain or loss recognized to policyholders),   354 (no gain            or   loss  recognized  to  holding  company  on  exchange  of            membership  interests to converted  company for stock,  and              1032 (no gain or loss recognized to either holding company or            converted company on receipt of property for stock).                      On its 1986 consolidated federal income tax return,            UNUM  did not claim  a "policyholder dividend"  deduction for            the  cash and stock  distributed to policyholders  during the            demutualization.  UNUM had entered into an agreement with the            IRS extending  the  time period  within which  the IRS  could            audit the  1986 return,  after which UNUM  would be  given an                                            ____________________            6.  The IRS has  not always held this view  regarding the tax            treatment  of  distributions  from  surplus  made  during   a            demutualization.    In  1983, the  IRS  issued  a non-binding            technical advice memorandum addressing the demutualization of            a  mutual  casualty  insurer  through  merger  with  a  stock            insurer.   Tech. Adv. Mem.  8409003 (Nov. 4, 1983).   In this            memorandum, the IRS  took the view now advanced  by UNUM that            cash  distributions  paid  out of  surplus  to  policyholders            during the demutualization  were policyholder dividends under            then   822(e)(2) and   822(c)(11).  In 1989, the IRS withdrew            this memorandum  without comment.   Tech.  Adv. Mem.  9010003            (Nov. 13, 1989).   Because such memoranda are  nonbinding, we            do not  base  our  conclusions upon  them.    We  nonetheless            recognize  that the IRS  has not consistently  maintained the            positions it presently advances in this appeal.                                         -16-                                          16            additional six months within which to decide whether to amend            the return to  claim a refund.  The IRS audit, which ended in            1991, concluded that UNUM had properly characterized the cash            distributions as nondeductible  stock redemptions under   302            and   the   stock   distributions   as   made   pursuant   to            nonrecognition exchanges  of its  stock for  property.   UNUM            thereafter  changed its view  of the proper  tax treatment of            the transaction by timely  amending its 1986 return to  claim            the   cash  ($129,738,478),  then  the  value  of  the  stock            ($522,471,336),  as deductible  policyholder dividends  under              808  and    805.   UNUM sought  a refund  in excess  of $77            million.  The IRS denied these claimed deductions.                        In 1993,  UNUM filed  suit in  the district  court,            seeking  deductions and  a refund  of the  $77 million.   The            district court ruled in favor of the government, holding that            the  cash and stock  distributions could not  be construed as            "policyholder dividends" under   808.  UNUM appeals.                                          II                                          II                      UNUM makes a  colorable but ultimately unpersuasive            argument that  this appeal involves  only the narrow  task of            interpreting   808 and   805 of the Code.  UNUM would have at            least  a  plausible  argument  that  it  was  entitled  to  a            "policyholder dividend" deduction if those  two sections were            the only  potentially relevant  Code sections  to this  case.            But we must construe the Code as a whole.  The  Supreme Court                                         -17-                                          17            admonished in  Helvering  v. N.Y.  Trust  Co., 292  U.S.  455                           _________     ________________            (1934),  that  "the  expounding  of   a  statutory  provision            strictly  according to  the letter  without  regard to  other            parts of the  Act and legislative history  [may] often defeat            the  object  intended  to  be  accomplished."    Id. at  464.                                                             ___            Therefore, courts must                       not look merely to a particular clause in                      which  general words may be used, but . .                      . take  in connection  with it  the whole                      statute (or statutes on the same subject)                      and the objects and policy of the law, as                      indicated by its  various provisions, and                      give  to it such  a construction  as will                      carry  into  execution  the  will of  the                      Legislature,    as   thus    ascertained,                      according to its true intent and meaning.                         Id. (citation and internal quotations omitted).            ___                      We conclude that   808 and   805 do not govern this            case.     UNUM's   demutualization   constitutes  a   capital            transaction   and  is  accordingly  subject  to  the  general            corporate  tax rules  under Subchapter  C  which govern  such            transactions.   These  rules clearly  bar  any deduction  for            amounts distributed during a capital transaction.            A.  Structural Overview                ___________________                      Because  this case  involves the  interplay between            two Subchapters  of the  Code, we  describe  them in  general            terms.  Subchapter  C is a broadly applicable  section of the            Code  which contains many of the Code's general corporate tax            provisions.  It applies to all corporations, including mutual            and  stock insurance companies.  See   7701(a)(3) ("When used                                             ___                                         -18-                                          18            in this title, . . . [t]he term 'corporation' includes .  . .            insurance companies.");   7701(a)(8) ("the term 'shareholder'            includes a member in an . . . insurance company.").                        Subchapter C governs corporate capital transactions            and   the  taxation   of  all  corporate   distributions  and            adjustments,   including    the   organization,    operation,            liquidation, and reorganization  of all corporate enterprises            and  their distributions to shareholders and associates.  See                                                                      ___               301-85.   Many general  rules in Subchapter  C as  well as            additional  rules in  other  sections  of  the  Code  contain            language that, by their literal terms, bar the deduction UNUM            seeks.    Sections 162,   311,  354,  and  1032   apply  with            particular force.  We explain  these sections and discuss why            they apply later.                      Subchapter  L, in  contrast,  is  a highly  focused            section  of  the  Code  which  specifically  governs  certain            aspects  of the  taxation of  life insurance companies.   See                                                                      ___               801-818.     Subchapter  L  enacts  a  special  scheme  of            determining  the gross income, deductions, and taxable income            of life insurance  companies, whether of the  stock or mutual            variety.   It  accommodates the unique  manner by  which life            insurance  companies  raise  and  distribute  capital.    One            purpose  behind this parallel system of income calculation is            to  determine  more  accurately the  taxable  income  of life                                         -19-                                          19            insurance companies  than general  tax rules  otherwise would            permit.                       While  Subchapter  L applies  specifically  to life            insurance companies, the  existence of Subchapter L  does not            exempt insurance companies  from the application of  the rest            of the Code.   Subchapter L  at times specifically  displaces            otherwise  applicable rules.    For  example, life  insurance            company taxable income is defined in   801 as "life insurance            gross  income"  reduced   by  "life  insurance   deductions".              801(b).   "Life  insurance gross  income"  is  specifically            defined  in   803, not the generally applicable definition of            gross  income  provided  in     61.    And  "life   insurance            deductions" are  specifically governed  by    804 and    805,            even though    804 and   805 incorporate many  of the general            rules  about deductions by reference.   But Subchapter L does            not alter general tax rules governing subjects not within its            ambit.   Specifically, Subchapter L does not exempt insurance            companies  from the general corporate tax rules of Subchapter            C  "[e]xcept to the extent that [Subchapter L makes] specific            provisions."   S.  Rep. No.  291,  86th Cong.,  1st Sess.  39            (1959), reprinted in 1959-2 C.B. 770, 798.                    ____________                      The  Supreme   Court  addressed   the  relationship            between  Subchapter C and  Subchapter L in  Colonial American                                                        _________________            Life Ins. Co. v. Commissioner, 491 U.S. 244 (1989).  Colonial            _____________    ____________                        ________            American   involved   the   question   of   whether   "ceding            ________                                         -20-                                          20            commissions"  paid by  a  reinsurance  company  to  a  direct            insurer  under  an indemnity  reinsurance  contract  could be            deducted in the year in which they were paid, or whether they            had  to  be  capitalized  over  the  estimated  life  of  the            underlying policies.  See id. at 246-47.  The taxpayer argued                                  ___ ___            that the ceding commissions were analogous to certain agents'            commissions deductible  under   809  and should  be similarly            deductible.  See  id. at 249-50.  The IRS  responded that the                         ___  ___            ceding commissions were more properly characterized as a type            of capital  expenditure  and should,  as  is usual  for  such            expenditures,  be  amortized  over  their  useful  life under              263.   See  id. at  252-53.   The  Court ruled  against the                     ___  ___            taxpayer,  holding that   809  did not expressly  provide for            the requested  deduction and that    263 should apply  in the            absence  of a specific provision to the contrary.  See id. at                                                               ___ ___            260.  The taxpayer's argument, the Court stated,                       at most proves only that Congress decided                      to  carve out  an  exception for  agents'                      commissions,     notwithstanding    their                      arguable     character     as     capital                      expenditures.   We would not take it upon                      ourselves  to  extend that  exception  to                      other        capital        expenditures,                      notwithstanding  firmly  established  tax                      principles    requiring   capitalization,                      where Congress  has not provided  for the                      extension.            Id. at 252.            ___                      Under  the  rule  of   Colonial  American,  general                                             __________________            corporate tax provisions  of Subchapter C apply  to insurance                                         -21-                                          21            companies unless Subchapter  L makes a specific  provision to            the contrary.  The question  that this case poses, therefore,            is whether  the cash  and  stock distributions  made by  UNUM            during  its conversion  are  made specifically  deductible by              808 and    805 of  Subchapter L,  notwithstanding the  fact            that  they are  clearly not  deductible  under   162,    311,              354,   1032 and other relevant provisions of the Code.             B.  UNUM's burden of proof                ______________________                      It  is  a now  "familiar rule"  that an  income tax            deduction "'is  a matter  of legislative grace  and that  the            burden of clearly showing the  right to the claimed deduction            is  on the  taxpayer.'"  INDOPCO,  Inc. v.  Commissioner, 503                                     ______________     ____________            U.S.  79,  84  (1992) (quoting  Interstate  Transit  Lines v.                                            __________________________            Commissioner, 319  U.S. 590,  593 (1943)).   Deductions  must            ____________            therefore be "strictly construed" and allowed "'only as there            is clear provision therefor.'"  Id. (quoting New Colonial Ice                                            ___          ________________            Co. v.  Helvering, 292 U.S.  435, 440 (1934)).   Subchapter L            ___     _________            has  been   subject  to  narrow   construction  because   its            provisions "give life  insurance companies tax  benefits over            other  taxpayers."   National  Life &  Accident  Ins. Co.  v.                                 ____________________________________            United States, 385 F.2d 832, 833 (6th Cir. 1967).  Thus it is            _____________            UNUM's   burden  to  demonstrate  that  the  cash  and  stock            distributed during the  demutualization constitute deductible            "policyholder dividends" under   808.              C.  Analysis of UNUM's arguments                ____________________________                                         -22-                                          22                      UNUM's  principal argument  is  that  the cash  and            stock distributions constitute "policyholder dividends" under            the  plain meaning of    808,   808(b)(1) in  particular, and            are therefore deductible under   805(a)(3).  Bolstering  this            position  are   two  overlapping   contentions:     (1)   the            legislative history and public  policy underlying the  Code's            scheme of  life insurance taxation demonstrate  that Congress            intended  the term  "policyholder  dividend"  to include  the            distributions  made  during UNUM's  demutualization;  and (2)            because  "policyholder dividends"  are  broader than  classic            corporate  dividends,   "policyholder  dividends"   need  not            possess  the essential characteristics of a dividend -- i.e.,            they  are not  subject  to the  constraints  which limit  the            classic definition of dividends.  We reject both arguments.                      There is  no dispute  that   805(a)(3)  allows life            insurance companies  to deduct "policyholder  dividends" from            income.   Section 805(a)(3) expressly states: "there shall be            allowed the following deductions:  . . . --The  deduction for            policyholder  dividends.  . .  ."      805(a)(3).   The  real            question, rather,  is whether the definition of "policyholder            dividend" in   808 encompasses the cash and stock distributed            during UNUM's demutualization.                      In this regard,  UNUM's principal argument is  that            the plain meaning of   808  entitles it to deduct the amounts                                         -23-                                          23            distributed during the demutualization.7  We believe that, in            order  to make this claim successfully, UNUM must demonstrate            that  the distributions satisfy  both   808(a)  and   808(b).            Section 808(a) provides that:                      [F]or  purposes of  this  part, the  term                      "policyholder    dividend"   means    any                      dividend  or   similar  distribution   to                      policyholders in their capacity as such.              808(a).  Under   808(b)(1), upon which UNUM hinges the main            body of its argument, a "policyholder dividend" may include:                      any amount paid or credited (including as                      an increase in benefits) where the amount                      is not fixed in  the contract but depends                      on the  experience of the  company or the                      discretion of the management.              808(b).                        UNUM asserts that the  distributions easily satisfy              808(a),  which, UNUM  claims,  merely emphasizes  the broad            scope  of "policyholder  dividends."   The  source of  UNUM's            authority  for this  claim is  unclear.   UNUM seems  to rely                                            ____________________            7.  Section 808(a) and (b) provide in full:                 (a) Policyholder dividend defined.--for purposes of this            part,  the term "policyholder dividend" means any dividend or            similar distribution to  policyholders in  their capacity  as            such.                 (b)  Certain  amounts  included.--For  purposes of  this            part, the term "policyholder dividend" includes--                      (1)  any amount paid  or credited (including  as an                      increase in benefits) where the amount is not fixed                      in  the contract but  depends on the  experience of                      the company or the discretion of the management.                      (2) excess interest,                      (3) premium adjustments, and                      (4) experience-rated refunds.                                         -24-                                          24            principally on Republic Nat'l Life Ins. Co. v. United States,                           ____________________________    _____________            594 F.2d 530 (5th  Cir. 1979), in which the court stated that            "policyholder dividends" have  an "expansive definition"  and            "include  more than  just classic  dividends."   Id. at  532.                                                             ___            UNUM  seems also to rely on  Treas. Reg.   1.811-2(a) (1997),            which tracks the language of   808(a), as further evidence of            the  broad scope  of the  "policyholder  dividend."   Because            "policyholder dividends"  are "expansive", UNUM  argues, they            necessarily  encompass  the  amounts  distributed during  the            demutualization.   We are  not persuaded by  these arguments,            which attempt  to sweep  the language  of   808(a)  under the            table.    Rather, we  think  that   808(a)  presents  a major            obstacle, which UNUM fails to overcome.                      UNUM  argues  that  the real  test  is  whether the            distributions satisfy    808(b).  UNUM focuses  its attention            on  the text  of   808(b)(1),  arguing:   (1) Nothing  in the            insurance  contracts  between  UNUM  and  its   policyholders            addressed  the  amounts   due  to  the  policyholders   in  a            demutualization; therefore the amounts were "not fixed in the            contract"; (2) The cash was distributed out of Union Mutual's            accumulated  surplus,  which  represents the  fruits  of  the            company's considerable  business success since  its founding;            therefore  the amounts "depend[ed]  on the experience  of the            company";  (3) Union Mutual's  management, though  subject to            the  supervision of the Maine Superintendent of Insurance and                                         -25-                                          25            obligated  to present  "fair  and  equitable"  terms  to  the            policyholder,  decided  the amounts  within that  range which            would be  paid to policyholders in exchange  for their equity            interests;  therefore,   the  amounts  were   based  "on  the            discretion  of  management."     The  combination   of  these            circumstances,  UNUM  argues,   satisfies  the  elements   of              808(b)(1),  and thus  the  distributions are  "policyholder            dividends" deductible  under   805(a)(3),  regardless of  the            general corporate tax provisions contained in Subchapter C.                      While   we  recognize   that  UNUM's   argument  is            plausible,  we nonetheless  find  it  unpersuasive.    As  we            explain later,   808(b) describes categories of distributions            that may  constitute policyholder dividends provided that the            definition  of   808(a)  is  met.   But  UNUM  has failed  to            satisfy  us  that  the  term  "policyholder  dividend"  under              808(a) includes value-for-value exchanges that occur during            a corporate  reorganization such  as this.   UNUM's  argument            ultimately suffers from a fundamental defect: it assumes that            Congress wished to  ignore the context in which  the cash and            stock distributions took place.   We later explain why UNUM's            arguments that  the distributions  fit within    808(a) fail.            We first set the stage as to why Subchapter C applies.            D.  Application of Subchapter C                ___________________________                      In a paradigmatic recapitalization, the corporation            is not  allowed  a deduction  for distributions  made in  the                                         -26-                                          26            course of the transaction.  See Woodward v. Commissioner, 397                                        ___ ________    ____________            U.S.  572, 579  n.8 (1970)  ("[W]herever a  capital asset  is            transferred  to  a new  owner  in exchange  for  value either            agreed upon  or determined by law to be  a fair quid pro quo,            the payment itself  is a capital expenditure .  . ."); United                                                                   ______            States v.  Houston Pipeline Co.,  37 F.3d 224, 226  (5th Cir.            ______     ____________________            1994)   ("Stock  redemptions,   as   a   general  rule,   are            characterized as capital transactions, and the purchase price            of  a  stock  redemption  is   not  deductible.")  (footnotes            omitted); Jim  Walter Corp.  v. United States,  498 F.2d  631                      _________________     _____________            (5th  Cir.  1974)  (corporation's  purchase  of   outstanding            warrants  in  connection  with issuance  of  stock  and bonds            treated as a  capital transaction); Frederick Weisman  Co. v.                                                ______________________            Commissioner, 97 T.C. 563, 572 (1991) (collecting cases).             ____________                      Here,  Union  Mutual purchased  its  policyholders'            equity interests and transferred them  to UNUM.  UNUM in turn            exchanged the  policyholders' membership  interests in  Union            Mutual for stock in UNUM or cash.  UNUM was financially in no            worse a  position after  "paying out" $522  million worth  of            stock to implement the demutualization than it was before the            transaction  occurred.     What  changed  was  the   form  of            ownership,  precisely the  topic  which capital  transactions            typically  involve.8  As for the  $130 million distributed in                                            ____________________            8.  UNUM acknowledged  that its demutualization was a capital            transaction  subject to  general corporate  tax  law when  it            submitted its May  22, 1985 request to the IRS  for a private                                         -27-                                          27            cash  to redeem  certain policyholders'  interests, UNUM  was            left  poorer.   But the  Code disallows  deductions for  such            distributions made in redemption.  See   311(a).                                               ___                      We find  that, because UNUM's  demutualization is a            capital transaction, it  is subject to the  general corporate            tax provisions of Subchapter C unless UNUM carries its burden            of showing an exception.  These provisions clearly prohibit a            company from deducting cash or the value of stock distributed            to  its policyholders in redemption of their equity interests            in the company.                        Applying  Subchapter  C,  the  Code  would  clearly            disallow UNUM from taking a deduction on the cash distributed                                                         ____            during  the  demutualization.   Section 311  provides  that a            corporation  that  purchases  shares  of  its  stock  from  a                                            ____________________            letter  ruling  regarding  whether  the  conversion  would be            entitled    to   tax-free    treatment   under      351   and              368(a)(1)(E).   The IRS  treated the  demutualization as  a            capital transaction in its response,  see Priv. Ltr. Rul. 87-                                                  ___            11-121  (Dec.  16,  1986),  in which  it  confirmed  that the            transaction would  be  nontaxable under  those  sections  and            further stated that  the cash distributions would  be treated            as  nondeductible redemptions  under     302  and  the  stock            distributions would be  treated as non-recognition  exchanges            under   1032.   We do not  view this as precluding  UNUM from            changing  its position, but that UNUM thought it necessary to            ask  the IRS for a letter ruling on the general corporate tax            implications of its demutualization reflects UNUM's awareness            that its restructuring was subject to Subchapter C.                                         -28-                                          28            shareholder ordinarily may  not receive a deduction  for that            purpose.9  Section 311(a) states:                      no  gain or loss shall be recognized to a                      corporation  on  the  distribution,  with                      respect to  its stock, of  its stock  (or                      rights   to   acquire  its   stock),   or                      property.              311(a).   Congress reinforced the  strength of this rule by            enacting    162(l) (now    162(k))  after  the Fifth  Circuit            recognized  a narrow exception in Five Star Manufacturing Co.                                              ___________________________            v.  Commissioner, 355  F.2d 724  (5th  Cir. 1966)  (deduction                ____________            allowed when expenditures  made to save the  corporation from            dire  and  threatening  circumstances).    Section  162(k)(1)            unreservedly  prohibits corporations  from taking  deductions            for  distributions  made  in the  course  of  reacquiring its            stock:                       Except  as  provided in  paragraph  2, no                      deduction  otherwise  allowable  shall be                      allowed under this chapter for any amount                      paid  or  incurred  by  a corporation  in                      connection with the  reacquisition of its                      stock . . . .10                                              ____________________            9.  The  Code treats the  membership interests held  by Union            Mutual's policyholders  as "stock".   See    7701(a)(7) ("the                                                  ___            term 'stock' includes shares in an . . . insurance company").            The  Code  also  treated  Union   Mutual's  policyholders  as            stockholders in a  corporation.  See   7701(a)(8)  ("the term                                             ___            'shareholder'  includes  a  member  in  an  .  .  . insurance            company.").            10.  Cf. I.R.C.    317(b), providing that "[f]or  purposes of                 ___            this   part,  stock  shall  be  treated   as  redeemed  by  a            corporation  if the  corporation acquires  its  stock from  a            shareholder  in exchange  for property,  whether  or not  the            stock so acquired is cancelled,  retired, or held as treasury            stock."                                         -29-                                          29              162(k)(1).  The  reference to "this chapter" is  to Chapter            One of the  Code (I.R.C.    1-1399), which  includes both the            general  corporate tax  provisions in  Subchapter  C and  the            insurance  tax provisions in Subchapter L.  While   162(k)(2)            does  contain some exceptions to the  general rule,11 none of            these apply  to insurance  companies. By  its literal  terms,            therefore,    162  forecloses  any  deduction  for  the  cash            distributed by UNUM.12                                            ____________________            11.  Section 162(k)(2) provides that:                      (2) Exceptions.--Paragraph (1) shall not apply to--                           (A) Certain deductions.--Any--                                (i) deduction allowable under section 162                                (relating to interest)                                (ii)  deduction  for  amounts  which  are                                properly  allocable  to  indebtedness and                                amortized   over   the   term   of   such                                indebtedness, or                                (iii)   deduction   for   dividends  paid                                (within the meaning of section 561)                           (B)  Stock  of  certain  regulated  investment                           companies.--Any  amount  paid or  incurred  in                           connection with the redemption of any stock in                           a  regulated investment  company which  issues                           only stock which is redeemable upon the demand                           of the shareholder.                The  "dividends  paid"  deduction under    561  does  not            include policyholder  dividends, but only  includes dividends            as  described in    316  "relating  to  [the]  definition  of            dividends for purposes of corporate distributions".   562(a).            12.  The legislative history of   162 supports the conclusion            that   162(k)  forecloses a deduction for UNUM  in this case.            The Committee Report suggests that Congress intended   162(l)            (now    162(k))  to  be construed  broadly  to  foreclose any            deduction for payments in connection with redemptions, except            for those specifically enumerated in the statute.                        The conferees intend that the denial of                      deductibility will apply  to amounts paid                      in connection with a purchase of stock in                                         -30-                                          30                      The  Code is equally clear that UNUM may not deduct            the value  of the  stock distributed  in exchange  for equity                               _____            interests.  Section 354(a) provides                      No gain  or loss shall  be recognized  if                      stock or  securities in  a corporation  a                      party   to  a   reorganization  are,   in                      pursuance of the  plan or reorganization,                      exchanged solely for  stock or securities                      in   such  corporation   or  in   another                      corporation     a     party     to    the                      reorganization.              354(a).    Section 354  thus  bars  any deduction  for  the            exchange of UNUM stock for the membership interests  of Union            Mutual  pursuant to  the  conversion  plan.    And    1032(a)            provides                      No  gain or loss shall be recognized to a                      corporation  on the  receipt of  money or                      property in exchange for stock (including                      treasury stock) of such corporation.                                             ____________________                      a  corporation,   whether  paid   by  the                      corporation directly or indirectly, e.g.,                      by  a  controlling  shareholder, commonly                      controlled subsidiary or related party.                        The  conferees  wish to  clarify  that,                      while the phrase "in  connection with [a]                      redemption" is  intended to  be construed                      broadly, the provision is not intended to                      deny a deduction for otherwise deductible                      amounts paid in a transaction that has no                      nexus  with  the  redemption  other  than                      being proximate in time or arising out of                      the same general circumstances.            H.R. Conf.  Rep. No. 99-841,  99th Cong., 2d Sess  at II-168,            reprinted in  1986 U.S.C.C.A.N. 4075,  4256.   In this  case,            ____________            there  is a  clearly established  nexus  in that  the payment            "does  .  .  . represent  consideration  for  the [membership            interests] or expense related to [their[ acquisition . . . ."            Id. at 4257.            ___                                         -31-                                          31              1032(a).   As is  the case with    162(k) and    311, these            Code sections do  not contain provisions excluding  insurance            companies from their scope.            E.  Section 808                ___________                      We  find   nothing  in     808  that   specifically            overrides  these general rules.   Indeed, that   808 does not            even mention these rules suggests that it may have nothing to                 _______            do with capital transactions altogether.  Congress  has  been            explicit in those situations  when it wished Subchapter  L to            modify  Subchapter C.   See   805(b) (modifying  the interest                                    ___            deduction under   163, the charitable contributions deduction            under   170,  the rules  for amortizable  bond premium  under              171, the net operating loss  deduction under   172, and the            dividends received  deductions under     243-245).   Congress            could have done the same with the Code sections that directly            govern  UNUM's demutualization.  That Congress did not choose            to do so strongly suggest that Congress wanted those sections            to apply with full force.                      Our   view  that   Congress  did  not   intend  the            demutualization process to be exempted from these general tax            rules  is  strengthened  when  we  examine    808(a).    UNUM            essentially  makes a  two-step  argument regarding    808(a):            (1)  any distribution  which  fits  the  strict  language  of              808(b)  is a "policyholder dividend" for purposes of   808,            regardless of the language of    808(a); and (2) because  the                                         -32-                                          32            transaction here  is a  "policyholder dividend"  under   808,            UNUM is entitled to a deduction under   805(a)(3).  We reject            the first prong, so the second collapses accordingly.                      UNUM argues  that the term  "policyholder dividend"            under    808 is  not  bound by  the constraints  that usually            characterize dividends,  but includes  any distribution  that            can fit within the language of   808(b)(1):  "any amount paid            or credited  .  . .  where the  amount is  not  fixed in  the            contract but depends on the  experience of the company or the            discretion of  the management."   We reject  this reading  of              808.                        Basic canons of  statutory construction require  us            to  consider the language of   808(a) in construing   808(b).            See United States Nat'l Bank of Or. v.  Indep. Ins. Agents of            ___ _______________________________     _____________________            America, Inc.,  508 U.S. 439,  455 (1993) (Courts must  "at a            _____________            minimum . . . account for  a statute's full text, language as            well  as  punctuation,  structure,  and  subject   matter.").            Section 808(a) states:                      For  purposes  of  this  part,  the  term                      "policyholder    dividend"    means   any                      dividend  or   similar  distribution   to                      policyholders in their capacity as such.              808(a).   This text may  be divided into  three components.            The "[f]or the purposes of this  part" language requires that            the definition of "policyholder dividend" has no force beyond            Part  I  of  Subchapter L,  which  specifically  involves the            taxation  of  life  insurance companies;  thus     808 cannot                                         -33-                                          33            govern  a   transaction  basically  within  the   purview  of            Subchapter C.   The  "any dividend  or similar  distribution"            language requires all "policyholder dividends" to possess the            essential  characteristics of a  dividend.  Finally,  the "to            policyholders  in their capacity  as such" requires  that the            dividend-like  distributions  be  based  on  the  contractual            relationship  between  the  policyholder  and  insurer.    We            interpret the  language of   808(a)  to mean exactly  what it            says.  Any  distribution by an  insurer to its  policyholders            must accordingly  bear  the essential  characteristics  of  a            dividend and be based on the contractual relationship between            the  policyholder  and  insurer  in  order  to  qualify  as a            "policyholder dividend".   And if   808(a) is  not satisfied,            then   808(b) cannot be satisfied either.                      UNUM attempts  to circumvent  the plain  meaning of              808(a) by arguing  that the language of    316 specifically            exempts "policyholder  dividends" from  the constraints  that            bind typical corporate dividends.  Section 316(a) defines the            term "dividend" as follows.                      For the  purposes of  this subtitle,  the                      term "dividend" means any distribution of                      property  made  by a  corporation  to its                      shareholders .  . . out  of its  earnings                      and profits of the taxable year . . . .              316(a).  By its terms, this definition of dividends applies            to  Subtitle A,  28  U.S.C.     1-1563,  which  includes  the            portion  of  the  Code governing  income  taxation.   Section                                         -34-                                          34            316(b)  limits  the   extent  of  the  application   of  this            definition:    The  definition  in  subsection                           (a) shall not apply to the term                           'dividend'    as    used     in                           Subchapter L in  any case where                           the reference  is to  dividends                           of insurance companies  paid to                           policyholders as such.                           316(b).     UNUM  argues  that  the  language  of    316(b)            demonstrates that "policyholder dividends" have broader scope            than  "dividends" as  defined  in   316(a),  so  it would  be            erroneous to conclude  that policyholder dividends should  be            deemed a  type of dividend as that term  is so defined. It is            true that   316(b)  means that a policyholder  dividend under              808 is not  limited to distributions  out of the  insurer's            earnings  and profits and may include additional amounts from            other  sources.   But, UNUM's  assertion notwithstanding,  it            does  not follow  that because  "policyholder dividends"  may            include   more   than   classic  corporate   dividends   then            "policyholder   dividends"   may  therefore   encompass   any            distribution to  policyholders regardless of  its context  or            purpose.13  As Judge Carter appropriately noted,                                             ____________________            13.  UNUM  cites dicta  in Republic  Nat'l Life  Ins. Co.  v.                                       __________________________________            United States, 594 F.2d 530, 532 (5th  Cir. 1979), describing            _____________            the  "policyholder   dividend"  as   "expansive."     Because            policyholder   dividends   are  "expansive,"   UNUM   argues,            policyholder  dividends  can encompass  even  value-for-value            exchanges  that  occur during  a  corporate recapitalization.            This argument  misapprehends the  meaning  of Republic  Nat'l                                                          _______________            Life.  In that case, the court was referring to the fact that            ____            the  definition  of  "policyholder   dividend"  is  expansive            relative  to the "classic  dividend" definition,  adding that            "Congress  intended   to  include  more  than   just  classic                                         -35-                                          35                      The fact that "policyholder dividend" is,                      in  certain  respects, broader  in  scope                      than "classic dividend"  neither implies,                      nor even suggests, that Congress intended                      "policyholder dividend"  to be  construed                      broadly.                          UNUM  Corp. v.  United States,  929 F.  Supp. 15, 20  n.6 (D.            _____________________________            Maine 1996).   Indeed,  the term  "policyholder dividend"  is            still a defined category.   That it possesses a broader scope            than the term "dividend" as defined in   316(a) suggests only            that  policyholder  dividends  are  different  from  ordinary            corporate dividends, not that  they are fundamentally  unlike            them.             F.  The distributions are not dividends                 ___________________________________                      This analysis suggests  that the lengthy debate  as            to whether and how policyholder dividends  are like or unlike            corporate  dividends  is  largely  beside  the  point.    All            dividends,  whether   policyholder  dividends   or  corporate            dividends,  share  certain  essential  characteristics.   The            focus should be  on whether the stock  and cash distributions            bear  the essential characteristics  which qualify them  as a            dividend  of any stripe.   We  find that  the cash  and stock            distributions   at  issue  in   this  case  simply   are  not            "policyholder  dividends" as  that  term is  defined, because            they are fundamentally not dividends or distributions similar            to dividends as   808(a) requires.   Because they do not meet                                            ____________________            dividends" within policyholder dividends.  Id.                                                         ___                                         -36-                                          36            the   definition  of     808(a),    808(b)   is  superfluous.            Moreover,  because  the   distributions  do   not  meet   the            definition of   808(a), they are still subject to the general            corporate tax rules of Subchapter C, under which they may not            be deducted.14                      The economics  of the  demutualization compel  this            conclusion.  A dividend, even  a policyholder dividend, is  a            unilateral distribution by a  company to its owners (who,  in            the case of mutual  life insurance companies, also  happen to            be customers).  No matter  how large, a dividend still leaves            intact the owner's  equity interest in the company.   But the            cash and stock distributions for which UNUM seeks a deduction            were not unilateral distributions by a company to its owners.            Both  were made  in  exchange  for policyholders'  membership            interests  in the former mutual  company.  Those who received            cash  had their  equity interests  extinguished, transactions            amounting to classic  redemptions.  Those who  received stock            had   their  equity  converted  from  one  form  to  another,            transactions  which were  classic non-recognition  exchanges.                                            ____________________            14.  While the holding in this case would be the same whether            or not there  was a PFA,  the existence of  the PFA is  added            evidence that  the economic  reality of  this transaction  is            that the conversion  of mutual membership interests  to stock            is not a  policyholder dividend.  The PFA,  a crucial element            in  the decision  of  the  Maine  Insurance  Commissioner  to            approve this transaction,  is an  accounting mechanism  which            recognizes  (in   the  common   sense  of   the  word)   that            policyholder  dividend expectations  may  be segregated  from            other ownership interests and the two are not equivalent.                                         -37-                                          37            No  authority exists supporting the proposition that the term            "dividend" encompasses such transactions.                        UNUM  nevertheless  argues that  the  distributions            should  still be  characterized  as "policyholder  dividends"            because,  removed  from   context,  they  can   plausibly  be            shoehorned into the text of   808(b)(1).  Judge Carter deftly            explained the fallacy of UNUM's argument as follows:                      The  fact  that  Congress  intended  life                      insurers  to   be  able  to   deduct  any                      dividend-like       distribution       to                      policyholders  to   the  extent   of  its                      capital-like  component neither  implies,                      nor  even  gives rise  to  the inference,                      that Congress also intended life insurers                      to be able to  deduct any distribution at                      all  to  policyholder   that  contains  a                      capital-like component  to the  extent of                      that component.            UNUM Corp. v. United States, 929 F. Supp. at 24 n.15.            ___________________________                      UNUM's  argument  clouds   the  reason  why     316            distinguishes policyholder from  regular corporate dividends.            Policyholder dividends typically include a capital  component            in  addition  to earnings  and Congress  wished to  provide a            deduction for  that  component.    See     805(a)(3);     809                                               ___            (limiting the  extent of the  deduction).  But the  fact that            "policyholder  dividends" may  include additional  components            does not  change the  fact that  they must  still essentially            constitute  dividends as   808(a)  expressly requires.    The            acknowledgement  reflected  in     316(b)  that  policyholder                                         -38-                                          38            dividends  are more expansive than classic dividends does not            alter this conclusion.                      As    the   district    court   observed,    UNUM's            bootstrapping argument ignores other sources of authority  on            what  constitutes a "dividend."  In  Hellmich v. Hellman, 276                                                 ___________________            U.S. 233 (1928), the Supreme Court described a dividend as                       the recurrent  return upon stock  paid to                      stock holders by  a going corporation  in                      the  ordinary course  of business,  which                      does not reduce  their stock holdings and                      leaves them in a position to enjoy future                      returns upon the same stock.            Id. at 237.  Similarly, the Supreme Court in United States v.            ___                                          ________________            Davis, 397  U.S.  301 (1970),  described  a "dividend"  as  a            _____            distribution whose                       effect is to  transfer the property  from                      the company to its shareholder without  a                      change in the relative interest or rights                      of the stockholders.            Id.  at  313  (emphasis  added).    A  distribution  is  "not            ___            essentially equivalent to a  dividend" if it "result[s] in  a            meaningful  reduction   of  the   shareholder's  proportional            interest  in  the  corporation."    Id.   In  light  of  this                                                ___            authority, we do not view distributions of stock or cash by a            mutual  insurer  in  consideration  for  the  same  value  of            ownership interest in a mutual company to be a dividend under            any  definition  of  the  term,   including  a  "policyholder            dividend" under   808.                                         -39-                                          39                      The  cash distribution is not a dividend or similar            to a dividend  precisely because it did reduce  (to zero) the            ownership  interest of those  policyholders who received cash            and left them in no  position to enjoy future returns, except            as policyholders.   Cf. Hellmich,  276 U.S.  at 237.   It was                                ___ ________            thus akin to  a nondeductible distribution in redemption.  In            contrast,  the stock  distribution  was  not  a  dividend  or            similar to a dividend because it  was not in the nature of  a            "recurrent return upon stock paid to  stockholders by a going            corporation  in  the  ordinary  course  of  business."    Id.                                                                      ___            Rather, it  effected a  conversion of one  form of  equity to            another through a classic non-recognition exchange.            G.  Other reasons                _____________                      The  fact  that   UNUM's  demutualization  occurred            through  a holding  company suggests  additional reasons  why            UNUM  is  also  not,  for   other  reasons,  entitled  to   a            "policyholder  dividend"  deduction.    First,  UNUM,   which            distributed  its stock to policyholders in exchange for their            membership   interests  in  Union  Mutual,  is  not  a  "life            insurance   company"  as   defined  in     816(a);   the  tax            consequences  of  the  stock  distributions  are  accordingly            subject to  general corporation tax provisions  in Subchapter            C,  which disallow the  deduction.  See    354(a);   1032(a).                                                ___            Second,  the  term  "amount  paid"  in    808(b)(1)  requires            distributions out of the company's surplus, whereas the stock                                         -40-                                          40            distribution came from the holding company.  Union Mutual did            not actually "pay"  anything in making that exchange.   It is            true that UNUM is the sole owner of a life insurance company,            but having  structured the  demutualization as  it did,  UNUM            must   "accept  the  consequences  of  [its]  choice."    See                                                                      ___            Commissioner v. National Alfalfa  Dehydrating & Milling  Co.,            ____________    ____________________________________________            417 U.S. 134, 149 (1974).15                      Even  so, our  decision does  not rely on  the fact            that UNUM structured  its demutualization  through a  holding            company.   Sections  354(a) and  1032(a)  would apply  to the            demutualization  regardless of its form, even if Union Mutual            distributed stock in the new stock company in direct exchange            for the membership interests of its policyholders.                      UNUM's  best argument may  be the analogy  it draws            between   a   mutual   insurance   company  liquidation   and            demutualization.    When   a  mutual  insurance  company   is            liquidated,  its assets are  distributed to the policyholders            and  those distributions  may  be  called  dividends.    This            reorganization, the company  says, is functionally equivalent                                            ____________________            15.  The  one  aspect of  the  demutualization  involving the            stock of a life insurance company was the transaction between            the  new stock  life  insurer,  UNUM  Life, and  the  holding            company, UNUM, in which  the stock company exchanged 100%  of            its  shares for  100%  of the  membership  interest in  Union            Mutual.  A transaction between two  corporations can not come            within the rubric  of   808, which involves  distributions to            "policyholders  in  their  capacity as  such."    Instead, it            constitutes a recapitalization  under   368(a)(1)(E), as  the            IRS confirmed, in  response to UNUM's request,  in Priv. Ltr.            Rul. 87-11-121.                                         -41-                                          41            to such a  liquidation because Union Mutual no  longer exists            on   completion  of  the  demutualization.    There  are  two            responses.  The first is that the analogy does not work.  The            very nature of  a demutualization fundamentally distinguishes            it  from  a liquidation  in  that  the  insurer is  still  in            business after the  conversion is complete.   In the  present            case, the  policyholders continue  to be  provided insurance,            albeit  through  a  different form  of  company  and  under a            different name.   Indeed,  ensuring that  Union Mutual  would            continue to  meet its policyholders'  reasonable expectations            on  the  investment value  of  their  policies was  the  very            purpose  of the  PFA, which calculated  the amount  of assets            necessary   to  pay   policy  claims,   provide  policyholder            dividends,  and satisfy  whatever other  benefits accrued  to            policyholders under their insurance  contracts.  Notably, the            Maine  Insurance  Commissioner  gave  his   blessing  to  the            transaction  only  on  being  assured  there  was  sufficient            capital  preserved,  together  with  premiums,  to  cover the            insured risks  in the future.   This  does not happen  in the            usual  liquidation  and,  indeed,  demonstrates  that  UNUM's            demutualization cannot properly be so characterized.                       Secondly,  even if the analogy were apt in general,            we  have little reason to think  Congress intended that final            distributions of all  assets to be  within the definition  of            "policyholder  dividends"  under    808(a).   Congress  could                                         -42-                                          42            easily  have provided for this deduction by enacting specific            language  to that  effect.   Had Congress  wanted to  provide            insurance companies with a  "policyholder dividend" deduction            for  any distribution  to  policyholders  not  fixed  in  the            contract,  it   could  simply   have  defined   "policyholder            dividend"  as referring to "any  distribution."  It would not            have  limited   the  definition  to  "dividends   or  similar            distributions" and  then left it to the insurance industry to            discover massive deductions in the shadows of the statute.                      Although  we think the plain meaning of   808 works            against, and  not for,  UNUM, and mindful  of the  usual rule            that resort to  legislative history is inappropriate  in such            circumstances,  we  do  briefly  explain  UNUM's  policy  and            legislative  history argument.   Our  primary  purpose in  so            doing is to  determine whether there  is a clearly  expressed            legislative  intention  which  would  cause  us  to  question            application of the usual  rule.  INS v. Cardoza-Fonseca,  480                                             ___    _______________            U.S.  421, 432  n.12 (1987).   A secondary reason  is to note            that UNUM's policy arguments are not implausible; they simply            do not carry  UNUM's burden of showing  clearly that Congress            intended such a deduction.                      In support  of its statutory argument,  UNUM offers            an extended  account of  the legislative  history and  public            policy behind  the Code's  scheme of  life insurance  company            taxation.  UNUM argues that Congress specifically created the                                         -43-                                          43            "policyholder  dividend"   deduction  to  equalize   the  tax            treatment  of  mutual insurers  relative  to  stock insurers.            Under  general tax  rules, stock companies  are not  taxed on            capital raised by  selling stock, but may  not deduct amounts            paid to redeem  that stock.  (No  tax, no deduction)   At the            same time,  mutual insurers  must pay  income tax on  capital            raised  by  charging  redundant  premiums;  but,  absent  the            policyholder dividend deduction, they  may not deduct amounts            paid  to  return capital  to  policyholders,  which typically            occur   through  policyholder  dividends.     (Tax,   but  no            corresponding  deduction)    By  creating  the   policyholder            dividend deduction  in   805(a)(3),  UNUM explains,  Congress            intended  to  create  symmetry  in  the  taxation  of  mutual            insurers and thus provide equal tax treatment for both mutual            and stock insurers.                      UNUM emphasizes the  expansiveness of "policyholder            dividends"  by  contrasting  them  with  a "return  premium".            Return  premiums  are refunds  that  occur when  a  policy is            cancelled,   where  the   amount  of  the   refund  generally            represents that portion  of paid premiums not  applied to the            purchase of coverage up to  the time of cancellation.  Robert            A.  Keeton  & Alan  I.  Widiss,  Insurance  Law: A  Guide  to                                             ____________________________            Fundamental   Principles,  Legal   Doctrines,  &   Commercial            _____________________________________________________________            Practices   5.11(d)(2)  (1988).   UNUM  explains  that  these            _________            amounts are "fixed in the contract" in that they are based on                                         -44-                                          44            the  terms of the contract.  "Policyholder dividends" are, in            contrast, any  amounts not fixed  in the contract,  i.e., any            distributions  from surplus (that depend on the experience of            the company  or the  discretion of  management) that  are not            return premiums.                      Under Subchapter L, UNUM explains, Congress divided            amounts  returned to  policyholders  into  the categories  of            "return  premiums"  and  "policyholder  dividend".     Return            premiums are  deductible, because  they contain  a return  of            premiums.    Policyholder   dividends  are  also  deductible,            because, like  return premiums, they  are in part  returns of            capital.  Policyholder dividends are only deductible in part,            however,  because they  can also  contain  earnings from  the            investment  of the  premiums  which  are nondeductible  under            general tax law.                      To account for this, UNUM  argues, Congress created            an  expansive definition of  "policyholder dividend" in   808            and enacted   809  to control  the extent  of the  deduction,            since the expansive language does not admit limitation.  UNUM            claims that   809 is the sole mechanism by which policyholder            dividends   should   be   limited,   not   through   judicial            construction  of the scope of the definition of "policyholder            dividend"  under   808.  Policyholder dividends should be, in            effect,  any  distribution  that a  mutual  insurer  makes to                                         -45-                                          45            policyholders out  of surplus  for any reason,  and only  the            terms of   809 limit the reach of the deduction.                       UNUM  argues that the  facts that  Congress created            the policyholder dividend deduction to achieve a tax symmetry            and that Congress accordingly defined "policyholder dividend"            to  possess broad  scope necessarily  compels  the conclusion            that "policyholder dividends" must even include distributions            to  policyholders that are  fundamentally not dividends.   We            believe  this  conclusion  is  unsupported  by  the  text  or            policies  underlying the  statute.   UNUM's  analysis of  the            legislative  history   and  public   policy  underlying   the            insurance tax provisions  of the Code  suffers from the  same            flaw  that undermines its  statutory argument.   Nothing UNUM            cites  supports the  proposition that  Congress intended  the            term  "policyholder dividends"  to encompass  value-for-value            exchanges  occurring   during  a   corporate  reorganization.            UNUM's argument  fails not  because its  relies on  erroneous            facts, but rather because  those facts simply do  not support            the conclusions UNUM wishes to draw.                      In  the  end,  the  mere  fact  that  "policyholder            dividends"  are  not "fixed"  by  the terms  of  an insurance            contract does  not mean  that they  include any  distribution            that  a mutual  insurer  makes to  its  policyholders in  any            capacity.   Under   808(a),  in order  for a distribution  to            qualify as  a "policyholder dividend",  the distribution must                                         -46-                                          46            occur to policyholders  "in their capacity as such"  -- i.e.,            in   their  capacity  as  policyholders,  not  owners.    The            distribution  must  also  fundamentally  be  a  "dividend  or            similar  distribution."   For the  reasons  explained in  the            balance of  the opinion, we  believe that the cash  and stock            distributions  made by UNUM were  not dividends.  Rather, the            cash distribution constituted a nondeductible distribution in            redemption, while the stock  distribution was part of a  non-            recognition exchange.                                           III                                         III                      In  Colonial American,  the  Supreme Court  faced a                          _________________            case  similar to  this one.    As here,  the taxpayer  made a            colorable  argument   that  Subsection  L  provided  for  tax            treatment  that   general  tax   law  otherwise   prohibited.            Similarly,  the IRS  responded that  the  basic policies  and            structure of the Code defeated the taxpayer's  argument.  The            Supreme Court, explaining its  decision in favor of the  IRS,            stated:                      It  cannot be denied that the language on                      which   petitioner   relies,   taken   in                      isolation, could be read to authorize the                      tax treatment it seeks. .  . .  But  when                      the statutory and  regulatory language is                      parsed   more   carefully,   petitioner's                      position  becomes dubious,  and when  the                      language is  read against  the background                      of  the statutory  structure, it  becomes                      untenable.              Colonial American, 491  U.S. at 257.  We believe  the same to            _________________            be true  in this case.  To  accept UNUM's arguments "we would                                         -47-                                          47            have to  conclude that  Congress subsumed  a major  deduction            within  the   fine  details   of  its   definition"  of   the            policyholder dividend.  Id. at  260.  We do not believe  that                                    ___            Congress intended  to conceal  in   808  a deduction  of this            magnitude.                      INDOPCO  requires a taxpayer to carry the burden of                      _______            proof that  it is entitled  to a claimed deduction.   Despite            UNUM's arguments, we do not believe that   808 and  805 apply            to value-for-value exchanges  as occurred  in this  insurance            company demutualization.                        We  affirm  the  judgment  of  the  district court.            Costs to appellees.                                         -48-                                          48
