-17-
between the loss event and the time when petitioner first became
obligated to make a payment in respect to the loss event.14
Losses exceeding $1 million were covered by a separate
reinsurance treaty.
Based on its pattern for paying significant claims,
petitioner's average "retention"15 by the time those claims would
be paid was about $375,000 to $400,000 during the years in issue
($300,000 plus $25,000 for each December that passed between the
coverage year and the year of final payment of the claim).
J. Income Tax Returns and Notice of Deficiency
Petitioner timely filed Forms 1120-PC, U.S. Property and
Casualty Insurance Company Income Tax Return, for 1991 and 1992.
Petitioner had undiscounted unpaid losses of $56,847,261 for
1991 and $61,971,100 for 1992. Petitioner reported on its
Federal income tax returns that it had discounted unpaid losses
of $45,650,249 for 1991 and $49,418,509 for 1992, which it
deducted as part of losses incurred under section 832(b)(5).
II. OPINION
A. Issue for Decision
The sole issue for decision is whether petitioner may deduct
$45,650,249 for its reserves for unpaid losses and loss
14 For example, if, in May 1994, petitioner paid $800,000 to
settle a covered 1991 loss event, the 1991-92 treaty would
provide reimbursement of $425,000, that is, $800,000 minus the
indexed amount of $375,000 ($300,000 plus $25,000 each for Dec.
31, 1991, Dec. 31, 1992, and Dec. 31, 1993).
15 Retention is the dollar level of risk up to which an
insurance company is self-insured; i.e., is not reinsured. See
Dockery v. Commissioner, T.C. Memo. 1998-114.
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