CHARGE TO PSA FOR DISTRIBUTION TO SHAREHOLDERS IS BASED ON FAIR MARKET VALUE, NOT ADJUSTED TAX BASIS.

            UNITED STATES DISTRICT COURT FOR THE NORTHERN

DISCUSSION

I. STANDARD

[2] Rule 56(c) of the Federal Rules of Civil Procedure allows us to grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." In considering the evidence submitted by the parties, we do not weigh it or determine the truth of asserted matters. Anderson v. Liberty Lobby, Inc., 477 US. 242, 249, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). We are to view all facts and draw all reasonable inferences in the light most favorable to the non-moving party. Transamerica Ins. Co. v. South, 975 F.2d 321, 327 (7th Cir. 1992). Here, the parties have stipulated to the facts necessary to resolve these motions.

[3] Bankers Life has brought each of its three counts, for refunds for tax years 1980, 1983, and 1984, on entirely separate legal grounds. In addition, each presents a different factual scenario. Therefore, we address the facts and the legal issues for each count separately.

II. SETTLEMENT OF THE GOLBAR LITIGATION (COUNT I)

A. FACTS

[4] On or about March 10, 1971, Bankers Life and fourteen other lenders (collectively, the "lenders") entered into a standby "takeout" commitment (the "commitment") with Golbar Properties, Inc. ("Golbar"), to loan Golbar or its assignee as permanent financing a total of $45,000,000 upon the completion by Golbar of the construction of a forty-four story office building in New York City. (Stip. Facts, P 8.) Bankers Life's portion of the loan commitment was $5,000,000. (Id.) Golbar was to use the commitment to obtain from Citibank N.A. a construction loan to finance the construction of the building. (Id.) In October 1974, the lenders, including Bankers Life, refused to fund the loan on the grounds that Golbar had failed to perform certain conditions precedent specified in the commitment agreement. (See id., P 9.)

[5] In November 1974, Golbar sued the lenders, including Bankers Life, in the New York state courts over their refusal to fund the loan. (Id., P 10.) Bankers Life, among others, filed a counterclaim. (Id., P 11.) On October 24, 1979, the court entered a money judgment in the amount of $6,495,000 in favor of Citibank N.A. (added as a plaintiff as Golbar's assignee) and against Bankers Life and the other lenders. (Id., PP 12, 13.) The court also dismissed the counterclaim. (Id., P 14.) On or about June 30, 1980, while the judgment was on appeal, Bankers Life settled the case for $4,545,455, which was just over ninety percent of its original loan commitment. (Id., P 15; Stip. Fact Ex. 5, P 1.) As part of the settlement, Bankers Life received a release from Citibank and the other plaintiffs in the litigation, while it dismissed its counterclaim with prejudice and withdrew its appeal. (Id., P 26; Stip. Fact Ex. 5.)

[6] Bankers Life filed its consolidated corporate federal income tax return (Form 1120L) for tax year 1980 with the Internal Revenue Service ("IRS") on or about September 15, 1981. (Id., P 17.) On its return, it claimed the entire settlement payment in the investment yield category on Schedule A, line 9, as an investment expense item. (Id., P 18.) When the IRS audited Bankers Life's 1980 return, the agent treated the settlement payment as belonging in the gain or loss from operations category on Schedule E, line 19, as an other deductions item. (Id., P 19.) The IRS Appeals Office ultimately agreed to allow $1,326,291 of the settlement payment as an interest expense deduction, but the balance of $3,219,164 was reclassified as an "other deduction" under section 809(d)(1) of the Internal Revenue Code. (Id., P 20.) This resulted in an increase in Bankers Life's federal income tax for tax year 1980, which was assessed on November 28, 1988. (Id.) Bankers Life paid the additional assessed tax on or before December 5, 1988. (Id., P21.)

[7] On May 26, 1989, Bankers Life filed two refund claims, amending its 1980 tax return, for refund of the additional assessed tax. (Id., P 22.) In one of the refund claims, Bankers Life sought claimed the $3,219,164 as a capital loss. (Id.) In January 1993, the IRS disallowed the entire refund claim. (Id., P 23.)

[8] Bankers Life, never discouraged, tried again to get a favorable tax treatment of the Golbar settlement expense. It filed a claim for refund of federal income tax for tax year 1983 (the "1983 refund claim") on about December 30, 1991. (Id., P 28.) In the 1983 refund claim, it included an amended 1983 tax return which reflected, among other changes, a claim for refund of the $3,219,164 paid in settlement of the Golbar litigation as a capital loss carryforward for the 1983 tax year. (Id., P 29.) On or before January 29, 1993, the IRS disallowed the 1983 refund claim. (Id., P 31.)

[9] At issue then in Count I is the proper tax treatment of $3,219,164 paid in settlement of the Golbar litigation. If that amount is treated as a capital loss carryforward, then Bankers Life overpaid its 1983 federal income tax. The parties have not agreed on the amount of the refund if Bankers Life is successful on this claim, but Bankers Life asserts that it would be approximately $900,000 to $1,600,000.

B. ANALYSIS

[10] Bankers Life asserts that the $3,219,164 should be treated as a capital loss carryforward for two reasons. First, it argues that its interest in the Golbar contract was an interest in an executory contract which should properly be treated for tax purposes as a capital asset. It reasons that the mutual releases given as part of the settlement, together with the payment by Bankers Life, constituted the equivalent of a sale or exchange of a capital asset from Bankers Life's standpoint. ¹ Alternatively, it contends that then-applicable section 1232 of the Tax Code should apply to the settlement. Section 1232 provided that an amount received on the retirement of an evidence of indebtedness of a corporation was to be treated as an amount received in an exchange. Thus, according to Bankers Life, the settlement transaction gave rise to a capital loss because the "bottom line effect" of settlement was the same as if Bankers Life had made a cash transfer of the loan commitment amount followed by its acceptance of only a partial repayment, accompanied by the parties' mutual releases -- a truly ingenious argument.

[11] The government remains unimpressed, arguing that to determine the characterization of the payment, the "origin of the claim" test requires that we examine the pleadings, other court papers, and settlement documents to determine the nature of the settlement payment. It contends the documents show that the settlement payment did not consist of the sale or exchange of a capital asset at a loss. First, it asserts that Bankers Life cannot be said to have had a capital asset or even property within section 1221 of the Tax Code because it did not have any rights or "bundle of rights" to enforce based upon its breach of the commitment which gave rise to the Golbar litigation. Second, it argues that the release of Bankers Life's obligation did not amount to a sale or exchange because Bankers Life did not receive anything besides the release; rather, the settlement payment was merely the satisfaction of a disputed obligation.

[12] The fundamental issue is whether the loss resulting from the settlement was a capital or an ordinary loss. As the taxpayer seeking a refund, Bankers Life has the burden of proof. Heublein, Inc. v. United States, 996 F.2d 1455, 1461 (2d Cir. 1993) (in refund suit, taxpayer has burden of proving overpayment of tax and amount of refund). Bankers Life has not met its burden. Its first premise -- that its loan commitment to Golbar was an executory contract that constituted a capital asset -- may well be correct, but it has no bearing on the issue here. We recognize that Bankers Life was to receive, pursuant to the commitment, rights to an interest in the building in exchange for loaning the $5,000,000. However, it does not follow from this that any transaction relating to the commitment, regardless of its nature, therefore constitutes a capital gain or loss for tax purposes. Rather, the proper characterization of a particular transaction, such as the one which occurred here, depends upon the facts behind it.

[13] In order for Bankers Life to prevail on this argument, not only must the commitment be properly characterized as a capital asset of Bankers Life, but its settlement of the Golbar litigation must have involved a release of its own rights which constituted a sale or exchange of the capital asset. But, Bankers Life did not settle on the original loan commitment; it settled on the money judgment awarded to Citibank N.A. in the litigation, as the settlement papers make clear. (Stip. Fact Ex. 5.) The money judgment extinguished Bankers Life's rights under the commitment agreement, and it constituted a debt or obligation of Bankers Life, not a capital asset. The cases of Meisels v. United States, 732 F.2d 132 (Fed. Cir. 1984), and Turzillo v. United States, 346 F.2d 884 (6th Cir. 1965), upon which Bankers Life principally relies, are inapposite, for neither involved settlement on a money judgment. In addition, as the government notes, to be a capital loss, Bankers Life must have sold or exchanged a capital asset resulting in a loss. But, in settling the Golbar litigation, Bankers Life in effect purchased a release of its disputed obligations under the commitment; it did not sell anything. If Bankers Life had funded the loan commitment as promised but had not received any interest in the building in return, and had then settled with Citibank N.A., the settlement might have been a capital loss. But that did not happen here.

[14] Bankers Life's second contention, that section 1232 requires that the loss be treated as a capital loss, is equally farfetched. Its "bottom line analysis" posits the tax treatment of a hypothetical transaction, not the one which actually occurred. Bankers Life did not shell out the original $5,000,000 loan as it bad committed, and it did not accept only a partial repayment. What it did was renege on the loan commitment and settle for a portion of that amount only after it had been hit with a money judgment greater than the value of the loan commitment. It has cited us no authority for the proposition that, regardless of the means used (i.e., the taxpayer's actual conduct), the tax treatment of this transaction should be determined solely on the basis of the ends achieved.

[15] The government has established that it properly refused to treat the settlement payment of $3,219,164 as a capital loss. Therefore, we grant the government's motion for summary judgment and deny Bankers Life's motion for summary judgment on Count I.

III. DISTRIBUTIONS TO THE FOUNDATION (COUNT II)

A. FACTS

[16] The Life Insurance Company Income Tax Act of 1959 established a three phase tax system for life insurance companies, which remained in effect until the statute was repealed in 1983. See generally Subchapter L of Internal Revenue Code of 1954 ("I.R.C."). Under this system, "Phase I" taxable income was the lesser of the life insurance company's taxable investment income or its gain from operations, which was roughly the sum of taxable investment income plus underwriting gain. I.R.C. section 802(b)(1). "Phase II" taxable income was one half the amount by which the gain from operations exceeded taxable investment income. I.R.C. section 802(b)(2). Finally, "Phase III" tax was imposed on the remaining one half of the amount by which the gain from operations exceeded taxable investment income; however, tax on this amount was deferred by being credited for tax purposes to a tax return memorandum account called the "policyholders surplus account" (the "PSA"). I.R.C. section 802(b)(3). This excluded income was subject to taxation upon eventual distribution to the shareholders, at which time the company's Phase III tax obligation arose. See I.R.C. section 802(a)(1), 802(b)(3).

[17] A life insurance company was also required to maintain for tax purposes another tax return memorandum account, the "shareholders surplus account" (the "SSA"). I.R.C. section 815(b). The SSA was essentially an accumulated after-tax earnings account, which reflected accumulated after-tax investment income and the accumulated after-tax portion of the one half of underwriting gain that had previously been taxed. See id. Distributions during a year to shareholders were first subtracted from the SSA, and then, to the extent of any excess, were subtracted from the PSA. I.R.C. section 815(a). The subtraction from the PSA released into taxable income some or all of the previously untaxed income held in the PSA and triggered the "Phase III" tax. I.R.C. section 802(b)(3).

[18] At the time of the death of John D. MacArthur on January 6, 1978, his Trust No. 1 held all of the capital stock of Bankers Life. ² (Stip. Facts, PP 34, 35.) Pursuant to the terms of the trust agreement, that stock was required to be distributed to The John D. and Catherine T. MacArthur Foundation (the "Foundation"). (Id., P 35.) This was accomplished on December 1, 1978. (Id., P36.)

[19] The Foundation, as a private foundation, was subject to limitations relating to its holdings in a business corporation's stock. (Id., P 37.) Under then-applicable Section 4943(c)(6) of the Internal Revenue Code, it was required to divest itself of no less than eighty percent of the Bankers Life capital stock within five years, or, in other words, on or before November 30, 1983. (Id.) On November 30, 1984, the Foundation obtained an additional five years in which to meet the divestiture requirements. (Id., P 43.)

[20] On September 3, 1982, the Bankers Life board adopted a plan of partial liquidation under which, during 1983, Bankers Life would distribute to the Foundation a large number of real estate holdings held by Bankers Life and its non-life insurance company subsidiaries. (Id., P 44.) Six days later, the Foundation board ratified Bankers Life's adoption of the plan of partial liquidation. (Id., P 45.)

[21] On March 25, 1982, a request for a ruling as to certain federal income tax consequences of the implementation of the plan of partial liquidation was submitted to the IRS. (Id., P 47.) The IRS issued its ruling on July 10, 1985, in Letter Ruling 8540070. (Id.) In addition, because for state law insurance purposes the plan of partial liquidation involved payment to the Foundation by Bankers Life of an "extraordinary dividend" as defined in the Illinois Insurance Code, by letter of November 23, 1983, Bankers Life sought authorization for such extraordinary dividend from the Illinois Department of Insurance (the "Department"). (Id., P 48.) The Department approved the extraordinary dividend on December 30, 1983. (Id., P49.)

[22] Bankers Life made the non-cash distributions of real estate and real estate-related assets to the Foundation pursuant to the plan of partial liquidation during calendar year 1983. (Id., P 50.) It filed its consolidated corporate federal income tax return (Form 1120L) for tax year 1983 with the IRS on or before September 17, 1984. (Id., P 51.) Pursuant to that return, it paid federal income tax in the amount of $95,923,210. (Id., P 52.)

[23] With respect to its 1983 taxable year, Bankers Life had an SSA of $241,014,695 and a PSA of $154,434,319. (Id., PP 59, 60.) In its 1983 return, in accordance with section 1.815-2(b)(3) of the Treasury Regulations, it reported the distributions to the Foundation on the basis of the fair market value of the assets distributed, which was in excess of $875,000,000, in computing the subtractions from its SSA and PSA. (Id., PP 56, 62.) Because the fair market value of the assets distributed exceeded the amount in its SSA, the excess was subtracted from its PSA. (Id., P 65.) As a consequence, Bankers Life had to report additional taxable income for 1983 in the amount of $154,434,319, which resulted in a Phase III tax of $71,039,787. (Id., P 57.) Bankers Life paid this tax with its 1983 return. (Id., P 58.)

[24] Bankers Life filed a claim for refund for tax year 1983 in the amount of $72,324,865, plus interest (the "1983 refund claim"), on or before December 30, 1991. (Id., PP 28, 68.) Of the total refund sought, $70,750,058 represented the Phase III tax it had paid as a result of the 1983 distribution of the non-cash assets, less subsequent adjustments, plus interest. (Id., P 69.) In the 1983 refund claim, Bankers Life contended that section 1.815-2(b)(3) of the Treasury Regulations was invalid and that the non-cash distributions to the Foundation should have been measured by their adjusted tax basis for purposes of determining the amounts to be subtracted from its SSA and PSA. (Id., P 70.) The adjusted tax basis of the non-cash distributions was $209,650,747. (Id., P 61.) If the non-cash distributions had been measured by their adjusted tax basis, then Bankers Life would have owed no Phase III tax in 1983. (Id., PP 64, 70.) The IRS disallowed the full amount of the 1983 refund claim on or before January 29, 1993. (Id., P71.)

B. ANALYSIS

[25] Bankers Life contends that it is entitled a refund in the amount of $70,750,058 in Phase III income tax it paid for the taxable year ending December 31, 1983, on the ground that Treasury Regulation section 1.815-2(b)(3) is invalid. It argues that the regulation improperly requires that, in charging distributions to shareholders against its SSA and PSA, the amount to be charged is based on the fair market value, rather than on the adjusted after tax basis, of the property distributed. According to Bankers Life, use of the fair market value improperly included unrealized appreciation.

[26] Before we examine the regulation in question, we consider our standard of review. Generally, Treasury regulations are entitled to great deference and must be sustained unless unreasonable and plainly inconsistent with the revenue statutes. Commissioner v. Portland Cement Company of Utah, 450 U.S. 156, 169, 67 L. Ed. 2d 140, 101 S. Ct. 1037 (1981). They must be upheld as long as they are found to "implement the congressional mandate in some reasonable manner." United States v. Cartwright, 411 U.S. 546, 660, 36 L. Ed. 2d 528, 93 S. Ct. 1713 (1973). The precise standard applicable to a given regulation is determined by the source of the authority for the regulation, which is one of two things. The source may be section 7805(a) of the Tax Code, which allows the Commissioner of the Internal Revenue Service to "prescribe all needful rules and regulations for the enforcement of this title," I.R.C. section 7805(a), or else it may be specific statutory grant of authority. Gehl Co. v. Commissioner, 795 F.2d 1324, 1328 (7th Cir 1986). The former is called an "interpretative" regulation, and it is entitled to deference as a reasonable interpretation of the congressional mandate to the extent that "it harmonizes with the statute's language, origin, and purpose." Id. at 1329. A regulation is harmonious with a statute's language even if "the statutory language will support a contrary interpretation." Id. (quoting United States v. Vogel Fertilizer Co., 455 U.S. 16, 26, 70 L.Ed. 2d 792, 102 S. Ct. 821 (1982)). The latter type of regulation is a "legislative" regulation, and it is entitled to greater deference than an interpretative one. Id. at 1238.

[27] The parties do not dispute that the regulation at issue, section 1.815-2(b)(3), is interpretative. The regulation states, in pertinent part,

     Except in the case of a distribution in cash and as otherwise

[28] Bankers Life raises five arguments in support of its position. First, it contends that the underlying Internal Revenue Code provisions, section 815(a)(1) and section 815(b)(3)(A), provide that a distribution must be "out of" the SSA in order to be a reduction from the SSA. However, the unrealized appreciation element in the assets distributed in 1983 was not reflected in the SSA immediately prior to the distribution, and the distribution was not a taxable event which would have required that the unrealized appreciation be added to the SSA. Therefore, according to Bankers Life, the unrealized appreciation was not a distribution "out of" the SSA.

[29] Second, Bankers Life asserts that, under basic tax accounting principles, credits and debits to a tax account must be based on the same measure. Under the statutory rules, amounts credited to the SSA are measured on an adjusted tax basis, so that, absent evidence that Congress intended otherwise, amounts debited from the SSA must be measured on the same basis. But, the regulation improperly measures the amount to be debited from the SSA by its fair market value instead.

[30] Third, Bankers Life argues that the Internal Revenue Code requires that distributions be charged last to the PSA (and first to the SSA). In this case, even after the distribution at issue, Bankers Life still held assets corresponding to the amount in its PSA, so that no part of the PSA can be deemed to have been distributed.

[31] Fourth, Bankers Life asserts that it was Congress' intent that the Life Insurance Company Income Tax Act of 1959 would not affect the general rules of taxation except as specifically mandated by the statute. However, according to Bankers Life, the fair market value rule of section 1.815-2(b)(3) results in a substantial taxable gain which would otherwise not have resulted from the distribution under the then applicable tax laws.

[32] Lastly, Bankers Life contends that the fair market value rule is inconsistent with the rules applicable to other tax areas in 1983 relating to the treatment of property distributions from the standpoint of the distributing corporation, which required that the property distributions be measured by adjusted tax basis. But, it argues, there is no evidence that Congress intended that the rule under section 815 of the Internal Revenue Code to be different from the prevailing rule in other areas of the Code.

[33] The government defends Treas. Reg. section 1.815-2(b)(3) on several grounds, of which we address only a few. First, it contends that the regulation is valid as a reasonable interpretation of the statute because the fair market value rule is consistent with the "amount" language of section 815 (which section, the government notes, says nothing about adjusted tax basis). Moreover, section 815 requires that a distribution to shareholders "shall be treated as" out of the SSA first and the PSA last, not that the distribution actually comes from assets held in those accounts, which do not hold assets at all. Furthermore, it argues, the regulation is consistent with the purpose behind the three phase income tax for life insurance companies, as set forth in the legislative history. According to the government, under the Life Insurance Company Income Tax Act of 1959, Congress viewed the tax deferral mechanism of Phases II and III as justified by the difficulty, due to the long-term nature of life insurance contracts, in ascertaining the underwriting income of a life insurance company on an annual basis. Accordingly, Congress provided that the income tax be deferred on half of what was apparently underwriting income in any particular year. This tax deferral provided a cushion for the long-term contingencies allegedly inherent in the life insurance business. Consequently,

     when a life insurance company . . . distribute[s] dividends to

[34] Additionally, the government argues that Bankers Life's contentions are based upon a fundamental mischaracterization of the nature of the SSA and the PSA. Those accounts, its argues, do not hold any assets; they are merely tax return memoranda accounts which record, in the instance of the SSA, the amount of income on which tax has already been paid and, in the instance of the PSA, the amount of income upon which tax has been deferred. See 1959 Act S. Rep. No. 291, 86th Cong., 1st Sess. at 13, reprinted in 1959-2 C.B. 770, 788- 89. Thus, there is nothing unreasonable about Treas. Reg. section 1.815-2(b)(3), which measures the amount charged to the SSA and the PSA by the fair market value of the assets distributed. And, according to the government, it is immaterial that the unrealized appreciation on the distributed assets was never "in" the SSA, because Bankers Life was not taxed on the unrealized appreciation, only on the amount charged against its PSA. On the same basis, the government argues that there is no merit to Bankers Life's contention that amounts "credited" to the SSA are held on an adjusted tax basis, because the SSA does not hold assets at all.

[35] The government responds to Bankers life's third contention by noting that it is nothing more than another possible interpretation of the regulation. But, the government points out, the choice among reasonable interpretations of the regulations lies with the Secretary of the Treasury, not with Bankers Life or this Court. ³ Hence, unless Bankers Life shows that the Secretary's interpretation is unreasonable, we must defer to it.

[36] We do not address the government's responses to Bankers Life's fourth and fifth contentions because we need not reach them to resolve the issue before us. We agree with the government that, however meritorious or reasonable Bankers Life's contentions may be, Bankers Life has failed to meet its burden of showing that section 1.815-2(b)(3) is invalid. ⁴ Many of Bankers Life's contentions are founded upon a mischaracterization of the SSA and the PSA as asset holding accounts rather than tax return memoranda accounts. As a consequence, these contentions do not establish either that the regulation at issue is unreasonable and plainly inconsistent with the revenue statutes or that it is not a reasonable interpretation of the congressional mandate in harmony with the statute's language, origin, and purpose. Rather, the government has adequately demonstrated that, given the unique treatment of income tax issues for life insurance companies under the Life Insurance Company Income Tax Act of 1959, the fair market rule in section 1.815-2(b)(3) is reasonable and harmonizes with the language, origin and purpose of section 815. Therefore, we grant the government's motion for summary judgment and deny Bankers Life's motion for summary judgment on Count II.

IV. THE SECTION 338 ELECTION (COUNT III)

A. FACTS

[37] As of January 1, 1984, the Foundation continued to own all of the capital stock of Bankers Life. (Stip. Facts, P 73.) At that time, Bankers Life's assets consisted primarily of assets used in its insurance operations and certain real estate interests which had not been distributed pursuant to the plan of partial liquidation. (Id., P 74.)

[38] On May 10, 1984, the Foundation executed a stock purchase agreement with ICH Corporation ("ICH"), pursuant to which the Foundation sold all of the capital stock of Bankers Life to ICH. (Id., P 75.) The sale closed on October 30, 1984. (Id., P 79.)

[39] On July 11, 1986, ICH filed with the IRS an election under section 338(g) of the Internal Revenue Code. (Id., P 80.) ICH listed Bankers Life and each of Bankers Life's life insurance company subsidiaries as includable target corporations in this election. (Id., P 80.) As a result of the election, the taxable year of Bankers Life and its subsidiaries ended as of October 30, 1984. (Id., P 81.)

[40] On or before September 16, 1985, Bankers Life filed its consolidated corporate federal income tax return (Form 1120L) for the short tax period ending October 30, 1984. (Id., P 82.) At the same time, Bankers Life paid federal income tax in the amount of $20,119,900 pursuant to that return. (Id., P 83.) It filed its consolidated corporate federal income tax return for its seven life insurance company subsidiaries. (Id., P 84.) As a result of the section 338 election by ICH, Bankers Life reported on its 1984 short period tax return additional taxable income pursuant to section 815(a)(2) of the Internal Revenue Code in the amount of $38,705,072, resulting in a federal income tax of $17,804,319. (Id., P 86.) Bankers life paid that tax when it filed its return. (Id., P 87.)

[41] On or before December 30, 1991, Banker Life filed a Form 1120X claim with the IRS for refund of federal income tax for the short tax period ended October 30, 1984, in the amount of $17,889,639, representing the 1984 federal income tax it paid which was attributable to the aggregate amount of the PSAs of its life insurance company subsidiaries, as adjusted by the appeals settlement, plus interest (the "1984 refund claim"). (Id., P 88.) On or before January 29, 1993, the IRS disallowed the full amount of the 1984 refund claim. (Id., P 89.)

B. ANALYSIS

[42] Before we reach the issues raised by Bankers Life in support of their refund claim, we consider the applicable statutory scheme. In the Tax Reform Act of 1984, Congress largely did away with the three phase tax scheme for life insurance companies. However, for life insurance companies which retained balances in their PSAs, direct or indirect distributions to shareholders from their PSAs still triggered Phase III tax liability under revised section 815 of the Internal Revenue Code. In other words,

          In general the [1984 Act] eliminates any further deferral

     For purposes of this subtitle, if a purchasing corporation makes

[44] In this case, ICH made a section 338 election with respect to both Bankers Life and its subsidiaries, and it thus obtained a step-up in basis of both Bankers Life's and the subsidiaries' assets. Consequently, Bankers Life's seven life insurance company subsidiaries were treated as having sold all of their assets in a complete liquidation pursuant to section 338(a)(1). For income tax purposes, then, ICH's section 338 election resulted in an indirect distribution which triggered the Phase III tax.

[45] Bankers Life asserts that ICH's section 338 election should not have been treated as a distribution to shareholders from the SSAs and PSAs of Bankers Life's seven subsidiaries under section 815 so as to trigger Phase III tax on those amounts. It argues that in fact none of the seven subsidiaries made any direct or indirect distribution to their shareholders. Therefore, it argues, it is entitled to a refund of the Phase III tax it paid based on the alleged distributions.

[46] The governments makes two responses. First, it asserts that Congress' reference to the Union Bankers Ins. Co. case in the House report is instructive. In that case, the Tax Court held, among other things, the "shall be treated as a distribution" language of I.R.C. section 304(a)(2) caused a constructive distribution from Union Bankers to its controlling shareholder, General Insurance Investment Co. ("General"), when Union Bankers' subsidiary, Bankers Service Life Insurance Co., purchased stock of Union Bankers from General. According to the government, Congress' reference to this case indicates its intent to include constructive distributions under Internal Revenue Code provisions using terms such as "treated as" as distributions within the meaning of section 815 of the 1984 Act. Second, it contends that its interpretation of the "treated as" language is consistent with the legislative intent to "construe broadly" the terms "direct or indirect distributions." Staff of the Joint Committee on Taxation, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Tax Reform Act of 1984 at 594 (1984). And, in this case, the amounts reflected in the seven subsidiaries' PSAs benefited Bankers Life indirectly because the deemed distributions in liquidation and resulting step-up in bases entitled the subsidiaries to substantial future deductions through amortization of intangible "insurance in force" accounts.

[47] We agree with the government that the section 338 election triggered Phase III tax liability because the election required that the seven subsidiaries be considered as having sold their assets in a complete liquidation, thus triggering the distribution requirement of section 815(f). The essence of Bankers Life's argument is that an actual distribution to shareholders from the seven subsidiaries' PSAs must have occurred before Phase III tax liability could be triggered. We fully recognize that no actual distribution to shareholders of the seven subsidiaries took place. But, as the House report on the 1984 Act makes clear, distribution means both actual and constructive distributions. 1984 Act H.R. Rep. No. 423, pt. 2, 98th Cong., 1st Sess., at 1410-11, reprinted in 1984 U.S.C.C.A.N. 697, at 1055. Here, the distribution was constructive, rather than actual. Thus, Bankers Life's argument that no actual distribution occurred misses the mark.

[48] Bankers Life has failed to show that it is entitled to judgment as a matter of law on its 1984 refund claim, while the government has demonstrated that it is. Therefore, we grant the government's motion for summary judgment and deny Bankers Life's motion for summary judgment on Count III.

CONCLUSION

[49] For the forgoing reasons, we grant defendant United States of America's motion for summary judgment and deny plaintiff Bankers Life and Casualty Company's motion for summary judgment on all counts. This order is final and appealable.

ENTER:

² Bankers Life was a stock life insurance company under Subchapter L of the Internal Revenue Code at all relevant times.

³ The government does not concede that Bankers Life's interpretation is reasonable. (Def's Br. at 33.)

⁴ We note for the record that we have not considered the "expert" report of Bruce W. Foudree, submitted by the government, because we consider it both unnecessary to our understanding of the legal issues and inappropriate for consideration on these motions, which we are deciding as a matter of law.