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accident years. Under the formula, petitioner's reserves at
yearend 1985 were reduced by the claims and the LAE paid in 1986
with respect to those reserves. To the extent that, at yearend
1986, a reserve was greater than the amount determined under the
formula, the excess was treated as a net increase to that reserve
account (i.e., "reserve strengthening"). To the extent that, at
yearend 1986, a reserve was less than the amount determined under
the formula, the difference was treated as a net decrease to that
reserve account (i.e., "reserve weakening").
Respondent determined that, at yearend 1986, petitioner's
"reserve strengthening" totaled the following amounts:
Reserve Strengthening
Line of Business (Weakening)
Auto liability ...................... ($10,559,423)
Other liability ..................... (1,279,374)
Workers' compensation ............... 4,691,659
Multiple peril ...................... 15,585,877
Schedule O1 (1985) .................. (3,870,000)
Schedule O (pre-1985) ............... 1,984,000
Net total ........................ 6,552,739
1Schedule 0, a part of the annual statement filed with the
National Association of Insurance Commissioners, contains
combined loss data on several lines of insurance business with
respect to which claims are filed and settled within a relatively
short period.
Respondent then discounted, pursuant to section 846, the
amount determined as "reserve strengthening" in order to
calculate the effect on petitioner's gross income.1 After
1For a discussion of sec. 846 and discounting generally, see
sec. I.A., "The Change from Undiscounted to Discounted Reserve
Accounting", in the Discussion section of this opinion.
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