Court Opinion

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Opinions of the United
1997 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

4-24-1997

Atl Mutl Ins Co v. Commissioner IRS
Precedential or Non-Precedential:

Docket 96-7424

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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT
                          ___________

                          No. 96-7424
                          ___________

          ATLANTIC MUTUAL INSURANCE COMPANY, and
          Includible Subsidiaries

                         vs.

          COMMISSIONER OF INTERNAL REVENUE

                                     Appellant

                          ___________

             Appeal from the United States Tax Court
                     (Tax Court No. 93-25767)

                          ___________

                             Argued
                         March 13, 1997
          Before: MANSMANN and LEWIS, Circuit Judges,
                  and MICHEL, Circuit Judge.*

                     (Filed April 24, 1997)

                          ___________

John S. Breckinridge, Jr., Esquire (ARGUED)
James H. Kenworthy, Esquire
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, NY 10019

Frederick B. Lacey, Esquire
LeBeouf, Lamb, Greene & MacRae
One Riverfront Plaza
Newark, NJ 07102

  COUNSEL FOR APPELLEE

*         Honorable Paul R. Michel of the United States Court of
Appeals for the Federal Circuit, sitting by designation.

                                 1
Gary R. Allen, Esquire
David I. Pincus, Esquire
Edward T. Perelmuter, Esquire (ARGUED)
Loretta C. Argrett
  Assistant Attorney General
United States Department of Justice
Tax Division
P.O. Box 502
Washington, D.C. 20044

  COUNSEL FOR APPELLANT

                             ___________

                        OPINION OF THE COURT
                             __________

MANSMANN,   Circuit Judge.

            In this appeal, we address the "fresh start" provision

of section 1023(e)(3) of the Tax Reform Act of 1986.    There

Congress permitted property & casualty insurers a one-time

forgiveness of income resulting from the change in computing

"losses incurred deductions" from undiscounted to a discounted

basis as mandated by newly enacted section 846 of the Internal

Revenue Code.   Specifically, the Commissioner challenges the

decision of the Tax Court which invalidated Treas. Reg. § 1.846-

3(c) to the extent that it defines all additions to a property &

casualty insurer's loss reserves as "reserve strengthening."

            We find that the meaning of the term "reserve

strengthening" in section 1023(e)(3)(B) of the Tax Reform Act of

1986 is ambiguous.   We thus turn to the legislative history to

determine Congress' intent.    Utilizing the deference principles

of Chevron U.S.A., Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984), we conclude that Treas. Reg. § 1.846-

3(c) is based on a permissible construction of the Act and

                                 2
implements the intent of Congress in some reasonable manner.

Accordingly, we will reverse the decision of the Tax Court.

                                 I.

           The statutory provision at issue is section 1023 of

Pub. L. No. 99-514, 100 Stat. 2085, 2399, of the Tax Reform Act

of 1986 (TRA 1986), which added new section 846 of the Internal

Revenue Code.    In enacting section 846, Congress included two

relief provisions--the "transition rule" and the "fresh start"--

to facilitate a smooth transition to the new rules.    Atlantic

Mutual Insurance Co. v. Commissioner, 71 T.C.M. (CCH) 2154, 2156

(1996).   The transition rule, set forth in section 1023(e)(2) of

TRA 1986, provided that for purposes of computing the losses

incurred deduction for 1987, the year-end 1986 reserves would be

discounted.1    Absent this relief provision, section 846 would

1.        Property & casualty companies are taxed pursuant to
I.R.C. §§ 831 through 835. Under section 832(a), the taxable
income of such a company is defined as the gross income minus
allowable deductions. Section 832(c)(4) provides that these
deductions include "losses incurred" as defined in section
832(b)(5). Prior to 1986, section 832(b)(5) defined "losses
incurred" for all relevant purposes as the amount of "losses
paid" during the year plus the increase (or minus the decrease)
in "unpaid losses." In practice, the P&C company would deduct
the full amount of the estimated total loss in the year of the
loss-event, even though the claim might not be paid for several
years. When the claim was paid, the company would not receive
any additional deduction (assuming that the payment equalled the
original estimate) because the payment would be offset by a
corresponding reduction it its unpaid-loss reserve.

          Prior to TRA 1986, property & casualty insurers
received an unsolicited benefit because the tax laws failed to
take into consideration the time value of money in calculating
the deduction for losses incurred. Congress addressed this
problem by enacting I.R.C. § 846 as part of TRA 1986, which
provides for the discounting of unpaid losses. The new
discounting rules apply to all taxable years commencing after

                                  3
have required property & casualty ("P&C") insurers to compare

undiscounted 1986 reserves with discounted 1987 reserves for

purposes of computing their losses incurred deductions for 1987.

 As the Tax Court explained, "Such an `apples-to-oranges'

comparison would have significantly reduced the losses incurred

deduction for the 1987 tax year."   Id.

          Notwithstanding the relief provided by the transition

rule, P&C insurers were still obligated to include in their 1987

taxable income the excess of the undiscounted year-end 1986 loss

reserves over the discounted year-end 1986 loss reserves, due to

the application of I.R.C. § 481.2   To avoid the application of

section 481, Congress allowed P&C insurers a one-time

"forgiveness" of income under the "fresh start" provision of

section 1023(e)(3) of TRA 1986. That section provides:
(3) Fresh Start.--
          (A) In General.--Except as otherwise provided
          in this paragraph, any difference between--
            (i) the amount determined to be the
               unpaid losses and expenses unpaid
               for the year preceding the 1st
               taxable year of an insurance
               company beginning after December
               31, 1986, determined without regard
               to paragraph (2), [i.e., without
               discounting] and
            (ii) such amount determined with
               regard to paragraph (2) [i.e., with
               discounting],
(..continued)
December 31, 1986. Tax Reform Act of 1986, Pub. L. No. 99-514,
100 Stat. 2085, 2404.

2.        Normally, section 481 would require a taxpayer to
recognize the excess as income, because the change in the basis
for computing losses incurred deductions from an undiscounted to
a discounted methodology constitutes a change in accounting
method. In this circumstance, I.R.C. § 481 requires the taxpayer
to make an appropriate adjustment to prevent it from obtaining a
double deduction created by the change in accounting method.

                                4
shall not be taken into account for purposes of the
          Internal Revenue Code of 1986.

In substance, the fresh start rule overrides section 481 by

excluding from taxable income the difference between the amount

of the year-end 1986 undiscounted loss reserves and the

discounted amount of such reserves.

             Congress anticipated, however, the potential for abuse

created by the fresh start provision -- that insurers could

manipulate the fresh start provision by inflating their reserves.

 To prevent such abuse, Congress enacted section 1023(e)(3)(B) to

exclude any increases in loss reserves due to "reserve

strengthening." Section 1023(e)(3)(B) provides:
          (B) RESERVE STRENGTHENING IN YEARS AFTER
          1985.--Subparagraph (A) 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 meaning of the term "reserve strengthening," as used in

section 1023(e)(3)(B), lies at the heart of the controversy

before us.    We turn now to the particular facts of this case.

                                 II.

             The parties fully stipulated to the following facts

before the United States Tax Court.        Atlantic Mutual Insurance

Co. (Atlantic) is the common parent of an affiliated group of

corporations whose principal place of business is located in

Madison, New Jersey.    Organized in 1842 under the laws of the

State of New York as a mutual marine insurer, Atlantic eventually

                                  5
expanded its insurance underwriting activities to include

property & casualty insurance.   Centennial Insurance Company, a

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

included in Atlantic's consolidated income tax return.   The

Commissioner's notice of deficiency relates to the activities of

both Atlantic and Centennial (collectively the "taxpayer").

          From 1985 through 1993, the taxpayer filed annual

financial statements with the appropriate state insurance

departments.3   P&C insurers are required to report estimates of

amounts they expect to pay for losses that have already occurred

on the annual statement.   These estimates are commonly referred

to as "loss reserves" (or simply "reserves").

          For the years in issue, case reserves constituted the

majority of the taxpayer's loss reserves.4   The taxpayer set up

its case reserves by assigning a claims adjuster to examine each

reported claim and to estimate the amount, if any, that would be

paid to resolve it.   For all years at issue, the taxpayer's case

3.        Each annual statement was prepared in the format
prescribed by the National Association of Insurance Commissioners
(NAIC) in order to provide state insurance commissioners with
information concerning a P&C insurer's financial condition. The
accounting principles on which the NAIC-prescribed annual
statement is based generally have been incorporated into the
Internal Revenue Code sections applicable to P&C insurers.

4.        In its P&C insurance business, the taxpayer maintained
three categories of loss reserves: (1) case reserves, which
reflect estimates of amounts to be paid to resolve claims that
have been reported to the taxpayer; (2) incurred but not yet
reported (IBNR) reserves, which consists of estimates of amounts
to be paid to resolve claims statistically presumed to have been
incurred but not yet reported to the taxpayer; and (3) loss
adjustment expense (LAE) reserves, which reflect estimates of
administrative costs to be paid in settling or otherwise
resolving claims.

                                 6
reserves totalled $255,655,141 at year-end 1985 and $277,705,661

at year-end 1986.

          The Commissioner tested for "reserve strengthening" by

applying the formula set forth in Treas. Reg. § 1.846-3(c)(3) to

each of the taxpayer's lines of P&C insurance for pre-1986

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

year-end 1985 were reduced by the claims and the loss adjustment

expense (LAE) paid in 1986 with respect to those reserves.    To

the extent that, at year-end 1986, a reserve was greater than the

amount determined under the formula, the excess was treated as a

net increase to that reserve account (i.e., "reserve

strengthening").    Where, at year-end 1986, a reserve was less

than the amount determined under the formula, the difference was

treated as a net decrease to that reserve account (i.e., "reserve

weakening").

          The Commissioner determined that, at year-end 1986, the

taxpayer's net "reserve strengthening" totalled $6,552,739.

Pursuant to I.R.C. § 846, the Commissioner then discounted the

$6,552,739, resulting in an understatement of the taxpayer's 1987

income of $1,339,039.    The Commissioner further determined that

this understatement caused a deficiency of $519,987 in the

taxpayer's 1987 income tax liability and, accordingly, issued a

Notice of Deficiency on September 23, 1993.    In response, the

taxpayer petitioned the Tax Court for a redetermination of the

deficiency.

          After considering all of the evidence, the Tax Court,

on February 22, 1996, issued its decision concluding that the

                                 7
taxpayer was not liable for the asserted deficiency.    In reaching

this conclusion, the Tax Court held the taxpayer's reserve

increases did not constitute "reserve strengthening."    Atlantic

Mutual, 71 T.C.M. at 2159.   The Tax Court found that the doctrine

of stare decisis obligated it to reach the same result as that

obtained in Western National Mutual Ins. Co. v. Commissioner, 102

T.C. 338 (1994), aff'd 65 F.3d 90 (8th Cir. 1995), which the

court found to be factually indistinguishable from this case.

The Commissioner filed this timely appeal.

             We have jurisdiction pursuant to 26 U.S.C. § 7482(a)

and we exercise plenary review over a legal challenge to the

validity of a treasury regulation.    Tate & Lyle, Inc. v.

Commissioner, 87 F.3d 99, 102 (3d Cir. 1996) (citing Mazzochi Bus

Co., Inc. v. Commissioner, 14 F.3d 923, 927 (3d Cir. 1994)).

                               III.

           Initially, we must determine whether the meaning of

"reserve strengthening" is clear from the plain language of

section 1023(e)(3)(B).   Our review of an agency's interpretation

of a statute that it is empowered to administer is guided by the

well-established principles of Chevron U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984); see also,

Appalachian States Low-Level Radioactive Waste Commission v.

O'Leary, 93 F.3d 103, 108 (3d Cir. 1996).    The two-step inquiry

in Chevron requires us to first determine "whether Congress has

directly spoken to the precise question at issue."    467 U.S. at

842.   If the intent of Congress is clear from the plain language

                                8
of the statute, then our inquiry ends there.    If we conclude,

however, that Congress is silent or the statute is ambiguous

regarding the issue, then the second step of our inquiry is to

determine whether the agency's interpretation is based on a

permissible construction of the statute.    Id. at 843.

            Addressing the first prong of Chevron, we turn to the

plain language of section 1023(e)(3)(B).    Clearly absent from the

text of the statute is any explanation of the meaning of the term

"reserve strengthening."    We must determine, therefore, whether

Congress intended the meaning of reserve strengthening, as used

in the life insurance industry, to apply to P&C insurers.    The

Tax Court, bound by its previous decision in Western National

which concluded that reserve strengthening as employed in section

1023(e)(3)(B) is a term of art adopted from the life insurance

industry, rejected the Commissioner's argument that the meaning

of "reserve strengthening" in the P&C insurance industry is

ambiguous.    We note the distinction, however, that the

Commissioner did not present expert witnesses in Western

National.

             The expert testimony here makes clear that the term

"reserve strengthening" as used in section 1023(e)(3)(B) is

subject to more than one interpretation.5    Indeed, the Tax Court
5. The Commissioner and the taxpayer introduced expert reports
in the Tax Court proceedings concerning the meaning of "reserve
strengthening" within the P&C industry. The taxpayer's first
expert, Irene R. Bass, construed "reserve strengthening" as
involving "a one-time (or, at least, unusual and non-periodic),
significant change in the assumptions and/or methodologies used
to compute the reserves which results in a material change to the
relative level of adequacy of the total reserve inventory." Bass
conceded, however, that "[w]ithin the context of the reserve

                                  9
(..continued)
setting process, the term reserve strengthening is not a well-
defined PC insurance or actuarial term of art to be found in PC
actuarial, accounting, or insurance regulatory literature." She
then opined that "the lack of a well recognized definition of
reserve strengthening in PC insurance literature can be
attributed to the recursive nature of the reserve setting process
and the fact that identification of reserve strengthening is not
a requirement of the normal process of setting reserves."
          The taxpayer's second expert, W. James MacGinnitie,
concurred with the expert opinion of Irene Bass. MacGinnitie
then described the concept of reserve strengthening in terms of
the adequacy of reserves to satisfy future claims, equating
adequacy to reserve strengthening and inadequacy to reserve
weakening. He further opined that this determination was one
that could not be definitively made until all claims covered by
the reserves in question had been finally settled. According to
MacGinnitie, in order to determine whether reserve strengthening
has occurred one must compare the adequacy of the current reserve
for a line of business to the adequacy of a previous reserve for
that same line of business.
          The Commissioner submitted expert reports prepared by
Raymond S. Nichols and Ruth Salzmann. In his report, Nichols
stated: "In the property-casualty industry the term `reserve
strengthening' has various meanings, rather than a single
universal meaning. However, in determining a property-casualty
insurer's underwriting income, `reserve strengthening' generally
refers to a positive amount resulting from the difference between
calendar year incurred losses and accident year incurred losses."
 Nichols opined that "[a]ny definition of `reserve strengthening'
that restricts the words to the idiosyncrasies of individual
company reserve assumptions and methods will miss the impact of
reserve strengthening during underwriting cycles. For this
reason alone, the common definition of `reserve strengthening'
does not restrict the meaning to changes in reserve assumptions
and methods."
          Finally, the Commissioner's second expert, Ruth
Salzmann, proffered her definition of reserve strengthening:
"Reserve strengthening (or reserve weakening) is a term used in
connection with P/C income statements. It refers to the dollar
change in the margin of adequacy in the beginning and ending
reserves for unpaid losses for that accounting period. The
change can be for whatever reason and for any amount. If ending
reserves are more adequate (or less inadequate) than the
beginning reserves, there is reserve strengthening in the
accounting period and net income is understated; conversely, if
ending reserves are less adequate (or more inadequate), there is
reserve weakening and net income for the accounting period is
overstated."

                               10
in Western National commented that the opinions and testimony of

the numerous expert witnesses failed to establish a "universal

and precise definition of reserve strengthening."    102 T.C. at

351 n.10.   The Tax Court nonetheless found that it was able to

glean from the expert testimony the conceptual elements of

reserve strengthening as they are commonly used in the insurance

industry; it concluded that the concept of reserve strengthening

has the same meaning in the context of the P&C and life insurance

business.   Id. at 351 n. 10 and 354.   We part company with the

Tax Court's holding in this regard.

            In determining that "reserve strengthening" has the

same meaning for both life and P&C insurers, the Tax Court in

Western National focused on the fact that Congress, in drafting

the language of Subchapter L of the Internal Revenue Code,

recognized the unique and highly specialized nomenclature of the

insurance industry.   Moreover, the court observed that "[i]n

enacting the fresh-start provision of the DEFRA [Deficit

Reduction Act of 1984], Congress used an industry term of art in

a manner consistent with its traditional definition[]" within the

life insurance business.6   102 T.C. at 359.   Accordingly, the Tax

Court concluded that "reserve strengthening" was a term of art
6.        When Congress enacted the fresh start provision for
certain life insurance rules in DEFRA, it specifically defined
"reserve strengthening" to include only changes in assumptions
and methodology. The Commissioner argued that "reserve
strengthening" has a different meaning in the P&C insurance
industry. In rejecting this argument, the Tax Court "concluded
that `Congress could not have expected a different quantitative
or qualitative meaning for the term' depending on the type of
insurer." Atlantic Mutual, 71 T.C.M. at 2158 (quoting Western
Nat'l, 102 T.C. at 354).

                                 11
adopted from the insurance industry.   Opining that the

legislative history contained contradictory explanations and, in

part, supported the Commissioner's regulatory position, the Tax

Court nonetheless concluded that Congress intended "reserve

strengthening" to be interpreted in a manner consistent with

industry usage.   Id. at 360.7

          The Tax Court's reliance on cases, revenue rulings and

legislation involving life insurance reserves is misplaced.     For

federal income tax purposes, life insurance companies and P&C

insurers are taxed in entirely separate manners.   Gross income as

well as loss reserves are computed on different bases and

assumptions.   Actuarial assumptions about interest rates and

mortality rates are an integral part of computing future losses

which form the basis of the loss reserves in life insurance.     On

the other hand, P&C loss reserves are determined primarily based

7.        The Court of Appeals for the Eight Circuit affirmed the
decision of the Tax Court, holding that Treas. Reg. § 1.846-3(c)
was invalid to the extent that it defines "reserve strengthening"
in a manner contrary to industry usage. Western National Mutual
Ins. Co. v. Commissioner, 65 F.3d 90, 93 (8th Cir. 1995). In
reaching this conclusion, the court of appeals opined that
Congress intended to deny the fresh start deduction only to those
property & casualty companies that computed their 1986 unpaid
loss reserves on the basis of methodologies or assumptions that
were different from those employed in calculating the same
reserves in prior years. Id. at 93. As a corollary to this
conclusion, the court of appeals also found that the term
"reserve strengthening" was not ambiguous. Id. (footnote
omitted). Accordingly, the court held that it was not required
to consider the legislative history to divine the meaning of
"reserve strengthening." Id. The court of appeals nonetheless
proceeded to examine the legislative history, "out of an
abundance of caution," and determined that it failed to provide
persuasive rationale for interpreting "reserve strengthening"
contrary to industry usage. Id. We respectfully disagree.

                                 12
on past claims experience and the judgments of the individual

claims adjusters.

          In the life insurance industry, reserve strengthening

constitutes an unusual increase resulting generally from a change

in one of the fundamental reserve assumptions (i.e., interest

rate, mortality rate, method), as contrasted to normal increases

in life insurance reserves, which result from the receipt of

additional premiums or accrued interest.   We find it illogical to

apply the life insurance definition of reserve strengthening to

P&C insurers -- whose reserves are not predicated upon the same

actuarial assumption.   If we did so apply it, arguably there

would never be any reserve strengthening in the P&C area since

interest rates, mortality assumptions and methodologies are not

underlying components of the P&C loss reserves.   The Commissioner

makes a persuasive argument that the differences between life

insurance and P&C loss reserves "render the wholesale importation

of life insurance concepts into the P&C unpaid-loss reserve area

quite dubious at best."

          The revenue rulings cited by the Tax Court and the

taxpayer8 are inapposite to the issue of reserve strengthening by

P&C insurers.   These revenue rulings address life insurance

reserves maintained by P&C insurers who also write life

insurance.   In both rulings, the taxpayers requested advice on

how to compute life insurance reserves in a given factual

situation.   The rulings do not define reserve strengthening with

8.        Rev. Rul. 65-240, 1965-2 C.B. 236, Rev. Rul. 78-354,
1978-2 C.B. 190.

                                13
respect to P&C loss reserves in the context of life insurance

reserves.

            Moreover, we find that the reserve strengthening

provision in DEFRA differs from the provision in TRA 1986 and,

thus, supports the Commissioner's argument that Congress did not

intend to import the life insurance definition of reserve

strengthening into section 1023(e)(3)(B).    The 1984 statute

specifically links reserve strengthening by life insurance

companies to changes in the reserve practice used on the most

recent annual financial statement.    A similar limitation was

contained in the Senate amendment to section 1023(e)(3)(B) but

was intentionally eliminated by the Conference Committee.      The

Supreme Court addressed a similar situation involving the RICO

statute and held:
[W]here Congress includes particular language in one
          section of a statute, but omits it in another
          section of the same Act, it is generally
          presumed that Congress acts intentionally and
          purposely in the disparate inclusion or
          exclusion. Had Congress intended to restrict
          § 1963(a)(1) to an interest in an enterprise,
          it presumably would have done so expressly as
          it did in the immediately following
          subsection (a)(2). * * * The short answer is
          that Congress did not write the statute that
          way. We refrain from concluding here that
          the differing language in the two subsections
          has the same meaning in each. We would not
          presume to ascribe this difference to a
          simple mistake in draftsmanship.

Russello v. United States, 464 U.S. 16, 23-24 (1983).

Accordingly, the reserve strengthening provision of DEFRA does

not support the taxpayer's position here.

                                 14
          Given the lack of an explicit statutory definition of

reserve strengthening, the conflicting definitions of reserve

strengthening provided by the expert witnesses, and our finding

that the meaning attributed to reserve strengthening in the life

insurance industry is not applicable to P&C insurers, we conclude

that the meaning of "reserve strengthening" is ambiguous.

Accordingly, we find the Tax Court erred as a matter of law in

holding that the meaning of reserve strengthening in section

1023(e)(3)(B) was plain.

                               15
                                  IV.

             Because we find the meaning of the term "reserve

strengthening" ambiguous with regard to P&C insurers, we turn to

the second prong of the Chevron inquiry.      In so doing, we are

required to take a deferential approach to ascertaining whether

the agency's interpretation is a permissible one.      Appalachian

States Low-Level Radioactive Waste Commission v. O'Leary, 93 F.3d

at    110.   Thus, "we must determine `whether the regulation

harmonizes with the plain language of the statute, its origin,

and purpose.     So long as the regulation bears a fair relationship

to the language of the statute, reflects the views of those who

sought its enactment, and matches the purpose they articulated,

it will merit deference.'"     Id. (quoting Sekula v. F.D.I.C., 39

F.3d 448, 452 (3d Cir. 1994)).

             We begin our analysis by turning to the legislative

history of section 1023(e)(3)(B).       The provision requiring P&C

insurers to discount their loss reserves originated in a House

bill.    H.R. 3838, 99th Cong., 1st Sess., §§ 1021-1027 (1985).       In

the Senate version, the provision was amended to include the

fresh start provision as well as the exclusion for reserve

strengthening. The pertinent language of the Senate bill states:
    (3)   FRESH START.--
(A)          IN GENERAL.--Except as otherwise provided in
             this paragraph, any difference between the
             amount determined to be the unpaid losses and
             expenses unpaid for the year preceding the first
             taxable year of an insurance company beginning
             after December 31, 1986, determined without
             regard to paragraph (2), and such amount
             determined with regard to paragraph (2), shall
             not be taken into account for purposes of the
             Internal Revenue code of 1954.

                                  16
          (B) RESERVE STRENGTHENING AFTER MARCH 1, 1986.
[The fresh start provision] shall not apply to any reserve
          strengthening reported for Federal income tax
          purposes after March 1, 1986, for a taxable year
          beginning before January 1, 1987, and such
          strengthening shall be treated as occurring in
          the taxpayer's 1st taxable year beginning after
          December 31, 1986. The preceding sentence shall
          not apply to the computation of reserves on any
          contract if such computation employs the reserve
          practice used for purposes of the most recent
          annual statement filed on or before March 1,
          1986, for the type of contract with respect to
          which reserves are set up.

H.R. 3838, 99th Cong., 2d Sess., § 1022(e) (as reported by the

Senate Finance Committee, May 29, 1986) (emphasis added).      The

Senate Finance Committee explained this provision 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 the 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. Rep. No. 99-313, 1986-3 C.B. (Vol. 3) 510.

          The Conference Committee reconciled the differences

between the House and Senate versions of H.R. 3838 by eliminating

the last sentence of the Senate amendment (section 1022(e)(3)(B))

that linked reserve strengthening to changes in reserve setting

practices.   Although the final bill did not define "reserve

strengthening," the Conference Committee report accompanying the

final bill did, in fact, provide a definition of that term.      The

Conference Committee's definition, which was more expansive than

                                17
that contained in the Senate Finance Committee report, reads as

follows:
Reserve strengthening is considered to include all
          additions to reserves attributable to an
          increase in an estimate of a reserve
          established for a prior accident year (taking
          into account claims paid with respect to that
          accident year), and all additions to reserves
          resulting from a change in the assumptions
          (other than changes in assumed interest rates
          applicable to reserves for the 1986 accident
          year) used in estimating losses for the 1986
          accident year, as well as all unspecified or
          unallocated additions to loss reserves. This
          provision is intended to prevent taxpayers
          from artificially increasing the amount of
          income that is forgiven under the fresh start
          provision.

H.R. Conf. Rep. No. 99-841, 99th Cong., 2d Sess., at II-367

(1986), reprinted in 5 U.S.C.C.A.N. 4075, 4455 (1986).9   Further

evidence of the Conference Committee's expansion of the

definition of reserve strengthening is found in Senator Wallop's

criticism of the Committee's action:
          Presumably, the intent is to prevent insurers
          from artificially increasing the opening
          reserve in order to increase income forgiven
          under fresh start. Implicit in this
          provision is the notion that reserve
          strengthening actions taken by insurance
          companies during 1986 for prior accident
          years is heavily motivated by the desire to
          avoid Federal income taxes. Nothing could be
          further from the truth.    While it certainly
          can be acknowledged that increases in
          reserves decrease an insurance company's
          Federal tax burden, there are substantial and
          legitimate nontax reasons10 for increasing
9.        The Tax Court here acknowledged that the Conference
Committee's definition of reserve strengthening was more
expansive than that contained in the Finance Committee report.
Atlantic Mutual, 71 T.C.M. at 2157.

10.       Senator Wallop offered two legitimate nontax reasons
for increasing reserves: (1) reserves are based on estimates
computed from statistical models that are subject to error and,

                               18
          the provision for unpaid losses in prior
          accident years. . . .
          . . .
The reserve strengthening definition as currently
          written in the conference report       is
          arbitrary and inconsistent with one of the
          goals of tax reform, that is, fostering
          positive behavioral response from corporate
          and individual taxpayers toward the Federal
          tax system.
          The Senate bill's reserve strengthening
          provision was fair. The Internal Revenue
          Service, as it does under current law, would
          combat abusive reserving practices. The
          conference modification substitutes a
          simplistic, cookbook approach that is
          entirely inappropriate and will likely create
          tensions causing companies to underreserve to
          the potential detriment of their
          policyholders.

132 Cong. Rec. 32625 (daily ed. October 16, 1986).

          Treas. Reg. § 1.846-3(c) (1992),11   which is predicated

on the definition of "reserve strengthening" set forth in the

Conference Committee report, provides in pertinent part:
          (c) Rules for determining the amount of
          reserve strengthening (weakening)--(1) In
          general. The Amount of reserve strengthening
          (weakening) is the amount that is determined
          under paragraph (c)(2) or (3) to have been
          added to (subtracted from) an unpaid loss
          reserve in a taxable year beginning in 1986.
           For purposes of [the fresh start], the
          amount of reserve strengthening (weakening)
          must be determined separately for each unpaid
          loss reserve by applying the rules of this
(..continued)
thus, must be reevaluated from time to time; and (2) P&C insurers
have historically been underreserved and reserve strengthening
for them occurs is a normal part of doing business.

11.       In 1988, the IRS issued a notice of forthcoming
regulations regarding the application of section 1023(e)(3)(B).
I.R.S. Notice 88-100, 1988-2 C.B. 439. Proposed regulations were
issued in 1991, Proposed Treas. Reg. § 1.846-3, 56 F.R. 20161
(May 2, 1991), and eventually, final regulations were promulgated
on September 4, 1992.

                               19
          paragraph (c). this determination is made
          without regard to the reasonableness of the
          amount of the unpaid loss reserve and without
          regard to the taxpayer's discretion, or lack
          thereof, in establishing the amount of the
          unpaid loss reserve. The amount of reserve
          strengthening for an unpaid loss reserve may
          not exceed the amount of the reserve,
          including any undiscounted strengthening
          amount, as of the end of the last taxable
          year beginning before January 1, 1987. For
          purposes of this section, an "unpaid loss
          reserve" is the aggregate of the unpaid loss
          estimate for losses (whether or not reported)
          incurred in an accident year of a line of
          business.

          . . .
          (3) Accident years before 1986--(i) In
          general. For each taxable year beginning in
          1986, the amount of reserve strengthening
          (weakening) for an unpaid loss reserve for an
          accident year before 1986 is the amount by
          which the reserve at the end of 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. . . .

In the explanation accompanying the final regulations, the IRS

noted its reason for not adopting the commentators' suggested

alternatives to the mechanical test:
Congress did not limit the imposition of the reserve
          strengthening rule to tax motivated
          transactions. The legislative history
          indicates that for purposes of the fresh
          start adjustment the term "reserve
          strengthening" includes "all additions to
          reserves attributable to an increase in an
          estimate of reserves 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

                               20
          in the assumed interest rates applicable to
          reserves for the 1986 accident year) used in
          estimating losses for the 1986 accident year,
          as well as all unspecified or unallocated
          additions to loss reserves". See 2 H.R.
          Conf. Rep. 841, 99th Cong., 2d Sess. II-367
          (1986), 1986-3 (Vol. 4) C.B. 367. Thus,
          Congress adopted an expansive and mechanical
          definition of reserve strengthening that is
          reflected in the final regulations.

1992-2 C.B. 146, 148.

          A close examination of Treas. Reg. § 1.846-3(c)(3)

reveals that virtually all additions to reserves constitute

reserve strengthening.   The regulation also contains two narrow

exceptions, neither of which applies here.   The regulation can be

reconciled with the Conference Committee's description of reserve

strengthening which is all-inclusive:   "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). . . ."   H.R. Conf. Rep.

No. 99-841.   As it applies to reserve strengthening for pre-1986

accident years, Treas. Reg. § 1.846-3(c) does not contradict the

Conference explanation and is somewhat more generous to the

taxpayer by providing two, albeit narrow, exceptions.

          Our remaining inquiry is whether the regulation

harmonizes with the articulated purpose of section 1023(e)(3)(B).

 The purpose of the reserve strengthening exception, as

articulated by the Conference Committee, is "to prevent taxpayers

from artificially increasing the amount of income that is

forgiven under the fresh start provision."   The Commissioner and

the taxpayer disagree as to the meaning to be ascribed to the

                                21
Committee's use of the word "artificially" in delineating the

purpose of the limitation.   This dispute stems from the Tax

Court's statement, in Western National, that the word

"artificial" suggests a dichotomy between routine, normal

additions to reserves and irregular or nonperiodic increases

attributable to changes in actuarial assumptions or methodology.

 The Tax Court's analysis, however, cannot be reconciled with the

Conference Committee's broad definition of reserve strengthening

which includes normal additions.     Thus, the Conference Committee

used the term "artificial" in a general sense, to refer to any

increases in the reserves other than those resulting from the

difference attributed to the discounting of reserves.     To accept

the Tax Court's construction of "artificial" would mean that the

Conference Committee intentionally contradicted itself one

sentence later.

          In light of the above discussion, we cannot say that

Treas. Reg. § 1.846-3(c)(3) is inconsistent with Congress'

intent, as evidenced by the Conference report.     Accordingly, we

find that Treas. Reg. § 1.846-3(c) meets the second prong of the

Chevron test and, thus, constitutes a valid interpretation of
section 1023(e)(3)(B).

          The taxpayer makes several arguments12 suggesting that

the application of the Treasury regulation will cause anomalous

12.       The taxpayer further contends that despite numerous
comments during the promulgation process as to the proposed
regulation's infirmities, the Commissioner went forward in
adopting a mechanical test for determining the amount of reserve
strengthening. In particular, the taxpayer takes issue with the
test's reserve-by-reserve approach as opposed to a claim-by-claim
calculation. The Conference Report, however, supports a reserve-

                                22
results.   These involve unrealistic assumptions about the size

and number of claims.   We agree with the Commissioner that, to

the extent the mechanical test is flawed, the taxpayer should

seek relief from Congress and not the courts.    "Judges cannot

override the specific policy judgments made by Congress in

enacting the statutory provisions with which we are here

concerned."   United States v. Sotelo, 436 U.S. 268, 279 (1978).

We must not focus on the Act's policy, but rather, on what

Congress intended in enacting the statute.13    Id. at 280.

           The Treasury Department considered proposed

alternatives to Treas. Reg. § 1.846-3 but ultimately concluded

that the interpretation was consistent with Congress' intent.      As

the Supreme Court observed in United States v. Correll, 389 U.S.

299, 306-07 (1967):
Alternatives to the Commissioner's . . . rule are of
          course available. Improvements might be
          imagined. But we do not sit as a committee
          of revision to perfect the administration of
          the tax laws. Congress has delegated to the
          Commissioner, not to the courts, the task of
          prescribing "all needful rules and
          regulations for the enforcement" of the
(..continued)
by-reserve approach ("all additions to reserves attributable to
an increase in an estimate of a reserve established for a prior
accident year.")(emphasis added).

13.       We agree with the Commissioner that the regulation need
not provide the "perfect solution in every case to be valid."
Indeed, in Mourning v. Family Publications Services, Inc., 411
U.S. 356, 371 (1973), the Court held the fact that another
remedial provision might be preferred irrelevant to determining
whether the agency overstepped its authority. The Court stated:
 "We have consistently held that where reasonable minds may
differ as to which of several remedial measures should be chosen,
courts should defer to the informed experience and judgment of
the agency to whom Congress delegated appropriate authority."
Id. at 371-72 (citations omitted).

                                23
          Internal Revenue Code. In this area of
          limitless factual variations, "it is the
          province of Congress and the Commissioner,
          not the courts, to make the appropriate
          adjustments." The role of the judiciary in
          cases of this sort begins and ends with
          assuring that the Commissioner's regulations
          fall within his authority to implement the
          congressional mandate in some reasonable
          manner.

(footnote and citation omitted).    Because Treas. Reg. § 1.846-

3(c) implements the intent of Congress in some reasonable manner,

the Tax Court erred in holding that the regulation was invalid.

                               V.

          For the reasons set forth above, we will reverse the

decision of the Tax Court.

_________________________

TO THE CLERK:

          Please file the foregoing opinion.

                               _____________________________
                                   Circuit Judge

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