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taxpayer's discretion, or lack thereof, in establishing
the amount of the unpaid loss reserve. The amount of
reserve strengthening for an unpaid loss reserve may
not exceed the amount of the reserve, including any
undiscounted strengthening amount, as of the end of the
last taxable year beginning before January 1, 1987.
For purposes of this section, an "unpaid loss reserve"
is the aggregate of the unpaid loss estimates for
losses (whether or not reported) incurred in an
accident year of a line of business.
* * * * * * *
(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 the
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. * * *
III. The Western National Decision
In Western Natl. Mut. Ins. Co. v. Commissioner, 102 T.C. 338
(1994), a Court-reviewed decision, this Court considered facts
virtually identical to those presented in this case. The Court
ruled for the taxpayer, holding that section 1.846-3(c), Income
Tax Regs., is invalid to the extent that it treats all net
additions in 1986, to pre-1986 loss reserves, as "reserve
strengthening". As in the present case, the taxpayer in Western
National had a higher loss reserve balance, for pre-1986 years,
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