Court Opinion

ID: 2965051
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:34:35.775201+00
Date Added: 2024-06-11T11:37:26.062647
License: Public Domain

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