No. 00-157 

In the Supreme Court of the United States 

UNITED DOMINION INDUSTRIES, INC., PETITIONER 

v. 

UNITED STATES OF AMERICA 

ON WRIT OF CERTIORARI 
TO THE UNITED STATES COURT OF APPEALS 
FOR THE FOURTH CIRCUIT 

BRIEF FOR THE UNITED STATES 

BARBARA D. UNDERWOOD 

Acting Solicitor General 

Counsel of Record 

CLAIRE FALLON 

Deputy Assistant Attorney 

General 

LAWRENCE G. WALLACE 

Deputy Solicitor General 

KENT L. JONES 

Assistant to the Solicitor 

General 

RICHARD FARBER 
EDWARD T. PERELMUTER 

Attorneys 

Department of Justice 
Washington, D.C. 20530-0001 
(202) 514-2217 

QUESTION PRESENTED 

A “product liability loss” incurred by a corporation 
may be carried back a maximum of ten years from the 
loss year and used as a deduction in the carryback year. 
26 U.S.C. 172(b)(1)(I) (1988); see 26 U.S.C. 172(b)(1)(C), 
(f ). The question presented in this case is whether, 
under the Treasury regulations that govern the years 
in which this case arose, the availability of the “product 
liability loss” carryback for affiliated entities that file a 
consolidated return is to be determined by (i) 
aggregating the income and expenses of the consoli- 
dated entities or, instead, (ii) separately calculating the 
income and expenses of each entity. 

(I) 

TABLE OF CONTENTS 

Page 

Opinions below ............................................................................... 
1 

Jurisdiction ...................................................................................... 1 

Statutes and regulations .............................................................. 
2 

Statement ........................................................................................ 3 

Summary of argument .................................................................. 
9 

Argument ........................................................................................ 13 

I. None of the individual corporations involved in 

this case incurred a product liability loss within 

the meaning of Section 172 of the Internal Revenue 

Code ................................................................................... 13 

II. When profitable corporations with product liability 

expenses file a consolidated return with affiliates 

that generate losses but have no product liability 

expenses, the resulting consolidated net operating 

loss is not a “product liability loss” under Section 

172(j) of the Code ............................................................ 
19 

A. The consolidated return regulations require 

the accounting for product liability expenses 

to occur first at the separate entity level ........... 

19 

B. Petitioner is not entitled to the product 

liability loss deductions that it claims in this 

case ............................................................................. 29 

Conclusion ....................................................................................... 42 

TABLE OF AUTHORITIES 

Cases: 

Amtel, Inc. v. United States, 31 Fed. Cl. 598 (1994), 

aff ’d, 59 F.3d 181 (Fed. Cir. 1995) ............... 

6, 7, 18, 22, 24, 26 

Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 

(1934) ........................................................................................ 29 

Chrone Plate, Inc., In re, 614 F.2d 990 (5th Cir. 

1980) ......................................................................................... 38-39 

(III) 

IV 

Cases—Continued: Page 

First Chicago NBD Corp. v. Commissioner, 135 

F.3d 457 (7th Cir. 1998) ........................................................ 

30 

Gottesman & Co. v. Commissioner, 77 T.C. 1149 

(1981) ........................................................................................ 39 

H Enters. Int’l, Inc. v. Commissioner, 105 T.C. 71 

(1995) ........................................................................................ 39 

Helvering v. Morgan’s, Inc., 293 U.S. 121 (1934) ............. 

38 

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992) ... 

35 

Intermet Corp. v. Commissioner, 209 F.3d 901 (6th 

Cir. 2000) ............................................................................... 

37, 38 

Interstate Transit Lines v. Commissioner, 319 U.S. 

590 (1943) ................................................................................. 

35 

Lisbon Shops, Inc. v. Koehler, 353 U.S. 382 (1957) .......... 

14 

Moline Props., Inc. v. Commissioner, 319 U.S. 436 

(1943) ........................................................................................ 38 

National Muffler Dealers Ass’n v. United States, 

440 U.S. 472 (1979) ................................................................ 

28 

United States v. Correll, 389 U.S. 299 (1967) ................... 

28 

United States v. Foster Lumber Co., 429 U.S. 32 

(1976) ........................................................................................ 14 

United States v. Moore, 95 U.S. 760 (1878) ....................... 

28 

Woolford Realty Co. v. Rose, 286 U.S. 319 (1932) ... 

12, 13, 24, 

25, 28, 31, 35, 41 

Statutes and regulations: 

Internal Revenue Code (26 U.S.C.) ............................ 

3, 13, 14, 19 

§ 11(a) ...................................................................... 

2, 3, 13, 38 

§ 162 .................................................................................. 

9, 16, 17 

§ 172 .................................................................................... passim 

§ 172(b) ................................................................................... 

23, 28 

§ 172(b)(1)(A) (1988) ......................................... 

3, 14, 17, 18, 19 

§ 172(b)(1)(A) (Supp. IV 1998) ........................................... 

14 

§ 172(b)(1)(B) (1988) ............................................................. 

14 

§ 172(b)(1)(C) ......................................................................... 

3 

§ 172(b)(1)(E) (1994 & Supp. IV 1998) .............................. 

31 

§ 172(b)(1)(I) (1988) ........................................................ 3, 5, 14 

V 

Statutes and regulations—Continued: 

Page 

§ 172(b)(2) .............................................................................. 

14 

§ 172(c) ................................................................................... 

14 

§ 172(f) .................................................................................... 

3, 37 

§ 172(h)(4)(C) (1994 & Supp. IV 1988) .............................. 

31 

§ 172(j) (1988) ............................... 

12, 19, 28, 31, 32, 33, 40, 41 

§ 172(j)(1) (1988) ................................. 

4, 15, 16, 17, 18, 29, 32 

§ 172(j)(2) (1988) ................................................................... 

15, 34 

§ 172(j)(2)(A) (1988) ............................................................. 

29 

§ 247 ........................................................................................ 

22 

§ 860E(a)(2) (1994 & Supp. IV 1988) ................................ 

31 

§ 860J(d) (Supp. IV 1988) .................................................... 

31 

§ 922 ........................................................................................ 

22 

§ 1231 ...................................................................................... 

22 

§ 1501 .................................................................................. 

2, 4, 20 

§ 1502 .................................................................................. passim 

§ 1503(a) ................................................................................. 

20 

§ 1504(a)(1)(A) ...................................................................... 20, 30 

§ 6110(k)(3) (1994 & Supp. IV 1998) ................................. 

36 

§ 7701(a)(1) ............................................................................ 

30 

§ 7701(a)(14) .......................................................................... 

30 

Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 

§ 1082(a)(1)-(2), 111 Stat. 950 ............................................... 

14 

Treas. Reg. (26 C.F.R.): 

Section 1.1502 (1986) ........................................................... 

2 

Section 1.1502-1(e) (1986) ................................................... 

6 

Section 1.1502-6(a) (1986) ................................................... 

30 

Section 1.1502-11 (1986) ...................................................... 

23, 36 

Section 1.1502-11(a) (1986) ................................................. 

21 

Section 1.1502-12 (1986) ............................. 

5, 21, 25, 34, 36, 39 

Section 1.1502-12(a) (1986) ............................................. 

26, 40 

Section 1.1502-12(a)-(n) (1986) ........................................... 

23 

Section 1.1502-12(j) (1986) .................................................. 

22 

Section 1.1502-12(l) (1986) .................................................. 

22 

Section 1.1502-12(q) (1986) ................................................. 

21 

Section 1.1502-21 (1986) ...................................................... 

22, 39 

Section 1.1502-21(a) (1986) ................................................. 23, 33 

VI 

Regulations—Continued: Page 

Section 1.1502-21(b) (1986) ................................................. 

23 

Section 1.1502-21(f) (1986) .................................................. 

23, 27 

Section 1.1502-79 (1986) ...................................................... 

41 

Section 1.1502-79(a) (1986) ................................................. 

25 

Section 1.1502-79(a)(3) (1986) ........................... 

6-7, 8, 26, 41 

Section 1.1502-79A ............................................................. 

24, 28 

Section 1.1502-79A(a)(1) ..................................................... 

25 

Section 1.1502-79A(a)(13) ......................................... 

25, 26, 27 

Section 1.1502-80(a) ........................................ 

2, 37, 38, 39, 40 

Miscellaneous: 

124 Cong. Rec. 34,733 (1978) ................................................... 

15, 32 

56 Fed. Reg. 4229 (1991) .......................................................... 
36 

Priv. Ltr. Rul. 88-16-002 (Dec. 31, 1987) ............................... 
36 

Staff of Joint Comm. on Taxation, 96th Cong., 1st Sess., 

General Explanation of the Revenue Act of 1978 
(H.R. 13511, 95th Cong., Pub. L. No. 95-600) (1979) ....... 
15 

Tech. Adv. Mem. 97-15-002 (Apr. 11, 1997) .......................... 36 

In the Supreme Court of the United States 

No. 00-157 

UNITED DOMINION INDUSTRIES, INC., PETITIONER 

v. 

UNITED STATES OF AMERICA 

ON WRIT OF CERTIORARI 
TO THE UNITED STATES COURT OF APPEALS 
FOR THE FOURTH CIRCUIT 

BRIEF FOR THE UNITED STATES 
OPINIONS BELOW 

The opinion of the court of appeals (Pet. App. 1a-24a) 
is reported at 208 F.3d 452. The opinion of the district 
court (Pet. App. 25a-41a) is unofficially reported at 98-2 
U.S. Tax Cas. (CCH) ¶ 50,527. 

JURISDICTION 

The judgment of the court of appeals was entered on 
March 24, 2000. The petition for rehearing and for 
rehearing en banc was denied on May 19, 2000 (Pet. 
App. 42a). The petition for a writ of certiorari was filed 
on July 28, 2000, and was granted on November 27, 
2000. The jurisdiction of this Court rests upon 28 
U.S.C. 1254(1). 

(1) 

2 

STATUTES AND REGULATIONS INVOLVED 

1. The applicable provisions of Section 172 of the 
Internal Revenue Code, 26 U.S.C. 172 (1988), and of the 
regulations that govern the filing of consolidated re- 
turns for the years 1983 through 1986, 26 C.F.R. 1.1502 
(1986), are set forth at Pet. 1-3 and Pet. App. 43a-59a. 
In addition to the regulations set forth in the petition, 
26 C.F.R. 1.1502-80(a) provides in relevant part: 

The Internal Revenue Code, or other law, shall be 
applicable to the group to the extent the regulations 
do not exclude its application. Thus, for example, in 
a transaction to which section 381(a) applies, the 
acquiring corporation will succeed to the tax 
attributes described in section 381(c). * * * 

2. 26 U.S.C. 11(a) provides: 

A tax is hereby imposed for each taxable year on 
the taxable income of every corporation. 

3. 26 U.S.C. 1501 provides, in relevant part: 

An affiliated group of corporations shall, subject 
to the provisions of this chapter, have the privilege 
of making a consolidated return with respect to the 
income tax imposed by chapter 1 for the taxable 
year in lieu of separate returns. The making of a 
consolidated return shall be upon the condition that 
all corporations which at any time during the 
taxable year have been members of the affiliated 
group consent to all the consolidated return regu- 
lations prescribed under section 1502 prior to the 
last day prescribed by law for the filing of such 
return. The making of a consolidated return shall be 
considered as such consent. * * * 

3 

4. 26 U.S.C. 1502 provides: 

The Secretary shall prescribe such regulations as 
he may deem necessary in order that the tax liabil- 
ity of any affiliated group of corporations making a 
consolidated return and of each corporation in the 
group, both during and after the period of affiliation, 
may be returned, determined, computed, assessed, 
collected, and adjusted, in such manner as clearly to 
reflect the income-tax liability and the various fac- 
tors necessary for the determination of such liabil- 
ity, and in order to prevent avoidance of such tax 
liability. 

STATEMENT 

1. a. The Internal Revenue Code imposes a tax each 
year “on the taxable income of every corporation.” 
26 U.S.C. 11(a). In calculating that tax during the years 
relevant to this suit, a corporation was allowed to 
carry back for a period of three years the amount of 
any “net operating loss” it incurred. 26 U.S.C. 
172(b)(1)(A) (1988). If the corporation incurred a 
“product liability loss,” however, the amount of that 
loss could be carried back a period of ten years from the 
loss year and used as a deduction in the carryback year. 
26 U.S.C. 172(b)(1)(I) (1988).1 The term “product 
liability loss” was defined for this purpose to mean the 
lesser of (i) the “net operating loss for such year” in- 
curred by the corporation or (ii) the deductible ex- 
penses incurred by the corporation that were 

1 The provisions formerly located at Section 172(b)(1)(I) have 
been relocated at Section 172(b)(1)(C), (f ). 

See 26 U.S.C. 

172(b)(1)(C), (f ). Unless otherwise noted, the statutory references 
hereafter set forth in this brief are to the Internal Revenue Code 
as in effect between 1983 and 1986. 

4 

attributable to the satisfaction or defense of product 
liability claims. 26 U.S.C. 172(j)(1). 

b. Petitioner is the successor in interest to the com- 
mon parent of an affiliated group of corporations that 
filed consolidated federal income tax returns for the 
taxable years 1983-1986. Pet. App. 3a. By filing con- 
solidated returns, these corporations “consent[ed] to all 
the consolidated return regulations prescribed under 
section 1502 [of the Internal Revenue Code] prior to the 
last day prescribed by law for the filing of such return.” 
26 U.S.C. 1501. That statute broadly authorizes the 
Secretary to adopt such consolidated return regulations 
as he “may deem necessary in order that the tax 
liability of any affiliated group of corporations making a 
consolidated return and of each corporation in the 
group * * * may be returned, determined, computed, 
assessed, collected, and adjusted, in such manner as 
clearly to reflect the income-tax liability * * * and in 
order to prevent avoidance of such tax liability.” 
26 U.S.C. 1502. 

The affiliated corporations that joined in the consoli- 
dated returns for 1983-1986 included Jesco, Inc., 
Cherry-Burrell Corporation, Amtel, Inc., The Litwin 
Corporation and Litwin Panamerican Corporation, each 
of which incurred product liability expenses during 
these years.2 Pet. App. 3a, 26a. Although petitioner 
reported consolidated net operating losses when com- 
bining all of its affiliated corporations for each of the 
years from 1983 to 1986,3 the affiliates named above 

2 Petitioner formed Cherry-Burrell in 1975. Petitioner ac- 
quired the other corporations at various times after 1976. Pet. 
App. 4a n.5. 

3 Petitioner reported consolidated net operating losses of 
$140,402,175 for 1983, $114,134,256 for 1984, $ 85,521,645 for 1985, 

5 

that had product liability expenses each generated 
positive net income during some or all of these years. 
Id. at 26a-27a.4 The issue in this case is whether the 
product liability expenses incurred by the affiliates that 
had positive separate incomes during these years con- 
stitute “product liability losses” under 26 U.S.C. 
172(b)(1)(I) (emphasis added) that may be carried back 
ten years and deducted from petitioner’s taxable 
income for the years 1973-1976. 

2. The Internal Revenue Service determined that 
the product liability expenses incurred by the affiliates 
that generated a positive separate net income during 
1983-1986 did not give rise to product liability “losses” 

and $101,221,077 for 1986. J.A. 8. The following amounts of pro- 
duct liability expenses were incurred by these affiliates during the 
1983-1986 taxable years (Pet. App. 27a): 

Corporation Product Liability Expenses 

1983 1984 1985 1986 

Jesco $166,042 $1,402,931 $1,292,733 $127,682 

Cherry-Burrell 34,608 192,287 8,642 87,760 

Amtel 0 12,135 13,218 7,549 

Litwin 5,250 0 14,139 8,909 

Panamerican _____19 _____1,987 ____5,056 _____502 

Total $205,919 $1,605,342 $1,333,788 $232,402 

4 Jesco, Cherry-Burrell and Panamerican had positive “sepa- 
rate taxable income” (under 26 C.F.R. 1.1502-12) for each year 
between 1983 and 1986. Pet. App. 27a. Amtel had positive sepa- 
rate taxable income for 1984, 1985 and 1986, and negative separate 
taxable income (of $3,017,912) only for 1983. Ibid. Litwin had posi- 
tive separate taxable income for 1983, 1985 and 1986, and negative 
separate taxable income (of $399,300) only for 1984. Litwin claimed 
$4198 in product liability deductions during 1984, a year in which it 
computed negative separate taxable income. Ibid. As explained at 
note 7, infra, the tax consequences of Litwin’s 1984 deductions are 
not at issue in this case. 

6 

that could be carried back ten years under Section 172. 
Because these affiliates each generated positive 
incomes—rather than “losses”—during those years, no 
“product liability losses” were incurred under the plain 
text of the statute. Pet. App. 28a. 

Petitioner thereafter brought two separate refund 
suits to challenge the Service’s determination. In the 
first suit, which was commenced in the United States 
Court of Federal Claims, petitioner asserted that the 
product liability expenses incurred during 1985 by the 
group of profitable affiliates that petitioner acquired 
after 1976 (see note 2, supra) generated a “product 
liability loss” that could be carried back ten years and 
deducted from the gross income reported on the sepa- 
rate returns filed by those affiliates in 1975.5 Petitioner 
argued that this group of affiliates was entitled to this 
carryback on the theory that “a consolidated group is 
treated as a single entity with respect to the product 
liability loss provisions.” Amtel, Inc. v. United States, 
31 Fed. Cl. 598, 599 (1994), aff ’d, 59 F.3d 181 (Fed. Cir. 
1995) (Table). The Court of Federal Claims rejected 
petitioner’s claim. The court held that petitioner’s 
affiliates “cannot carry back a product liability loss from 
1985 to 1975 because [they] had no net operating loss in 
1985.” 31 Fed. Cl. at 600. Relying on the consolidated 
return regulations adopted by the Treasury under 
Section 1502, the court concluded that these affiliates 
had no “separate net operating loss” (26 C.F.R. 1.1502- 

5 In 1975, Amtel was the common parent of an affiliated group 
of corporations that included Litwin and Panamerican. Those 
corporations were not members of petitioner’s affiliated group in 
that year. The consolidated return regulations accompanying Sec- 
tion 1502 of the Code denominate the 1975 taxable year a “separate 
return year” for Amtel, Litwin and Panamerican. See 26 C.F.R. 

1.1502-1(e). 

7 

79(a)(3)) for 1985 to carry back to their 1975 separate 
return year. 31 Fed. Cl. at 601. Because, as the 
affiliates acknowledged, their “separate net operating 
loss * * * was zero,” the court held that there was no 
product liability “loss” to be carried back. Ibid. 

The Court of Federal Claims expressly rejected peti- 
tioner’s argument that a “consolidated” product liability 
loss occurred merely because other reporting entities 
included on petitioner’s 1985 consolidated return–- 
entities that themselves had no product liability 
expenses—incurred losses that were sufficient to create 
an aggregate net operating loss on the consolidated 
return. The court explained that the governing “regu- 
lations do not use the term ‘consolidated product liabil- 
ity loss’ or incorporate such a concept by directing that 
product liability loss be treated on a consolidated 
basis.” 31 Fed. Cl. at 602. The Federal Circuit affirmed 
the decision of the Court of Federal Claims in an 
unpublished opinion. 59 F.3d 181 (1995) (Table). 

3. After the Federal Circuit issued its opinion in 
Amtel, petitioner filed this second refund suit in the 
United States District Court for the Western District 
of North Carolina. In this second suit, petitioner 
contended that the product liability deductions claimed 
by its affiliates during 1983, 1984, 1985 and 1986 created 
product liability “losses” that could be carried back ten 
years and deducted from petitioner’s consolidated 
taxable income for 1973, 1974, 1975 and 1976.6 The 

6 Those years were all before the date on which these affiliates 
had become part of petitioner’s consolidated group. See note 2, 
supra. 

8 

complaint sought a refund of $1,618,305 plus statutory 
interest. J.A. 15.7 

The district court granted summary judgment to 
petitioner. Pet. App. 25a-41a. The court agreed with 
the argument that the Court of Federal Claims had 
rejected in the Amtel case, and concluded that an 
affiliated group’s product liability “loss” is to be deter- 
mined on a consolidated basis. Id. at 38a-39a.8 The 
district court held that, so long as the consolidated 
return reflects an aggregate net operating loss, the 
product liability expenses incurred by profitable affili- 
ates may be employed to generate “product liability 
losses” that may be carried back and set off against any 
earnings of the consolidated entities for a period of up 
to ten years. Ibid (emphasis added). 

4. The court of appeals reversed. Pet. App. 1a-24a. 
The court concluded that the consolidated return 
regulations “make[] clear * * * that a comparison of 
the group members’ aggregated product liability 
expenses to the consolidated net operating losses in 
order to derive a consolidated ‘product liability loss’ is 
not intended.” Id. at 16a. The court observed that, 
under the consolidated return regulations, “product 

7 The refund claim included the product liability deductions 
claimed by Litwin in 1984. Petitioner conceded in the court of 
appeals, however, that under 26 C.F.R. 1.1502-79(a)(3), Litwin’s 
1984 product liability loss could not be carried back to petitioner’s 
1974 consolidated return year because Litwin was not a member of 
petitioner’s affiliated group in that year. See Pet. App. 4a n.4. 

8 The district court held that the decision in Amtel did not col- 
laterally estop petitioner from asserting, in the context of this case, 
that product liability losses must be accounted for on a 
consolidated basis. Pet. App. 39a-40a. The United States did not 
challenge that collateral estoppel determination in the court of 
appeals, and the issue is not now presented in this case. 

9 

liability expenses are linked to the consolidated net 
operating loss only through their nexus to the group 
member” (ibid.) and “that an interpretation removing 
the close nexus between such expenses and whether 
the affected company operated at a loss is inconsistent 
with the regulations.” Id. at 17a. The court concluded 
“that determining ‘product liability’ loss separately for 
each group member is correct and consistent with the 
regulations.” Ibid. The court explained the proper 
method under the regulations for determining product 
liability loss on a consolidated return (id. at 21a): 

The regulations governing consolidated returns 
provide a simple and direct method for determining 
the portion of a group member’s product liability 
expenses that are “product liability loss.” The 
regulations define a group member’s “separate net 
operating loss,” see Treas. Reg. § 1.1502-79(a)(3), 
which is analogous to an individual’s “net operating 
loss” on a separate return. By comparing each 
member’s product liability expenses to its “separate 
net operating loss,” that member’s “product liability 
loss” may be properly calculated. The parent’s 
“product liability loss” is then calculated as the total 
of the members’ “product liability loss.” 

SUMMARY OF ARGUMENT 

I. Because product liability expenses are often in- 
curred by businesses in an unforeseen and unpredict- 
able manner, Congress has provided a special tax rule 
for losses resulting from such expenses. When a 
taxpayer incurs product liability expenses, it must first 
deduct them in the year they are incurred as “ordinary 
and necessary” business expenses under Section 162 of 
the Internal Revenue Code. If any portion of such 

10 

product liability expenses is not effectively employed as 
deductions in that year—because there is insufficient 
taxable income that year to set them against—then 
that unconsumed portion of those expenses (and only 
that portion) constitutes a “product liability loss” that, 
under Section 172 of the Code, may be carried back as 
many as ten years and be set off against previously 
earned taxable income. 

In the present case, it is undisputed that each of the 
affiliated corporations that incurred product liability 
expenses in the tax years at issue would have reported 
positive net income—rather than a net operating loss— 
for those years if it had filed a separate return that 
reflected its individual operations. Under the plain text 
of the statute, none of these entities would have been 
entitled to a “product liability loss” deduction on a sepa- 
rate return, for none of them incurred a “loss.” Instead, 
each of these profitable entities obtained a full and 
effective current use of its product liability expenses by 
deducting them in the year the expenses were incurred. 

II. Petitioner concedes that its affiliates with pro- 
duct liability expenses had positive separate incomes 
and therefore would not qualify for a “product liability 
loss” carryback as individual corporations. Petitioner 
nonetheless asserts that the fact that these profitable 
affiliates filed a consolidated return with other entities 
—entities that had operating losses but no product 
liability expenses—somehow requires a different result. 
That contention is incorrect because, under the gov- 
erning consolidated return regulations, the product li- 
ability expenses of each affiliate must be netted against 
the income of that affiliate in determining the “separate 
taxable income” of that member of the group. When, as 
in this case, the “separate taxable income” of the 
affiliates with product liability is positive, then all of the 

11 

product liability expenses have been fully utilized in 
reducing taxable income at that level. As a conse- 
quence, there are no unconsumed or unutilized product 
liability expenses—or “product liability losses”—to 
carry to the consolidated level of the group. 

By contrast, under these controlling regulations, if an 
individual affiliate has a negative separate income for 
the current year and unconsumed product liability ex- 
pense deductions for that year, those unutilized product 
liability expenses are properly carried to the consoli- 
dated level. They are then first applied to offset any 
net operating profit from other affiliates at the consoli- 
dated level—thereby providing an immediate tax 
benefit from the deductions. If, after application of 
such deductions, the consolidated entity realizes a 
positive net operating income, then all of the product 
liability expenses have (by definition) been consumed as 
deductions in that year and there is nothing left to 
carry to other years. Alternatively, if a consolidated 
net operating loss results in the current year, then any 
product liability expenses that have not either been 
utilized by the individual entity that incurred them or 
been consumed at the consolidated level may be carried 
back for as many as ten years as “product liability 
losses” for the consolidated entity. On the facts of this 
case, however, all of the product liability expenses 
were fully deducted in determining the separate income 
of the profitable individual affiliates that incurred those 
expenses. There are thus no unutilized deductions, or 
“product liability losses,” in this case. 

Petitioner is incorrect in asserting that, as applied to 
a consolidated group of corporations, the “taxpayer” to 
whom the “product liability loss” provisions apply is 
exclusively the consolidated group. Even though 
separate affiliated taxpayers may join in filing a 

12 

consolidated return, “each of [the] corporations joining 

* * * in a consolidated return is none the less a 
taxpayer.” Woolford Realty Co. v. Rose, 286 U.S. 319, 
328 (1932). The text and history of Section 172(j) both 
make clear that the “taxpayer” referred to in that 
statute is the corporation that has itself incurred pro- 
duct liability expenses and is unable fully to utilize 
them due to an insufficient amount of current income. 
Congress was concerned with smoothing the accounting 
of the income and expenses of the individual entity that 
is liable for product liability expenses. The statute is 
not designed to provide tax benefits for affiliated 
entities that (either by conscious corporate design or by 
historical accident) have kept themselves and their 
assets free from any liability for these expenses. 
Moreover, Congress did not intend to provide any tax 
benefit to a profitable corporation—such as the affili- 
ates involved in this case—even though that corpora- 
tion might have had large product liability expenses. 
When, as here, a profitable corporation employs its 
product liability expense deductions to reduce its net 
income in the current period, there are no remaining 
unused deductions—or “product liability losses”—for it 
to pass to its affiliates on a consolidated return either as 
current deductions or as a carryback to prior years 
under Section 172(j). 

The rule that petitioner advocates would permit sig- 
nificant tax avoidance abuses. Under petitioner’s ap- 
proach, a corporation that is currently unprofitable but 
that had substantial income in prior years could (i) ac- 
quire a profitable corporation with product liability ex- 
pense deductions in the year of acquisition, (ii) file a 
consolidated return and (iii) thereby create an other- 
wise nonexistent “product liability loss” for the new af- 
filiated group that would allow the acquiring corpora- 

13 

tion to claim refunds of the tax it paid in prior years. 
As this Court emphasized in a case that involved a 
similar abuse, “[t]he mind rebels against the notion that 
Congress in permitting a consolidated return was 
willing to foster an opportunity for juggling so facile 
and so obvious.” Woolford Realty Co. v. Rose, 286 U.S. 
at 330. The result advocated by petitioner thus would 
not only contravene the text and intent of the gov- 
erning statute and regulations, it would also defeat the 
directive of Congress that consolidated returns not be 
employed as an artifice for “avoidance of such tax 
liability.” 26 U.S.C. 1502. 

ARGUMENT 

Whether reported on a separate or consolidated 
return, product liability expenses are to be deducted by 
each individual corporation in determining the net 
income attributable to that individual entity. When, as 
in this case, the resulting net income of each individual 
corporation with product liability expenses is positive, 
there are no unused product liability deductions—or 
“product liability losses”—to be carried back and 
deducted from income in prior years under section 172 
of the Internal Revenue Code. 

I. NONE OF THE INDIVIDUAL CORPORATIONS 
INVOLVED IN THIS CASE INCURRED A PRODUCT 
LIABILITY LOSS WITHIN THE MEANING OF 
SECTION 172 OF THE INTERNAL REVENUE CODE. 

A. The Internal Revenue Code imposes a tax each 
year “on the taxable income of every corporation.” 26 
U.S.C. 11(a). In calculating that taxable income, a 
corporation was allowed by Section 172 of the Code to 
carry back for a period of three years, or carry forward 
for a period of 15 years, the amount of any “net 

14 

operating loss” it incurs. 26 U.S.C. 172(b)(1)(A), (B).9 
Section 172(c) generally defines a “net operating loss” 
as “the excess of the deductions allowed by this chapter 
over the gross income.” 26 U.S.C. 172(c). Thus, “[a] 
taxpayer does not have a [net operating] loss for a par- 
ticular year unless its deductions exceed its ordinary 
income and its capital gains.” United States v. Foster 
Lumber Co., 429 U.S. 32, 47 (1976). By providing for 
the carryforward and carryback of net operating losses, 
Section 172 “permit[s] a taxpayer to set off its lean 
years against its lush years, and to strike something 
like an average taxable income computed over a period 
longer than one year.” Lisbon Shops, Inc. v. Koehler, 
353 U.S. 382, 386 (1957). 

Although the general carryback period for a net 
operating loss is three years from the year in which the 
loss is incurred, Congress adopted a special ten-year 
carryback period for a “product liability loss” incurred 
by a “taxpayer.” 26 U.S.C. 172(b)(1)(I). 

10 The term 
“product liability loss” is defined to mean, for any 
taxable year, “the lesser of” the “net operating loss for 

9 Unless otherwise noted, the statutory references in this brief 
are to the Internal Revenue Code and Treasury regulations as in 
effect between 1983 and 1986. See note 1, supra. In the Taxpayer 
Relief Act of 1997, Pub. L. No. 105-34, § 1082(a)(1)-(2), 111 Stat. 
950, Congress amended Section 172(b)(1)(A) to shorten the general 
carryback period to two years and to enlarge the carryforward 
period from fifteen years to twenty years. 

10 The product liability loss is carried back a maximum of ten 
years to the earliest taxable year for which the taxpayer reported 
taxable income. 26 U.S.C. 172(b)(2). In the event any portion of 
the loss remains after application in the earliest taxable year, the 
remainder is carried forward to the next taxable year for which 
the taxpayer reported taxable income. Ibid. The process con- 
tinues until the loss is used up. 

15 

such year” or the deductible expenses incurred by that 
entity that are “attributable to” the satisfaction or 
defense of product liability claims. 26 U.S.C. 172(j)(1). 

11 

A “taxpayer” thus has a “product liability loss” for a 
particular taxable year only if (i) the taxpayer has a net 
operating loss for the year (i.e., its total deductions 
exceed its gross income) and (ii) that net operating loss 
is attributable in whole or in part to deductions for 
product liability or product liability expenses. 

In adopting this provision, Congress was concerned 
that product liability expenses are often incurred in 
cycles that are not clearly reflected under normal tax 
accounting principles. Although income is earned upon 
the sale of a product, associated liability expenses may 
not be incurred for many years thereafter. And, when 
such liability expenses are incurred, they are often 
“large and sporadic.” Staff of Joint Comm. on Taxation, 
96th Cong., 1st Sess., General Explanation of the Reve- 
nue Act of 1978 (H.R. 3511, 95th Cong., Pub. L. 95-600) 
232 (1979). The extended carryback period for product 
liability losses under Section 172 is designed to “allow 
businesses to use previous taxable income as at least a 
partial reserve” against product liability expenses 
subsequently incurred by that company. 124 Cong. 
Rec. 34,733 (1978) (Sen. Culver). 

11 The term “product liability” is defined as (26 U.S.C. 172(j)(2)): 

liability of the taxpayer for damages on account of physical 

injury or emotional harm to individuals, or damage to or loss 
of the use of property, on account of any defect in any product 
which is manufactured, leased, or sold by the taxpayer, but 
only if such injury, harm, or damage arises after the taxpayer 
has completed or terminated operations with respect to, and 
has relinquished possession of, such product. 

16 

To accomplish this goal, Congress established the 
following method for accounting for product liability 
expenses. When a taxpayer incurs product liability 
expenses, it must first deduct them in the year they are 
incurred as “ordinary and necessary” business expenses 
under Section 162 of the Code. 26 U.S.C. 162. If any 
portion of such product liability expenses is not effec- 
tively employed as deductions in that year—because 
there is insufficient taxable income that year to set 
them against—then that unconsumed portion of those 
expenses (and only that portion) constitutes a “product 
liability loss” that may be carried back as much as ten 
years and be set off against previously earned taxable 
income. 

Section 172 is plainly not designed to provide the 
taxpayer with a double deduction. The extended carry- 
back of losses permitted under that Section allows a 
corporation that incurs product liability expenses only 
one effective use of a deduction for these expenses—by 
permitting the deduction to be carried back to a prior 
year when, due to an insufficient amount of income from 
current operations, the corporation is not able fully to 
utilize the expense as a deduction in the current year. 

If all of the product liability expenses are consumed 
in determining the taxable income of the liable cor- 
poration, and the corporation thus has no net operating 
loss, it cannot have a “product liability loss” under this 
statute. 26 U.S.C. 172(j)(1). And, if the corporation 
does have a net operating loss, the amount of its “pro- 
duct liability loss” is defined as the lesser of the amount 
of that loss or the amount of the product liability 
expenses incurred in that year by the corporation—in 
other words, it is the portion of the product liability 
expenses that are not effectively utilized as deductions 

17 

to reduce the taxable income of the corporation in the 
current year. See ibid. 

B. The various possible applications of the “product 
liability loss” provisions to individual corporations are 
all encompassed within the following three examples. 

1. If the corporation has product liability expenses 
for a particular tax year but has sufficient income that 
it does not incur a net operating loss for that year, it 
has no “product liability loss,” for Section 172(j)(1) 
defines that term as the lesser of the net operating loss 
for the taxable year or the amount of product liability 
deductions claimed by the taxpayer during that year. 
26 U.S.C. 172(j)(1). Since the product liability expenses 
were fully and effectively utilized in that year as cur- 
rent deductions under Section 162, there are no uncon- 
sumed product liability expenses—or “product liability 
losses”—to carry back to other years. 

2. If the corporation incurs a net operating loss for 
the taxable year but has no product liability expense 
deductions during that year, there are necessarily no 
unconsumed product liability deductions in that year 
and thus no “product liability losses” to carry back to 
other years under 26 U.S.C. 172(j)(1). The corporation 
does, however, have a “net operating loss” for the year 
that may be carried back a maximum of three years 
under 26 U.S.C. 172(b)(1)(A). 

3. If the corporation incurs a net operating loss for 
the taxable year and has product liability expenses in 
that year, two situations may arise. First, if the pro- 
duct liability expenses incurred in that year are less 
than the net operating loss for that year, the corpora- 
tion has a “product liability loss” (with a ten-year 
carryback) only for the amount of the product liability 
expenses; the remaining portion of the net operating 
loss may be carried back only for the three-year period 

18 

allowed by Section 172(b)(1)(A). Second, if the product 
liability expenses are greater than the amount of the 
net operating loss, only the unconsumed portion of the 
product liability expenses—which is then equal to the 
amount of the net operating loss—constitutes a “pro- 
duct liability loss” for which a ten-year carryback is 
permitted. 26 U.S.C. 172(j)(1). 

C. In the present case, it is undisputed that each of 
the affiliated corporations that incurred product liabil- 
ity expenses in the tax years at issue would have re- 
ported positive net income—rather than a net operating 
loss—for those years if it had filed a separate return 
that reflected its individual operations. Pet. App. 27a; 
see page 7, supra. Under the plain text of Section 172, 
none of these entities would have been entitled to a 
“product liability loss” deduction on a separate return, 
for none of them incurred a “loss.” 26 U.S.C. 172(j)(1). 
Instead, each of these entities obtained a full and effec- 
tive use of its product liability expenses by deducting 
them in the year the expenses were incurred. 

Because these expenses were fully utilized as deduc- 
tions in the year they were incurred, there were no 
unconsumed product liability expenses—or “product 
liability losses”—for these corporations to carry back to 
set off against their taxable income in prior years. See 
Amtel, Inc. v. United States, 31 Fed. Cl. at 601. Indeed, 
petitioner concedes that none of these entities had a 
negative taxable income “when considered on a sepa- 
rate company basis” (Pet. Br. 7 (emphasis omitted)). It 
therefore follows that none of these corporations would 
be able to claim a “product liability loss” under Section 
172 if it had filed a separate return. See also Amtel, 
Inc. v. United States, 31 Fed. Cl. at 601. 

19 

II. WHEN PROFITABLE CORPORATIONS WITH PRO- 
DUCT LIABILITY EXPENSES FILE A CONSOLI- 
DATED RETURN WITH AFFILIATES THAT GEN- 
ERATE LOSSES BUT HAVE NO PRODUCT LI- 
ABILITY EXPENSES, THE RESULTING CONSOLI- 
DATED NET OPERATING LOSS IS NOT A 
“PRODUCT LIABILITY LOSS” UNDER SECTION 
172(j) OF THE CODE 

While conceding that its affiliates with product 
liability expenses had positive separate incomes and 
therefore would not qualify for a “product liability loss” 
carryback as individual corporations, petitioner none- 
theless asserts that the fact that these profitable 
corporations joined in filing a consolidated tax return 
with other entities—entities that had operating losses 
but no product liability expenses—somehow requires a 
different result.12 The court of appeals correctly held, 
however, that petitioner may not use product liability 
expenses incurred by a profitable affiliate to generate 
“product liability losses” to be carried back ten years on 
petitioner’s consolidated return. Under Section 172 and 
the consolidated return regulations, product liability 
losses must be calculated “separately for each group 
member.” Pet. App. 17a. 

A. The Consolidated Return Regulations Require The 

Accounting For Product Liability Expenses To Occur 

First At The Separate Entity Level 

1. The Internal Revenue Code vests ample author- 
ity in the Treasury to adopt consolidated return regu- 
lations to effect a binding resolution of the question 

12 The losses incurred by these other entities would represent 
“net operating losses” for which a three-year carryback would be 
permitted if they had filed separately. 26 U.S.C. 172(b)(1)(A). 

20 

presented in this case. Section 1501 of the Code 
specifies that affiliated corporations may file a 
consolidated income tax return, “in lieu of separate 
returns,” only “upon the condition that * * * the 
affiliated group consent to all the consolidated return 
regulations prescribed under Section 1502 prior to the 
last day prescribed by law for the filing of such return.” 
26 U.S.C. 1501. 

13 In turn, Section 1502 authorizes the 
Secretary of the Treasury to: 

prescribe such regulations as he may deem neces- 
sary in order that the tax liability of any affiliated 
group of corporations making a consolidated return 
and of each corporation in the group, both during 
and after the period of affiliation, may be returned, 
determined, computed, assessed, collected, and ad- 
justed, in such manner as clearly to reflect the 
income-tax liability and the various factors neces- 
sary for the determination of such liability, and in 
order to prevent avoidance of such tax liability. 

26 U.S.C. 1502. Any taxpayer that files a consolidated 
return is bound by the regulations that are in effect on 
the date the return was due (26 U.S.C. 1501), and the 
tax on the consolidated return is to “be determined, 
computed, assessed, collected, and adjusted in accor- 
dance with the[se] regulations * * * .” 26 U.S.C. 
1503(a). 

2. a. The consolidated return regulations promul- 
gated by the Secretary under Section 1502 arrive at a 
single figure of “consolidated taxable income” for the 

13 The Internal Revenue Code generally defines an “affiliated 
group” as “1 or more chains of includible corporations connected 
through stock ownership with a common parent corporation.” 26 
U.S.C. 1504(a)(1)(A). 

21 

affiliated group by starting first at the individual entity 
level. 26 C.F.R. 1.1502-11(a). Section 12 of the regu- 
lations provides that, subject only to the specific 
modifications set forth in the regulation, “[t]he separate 
taxable income of a member * * * is computed in 
accordance with the provisions of the Code covering the 
determination of taxable income of separate cor- 
porations * * *.” 26 C.F.R. 1.1502-12 (emphasis 
added). Product liability expenses are not included 
among the specific items for which modified treatment 
is provided in computing the “separate taxable income 
of a member” under this regulation. See ibid.; pages 22- 
23, infra. As a result, the product liability expenses of 
each affiliate must be netted against the income of that 
affiliate in determining the “separate taxable income” 
of that member of the group. When, as in this case, the 
“separate taxable income” of the affiliates with product 
liability expenses is positive, then all of the product 
liability expenses have necessarily been consumed and 
utilized in reducing taxable income at that level. As a 
consequence, there are no unconsumed or unutilized 
“product liability losses” to carry to the consolidated 
level of the group. It is only when the separate taxable 
income of the individual member is negative that there 
will be an unutilized product liability loss to carry to the 
consolidated level. 

14 

14 “The term ‘separate taxable income’ * * * include[s] a case 
in which the determination * * * results in an excess of 
deductions over gross income.” 26 C.F.R. 1.1502-12(q). As we 
discuss in further detail below (pages 24-27, infra), the “separate 
taxable income” computed by a member of an affiliated group is 
not necessarily equivalent to the income or net operating loss 
figure that the corporation would have computed if it had filed a 
separate return. It is possible for a corporation to compute posi- 
tive separate taxable income even though the corporation would 

22 

b. Under the regulations, the following items are 
excluded from the computation of the “separate taxable 
income” of each member and are instead treated as 
“consolidated items” that flow through directly to the 
“consolidated taxable income” of the affiliated group: 
(1) the consolidated net operating loss deduction (com- 
puted under 26 C.F.R. 1.1502-21); (2) any consolidated 
capital gain net income; (3) any consolidated Section 
1231 net loss; (4) any consolidated charitable contribu- 
tions deduction; (5) any consolidated Section 922 
deduction; (6) any consolidated dividends received 
deduction; and (7) any consolidated Section 247 deduc- 
tion. 26 C.F.R. 1.1502-12 (a)-(n). The net operating 
profit or loss of the consolidated entity is determined by 

have reported a net operating loss if it had filed a separate return. 
For example, if a corporation made a charitable contribution 
during a particular year, it conceivably could have had a “net 
operating loss” under Section 172 even though it computed 
positive separate taxable income under the consolidated return 
regulations, because the charitable contribution deduction is not 
taken into account in the computation of separate taxable income. 
See 26 C.F.R. 1.1502-12(l). Conversely, it is possible for a 
corporation to compute negative separate taxable income even 
though it would have reported positive income if it had filed a 
separate return. That would occur if the corporation had capital 
gains that, along with the other income it earned, exceeded the 
corporation’s deductions, since capital gains are not taken into 
account in the computation of separate taxable income. See 26 
C.F.R. 1.1502-12(j). The record of this case, however, reflects that 
no member of petitioner’s affiliated group that computed positive 
separate taxable income and claimed product liability deductions 
would have had a “net operating loss” under Section 172 if it had 
filed a separate return. Petitioner has acknowledged that its 
profitable affiliates had positive separate taxable income and 
incurred no separate net operating losses in the years relevant to 
this case. Pet. Br. 7; Amtel, Inc. v. United States, 31 Fed. Cl. at 
601. 

23 

adding these “consolidated items” to the aggregated 
amount of “separate taxable income” calculated for each 
of the individual affiliates. 26 C.F.R. 1.1502-11. See 
also 26 C.F.R. 1.1502-21(f ) (“[t]he consolidated net op- 
erating loss shall be determined by taking into account 

* * * [t]he separate taxable income of each member of 
the group”). 

15 

Under these provisions, if an individual affiliate had a 
separate operating loss for the current year (a negative 
“separate taxable income”) and had unconsumed pro- 
duct liability expenses for that year, the unutilized 

15 The consolidated net operating loss deduction, for which a 
three-year carryback is permitted under Section 172(b), is defined 
in the regulations as “an amount equal to the aggregate of the 
consolidated net operating loss carryovers and carrybacks to the 
taxable year,” which consists “of any consolidated net operating 
losses (as determined under paragraph (f) of this section) of the 
group, plus any net operating losses sustained by members of the 
group in separate return years, which may be carried over or back 
to the taxable year under the principles of section 172(b).” 26 
C.F.R. 1.1502-21(a),(b). Paragraph (f) of the regulation, in turn, 
provides that the “consolidated net operating loss” of the group is 
determined by aggregating “[t]he separate taxable income * * * 
of each member of the group” along with the consolidated items 
(such as capital gains and charitable deductions) that are dealt with 
directly at the consolidated, rather than the individual corporate, 
level. 26 C.F.R. 1.1502-21(f); see page 21, supra. 

The “consolidated net operating loss” of an affiliated group of 
corporations is thus determined in the same manner as the group’s 
consolidated taxable income. Each member of the group computes 
its separate taxable income or loss, the separate taxable income or 
loss figures are aggregated into a single figure, and this figure is 
adjusted by taking into account the consolidated items set forth in 
the regulation. The resulting consolidated net operating loss may 
then be carried back (or forward) to other taxable years for which 
the group reported taxable income and be deducted as part of the 
group’s consolidated net operating loss deduction for those years. 

24 

product liability expenses would then be applied to 
offset any net operating profit from other affiliates at 
the consolidated level—thereby providing an immedi- 
ate tax benefit from the deduction. If, after application 
of such deductions, the consolidated entity realizes a 
net operating profit, then all of the product liability 
expenses have (by definition) been consumed as 
deductions in that year and there is nothing left to 
carry to other years. If, however, the consolidated 
entity realizes a net operating loss in the current year, 
then any product liability expenses that had not (i) first 
been utilized by the individual entity that incurred 
them, or (ii) thereafter been consumed at the consoli- 
dated level may then be carried back for as many as ten 
years as “product liability losses” for the consolidated 
entity. 

c. Even in this situation, however, the carryback 
will not be allowed if the corporations have not been 
members of the same affiliated group throughout the 
carryback period. See Amtel, Inc. v. United States, 31 
Fed. Cl. at 601; pages 6-7, infra. In providing for 
consolidated returns, Congress directed the Treasury 
to adopt regulations to ensure that such returns are not 
employed as an artifice for “avoidance” of taxes or to 
distort the clear reflection of income. 26 U.S.C. 1502. 
Acting under this directive, the Treasury has promul- 
gated detailed rules that limit the ability of affiliated 
corporations to carry consolidated losses back to their 
separate return years. 26 C.F.R. 1.1502-79A. By 
limiting the carryback of losses to separate return 
years, these rules forestall the trading in tax losses that 
could occur through the acquisition of profitable cor- 
porations by corporations with losses, or vice versa. As 
this Court stated in Woolford Realty Co. v. Rose, 286 
U.S. 319, 329 (1932), rules of this type are required to 

25 

avoid “the mischiefs certainly to be engendered” by 
permitting such abuse to occur. Without such restric- 
tions on the use of loss carrybacks on consolidated 
returns, “a prosperous corporation could buy the shares 
of one that had suffered heavy losses and wipe out 
thereby its own liability for taxes.” Id. at 329-330. As 
the Court emphasized in Woolford Realty, “[t]he mind 
rebels against the notion that Congress in permitting a 
consolidated return was willing to foster an opportunity 
for juggling so facile and so obvious.” Id. at 330. 

Under the anti-abuse regulations adopted by the 
Treasury, a corporation may carry back to its “separate 
return years” only the portion of the consolidated loss 
that is attributable to its own operations. 26 C.F.R. 

1.1502-79A(a)(1). That amount is determined in a two- 
step process. First, the entity’s “separate net operat- 
ing loss” is determined by adding to that entity’s 
“separate taxable income” its share of the consolidated 
items that are treated directly on the consolidated re- 
turn under the regulations described above. 26 C.F.R. 

1.1502-79A(a)(3); see 26 C.F.R. 1.1502-12. Second, a 
ratio is applied to the amount of the entity’s “separate 
net operating loss” to allocate to that entity the portion 
of the entire consolidated loss that is attributed to the 
separate operations of the individual entity. 26 C.F.R. 

1.1502-79A(a)(3). 

16 

16 That ratio may be expressed as a fraction, the numerator of 
which is the consolidated loss of the entire group and the denomi- 
nator of which is the sum of the “separate net operating losses” of 
the entities that had such losses. 26 C.F.R. 1.1502-79A(a)(3). 
Because the separate net operating losses of the affiliates that 
have losses may be used to offset positive income of other affili- 
ates, this fraction will never be greater than one but will often be 
less than one. 

26 

In rejecting the contention advanced by petitioner 
that “there is no such thing as a separate net operating 
loss for any separate member of an affiliated group” 
(Pet. Br. 10-11), the court of appeals correctly pointed 
out that this anti-abuse regulation utilizes the exact 
concept of a “separate net operating loss” (26 C.F.R. 

1.1502-79A(a)(3)) in directing application of the net 
operating loss carryback provisions in the consolidated 
return context. Pet. App. 21a. We agree with the court 
of appeals that the regulatory definition of the term 
“separate net operating loss” “is analogous to an 
individual’s ‘net operating loss’ on a separate return.” 
Ibid. We also agree that, if a situation arose in which a 
taxpayer had items that were excluded in the calcula- 
tion of “separate taxable income” under 26 C.F.R. 

1.1502-12(a), then application of the regulatory concept 
of “separate net operating loss” from the anti-abuse 
provisions of 26 C.F.R. 1.1502-79A(a)(3) by analogy 
would not be inappropriate. 

17 But neither this case, nor 

Contrary to the suggestion of petitioner (Pet. Br. 35-36), 
however, the government has not advocated that this allocation 
formula, which was specifically developed in the anti-abuse 
regulation to address the special problem of separate return years 
(see Amtel, Inc. v. United States, 31 Fed. Cl. at 601), would apply 
outside that context. The court of appeals also did not apply that 
ratio in this case. Instead, it denied petitioner’s claim expressly 
because the profitable affiliates in this case had no “separate net 
operating loss,” and thus no unutilized “product liability losses” to 
carry to the consolidated level of petitioner’s return. Pet. App. 
21a-23a. 

17 The rationale applied by the court of appeals in this case 
appears to be a sensible way to harmonize the product liability loss 
provisions of Section 172 of the Code with the consolidated return 
regulations. The “separate net operating loss” described in 26 
C.F.R. 1.1502-79(a)(3) adds the excluded consolidated items (under 
26 C.F.R. 1.1502-12(a)) back to the separate taxable income of the 

27 

any other pending case of which we are aware, presents 
such a factual scenario. 

18 See note 14, supra. 
It is sufficient to resolve the present case to note that 
under both (i) the direct text of the regulations that 
were in fact in place in the relevant years (26 C.F.R. 

1.1502-21(f )) and (ii) the analogous principles set forth 
in the anti-abuse rule for application of consolidated 
losses to separate entities (26 C.F.R. 1.1502-79A(a)(3)), 
product liability expenses must first be applied in 
determining the separate income of the affiliate to 
which the product liability has attached. Only the 
portion of that amount that remains after applying 
those expenses against the current income of that 
affiliate then passes to the consolidated entity, where it 
is then set off against items of current income of other 
affiliates before any then-remaining amount is eligible 
for carryback to prior years. Because, as petitioner 
concedes, none of the affiliates involved in this case that 
had product liability expenses had either a negative 
“separate taxable income” or a “separate net operating 
loss” (see notes 14, 18, supra), it is a mathematical fact 
that none of those affiliates had any unutilized product 

affiliate and is thus analogous to the “net operating loss” that 
would be computed if that entity filed a separate return. Because 
those two measures of separate income yield identical results in 
this case, however, whether the anti-abuse provisions should apply 
here should be left for resolution by the Treasury in prospectively 
applicable regulations adopted under the broad authority provided 
by Section 1502. See pages 28-29, infra. 

18 This issue could arise only if there were “consolidated items” 
derived from a particular affiliate—an affiliate with product liabil- 
ity expenses in that period—that were sufficient to alter a positive 
“separate taxable income” for that affiliate into a “separate net 
operating loss.” This unusual factual combination has not been 
presented in any pending case. 

28 

liability loss deductions to carry to the consolidated 
return. Because these entities had no unused deduc- 
tions, there were no “product liability losses” to account 
for at the consolidated level. The entire amount of the 
consolidated net operating loss is thus subject only to 
the three-year carryback authorized by Section 172(b), 
rather than the ten-year carryback provided for 
“product liability losses” under Section 172(j). 

d. Congress has directed the Secretary of the 
Treasury—rather than the courts—to devise rules to 
ensure that consolidated returns achieve a full and clear 
reflection of income. 26 U.S.C. 1502. See United States 

v. Correll, 389 U.S. 299, 307 (1967). 

19 It is evident from 
inspection of the complexities of the anti-abuse rules 
established in 26 C.F.R. 1.1502-79A that the Secretary 
will be required to give careful attention to ensuring 
that any detailed rule in this area guards against the 
“opportunity for juggling” that consolidated returns can 
provide in this and related contexts. Woolford Realty 
Co. v. Rose, 286 U.S. at 330. It is therefore appropriate 
to defer to the future the question whether the 
“separate net operating loss” definition contained in the 
anti-abuse regulations should apply, by analogy, to a 
case in which the facts could possibly call for application 
of such a rule. See note 18, supra. Since that issue is 
not presented on the facts of this case, and since 
Congress has authorized the Secretary to resolve this 

19 “Congress has delegated to the Commissioner, not to the 
courts, the task of prescribing ‘all needful rules and regulations for 
the enforcement’ of the Internal Revenue Code.” United States v. 
Correll, 389 U.S. at 307. Deference to the agency’s interpretations 
“helps guarantee that the rules will be written by ‘masters of the 
subject,’ United States v. Moore, 95 U.S. 760, 763 (1878), who will 
be responsible for putting the rules into effect.” National Muffler 
Dealers Ass’n v. United States, 440 U.S. 472, 477 (1979). 

29 

matter prospectively in legislative rules adopted under 
Section 1502, it is not necessary for the Court to 
attempt at this time to anticipate the Secretary’s 
eventual ruling on that issue. 

B. Petitioner Is Not Entitled To The Product Liability 

Loss Deductions That It Claims In This Case 

Petitioner is wrong in contending that the court of 
appeals committed a “fundamental error” by “think[ing] 
of the issue in this case as involving the taxpayer’s 
right to a deduction” (Pet. Br. 29). Petitioner cannot 
recover on its refund claims in this case unless it is 
allowed to carry back to its consolidated returns for 
1973-1976 the same product liability expenses that have 
already been deducted in determining the positive net 
incomes of its profitable affiliates in the years 1983- 
1986. In Charles Ilfeld Co. v. Hernandez, 292 U.S. 62, 
66 (1934), this Court held that an affiliated group that 
files a consolidated return is not entitled to a claimed 
deduction in the absence of a statutory provision or a 
consolidated return regulation “that fairly may be read 
to authorize it.” That principle is dispositive of this 
case, for both the statute and the regulations preclude 
the double application of the deduction that petitioner 
proposes. 

1. The text of Section 172 directs that product 
liability expenses be calculated at the individual tax- 
payer level and be applied first against the current 
income of that entity. By directing that product 
liability expenses be based on the “liability of the 
taxpayer” (26 U.S.C. 172(j)(2)(A)) and be reduced from 
the current income of that same “taxpayer” in calcu- 
lating the “net operating loss” of that taxpayer (26 
U.S.C. 172(j)(1)), Section 172 confines the benefit of an 
extended carryback of losses to the entity that is itself 

30 

liable for these product liability expenses. The statute 
has no application to, and provides no extended 
carryback benefits for, any affiliates of that taxpayer 
that are not themselves subject to such product 
liability. 

Petitioner is incorrect in asserting (Pet. Br. 25-26) 
that, as applied to a consolidated group of corporations, 
the “taxpayer” to whom the Section 172 scheme applies 
is the consolidated group. Section 7701(a)(14) of the 
Code generally specifies that the term “taxpayer” as 
used in the Code means “any person subject to any 
internal revenue tax.” 26 U.S.C. 7701(a)(14). 

20 Even 
though separate affiliated taxpayers may join in filing a 
consolidated return, the resulting tax liability is not a 
liability of the “group.” Instead, it attaches directly to 
each of the individual taxpayers that are members of 
the group, who are severally liable for the tax incurred. 
26 C.F.R. 1.1502-6(a). As this Court has emphasized, 
while a consolidated group files a return that aggre- 
gates information developed from the various separate 
affiliates, “[t]he fact is not to be ignored that each of 
[the] corporations joining * * * in a consolidated 

20 Section 7701(a)(1) of the Code provides that, “where not 
otherwise distinctly expressed or manifestly incompatible with the 
intent thereof,” “[t]he term ‘person’ shall be construed to mean and 
include an individual, a trust, estate, partnership, association, com- 
pany or corporation.” 26 U.S.C. 7701(a)(1). By contrast, an 
affiliated group is defined for purposes of the Code as “1 or more 
chains of includible corporations connected through stock owner- 
ship with a common parent corporation * * *.” 26 U.S.C. 
1504(a)(1)(A) (emphasis added). Cf. First Chicago NBD Corp. v. 
Commissioner, 135 F.3d 457, 458 (7th Cir. 1998) (holding that a 
statute that referred to “a” corporation did not include an affiliated 
group of corporations that filed a consolidated return). 

31 

return is none the less a taxpayer.” Woolford Realty 
Co. v. Rose, 286 U.S. at 328. 

When Congress has decided to apply a particular 
provision of the Code that refers to a “taxpayer” 
directly to an affiliated group of corporations, it has 
done so expressly. For example, Section 172(h)(4)(C) of 
the current Code provides a special rule for net operat- 
ing loss carrybacks of any “corporate equity reduction 
interest loss” authorized under Section 172(b)(1)(E). It 
states that, “[e]xcept as provided by regulations, all 
members of an affiliated group filing a consolidated 
return under section 1501 shall be treated as 1 taxpayer 
for purposes of this subsection and subsection 
(b)(1)(E).” 26 U.S.C. 172(h)(4)(C) (1994 & Supp. IV 
1998) (emphasis added). See also 26 U.S.C. 860E(a)(2) 
(1994 & Supp. IV 1998) (“All members of an affiliated 
group filing a consolidated return shall be treated as 1 
taxpayer for purposes of this subsection.”) (emphasis 
added); 26 U.S.C. 860J(d) (Supp. IV 1998) (“All mem- 
bers of an affiliated group filing a consolidated return 
shall be treated as one taxpayer for purposes of this 
section.”) (emphasis added). Congress has not enacted 
similar language in Section 172 to provide for the 
carryback of product liability losses on a consolidated, 
rather than individual “taxpayer,” basis. Although it is 
obvious that Congress knows how to provide for 
consolidated treatment of the special net operating loss 
provisions of Section 172 when it desires to do so, 
Congress made no such provision for the “product li- 
ability loss” carryback established under Section 172(j). 

The “taxpayer” referred to in Section 172(j) is thus 
the corporation that itself has incurred product liability 
expenses and is unable fully to utilize them due to an 
insufficient amount of current income. Congress was 
concerned with smoothing the accounting of the income 

32 

and expenses of the individual entity that is liable for 
product liability expenses. The statute is not designed 
to provide tax benefits for affiliated entities that (either 
by corporate design or by historical fact) themselves 
have no liability for these expenses. As the sponsor of 
this legislation explained (124 Cong. Rec. at 34,733 (Sen. 
Culver) (emphasis added)): 

The amendment would allow businesses to “carry 
back” product liability losses and apply them against 
taxable income for the 10 preceding years. This is 
an extension specifically for product liability losses 7 
years beyond the 3-year period permitted for most 
business losses. By allowing businesses to use 
previous taxable income as at least a partial reserve 
against major product liability losses, the amend- 
ment would help assure that a business which 
suffered a major product liability loss would have 
the funds both to stay in business and provide 
reasonable compensation to injured consumers. 

It is the “business which suffered [the] loss”—rather 
than the affiliates of that business which, due to their 
separate corporate existence, are not themselves liable 
for the loss—that the statute is designed to assist. 

In enacting the “product liability loss” provision, 
Congress sought to assist only those corporations that 
experience financial difficulties from product liability. 
Congress did not provide any benefit to a profitable 
corporation even though that corporation might have 
had large product liability expenses. 26 U.S.C. 
172(j)(1). The ten-year carryback authorized by Section 
172(j) applies only when the product liability expenses 
cannot currently be utilized as deductions by the 
corporation because it incurred a net loss in the current 
period. Ibid. After a profitable corporation employs its 

33 

product liability expense deductions to reduce its net 
income in the current period, there are no remaining 
unused deductions—or “product liability losses”—for it 
to pass on to its affiliates either as current deductions 
on the consolidated return or as a carryback to prior 
years under Section 172(j). See pages 16-18, supra. 

2. For these same reasons, petitioner errs in con- 
tending that the fact that the consolidated return regu- 
lations ultimately yield a “consolidated” net operating 
income or loss means that the “product liability loss” 
provisions are to be applied only at the consolidated 
level. Pet. Br. 14-19. The consolidated net operating 
loss that is calculated under 26 C.F.R. 1.1502-21(a) is 
obtained only after first determining, and then 
aggregating, the “separate taxable income” of each 
separate affiliate. Although a few specific items (such 
as capital gains and charitable deductions) are treated 
as consolidated, rather than separate items, product 
liability expenses are treated initially at the separate 
entity level. Under the “separate taxable income” 
approach of the regulations, product liability expenses 
are first deducted against the current income of the 
individual affiliates that incurred them. See page 21, 
supra. As the court of appeals correctly concluded in 
this case, the requirement of the consolidated return 
regulations that a “separate taxable income” be 
computed for each affiliate “makes clear that blending 
those expenses is not permitted, i.e., that a comparison 
of the group members’ aggregated product liability 
expenses to the consolidated net operating losses in 
order to derive a consolidated ‘product liability loss’ is 
not intended.” Pet. App. 16a. Instead, first “deter- 
mining ‘product liability loss’ separately for each group 
member is correct and consistent with the regulations.” 
Id. at 17a. 

34 

By contrast, petitioner is seeking to amend the 
consolidated return regulations to provide, as an addi- 
tional “consolidated item” under 26 C.F.R. 1.1502-12, a 
consolidated, rather than separate, product liability 
expense deduction. On petitioner’s theory of this case, 
the product liability expenses of each member of the 
group would be treated in the same manner as charita- 
ble deductions, capital gains and the other consolidated 
items specified in the regulations. See pages 22-23, 
supra. Under that theory, each member would compute 
its separate taxable income without taking into account 
its product liability expenses, and those expenses would 
instead be utilized as deductions only at the con- 
solidated level. 

The rule that petitioner proposes plainly conflicts 
with the express requirements of the regulations that 
the Secretary has promulgated under the broad 
authority of Section 1502. Under those regulations, 
each member of an affiliated group must take its prod- 
uct liability expenses into account in computing its 
“separate taxable income.” See page 21, supra. More- 
over, petitioner’s attempt to aggregate those same 
expenses and take them into account only at the con- 
solidated level also conflicts with the fundamental ob- 
jectives of the statute, which seeks to provide benefits 
only for a business that itself incurs product liability 
expenses. 26 U.S.C. 172(j)(2). The statute is not de- 
signed to provide benefits for other corporations or af- 
filiates which, either by intentional corporate design or 
historical accident, shoulder none of that exposure. 

21 

21 Petitioner errs in asserting (Pet. Br. 22) that the Com- 
missioner’s position “ascribes overwhelming tax significance to the 
organizational structure of the taxpayer’s business” and produces 
“a result that is completely at odds with the underpinnings of the 

35 

Petitioner’s efforts to use its consolidated return to 
accomplish a tax benefit that Congress did not intend 
thus suffers from the defect identified by this Court in 
Woolford Realty Co. v. Rose, 286 U.S. at 330. In 
rejecting the taxpayer’s effort in that case to employ a 
consolidated return to take advantage of deductions 
that Congress had not intended to allow, the Court 
stated (ibid.): 

Submission to such mischiefs would be necessary if 
the statute were so plain in permitting the 
deduction as to leave no room for choice between 
that construction and another. Expediency may tip 
the scales when arguments are nicely balanced. 
True, of course, it is that in a system of taxation so 
intricate and vast as ours there are many other 
loopholes unsuspected by the framers of the statute, 
many other devices whereby burdens can be 
lowered. This is no reason, however, for augment- 
ing them needlessly by the addition of another. 

Petitioner’s claim in this case should be denied because 
petitioner has failed to sustain its “burden of clearly 
showing the right to the claimed deduction” under 
either the statute or the regulations. INDOPCO, Inc. 

v. Commissioner, 503 U.S. 79, 84 (1992) (quoting 
Interstate Transit Lines v. Commissioner, 319 U.S. 
590, 593 (1943)). See also Woolford Realty Co. v. Rose, 
286 U.S. at 330 (the statute is not “plain in permitting 
the deduction”). 

consolidated tax return regime.” The “product liability loss” 
provisions of Section 172 are not intended to provide benefits for 
corporations that, due to “the organizational structure” adopted by 
the affiliated enterprises, have kept themselves apart from any 
exposure to product liability claims. See page 32, supra. 

36 

3. Petitioner errs in asserting (Pet. Br. 19-20) that 
its approach in this case is “perfectly in harmony” with 
positions taken by the Internal Revenue Service in 
prior agency rulings. Petitioner fails to acknowledge 
that, in Technical Advice Memorandum 97-15-002 (Apr. 
11, 1997), the Service addressed the very issue pre- 
sented in this case and specifically rejected the ap- 
proach advocated by petitioner. 

22 Moreover, the 
authorities that petitioner cites are simply unrelated to 
the issues presented in this case. The Notice of 
Proposed Rulemaking cited by petitioner (Pet. Br. 20- 

21) merely makes the unremarkable observation that, 
under the governing regulations (26 C.F.R. 1.1502-11 & 

12), corporations that file a consolidated return are to 
combine their separate income and losses to arrive at a 
single consolidated income (or loss) for the group. 

23 56 
Fed. Reg. 4229 (1991). As we have described in detail, 
however, these same regulations require each individ- 
ual corporation with product liability expenses first to 
claim and utilize those deductions in computing its 
“separate taxable income.” See pages 21-23, supra. 
The “separate taxable income” calculated independ- 
ently for each of the several affiliates is thereafter 
combined to derive a consolidated income figure. Ibid. 
When, as in this case, the product liability expenses are 

22 The technical advice memoranda and similar agency docu- 
ments cited by petitioner have no precedential weight, and Con- 
gress has specified that such informal written determinations “may 
not be used or cited as precedent.” 26 U.S.C. 6110(k)(3) (Supp. IV 
1998). We cite them here only to address petitioner’s misuse of 
these documents. 

23 Private Letter Ruling 88-16-002 (Dec. 31, 1987), which is cited 
by petitioner (Pet. Br. 19), similarly notes that an affiliated group 
computes a consolidated net operating loss after the separate 
taxable income of each affiliate is first determined. 

37 

fully utilized as deductions at the separate entity level, 
there are no remaining deductions—or “product liabil- 
ity losses”—to be passed on and employed at the con- 
solidated level. 

4. The Sixth Circuit erred in Intermet Corp. v. 
Commissioner, 209 F.3d 901 (2000), in reaching the 
contrary conclusion. Although the court stated in 
Intermet that the consolidated return “regulations do 
not specifically address” the application of the special 
ten-year carryback for a “specified liability loss” in the 
consolidated return context (209 F.3d at 905; see note 1, 
supra), the court ultimately concluded that this issue 
should be resolved by a provision in the regulations 
that neither party had cited. That regulation is 26 
C.F.R. 1.1502-80(a), which specifies that “[t]he Internal 
Revenue Code, or other law, shall be applicable to the 
[consolidated] group to the extent the regulations do 
not exclude its application.” The court in Intermet 
reasoned that, because the consolidated return 
regulations provide no specific rule for the treatment of 
product liability expenses, the entire affiliated group 
must be treated as a single “taxpayer” for purposes of 
Section 172(f ). 209 F.3d at 906, 908. 

24 The court stated 
that it found nothing in the regulations that modified 
the “default rule” in 26 C.F.R. 1.1502-80(a) that 

24 The unexplained assertion of petitioner that “the Sixth 
Circuit did not rely on Treas. Reg. § 1.1502-80 to resolve the issue 
before it” (Pet. Br. 24) is refuted by the direct citation of that 
provision, and the direct reliance upon that provision, in the court’s 
opinion. See 209 F.3d at 905-908. For example, the court of 
appeals stated that, “[t]o assess Intermet’s position, the consoli- 
dated return regulations direct us first to determine whether the 
group, as opposed to its individual members, satisfies the Code’s 
requirements for the SLL carryback. See Treas. Reg. § 1.1502- 
80(a).” 209 F.3d at 905-906. 

38 

requires the consolidated group to be treated as if it 
were a single taxpayer. 209 F.3d at 908. 

The Sixth Circuit erred in its construction of this 
regulation. The regulation simply specifies that the 
usual rules found in the Internal Revenue Code, or 
other sources of law, apply to an affiliated group of 
corporations unless the consolidated return regulations 
exclude their application. 26 C.F.R. 1.1502-80(a). The 
usual rules of the Internal Revenue Code require each 
corporation to be treated as a separate taxpayer. See 
26 U.S.C. 11(a). The usual rule incorporated into the 
consolidated return regulations is thus that the 
separate status of every corporation continues to be 
recognized except as the consolidated return regula- 
tions otherwise provide. 

25 See also 26 C.F.R. 1.1502-12 
(“[t]he separate taxable income of a member * * * is 
computed in accordance with the provisions of the Code 
covering the determination of taxable income of 
separate corporations”). 

As this Court stated in 
Helvering v. Morgan’s, Inc., 293 U.S. 121, 127 (1934), 
“[a]fter affiliation, as before, the affiliated corporations, 
although filing consolidated returns, continued to be 
separate taxable units.” See also Moline Properties, 
Inc. v. Commissioner, 319 U.S. 436, 440 (1943) (an 
affiliated corporation is “as much a separate entity as if 
its stock had been transferred * * * to third 
persons”); In re Chrome Plate, Inc., 614 F.2d 990, 996 

25 The example provided in the very next sentence of the regu- 
lation relied on by the court of appeals in Intermet makes clear 
that specific provisions of the Code continue to apply directly to 
individual members of the group when the consolidated return 
regulations have not specified otherwise. 26 C.F.R. 1.1502-80(a) 
(“[f]or example, in a transaction to which [26 U.S.C.] 381(a) applies, 
the acquiring corporation will succeed to the tax attributes 
described in section 381(c).”). 

39 

(5th Cir. 1980) (“[t]he filing of [a consolidated return] 

* * * is insufficient to destroy the separate existence 
of the corporations”). 

It has thus long been held that the “general rule” 
established by this regulation is that, “to the extent the 
consolidated return regulations do not mandate 
different treatment, corporations filing consolidated 
returns are to be treated as separate entities when 
applying other provisions of the Code.” Gottesman & 
Co. v. Commissioner, 77 T.C. 1149, 1156 (1981). Under 
26 C.F.R. 1.1502- 80(a), “[w]here the consolidated re- 
turn regulations do not require that corporations filing 
such returns be treated differently from the way 
separate entities would be treated, these corporations 
shall be treated as separate entities when applying 
provisions of the Code.” H Enterprises International, 
Inc. v. Commissioner, 105 T.C. 71, 85 (1995). 

26 The 
court of appeals erred in Intermet by giving this 

26 Petitioner acknowledges that, under the general rule of 26 
C.F.R. 1.1502-80(a), “corporations filing consolidated returns are to 
be treated as separate entities to the extent that the consolidated 
return regulations do not require otherwise” (Pet. Br. 25). Peti- 
tioner merely contends that treating the members of an affiliated 
group as separate entities “is not tantamount to saying that 
product liability losses must be determined on a separate company 
basis because the consolidated return regulations do not contain 
specific words requiring that such losses be computed on a 
consolidated basis” (ibid.). In making that assertion, however, 
petitioner fails to account for the fact that the consolidated return 
regulations specify that product liability expenses must first be 
applied at the separate entity level and that only the unconsumed 
portion of such expenses may thereafter be applied at the 
consolidated level. See 26 C.F.R. 1.1502-12 & 21; pages 21-23, 
supra. Because all of the product liability expenses involved in 
this case were utilized at the separate entity level, there are no 
“product liability losses” to reach the consolidated return. 

40 

regulation an interpretation that simply turns its 
established meaning upside down. 

As we have noted, no member of petitioner’s 
affiliated group would have incurred a “product liability 
loss” under Section 172(j) if it had filed a separate 
return during the years in issue. See pages 7, 18 & note 
14, supra. Application of the general rule of 26 C.F.R. 

1.1502- 80(a) to this case would thus support rejection, 
rather than acceptance, of petitioner’s claim. But there 
is, in any event, no need to rely on any “general” or 
“default” rule in this case, for the plain text of the 
regulations requires all product liability expenses first 
to be deducted in determining the separate income of 
the individual affiliate that incurred those expenses. 26 
C.F.R. 1.1502-12(a); see pages 21-23, supra. On the 
facts of this case, there are no unutilized deductions at 
that level because each of these affiliates earned a 
profit during the relevant years. There are thus no 
“product liability losses” from these profitable affiliates 
to carry to the consolidated level or to carry back to 
prior years. 

5. The rule that petitioner advocates would permit 
significant tax avoidance abuses. Under petitioner’s 
approach, a corporation that is currently unprofitable 
but that had substantial income in prior years could (i) 
acquire a profitable corporation with product liability 
expense deductions in the year of acquisition, (ii) file a 
consolidated return and (iii) thereby create an other- 
wise nonexistent “product liability loss” for the new 
affiliated group that would allow the acquiring cor- 
poration to claim refunds of the tax it paid in prior 
years. 

27 Neither the terms nor the purpose of the 

27 For example, a manufacturing company (with prior profits 
and current losses) that has no product liability exposure could 

41 

consolidated return regulations authorize that sort of 
“juggling” and trading of corporate tax attributes. 

28 It 
is precisely because “[t]he mind rebels against the 
notion” that “an opportunity for juggling so facile and 
so obvious” should be permitted (Woolford Realty Co. 

v. Rose, 286 U.S. at 330) that Congress directed the 
Secretary to ensure that the consolidated return regu- 
lations be designed “to prevent avoidance of such tax 
liability.” 26 U.S.C. 1502. 

The result advocated by petitioner thus would not 
only contravene the text and intent of the product 
liability loss provisions in Section 172(j). It would also 
contravene the clear admonition of Congress, and of 

purchase a tobacco company (with both prior and current profits) 
that has significant product liability expenses. The combined 
entity could, on petitioner’s theory, assert a ten-year carryback of 
“product liability losses” even though the tobacco company has 
always made a profit and never incurred a “loss” of any type. See 
also note 28, infra. 

28 In this respect, the anti-abuse regulation on which the court 
of appeals relied (26 C.F.R. 1.1502-79) reveals a fundamental flaw 
in petitioner’s position. Four of the members of petitioner’s 
affiliated group that computed positive separate taxable income 
and claimed product liability deductions between 1983 and 1986 
(Jesco, Amtel, Litwin and Panamerican) were not members of 
petitioner’s affiliated group during the years to which petitioner 
seeks to carry back its alleged product liability losses. It is clear 
under the anti-abuse regulation that, if those corporations had 
incurred “separate net operating losses” during the period from 
1983 to 1986, those losses could have been carried back only to 
their separate return years under 26 C.F.R. 1.1502-79(a)(3) and 
could not have been carried back and used by petitioner. See notes 
4, 6, supra. There is no logical reason why petitioner should be 
able to use these deductions to create product liability “losses” for 
itself simply because the affiliated corporations that actually 
incurred the product liability expenses realized profits instead of 
“losses.” 

42 

this Court, that consolidated returns not be employed 
as an artifice to evade taxes. 

CONCLUSION 

The judgment of the court of appeals should be 
affirmed. 

Respectfully submitted. 

BARBARA D. UNDERWOOD 

Acting Solicitor General 

CLAIRE FALLON 

Deputy Assistant Attorney 

General 

LAWRENCE G. WALLACE 

Deputy Solicitor General 

KENT L. JONES 

Assistant to the Solicitor 

General 

RICHARD FARBER 
EDWARD T. PERELMUTER 

Attorneys 

FEBRUARY 2001