Court Opinion

ID: 4472307
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:22:36.672294+00
Date Added: 2024-06-11T14:53:47.294528
License: Public Domain

Halpern, J., dissenting: Petitioner is a property and casualty insurance company. To reflect the fact that there is some delay between the occurrence of a covered loss and the payment of any resulting claim, petitioner maintains reserve accounts that, at yearend, approximate its expected insurance liabilities (and related expenses) for each accident year then ended. During 1986, petitioner made net additions of $1,383,383 to insurance reserves established for prior accident years. Pursuant to section 1.846-3(c), Income Tax Regs, (section 1.846-3(c)), respondent determined that such net additions constituted “reserve strengthening”. As a result (and pursuant to the regulations), respondent denied petitioner any “fresh start” for the excess of such net additions to reserves over the discounted amount carried over to 1987. The majority holds section 1.846-3(c) invalid because the section contains too broad a definition of the term “reserve strengthening”. The regulation implements section 1023(e)(3)(B) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2404 (section 1023(e)(3)(B) and the 1986 Act, respectively). The majority concludes that section 1023(e)(3)(B) unambiguously expresses Congress’ intent to use the term “reserve strengthening” as a term of art, the meaning of that term being determined by its usage in the insurance industry. The regulation is too broad, says the majority, because it does not limit the term “reserve strengthening” to comport with insurance industry usage. I dissent from the majority’s opinion because (1) I do not believe that Congress unambiguously expressed its intent to adopt insurance industry usage and (2) I believe that section 1.846-3(c) does comport with Congress’ intent as to the meaning of the term, as that intent is expressed in the legislative history of the 1986 Act. I. Construing the Statute The principal objective in interpreting any statute is to determine what Congress meant by the use of the statutory language being construed. United States v. American Trucking Associations, 310 U.S. 534, 542 (1940); Fehlhaber v. Commissioner, 94 T.C. 863, 865 (1990), affd. 954 F.2d 653 (11th Cir. 1992); U.S. Padding Corp. v. Commissioner, 88 T.C. 177, 184 (1987), affd. 865 F.2d 750 (6th Cir. 1989). Where the statute is ambiguous, it is well established that we may look to its legislative history and to the reason for its enactment. United States v. American Trucking Associations, supra at 543-544; Centel Communications Co. v. Commissioner, 92 T.C. 612, 627-628 (1989), affd. 920 F.2d 1335 (7th Cir. 1990); U.S. Padding Corp. v. Commissioner, supra at 184. If a term is used in the Code without definition and the legislative history fails to provide any insight or guidance as to the appropriate definition, the ordinary and common usage of the term is the definition that will be used in applying the provision of the Code. See Commissioner v. Brown, 380 U.S. 563, 570-571 (1965); Crane v. Commissioner, 331 U.S. 1 (1947); Union Pac. Corp. v. Commissioner, 91 T.C. 32, 38-40 (1988); First Sav. & Loan Association v. Commissioner, 40 T.C. 474, 482 (1963). II. The Majority’s Reasoning The majority assembles a number of reasons to support its conclusion that Congress used the term “reserve strengthening” as a term of art. Majority op. pp. 360-361. The principal reasons relied on by the majority are as follows: (1) The statute unambiguously uses a term that is a term of art in the insurance industry, (2) because the statute affects only the insurance industry, it is natural to construe that term as it would be used in the insurance industry, (3) the relevant committee reports are contradictory and cannot be relied on as evidence that Congress intended anything other than to use the term as a term of art, and (4) because Congress used the term as a term of art in a prior statute, that is evidence that Congress so used the term here. The majority fortifies its reasoning (1) by stating that the regulation can cause an “anomalous” result and (2) by classifying as artificial those reserve increases that, by industry practice, constitute reserve strengthening. I will not quibble that subchapter L concerns itself with insurance companies or that the term “reserve strengthening” is an insurance industry term of art. I disagree strongly, however, that (1) the committee reports are contradictory and cannot be relied on to support the regulation and (2) Congress’ prior usage is persuasive evidence that Congress intended a term of art. Indeed, I believe that the committee reports are persuasive evidence that Congress did not intend a term of art. Moreover, I believe that the committee reports support the regulation. Finally, I do not find the majority’s additional reasons persuasive. My reasoning is as follows. III. Congress’ Intent At issue, of course, are the words of a statute. The statute, however, offers little intelligence as to the meaning that Congress intended to attach to those words. A. The Ambiguity in the Statute Section 1023(e)(3)(B) provides in pertinent part: (B) Reserve Strengthening in Years After 1985.— * * * [The fresh-start rule] shall not apply to any reserve strengthening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer’s 1st taxable year beginning after December 31, 1986. The term “reserve strengthening” is defined neither in section 1023(e)(3)(B) nor in any other provision of the 1986 Act (or the Code). Moreover, nowhere in the 1986 Act does Congress state that the term is being used in any technical sense or as a term of art. Thus, Congress’ intent that the term have a specific meaning or that Congress is using the term as a term of art is unexpressed in the language of the statute. In that sense, the statute is ambiguous. B. The Structure of the Statute 1. In General The structure of the statute, as it relates to the fresh-start adjustment and the exception for reserve strengthening, does not indicate any technical meaning for the term “reserve strengthening”. Subsections (a) through (d) of section 1023 amend the Code to provide for the discounting of unpaid losses and certain unpaid expenses. A fifth subsection, subsection (e), accomplishes three things: (1) It specifies that the amendments made by section 1023 shall apply to taxable years beginning after 1986; (2) it provides a transitional rule, and (3) it allows a fresh start, except with regard to reserve strengthening. 2. The Transitional Rule The second accomplishment of subsection (e), the transitional rule, simply provides that the unpaid loss balances carried over from the last preceding year to the first year in which discounting is required shall be computed on a discounted basis. The effect of the transitional rule is to reduce such carryover balances by the amount of required discount. In the normal course of insurance company accounting, that reduction (1) would have flowed back into income, (2) to be deducted again as time ran (the discount shrank) or the loss was paid. 3. The Fresh-Start Adjustment The fresh-start adjustment eliminates the first, but not the second, of those two consequences of the transitional rule. Thus, in effect, the fresh-start adjustment allows the same amount of expected liability (the amount of the discount) to be twice counted as an unpaid loss: once, when, prior to the required reduction of the carryover balance, it is added to unpaid losses, and, twice, when, thereafter, it is again added to unpaid losses or is paid. 4. The Reserve Strengthening Exception The reserve strengthening exception eliminates what might well be thought of as a double deduction for certain amounts added to reserves for unpaid losses in years beginning in 1986 (the last year before the first year of discounting). Nothing in the structure of sections (a) through (d) of section 1023 or in the effective date provisions or other provisions of section 1023(e) compels any particular reading of the term “reserve strengthening”. Indeed, based on the language and structure of the statute, the only intent that Congress unambiguously expressed with respect to reserve strengthening is that any reserve strengthening that occurred in 1986 should be disqualified from a fresh start. C. The Committee Reports 1. The Senate Amendment The loss discounting rules at issue had their origin in the Senate amendment (the Senate amendment) to a House bill, H.R. 3838, 99th Cong., 1st Sess. secs. 1021-1027 (1985). See S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 1, 510. The Senate amendment had both a fresh start adjustment and a reserve strengthening exception. As enacted, the fresh start adjustment was virtually identical to the provision contained in the Senate amendment. The reserve strengthening exception, however, was quite different. The reserve strengthening exception in the Senate amendment was as follows: (B) Reserve Strengthening After March 1, 1986. — * * * [the fresh-start adjustment] shall not apply to any reserve strengthening reported for Federal income tax purposes after March 1, 1986, for a taxable year beginning before January 1, 1987, and such strengthening shall be treated as occurring in the taxpayer’s 1st taxable year beginning after December 31, 1986. The preceding sentence shall not apply to the computation of reserves on any contract if such computation employs the reserve practice used for purposes of the most recent annual statement filed on or before March 1, 1986, for the type of contract with respect to which reserves are set up. [H.R. 3838, 99th Cong., 2d sess., as reported by the Senate Finance Committee May 9, 1986.] The Finance Committee explained its reserve strengthening exception as follows: Any reserve strengthening after March 1, 1986, is to be treated as reserve strengthening for the first taxable year beginning after December 31, 1986. The committee intends that any adjustments to reserves that are attributable to changes in reserves on account of changes in the basis for computing reserves (i.e., reserve strengthening or reserve weakening) in a taxable year beginning before January 1, 1987, are not taken into account in determining taxable income after the effective date. [S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 1, 510.] 2. The Conference Agreement The differences between the House- and Senate-passed versions of H.R. 3838 were reconciled by a Committee of Conference (the conference committee). The agreements reached by the conference committee became law as the 1986 Act. With regard to reserve strengthening, the agreement reached by the conference committee (the conference agreement) differs from the Senate amendment in two significant respects: It applies to reserve strengthening for all of any taxable year beginning in 1986 (rather than just for periods beginning after March 1, 1986), and it eliminates any discussion of reserve computations to which it does or does not apply. The conference agreement is as follows: (B) Reserve Strengthening In Years After 1985. — Subparagraph (A) [the fresh-start provision] shall not apply to any reserve strengthening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer’s 1st taxable year beginning after December 31, 1986. [H. Conf. Rept. 99-841 (Vol. I), at 1-338 (1986).] The conference committee modified, and knew it was modifying, the Senate amendment. The conference explanation with regard to the fresh-start adjustment is as follows: Fresh start adjustment The conference agreement follows the Senate amendment with respect to providing a fresh start adjustment — i.e., a forgiveness of income- — for the reduction in reserves resulting from discounting the opening reserves in the first post-effective date taxable year of the provision. The conference agreement modifies the Senate amendment with respect to the treatment of reserve strengthening under the fresh start income forgiveness provision. Under the conference agreement, reserve strengthening in taxable years beginning after December 31, 1985, is not treated as a reserve amount for purposes of determining the amount of the fresh start. Instead, such reserve strengthening additions to loss reserves in taxable years beginning in 1986 are treated as changes to reserves in taxable years beginning in 1987, and are subject to discounting. Reserve strengthening is considered to include all additions to reserves attributable to an increase in an estimate of a reserve established for a prior accident year (taking into account claims paid with respect to that accident year), and all additions to reserves resulting from a change in the assumptions (other than changes in assumed intere'st rates applicable to reserves for the 1986 accident year) used in estimating losses for the 1986 accident year, as well as all unspecified or unallocated additions to loss reserves. This provision is intended to prevent taxpayers from artificially increasing the amount of income that is forgiven under the fresh start provision. [H. Conf. Rept. 99-841 (Vol. II) (1986), 1986-3 C.B. (Vol. 4) 1, 367; emphasis added.] 3. What Is To Be Made of the Committee Reports? The majority finds support for section 1.846-3(c) in the committee reports. Majority op. p. 355. Nevertheless, the majority judges that support to be weak, because it sees the committee reports to be in conflict. Majority op. pp. 350, 360. The majority ignores the evolution of the reserve strengthening provision as it passed from the Senate through the conference committee. Taking that evolution into consideration, I accord the conference explanation significantly greater weight than does the majority. Moreover, we are not here faced simply with picking the better of two conflicting explanations of the same provision. The committees were dealing with substantially different provisions, and that must be taken into account in weighing any differences between the reports. The conference agreement became law. The conference explanation, I believe, presents strong evidence that Congress did not intend a wholesale adoption of industry usage. The conference committee carefully set out what it considered to be included within the meaning of the term “reserve strengthening”. While that is not necessarily inconsistent with the committee limiting the meaning of the term to industry usage, a more convincing explanation is that the committee had in mind something in place of (or at least in addition to) industry usage. Indeed, the majority seems to concede that much. Majority op. p. 350 (“in the promulgation of the regulation, there was reliance upon a possible explanation of the term in the legislative history which is substantially different from and broader than the customary industry usage.”) D. Prior Usage 1. The Majority’s Position The Deficit Reduction Act of 1984 (defra), Pub. L. 98-369, 98 Stat. 494, significantly changed the way that companies that sell life insurance compute reserves for Federal income tax purposes, defra secs. 201-231, 98 Stat. 719-777. Those provisions contain a fresh-start adjustment and a reserve strengthening exception. DEFRA sec. 216, 98 Stat. 758. The majority makes the following two points with regard to those provisions: (1) “[I]t is clear that the term [“reserve strengthening”] was used in its technical industry parlance.” Majority op. p. 350. (2) “The fact that the same terminology was used as was employed in similar legislation 2 years earlier in the same subchapter of the Code creates the presumption that no change in meaning was intended.” Majority op. p. 354. I am unconvinced of the first point, and question the consequence of the second. 2. DEFRA Section 216(b)(3) In pertinent part, DEFRA section 216(b)(3), 98 Stat. 759, (section 216(b)(3)) provides as follows: (3) Reinsurance transactions, and reserve strengthening, after September 27, 1983.— (A) In general. — Paragraph (1) [general rule for fresh start adjustment] shall not apply * * * (ii) to any reserve strengthening reported for Federal income tax purposes after September 27, 1983, for a taxable year ending before January 1, 1984. Clause (ii) shall not apply to the computation of reserves on any contract issued if such computation employs the reserve practice used for purposes of the most recent annual statement filed before September 27, 1983, for the type of contract with respect to which such reserves are set up. Section 216(b)(3) is explained in the accompanying report of the Finance Committee as follows: Also, the “fresh start” rule does not apply to any reserve strengthening reported for Federal income tax purposes after September 27, 1983, for a taxable year ending before January 1, 1984. For these purposes, the phrase “any reserve strengthening” includes the computation of reserves on contracts issued in 1983, under plans of insurance in existence on September 27, 1983, on a more conservative basis than was the customary practice of the company for similar contracts, or to the strengthening of reserves for tax purposes, generally, on existing business. * * * [S. Print 98-169 (Vol. I), at .568 (1984)]. See H. Conf. Rept. 98-861 (1984), 1984-3 C.B. (Vol. 2) 1, 325-326 (Senate definition of reserve strengthening adopted). 3. How Was the Term Used in the 1984 Act? Contrary to the majority’s first assertion, it is not clear from either defra section 216(b)(3) or the report of the Finance Committee that Congress was using the term “reserve strengthening” “in its technical industry parlance.” That assumption by the majority appears to be based on no more than the majority’s perception that there is a lack of evidence to the contrary. However, both the sentence following clause (ii) in section 216(b)(3) and the report of the Finance Committee appear to contemplate that, for purposes of section 216(b)(3), reserve strengthening includes certain computations of reserves on contracts issued in 1983. That seems to contradict the majority’s belief that reserve strengthening is confined to changes in reserves first held before the current year: “the term ‘reserve strengthening’ is confined to a change in the basis for calculating the current reserve for claims incurred in a previous period (for which a reserve computed on a different basis had been held prior to the current period).” Majority op. p. 352. If, indeed, the 1984 provision and legislative history do contradict the majority’s belief as to the term “reserve strengthening”, then the majority has failed to explain how those interpretative materials are not evidence that Congress intended something other than to adopt an industry usage. 4. A Presumption Rebutted According to the authority cited by the majority, the presumption that no change in meaning was intended is called the “‘rebuttable presumption of formal consistency’”. Zuanich v. Commissioner, 77 T.C. 428, 443 n.26 (1981) (quoting Dickerson, Interpretation and Application of Statutes 224 (1975)). As with many evidentiary presumptions, however, evidence to the contrary eliminates the dispositive authority of the presumption. See, e.g., Lilly, Introduction to the Law of Evidence, secs. 3.2-3.4 (2d ed. 1987) (“Once the basic facts [that set up the presumption] are believed, the resulting presumed fact must be accepted by the trier unless it is rebutted by contravening evidence.”). Moreover, the rebuttable presumption of formal consistency is not even an evidentiary presumption; it is nothing more than a tool to be used in construing statutes. “[R]ules of construction are not in any true sense rules of law. So far as valid, they are what Mr. Justice Holmes called them, axioms of experience.” Frankfurter, “Some Reflections on the Reading of Statutes”, 47 Colum. L. Rev. 527, 544 (1947). Thus, the interpretative value of the rebuttable presumption of formal consistency largely depends upon the particulars of each individual case. Contradictory evidence will curtail, or even eliminate, the force of that presumption. There is such evidence here, which not only eliminates the force of the presumption, but which is, I think, dispositive to the contrary. Although it is true that the words “reserve strengthening” appear in both section 216(b)(3) of the 1984 Act and section 1023(e)(3)(B) of the 1986 Act, the two provisions are otherwise significantly different. Section 1023(e)(3)(B) does not contain a limitation excluding from the term “reserve strengthening” certain computations of reserves employing past practices. A similar limitation did appear in the Senate amendment (in connection with the 1986 Act), and I think it fair to assume that the Senate amendment was modeled on section 216(b)(3). That limitation, however, was dropped by the conference committee. Moreover, the conference committee stated that it was modifying the Senate amendment with respect to reserve strengthening. See infra. That raises the question, of course, of the intended scope of the modifications. That would seem a question for this Court. There is, thus, evidence to rebut the presumption. I believe that the presumption has lost its force. Indeed, on the evidence before us, it would be difficult to conclude that Congress did not have something of a different meaning in mind. E. Anomalous Results Petitioner hypothesizes that, in certain situations, the application of section 1.846-3(c) would lead to “absurd” or “manifestly absurd” results, unintended by Congress. Majority op. pp. 349 n.8, 358-359. The majority describes section 1.846-3(c) as causing “anomalous results”, and cites those results in support of its conclusion that the regulation is invalid. Majority op. pp. 360-361. As far as I can tell, however, the results that petitioner characterizes as absurd and the majority characterizes as anomalous are only the following: With regard to additions to reserves subject to the regulation (i.e., reserve strengthening), a taxpayer can deduct the required discount no more than once in computing its deductions for losses incurred. While it is true that the effect of discounting is to delay, in part, the deduction for such additions to reserves, that delay is no more than a matter of timing. A taxpayer is entitled to deduct no less than the full amount of the increase in reserves for any claim. The anomaly taken account of by the majority is the lack of an advantage (which certainly may be viewed as a disadvantage), but it is not a manifestly absurd result, as petitioner’s example would suggest. Congress clearly intended to prohibit an advantage in some cases, and the only question is where it drew the line. F. Artificial Increases 1. The Majority’s Position The conference explanation evidences Congress’ concern with preventing artificial increases in the amount of income forgiven under the fresh start adjustment: “This provision is intended to prevent taxpayers from artificially increasing the amount of income that is forgiven under the fresh start provision.” H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 1, 367. The majority recognizes that and equates artificial increases with reserve strengthening (as the industry defines it) but not with other additions to reserves. Majority op. p. 356.1 1 do not find the majority’s distinction persuasive. 2. Artificial Increases The conference explanation does not say in what sense the word “artificial” is being used. Common dictionary definitions involve mostly the distinction between man-made and natural objects or phenomena. E.g., Webster’s Ninth New Collegiate Dictionary (1985). That usage seems inappropriate with regard to reserves, which, after all, are estimates of liabilities: “‘best estimates’ of future settlement costs.” Salzmann, Estimated Liabilities For Losses & Loss Adjustment Expenses 155 (1984) (majority op. pp. 350-351 n.9). It is difficult to conceive of an estimate being man-made as opposed to natural. A less common definition of the word “artificial” is: “artful” or “cunning”. Webster’s Ninth New Collegiate Dictionary (1985). Apparently, that is the sense that the conference committee had in mind. 3. Normal Additions and Reserve Strengthening The majority distinguishes between (1) normal additions to an insurance company’s reserves made each year to fund existing and increasing obligations under policies in force and (2) additions required when a method or assumption used in calculating policy reserves is changed so as to produce higher reserves. Majority op. p. 351. Such latter additions the majority accepts as reserve strengthening (“the term ‘reserve strengthening’ is confined to a change in the basis for calculating the current reserve for claims incurred in a previous period (for which a reserve computed on a different basis had been held prior to the current period).”). Majority op. p. 352 (fn. ref. omitted). The majority cites an insurance authority (Carter, “Capital and Surplus Accounts”, in Insurance Accounting and Statistical Association, Life Insurance Accounting 147, 163 (Strain ed. 1977)) to explain the reason for the distinction: The ordinary increases in reserves during each year are charged to net gain from operation. It would be inappropriate, however [from a financial analysis point of view], to include in this annual charge the one-time, extraordinary increase due to reserve strengthening, so the latter increase is charged instead directly to surplus. * * * [Majority op. p. 352 n.ll.] 4. Cannot Normal Additions to Reserves Be Artificial'? The majority goes on to state: (1) “Congress intended to permit PC companies a fresh start for normal reserve increases (ones which are not artificial in nature) for the designated period.”, and (2) “reserve strengthening is essentially an artificial (nonperiodic) change in the assumptions and/or methodology used to compute the reserves.” Majority op. p. 356. The majority equates artificiality with irregularity, or nonperiodicity. I assume that the majority’s concern is that, being irregular in occurrence, reserve strengthening is subject to manipulation as to timing, while “normal” additions to reserves, being periodic, are not (since they will occur anyway). That may well be true, but it does not mean that normal additions cannot be inflated for the purpose of taking advantage of the fresh start adjustment. Indeed, the normal additions in this case are described by the majority as, at least with regard to incurred but not reported (IBNR) reserves, being dependent on the judgment of George Klouda, taxpayer’s president and general manager, that, based on emerging claims experience as against previous IBNR reserves, existing IBNR reserves were inadequate. Majority op. p. 341. It may not have happened here, but the majority has not convinced me that such additions are immune from a “finger-in-the-wind” analysis that would be artificial, as Congress used that term. Simply put, I am not convinced that only nonperiodic reserve additions (reserve strengthening, in industry terms) are subject to the abuse that Congress was concerned with, and labeled artificial. G. What Congress Had in Mind The term “reserve strengthening” is not defined in the statute. Within the insurance industry, however, it apparently is something of a term of art.2 The majority grasps hold of that fact because it can find no persuasive rationale for interpreting the term “reserve strengthening” differently. Majority op. p. 355. Respectfully, I suggest that the majority has misread the pertinent legislative history. There is no support for the majority’s position where the majority finds support (in defra), and the conference explanation weakens the majority’s position much more than the majority concedes. On balance, I think that the conclusion to be drawn from the conference explanation is that, in adopting the conference agreement, Congress had in mind something in place of (or at least in addition to) industry usage. The only question left, then, is whether section 1.846-3(c) conflicts with what Congress had in mind (and expressed in the conference explanation). I do not believe that it does. IV. Validity of Section 1.846-3(c) A. Governing Propositions The majority has nicely set forth those propositions that must govern our evaluation of section 1.846-3(c). Majority op. pp. 357-358. They are: (1) A regulation may not contradict the unambiguous language of a statute. Citizen’s National Bank of Waco v. United States, 417 F.2d 675, 679-680 (5th Cir. 1969); Hefti v. Commissioner, 97 T.C. 180, 189 (1991), affd. 983 F.2d 868 (8th Cir. 1993). (2) Even if a regulation does not directly contradict or limit the language of the statute it purports to interpret, the regulation may still be invalid if it is fundamentally at odds with or inconsistent with the statute’s origin and purpose. United States v. Vogel Fertilizer Co., 455 U.S. 16, 26 (1982); CWT Farms, Inc. v. Commissioner, 79 T.C. 1054, 1062 (1982), affd. 755 F.2d 790 (11th Cir. 1985). (3) Unless an interpretative regulation is unreasonable and plainly inconsistent with the statute, it should be sustained. Bingler v. Johnson, 394 U.S. 741, 750 (1969). B. An Ambiguous Statute The term “reserve strengthening” may have a common and ordinary (and perhaps unambiguous) meaning in the insurance industry. As discussed above, however, it is not clear that Congress intended that meaning for purposes of section 1023(e)(3)(B). In that sense, the statute is ambiguous. The fact that section 1.846-3(c) may define reserve strengthening in a way that departs from its common and ordinary meaning in the insurance industry does not, thus, give rise to a contradiction that, necessarily, invalidates the regulation. We must look to the origin and purpose of the statute. C. Congress’ Intent It may fairly be supposed that Congress intended the reserve strengthening exception to prevent taxpayers from taking unintended advantage of the income-exclusion consequence of the fresh-start adjustment. Indeed, the conference explanation states: “This provision is intended to prevent taxpayers from artificially increasing the amount of income that is forgiven under the fresh-start provision.” H. Conf. Rept. 99-861 (1986), 1986-3 C.B. (Vol. 4) 1, 367. The conference committee drew a line between artificial and nonartificial increases in the amount of income that is forgiven under the fresh-start provision. The implication, nonetheless, is that there are some reserve additions that were intended not to constitute reserve strengthening (as the committee used that term). That is so because the amount of income that is forgiven under the fresh-start adjustment depends on a taxpayer’s unpaid losses and expenses {reserves) at the end of its last taxable year beginning in 1986. See sec. 1023(c)(3)(A). The conference committee did not leave us in the dark as to those reserve additions that do not constitute reserve strengthening. In pertinent part, the conference explanation states: Reserve strengthening is considered to include [1] all additions to reserves attributable to an increase in an estimate of a reserve established for a prior [pre-1986] accident year (taking into account claims paid with respect to that accident year), and [2] all additions to reserves resulting from a change in the assumptions (other than changes in assumed interest rates applicable to reserves for the 1986 accident year) used in estimating losses for the 1986 accident year, as well as [3] all unspecified or unallocated additions to loss reserves. * * * [H. Conf. Rept. 99-861 (1986), 1986-3 C.B. (Vol. 4) 1, 367.] The first [1] category of additions described by the committee deals with additions to reserves for accident years before 1986; the second [2] deals with additions for 1986 accident years, and the third [3] deals with unspecified or unallocated additions. Clearly, many more additions to reserves constitute reserve strengthening than do not. No additions in the third category constitute other than reserve strengthening. In the second category, only additions resulting from a change in assumed interest rates constitute other than reserve strengthening. In the first category, only additions not attributable to an increase in an estimate of a reserve constitute other than reserve strengthening. D. The Regulation At issue here is section 1.846-3(c), Income Tax Regs., and, in particular, subparagraph (3) thereof. Subparagraph (3) deals with accident years before 1986. It contains a general rule and three exceptions.3 The general rule is inclusive, with virtually all additions to reserves constituting reserve strengthening. The exceptions are narrow; nevertheless, they are exceptions. The only question is whether the general rule, as limited by the exceptions, describes a universe that corresponds to the committee’s description of reserve strengthening for accident years before 1986: all additions to reserves attributable to an increase in an estimate of a reserve established for a prior [pre-1986] accident year (taking into account claims paid with respect to that accident year) * * * [H. Conf. Rept. 99-861 (1986), 1986-3 C.B. (Vol. 4) 1, 367.] The majority defines reserves as follows: Historically, reserves have been described in PC insurance literature as estimated liabilities for losses and loss adjustment expenses.9 To some extent, loss reserves are estimates extrapolated from past trends, patterns, averages, and inferences and predictions as to the future. * * * [Emphasis added.] [Majority op. pp. 350-351.] As stated, according to the conference explanation, with regard to pre-1986 accident years, only additions not attributable to an increase in an estimate of a reserve constitute other than reserve strengthening. Given the majority’s definition of a reserve (with which I have no reason to disagree), it is difficult to imagine any reserve addition for a pre-1986 accident year that does not constitute reserve strengthening. The conference committee seems to be saying that, for a pre-1986 accident year, reserve strengthening constitutes all additions attributable to an increase in “an estimate of an estimate”. What reserve additions are not included? Section 1.846-3(c), as it applies to reserve strengthening for pre-1986 accident years, does not contradict the conference explanation by overbroadly defining reserve strengthening. If anything, by providing exceptions to the general rule of inclusion, section 1.846 — 3(c)(3)(ii) seems generous. If Congress’ intent is evidenced by the conference explanation, then section 1.846 — 3(c)(3) is not fundamentally at odds with, or inconsistent with, the statute’s origin and purpose. E. Conclusion The third proposition for determining the validity of a regulation set forth above is as follows: Unless an interpretative regulation is unreasonable and plainly inconsistent with the statute, it should be sustained. Bingler v. Johnson, 394 U.S. 741, 750 (1969). Taking into account the conference explanation of what it (and Congress) intended to accomplish, I do not find section 1.846-3(c) to be either unreasonable or plainly inconsistent with the statute. I would sustain it. Wells, Whalen, and Beghe, JJ., agree with this dissent.   The majority states, majority op. pp 347-348: It is important to note that respondent agrees that petitioner’s additions to its reserves were reasonable and that the reserves were determined in accord with petitioner’s prior practices and procedures. * * * Respondent does not question whether petitioner’s reserve additions would represent reserve strengthening by reference to the definition advanced by petitioner. Due to respondent’s concession in this case, we do not have to address the question of whether petitioner attempted to “artificially” increase its reserve to take advantage of the fresh-start provisions. [Fn. ref. omitted; emphasis added.] It is unclear precisely what concession the majority is referring to: (1) That petitioner’s additions to reserve were reasonable and determined in accord with prior practices and procedures or (2) that such additions did not constitute reserve strengthening within industry usage. Apparently, it is the first. See majority op. p. 348 n.6. Since the majority determines that, for purposes of judging the validity of sec. 1.846-3(c), artificial reserve increases involve nonperiodic changes in the assumptions or methodology used in computing reserves, see majority op. p. 356, the importance of the concession to the question of validity is unclear. First, respondent has certainly not conceded the majority’s definition that artificial reserve increases involve only nonperiodic changes in reserve assumptions or methodology. Second, neither has respondent conceded that validity turns on whether the regulation distinguishes between good and bad faith additions to reserves. What is missing from the majority’s analysis is the link between respondent’s concession and the issue in this case.    To this point in my analysis, I have not questioned that the term “reserve strengthening” is an insurance industry term of art. I have questioned whether Congress intended to be bound by a term of art, and have concluded that it did not. Even if Congress did intend to be bound by a term of art, however, I am not persuaded by the majority that sec. 1.846-3(c), Income Tax Regs. (sec. 1.846-3(c)) is invalid. The regulation would only be invalid if it did not constitute a reasonable interpretation of that term of art. Cf. Pepcol Manufacturing Co. v. Commissioner, 13 F.3d 355 (10th Cir. 1993), revg. 98 T.C. 127 (1992) (concept of recycling in the regulations not unreasonable or plainly inconsistent with Congress’ intent in providing a tax credit for certain “recycling equipment”). I am not persuaded by the majority because the majority has not shown that, as a term of art, the term “reserve strengthening” is sufficiently unambiguous that it is necessarily contradicted by sec. 1.846-3(c). My concern is justified by Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Under Chevron, the first inquiry to be made by a court when it reviews an agency’s construction of a statute is whether Congress has directly spoken to the precise question at issue. “[F]or the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Id. at 842-843. If Congress has not spoken to the precise question, then respondent’s regulation must be upheld if it is a permissible construction of the statute under the second inquiry in the Chevron analysis. I believe that the precise question here is the meaning of the term “reserve strengthening”. Further, I believe that all that the majority has shown is that, at best, Congress has unambiguously settled on an imprecise meaning. The majority states: “In order to adopt respondent’s regulatory use of the term ‘reserve strengthening”, we would have to redefine an insurance concept so as to reach a definition different from its established industry meaning.” Majority op. 360. The inference is that the term has a sufficiently precise industry meaning, so that it can be determined that the regulatory definition is incompatible with that meaning. The majority, however, is unable to provide a specific definition for “reserve strengthening” as that term presumably is used in connection with property and casualty companies. Admittedly, the majority does assert that adjustments of reserves that result from a change in the basis for computing reserves fall within the definition of “reserve strengthening.” Majority op. p. 352. Beyond that statement, however, all that the majority can say is that there are certain “reserve strengthening concepts” and that respondent’s regulation is inconsistent with those concepts. The majority does not explain precisely how respondent’s regulation differs from those concepts. For a life insurance company, the basis for computing reserves principally involves three assumptions: (1) The number of lives, (2) mortality rates, and (3) interest rates. At least the first two seem subject to accurate prediction. For a property and casualty company, on the other hand, insuring against, say, the risks of hurricane damage, the basic assumptions may involve less prediction and more guesswork. Changes in the basis for computing reserves may be more common and, thus, less important. Reserve strengthening may not be a developed concept. Beyond pointing to the “reserve strengthening concepts”, the majority is unable to come up with any accepted definition in the property and casualty insurance company context. I fail to see how the majority’s holding that Congress intended to use a term of art can meet the “unambiguously expressed intent of Congress” test under the Chevron analysis, where, as here, that term is defined simply as “reserve strengthening concepts” and is not given any concrete meaning in the context in which this case arose (i.e., property and casualty insurance company reserve practices). Thus, based upon the majority’s analysis, I must disagree with the assertion that “the statute is neither ambiguous nor imprecise.” Majority op. p. 360 n.25. Indeed, using the various tools of construction and interpretative materials as they have been employed by the majority, I find it difficult to conclude otherwise than that the statute is ambiguous and imprecise with respect to the “precise question at issue” in this case.    Paragraph 3 of sec. 1.846 — 3(c) states: (3) Accident years before 1986. (i) In general. For each taxable year beginning in 1986, the amount of reserve strengthening (weakening) for an unpaid loss reserve for an accident year before 1986 is the amount by which the reserve at the end of that taxable year exceeds (is less than)— (A) The reserve at the end of the immediately preceding taxable year; reduced by (B) Claims paid and loss adjustment expenses paid (“loss payments”) in the taxable year beginning in 1986 with respect to losses that are attributable to the reserve. The amount by which a reserve is reduced as a result of reinsurance ceded during a taxable year beginning in 1986 is treated as a loss payment made in that taxable year. (ii) Exceptions. Notwithstanding paragraph (c)(3)(i) of this section, the amount of reserve strengthening (weakening) for an unpaid loss reserve for an accident year before 1986 does not include— (A) An amount added to the reserve in a taxable year beginning in 1986 as a result of a loss reported to the taxpayer from a mandatory state or federal assigned risk pool if the amount of the loss reported is not discretionary with the taxpayer; or (B) Payments made with respect to reinsurance assumed during a taxable year beginning in 1986 or amounts added to the reserve to take into account reinsurance assumed for a line of business during a taxable year beginning in 1986, but only to the extent that the amount does not exceed the amount of a hypothetical reserve for the reinsurance assumed. The amount of the hypothetical reserve is determined using the same assumptions (other than the assumed interest rates) that were used to determine a reserve for reinsurance assumed for the line of business in a taxable year beginning in 1985. (iii) Certain transactions deemed to be reinsurance assumed (ceded) in 1986. For purposes of this paragraph (c)(3), reinsurance assumed (ceded) in a taxable year beginning in 1985 is treated as assumed (ceded) during the succeeding taxable year if the appropriate unpaid loss reserve is not adjusted to take into account the reinsurance transaction until that succeeding taxable year.    Reserves are ‘“best estimates’ of future settlement costs.” Salzman, Estimated Liabilities For Losses & Loss Adjustment Expenses 155 (1984).