-21-
ascertain them. Sec. 1.832-4(a)(5), (b), Income Tax Regs.19 The
estimate of unpaid losses must be fair and reasonable based on
the facts in each case and the company's experience with similar
cases. Id.
The reserve for unpaid losses is an estimate, made at the
close of a taxable year, of the insurer's liability for claims
that it will be required to pay in future years. Western Cas. &
Sur. Co. v. Commissioner, 65 T.C. 897, 917 (1976), affd. on
another issue 571 F.2d 514 (10th Cir. 1978). 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, 69 T.C. 260, 270 (1977), affd. 598 F.2d 1211 (1st
Cir. 1979).
19 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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