No. 00-157 

In the Supreme Court of the United States 

UNITED DOMINION INDUSTRIES, INC., PETITIONER 

v. 

UNITED STATES OF AMERICA 

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

BRIEF FOR THE UNITED STATES 

SETH P. WAXMAN 

Solicitor General 

Counsel of Record 

PAULA M. JUNGHANS 

Acting Assistant Attorney 

General 

LAWRENCE G. WALLACE 

Deputy Solicitor General 

KENT L. JONES 

Assistant to the Solicitor 

General 

EDWARD T. PERELMUTER 

Attorney 

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 year 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 

Statement ........................................................................................ 2 

Argument ........................................................................................ 3 

Conclusion ....................................................................................... 7 

TABLE OF AUTHORITIES 

Cases: 

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

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

4, 5 

Braxton v. United States, 500 U.S. 344 (1991) ................. 

8 

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

1980) ......................................................................................... 14-15 

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

(1981) ........................................................................................ 15 

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

(1995) ........................................................................................ 15 

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

13 

Intermet Corp. v. Commissioner, 209 F.3d 901 

(6th Cir. 2000) ......................................................................... 

7, 13 

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

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

13 

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

(1943) ........................................................................................ 14 

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

(1976) ........................................................................................ 9 

Statutes and regulations: 

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

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

2, 15 

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

2, 4, 7, 11, 12 

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

9 

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

4, 9 

§ 172(b)(1)(f) .......................................................................... 4 

(III) 

IV 

Statutes and regulations—Continued: 
Page 

§ 172(b)(i)(I) (1988) ........................................................... 

4, 9, 10 

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

8 

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

4, 14 

§ 172(f)(1)(A) ......................................................................... 

9 

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

15 

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

9 

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

9 

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

2, 3, 7, 8 

§ 1502 ..................................................................... 

2, 3, 5, 7, 8, 10 

§ 1503 ...................................................................................... 

8, 10 

§ 1504(a) ................................................................................. 

10 

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

10 

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

10 

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

Section 1.1502 (1988) ............................................................ 

2 

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

4 

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

10 

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

3, 11 

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

11 

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

12 

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

12, 13 

Section 1.1502-80(a) ............................................................... 14, 15 

In the Supreme Court of the United States 

No. 00-157 

UNITED DOMINION INDUSTRIES, INC., PETITIONER 

v. 

UNITED STATES OF AMERICA 

ON PETITION FOR A 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. The jurisdiction of this Court is 
invoked under 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, 26 C.F.R. 1.1502 (1986), are set forth at Pet. 1-3 
and Pet. App. 43a-59a. 

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 
regulations 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. * * * 

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

The Secretary shall prescribe such 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 cor- 
poration 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 

3 

and the various factors necessary for the deter- 
mination of such liability, and in order to prevent 
avoidance of such tax liability. 

STATEMENT 

1. Petitioner is the successor in interest of the 
common 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 
a consolidated return, 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. The 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 cor- 
porations making a consolidated return and of each 
corporation in the group * * * may be returned, 
determined, computed, assessed, collected, and ad- 
justed, 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 
consolidated return included Jesco, Inc., Cherry-Burrell 
Corporation, Amtel, Inc., The Litwin Corporation and 
Litwin Panamerican Corporation. Pet. App. 3a. 
Petitioner reported consolidated net operating losses 
for each of the years from 1983 to 1986. While all of the 
affiliates named above incurred product liability 
expenses in each of those years, either some or all 
of them had a positive “separate taxable income” (under 
26 C.F.R. 1.1502-12) during those years. Pet. App. 27a. 
The issue in this case is whether the product liability 
expenses incurred by the affiliates that had positive 

4 

separate income during these years constitute “product 
liability losses” under 26 U.S.C. 172(b)(1)(I) (1988) that 
may be carried back ten years and used as deductions 
from petitioner’s consolidated taxable income for the 
taxable years 1973-1976.1 The Internal Revenue 
Service determined that the product liability deduc- 
tions claimed by the affiliates during the years that 
they had positive separate taxable incomes did not 
constitute “product liability losses” for purposes of 
Section 172 that could be carried back for the ten-year 
period authorized by that statute. Pet. App. 28a. The 
Service therefore denied petitioner’s refund claims for 
the 1973-1976 consolidated return years. Ibid. 

2. Petitioner thereafter brought a refund suit in the 
United States Court of Federal Claims, asserting that 
the product liability deductions claimed by its affiliates 
during 1985 created a product liability loss that could be 
carried back ten years and deducted from the gross 
income reported on their consolidated return for 1975. 
In that case, petitioner contended that the Amtel group 
was entitled to the carryback on the theory that “a 
consolidated group is treated as a single entity with 
respect to the product liability provisions.” Amtel, Inc. 

v. United States, 31 Fed. Cl. 598, 599 (1994), aff ’d, 59 
F.3d 181 (Fed. Cir. 1995).2 The Court of Federal Claims 

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). 

2 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 
Section 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). 

5 

held, however, that “Amtel cannot carry back a product 
liability loss from 1985 to 1975 because it had no net 
operating loss in 1985.” 31 Fed. Cl. at 600. The court 
noted that, under the governing consolidated return 
regulations (26 C.F.R. 1.1502-79(a)(3)), Amtel had no 
separate loss for 1985 to carry back to its 1975 separate 
return year. 31 Fed. Cl. at 601. The court rejected the 
argument that a “consolidated product liability loss” 
should be computed for petitioner for 1985 because the 
consolidated return “regulations do not use the term 
‘consolidated product liability 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, again contending that product lia- 
bility 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. Pet. App. 28a. The complaint sought a 
refund of $1,618,305 plus statutory interest. J.A. 15. 
The district court granted petitioner’s motion for 
summary judgment. Pet. App. 25a-41a. The court 
agreed with petitioner that an affiliated group’s product 
liability loss carryback should be determined on a 
consolidated basis. Id. at 38a-39.3 

3 The district court also held that the decision in Amtel did not 
collaterally estop petitioner from asserting that product liability 
losses must be accounted for on a consolidated basis. Pet. App. 

6 

4. The court of appeals reversed. Pet. App. 1a-23a. 
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 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 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.” 

39a-40a. The United States did not raise the collateral estoppel 
issue in the court of appeals. 

7 

ARGUMENT 

1. The court of appeals correctly concluded that 
petitioner is not entitled to use product liability ex- 
penses incurred by a profitable affiliate to generate 
“product liability losses” that may be carried back for 
the ten-year period authorized by Section 172 of the 
Internal Revenue Code, 26 U.S.C. 172. The Sixth Cir- 
cuit, however, incorrectly reached the opposite 
conclusion in its recent decision in Intermet Corpora- 
tion v. Commissioner, 209 F.3d 901 (2000). There is 
thus a conflict among the circuits on a matter of sub- 
stantial recurring importance in tax administration. 
Under Section 1501 of the Code, the Treasury has the 
authority and responsibility to adopt consolidated 
return regulations that, when adopted, would effect a 
binding resolution of this matter. Section 1501 specifies 
that affiliated corporations may file a consolidated 
return 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. In turn, Section 1502 authorizes the 
Secretary to “prescribe such regulations as he may 
deem necessary in order that the tax liability of any 
affiliated group” be properly determined “in such 
manner as clearly to reflect the income tax liability” of 
those entities. 26 U.S.C. 1502. Congress has thus 
vested ample authority in the Secretary to adopt 
binding regulations to govern the treatment of 
consolidated returns. Once such binding regulations 
are adopted, any taxpayer who files a consolidated turn 
“shall be considered” as having consented to them. 26 
U.S.C. 1501. 

8 

When, as in this case, an agency has been directed to 
resolve controversial applications of a statute by 
regulation, this Court has stated that it is “more 
restrained and circumspect in using [the] certiorari 
power as the primary means of resolving [circuit] 
conflicts.” Braxton v. United States, 500 U.S. 344, 348 
(1991). Nonetheless, the regulations adopted by the 
Secretary under Section 1502 are binding on taxpayers 
only if they are in effect “prior to the last day 
prescribed by law for the filing” of the taxpayer’s 
consolidated return. 26 U.S.C. 1501.4 Accordingly, 
while the Secretary remains fully empowered to re- 
solve the existing controversy prospectively, it appears 
that only this Court could now resolve the existing 
conflict among the circuits for past years. 

The Internal Revenue Service advises us that the 
question presented in this case is currently pending in 
more than 100 cases at the administrative level. 
Moreover, for all years that precede any prospec- 
tive administrative clarification of the governing 
regulations—a clarification that is now only at the 
earliest stages of consideration—the question pre- 
sented here is likely to arise in numerous cases. In this 
situation, we do not oppose the grant of certiorari in 
this case. 

2. a. 

A “net operating loss” is defined as “the excess 

of the deductions * * * over the gross income” of the 
taxpayer. 26 U.S.C. 172(c).5 “A taxpayer does not have 

4 See also 26 U.S.C. 1503 (whenever a consolidated return is 
filed, “the tax shall be determined * * * in accordance with the 
regulations under section 1502 prescribed before the last day 
prescribed by law for the filing of such return”). 

5 Unless otherwise noted, the statutory references in this 
brief are to the Internal Revenue Code as in effect between 1983 
and 1986. 

9 

a [net operating] loss for a particular year unless its 
deductions exceed its ordinary income and its capital 
gains.” United States v. Foster Lumber Co., 429 U.S. 
32, 47 (1976). Under Section 172 of the Code, a tax- 
payer is generally allowed to carry back net operating 
losses for three years from the year in which the loss 
was incurred. 26 U.S.C. 172(b)(1)(A). Section 
172(b)(1)(I) of the Code, however, provides an 
exception from the general rule that allows “product 
liability losses” to be carried back for a period of ten 
years. 26 U.S.C. 172(b)(1)(I).6 The term “product 
liability loss” is defined to mean “the lesser of” the “net 
operating loss for such year” and the deductible ex- 
penses incurred by the entity that are “attributable to” 
the satisfaction or defense of product liability claims. 26 
U.S.C. 172(j)(1).7 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) the 
net operating loss is attributable in whole or in part to 
deductions for product liability expenses.8 

6 The ten-year carryback period for product liability losses is 
now provided by Sections 172(b)(1)(C) and 172(f)(1)(A) of the Code. 

26 U.S.C. 172(b)(1)(C), (f)(1)(A) (1994 Supp.). 

7 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. 

8 The Internal Revenue Code generally defines a “taxpayer” 
as “an individual, a trust, estate, partnership, association, com- 

10 

b. This case concerns the proper application of 
the product liability loss provisions to an affiliated 
group of corporations that files a consolidated return. 
When an affiliated group of corporations files a con- 
solidated return, “the tax shall be determined, com- 
puted, assessed, collected, and adjusted in accordance 
with the regulations under section 1502 prescribed 
before the last day prescribed by law for the filing of 
such return.” 26 U.S.C. 1503. The consolidated return 
regulations promulgated by the Treasury pursuant to 
Section 1502 are designed to arrive at a single figure of 
income or loss for the affiliated group for the 
consolidated return year. This figure, which is 
denominated “consolidated taxable income” under the 
regulations, is determined by taking into account the 
“separate taxable income” of each member of the 
affiliated group. 26 C.F.R. 1.1502-11 (1986). Subject to 
specific exceptions, the regulations provide that “[t]he 
separate taxable income of a member * * * is 

pany, or corporation.” 26 U.S.C. 7701(a)(1) and (14). Section 
7701(a)(1) 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, company or corporation.” 
Section 7701(a)(14) provides that “[t]he term ‘taxpayer’ means any 
person subject to any internal revenue tax.” An affiliated group 
of corporations that files a consolidated return is generally not 
treated as a “taxpayer” for purposes of the Internal Revenue Code 
because an affiliated group is defined as “1 or more chains of 
includible corporations connected through stock ownership with a 
common parent corporation, which is an includible corporation 

* * *.” 

26 U.S.C. 1504(a). Thus, the “taxpayer” referred to in 

Section 172(b)(1)(I) is a corporation that files a separate return, 
reports a net operating loss, and claims product liability deduc- 
tions; the term does not encompass an affiliated group of cor- 
porations. 

11 

computed in accordance with the provisions of the Code 
covering the determination of taxable income of 
separate corporations * * *.” 26 C.F.R. 1.1502-12 
(1986).9 The “net operating loss deduction” available for 
the consolidated entity is thus determined in the same 
manner as the group’s consolidated taxable income: 
each member of the group computes its separate tax- 
able income or loss and, with specific adjustments, 
these separate figures are then aggregated into a single 
figure constituting the consolidated taxable income. 

10 If 

9 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 
had it filed a separate return. It is possible for a corporation to 
compute positive separate taxable income even though the cor- 
poration would have reported a net operating loss had it filed a 
separate return. For example, if a corporation made a charitable 
contribution during a particular year, it could conceivably 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 contributions deduction is not 
taken into account in the computation of separate taxable income. 
Conversely, it is possible for a corporation to compute negative 
separate taxable income even though it would have reported 
positive income had it filed a separate return. Nothing in the 
record of this case, however, suggests that any member of peti- 
tioner’s affiliated group that computed positive separate taxable 
income and claimed product liability deductions would have had a 
“net operating loss” under Section 172 had it filed a separate re- 
turn. 

10 Under the regulations, the “net operating loss deduction” 
available for the consolidated entity is defined as “an amount equal 
to the aggregate of the consolidated net operating loss carryovers 
and carrybacks to the taxable year (as determined under para- 
graph (b) of this section).” 26 C.F.R. 1.1502-21(a) (1986). In turn, 
paragraph (b) provides that “[t]he consolidated net operating loss 
carryovers and carrybacks to the taxable year shall consist of any 
consolidated net operating losses (as determined under paragraph 

12 

a consolidated net operating loss results from these 
calculations, it may then be carried back (or forward) 
under Section 172 to other taxable years for which the 
affiliated group reported taxable income. 

c. Petitioner errs in claiming that an affiliated group 
that reports a consolidated net operating loss for a 
particular year necessarily has a product liability loss 
for the year equal to the sum of the product liability 
expense deductions claimed by its members. See Pet. 
App. 11a. Under the regulations described above, each 
group member must initially compute its product 
liability loss (if any) on an individual basis, and the 
resulting figures are then to be aggregated to arrive at 
the total loss for the group. 

11 The court of appeals 
correctly held (Pet. App. 17a) that petitioner’s contrary 
approach is at odds with these regulations. 

In particular, the consolidated return regulations 
require the consolidated net operating loss deduction to 
be computed by aggregating the separate taxable 
income of each of the affiliates. 26 C.F.R. 1.1502-21(f) 
(1986). The individual members of the group are 
initially to compute their “separate taxable incomes,” 
those figures are to be aggregated into a single amount, 
and this amount is then adjusted by taking into account 

(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 prin- 
ciples of section 172(b).” 26 C.F.R. 1.1502-21(b) (1986). And, in 
turn, paragraph (f) provides that “the consolidated net operating 
loss shall be determined by taking into account * * * [t]he 
separate taxable income * * * of each member of the group * * 

* .” 26 C.F.R. 1.1502-21(f) (1986). 

11 Petitioner is simply wrong in suggesting that “the IRS itself 
has favored single-entity treatment in the past” (Pet. 14). In fact, 
the Service has never endorsed that approach. 

13 

the consolidated items delineated in the regulation. 
Ibid. The consolidated items listed in the regulation do 
not include deductions attributable to product liability 
expenses. See ibid. Deductions for product liability 
expenses therefore must be applied in the first instance 
against the gross income of each affiliate in computing 
its “separate taxable income” under the regulations. 
Because the deductions are applied against the income 
of the individual affiliates, they cannot be treated 
separately from the corporation that claimed them. As 
the court of appeals correctly concluded, the require- 
ment 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. The court of appeals properly rejected 
petitioner’s claim in this case, for petitioner failed to 
sustain its “burden of clearly showing the right to the 
claimed deduction” under the regulations. Indopco, 
Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (quoting 
Interstate Transit Lines v. Commissioner, 319 U.S. 
590, 593 (1943)). 

12 

3. In Intermet Corporation v. Commissioner, supra, 
the Sixth Circuit resolved the question presented in 
this case in favor of the taxpayer. Pet. App. 60a-76a. 

12 Petitioner’s criticism of the court’s method of computing the 
“product liability loss” for specific individual members of the 
affiliated group (Pet. 12) is irrelevant to the legal issue presented 
in this case. There is no evidence in the record that any individual 
member of petitioner’s affiliated group would have a “product 
liability loss” under any method of calculating such a loss at the 
individual level. See note 9, supra. 

14 

Although the court stated in Intermet that the con- 
solidated return “regulations do not specifically address 
the application of the [loss] carryback” (id. at 67a), the 
court ultimately concluded that this issue was properly 
resolved by a portion of 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 stated that this 
regulation requires an affiliated group of corporations 
to be treated as a single taxpayer for purposes of the 
Internal Revenue Code unless the consolidated return 
regulations mandate a different result. Pet. App. 69a. 
The court in Intermet reasoned that, because the 
consolidated return regulations mandate no specific 
result in this situation, the entire affiliated group must 
be treated as a single “taxpayer” for purposes of 
Section 172(f). Pet. App. 69a. The court concluded that 
nothing in the regulations modified “the default rule” in 
26 C.F.R. 1.1502-80(a) under which the consolidated 
group was to be treated as if it were a single taxpayer. 
Pet. App. 74a. 

The Sixth Circuit erred in its construction of this 
regulation, which 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 provide a different 
rule. 26 C.F.R. 1.1502-80(a). The relevant “default” 
rule thereby incorporated into the consolidated return 
regulations is that every separate corporation is to be 
treated as a separate taxable entity (unless the 
consolidated return regulations otherwise provide). 
See 26 U.S.C. 11(a); Moline Properties v. Commis- 
sioner, 319 U.S. 436, 439-440 (1943); In re Chrome 

15 

Plate, Inc., 614 F.2d 990, 996 (5th Cir. 1980). The 
“default” rule provided by the regulation thus requires 
members of an affiliated group to be treated as separate 
entities when applying provisions of the Internal 
Revenue Code unless the consolidated return regula- 
tions provide for treatment of the group as a single 
entity. See Gottesman & Co. v. Commissioner, 77 T.C. 
1149, 1156 (1981); H Enterprises International, Inc. v. 
Commissioner, 105 T.C. 71, 85 (1995). The court of 
appeals erred in Intermet by giving the regulation an 
interpretation that simply stands its plain text upside 
down. 

There is, as we have noted, no evidence in the record 
of this case that any member of petitioner’s affiliated 
group would have had a product liability loss under 
Section 172(j) if it had filed a separate return during the 
years in issue. See note 12, supra. Applying the “de- 
fault” rule of 26 C.F.R. 1.1502-80(a) to this case there- 
fore requires rejection, rather than acceptance, of 
petitioner’s claim. 

16 

CONCLUSION 

For the reasons stated above, the United States does 
not oppose the granting of the petition for a writ of 
certiorari. 

Respectfully submitted. 

SETH P. WAXMAN 

Solicitor General 

PAULA M. JUNGHANS 

Acting Assistant Attorney 

General 

LAWRENCE G. WALLACE 

Deputy Solicitor General 

KENT L. JONES 

Assistant to the Solicitor 

General 

EDWARD T. PERELMUTER 

Attorney 

OCTOBER 2000