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Petitioners contend that the unpaid losses reserve for
workers' compensation liabilities should include the total
anticipated liability regardless of the year during which payment
is recorded. We agree with petitioners. We find no basis for
Mr. Merlino's adjustment in the workers' compensation unpaid
losses reserves to account for unpaid premiums. Section 832(c)
provides a deduction from the taxable income of an insurance
company for "losses incurred" during the taxable year. Losses
incurred includes a fair and reasonable estimate of actual
outstanding unpaid losses that an insurance company will be
required to pay sometime in the future. Sec. 1.832-4(b), Income
Tax Regs. Neither the Code nor the regulations correlate unpaid
losses to premiums paid. Accordingly, we conclude that Mr.
Merlino's reduction of the unpaid losses reserve of $12.5 million
for 1987 and $11.2 million for 1988 is not warranted.
Mr. Merlino further reduced the unpaid losses reserves for
years ended 1987 and 1988 to conform the claimed unpaid losses
reserves for workers' compensation and professional and general
liabilities to the unpaid losses reserves for those lines of
business recommended in Mr. Biscoglia's reserve analysis reports
for those years. Respondent contends that those adjustments are
required to bring the reserves to a level which meets the fair
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