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The reserve for unpaid losses at the end of the taxable year
is an estimate, made at the close of the current taxable year, of
the insurer's liability for claims that it will be required to
pay in future years. Home Mutual Ins. Co. v. Commissioner, 70
T.C. 944, 951 (1978), affd. in part, revd. in part and remanded
639 F.2d 333 (7th Cir. 1980); Western Casualty & Surety Co. v.
Commissioner, 65 T.C. 897, 917 (1976), affd. on another issue 571
F.2d 514 (10th Cir. 1978). The unpaid loss reserve at the end of
the taxable year for purposes of computing the "losses incurred"
deduction consists of the aggregate unpaid loss reserves for all
lines of business of the insurance company. Hanover Ins. Co. v.
Commissioner, 69 T.C. 260, 271 (1977), affd. 598 F.2d 1211 (1st
Cir. 1979); Western Casualty Surety Co. v. Commissioner, supra at
917.18 The resolution of a fair and reasonable estimate of a
taxpayer's unpaid losses is essentially a valuation issue and a
question of fact. Hanover Ins. Co. v. Commissioner, supra at
270. Calculation of unpaid losses may not be based on estimates
of potential losses that might be incurred in future years.
18 See also Rev. Proc. 75-56, 1975-2 C.B. 596, 597, sec. 3.03
(the deduction for unpaid losses incurred shall be the aggregate
of the reasonable estimates for each line of business at the end
of each taxable year). Rev. Proc. 75-56 sets forth procedures
for computing the deduction for losses incurred pursuant to sec.
832(b)(5).
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