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next year (retrospective year), Parthenon received a
retrospective premium that was designed to cover the remaining
losses for the policy year.
In his calculation of the workers' compensation unpaid
losses reserve requirements for the policy year, Mr. Biscoglia
estimated workers' compensation reserves for the entire year
(including the portion of the liability paid during the
retrospective year). On the annual statement for the policy
year, however, Parthenon reported workers' compensation
liabilities relating only to the first-year installment premium.
Parthenon recorded the balance of the expected losses for the
policy year on the annual statement for the retrospective year
when the retrospective premium was paid.
In calculating his adjustment to the workers' compensation
unpaid losses reserves, Mr. Merlino reduced Mr. Biscoglia's
estimate of the required workers' compensation unpaid losses
reserve for each year to exclude the portion of the workers'
compensation unpaid losses reserve related to the retrospective
payment because he believed that petitioners would receive an
undue tax advantage if Parthenon were allowed to deduct the total
liability for the policy year without at the same time recording
an offsetting amount of premium income.
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