386
Opinion of the Court
reserve by applying the rules of this paragraph (c). This determination is made without regard to the reasonableness of the amount of the unpaid loss reserve and without regard to the taxpayer's discretion, or lack thereof, in establishing the amount of the unpaid loss reserve. . . .
. . . . . "(3) Accident years before 1986—(i) In general. For each taxable year beginning in 1986, the amount of reserve strengthening (weakening) for an unpaid loss reserve for an accident year before 1986 is the amount by which the reserve at the end of that taxable year exceeds (is less than)—
"(A) The reserve at the end of the immediately preceding taxable year; reduced by
"(B) Claims paid and loss adjustment expenses paid ("loss payments") in the taxable year beginning in 1986 with respect to losses that are attributable to the reserve. . . ." Treas. Reg. § 1.846-3(c), 26 CFR § 1.846- 3(c) (1997).
In short, any net additions to reserves (with two exceptions not here at issue, § 1.846-3(c)(3)(ii)) constitute "reserve strengthening" under the regulation.
The Commissioner of Internal Revenue determined that Atlantic made net additions to reserves—"reserve strengthening"—during 1986, reducing the "fresh start" entitlement by an amount that resulted in a tax deficiency of $519,987. The Tax Court disagreed, holding that Atlantic had not strengthened its reserves. "Reserve strengthening," the Tax Court held, refers only to increases in reserves that result from changes in the methods or assumptions used to compute them. (Atlantic's reserve increases, there is no dispute, did not result from any such change.) The United States Court of Appeals for the Third Circuit reversed the Tax Court, concluding that the Treasury Regulation's defini-
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