Atlantic Mutual Insurance Company v. Commissioner of Internal Revenue

PETITIONER: Atlantic Mutual Insurance Company
RESPONDENT: Commissioner of Internal Revenue
LOCATION: National Endowment for the Arts

DOCKET NO.: 97-147
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 523 US 382 (1998)
ARGUED: Mar 02, 1998
DECIDED: Apr 21, 1998

George R. Abramowitz - for Petitioner
Kent L. Jones - for Respondent

Facts of the case

The Internal Revenue Code allowed property and casualty insurers to fully deduct "loss reserves," or unpaid losses. The Tax Reform Act of 1986 altered the deduction formula. Under the Act, increases in loss reserves that constitute "reserve strengthening," or additions to the loss reserve, were excepted from a one time tax benefit because it would result in a tax deficiency. Treasury regulation and the Commissioner of Internal Revenue interpreted the law to say that any increase in loss reserves constituted reserve strengthening. The Commissioner then determined Atlantic Mutual Insurance Company had engaged in reserve strengthening. The Tax Court disagreed with the government's interpretation. It held reserve strengthening referred only to increases resulting from computational methods. The Court of Appeals reversed the decision. It held reserve strengthening to encompass any increase in loss reserves.


Is the government's interpretation of reserve strengthening correct in determining property and casualty insurers' liability?

Media for Atlantic Mutual Insurance Company v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument - March 02, 1998 in Atlantic Mutual Insurance Company v. Commissioner of Internal Revenue

William H. Rehnquist:

We'll hear argument next in Number 97-147, Atlantic Mutual Insurance Company v. Commissioner of Internal Revenue.

Mr. Abramowitz, you may proceed whenever you're ready.

George R. Abramowitz:

Mr. Chief Justice, and may it please the Court--

The setting for this statutory interpretation case is, alas, subchapter L of the Internal Revenue Code, which contains, as this Court has recognized, highly specialized, carefully crafted rules for determining the taxable income of insurance companies.

The petitioner's position in this case is straightforward and very simply stated.

In connection with a transition rule that Congress adopted in 1986 with respect to a change in the taxations methodology for unpaid losses of insurance companies, it provided fresh start relief, a very favorable provision, but excluded from that fresh start relief reserve strengthening.

Reserve strengthening was the term of art that Congress used in the statute.

Reserve strengthening had, in 1986, a decades old meaning in insurance tax law.

Ruth Bader Ginsburg:

But isn't that a disputed point?

I mean, the Government tells us it didn't, and said we have witnesses to say it didn't have.

George R. Abramowitz:

The... I... it's unclear, actually, Justice Ginsburg, the extent to which the Government disputes the history of the meaning of reserve strengthening in insurance tax law.

In this case below and in the Western National case the Government conceded that the term, reserve strengthening had a clear meaning in the context of life insurance taxation.

It disputed whether the meaning was clear in the context of property and casualty tax--

Ruth Bader Ginsburg:

Which is what we're talking about here, and they had two witnesses to say in property and casualty, at least, the meaning is not a term of art.

There are multiple meanings.


George R. Abramowitz:

--The Government--

Ruth Bader Ginsburg:

--I'm just bringing that up to say that it isn't... can't be clear that it is a term of art in the kind of insurance we're talking about.

George R. Abramowitz:

--In the context of this case it is petitioner's position that the term, reserve strengthening, was a tax term of art, that Congress knew precisely what the term meant when it used it, that in fact the distinction between life insurance and property casualty insurance in this context is really not at all relevant.

The... subchapter L of the Internal Revenue Code covers both types of companies.

This provision applied to both... it's been loosely called a provision that applies to property and casualty companies but, in fact, it applies to both life insurance companies and property and casualty companies and, indeed, the difference between life and... what we're calling life insurance companies and property casualty companies really, in subchapter L of the Internal Revenue Code, is only a question of the relationship between the amount of reserves they hold to qualify as life insurance reserves and the amount of reserves they hold that are--

Sandra Day O'Connor:

Well, what are the differences in reserve accounting between the life insurance and the property and casualty insurance businesses?

George R. Abramowitz:

--Insofar as relevant to this case, Justice O'Connor, there are none.

There are differences, because obviously a life insurance policy covers one sort of risk and a property casualty insurance policy covers a different sort of risk.

Stephen G. Breyer:

Well, I thought there was a big difference.

I thought the difference with life insurance is, if I sell a policy today and I take the income in and I'm going to have to pay it out in 30 years, I use a bunch of statistical tables that tell me people's life expectancy.

If I'm in the casualty business, at the end of the year in which I've received the premium I have to make what I'd call an educated guess about how many tornadoes... there were some tornadoes, but I mean, how many houses actually were flattened and how many people are out there with television sets that they haven't put their property claim in yet, and there aren't some tables I can go to.

I thought people sit there and they make educated guesses about to what extent the policy that was sold in year one is going to result in a claim for that year that I'll have to pay out in year 10.

I thought that's quite a big difference, so that seemed to me difference one, and difference two is that you had a sentence in the bill that would... they have a sentence in the bill that says, in the life insurance case, you know, strengthening is... does not... you know the sentence I'm referring to.

It's right there.