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the end of the taxable year, (4) less all unpaid losses
outstanding at the end of the preceding taxable year, (5) plus
estimated salvage and reinsurance recoverable at the end of the
preceding taxable year, (6) less estimated salvage and
reinsurance recoverable at the end of the taxable year. The
portion of "losses incurred" that represents unpaid losses must
comprise only actual unpaid losses as nearly as it is possible to
ascertain them. Sec. 1.832-4(b), Income Tax Regs.17 The
estimate of actual outstanding unpaid losses must be fair and
reasonable based on the facts in each case and the company's
experience with similar cases. Id.
17 Sec. 1.832-4(b), Income Tax Regs., provides as follows:
(b) Losses incurred. Every insurance company to which this
section applies must be prepared to establish to the
satisfaction of the district director that the part of the
deduction for "losses incurred" which represents unpaid
losses at the close of the taxable year comprises only
actual unpaid losses. See Section 846 for rules relating to
the determination of discounted unpaid losses. These losses
must be stated in amounts which, based upon the facts in
each case and the company's experience with similar cases,
represent a fair and reasonable estimate of the amount the
company will be required to pay. Amounts included in, or
added to, the estimates of unpaid losses which, in the
opinion of the district director, are in excess of a fair
and reasonable estimate will be disallowed as a deduction.
The district director may require any insurance company to
submit such detailed information with respect to its actual
experience as is deemed necessary to establish the
reasonableness of the deduction for "losses incurred."
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