-26-
$42,577,000 for 1992.
D. Analysis
1. Whether Petitioner's Reserves Were Fair and Reasonable
Respondent contends that respondent's adjustments to the
unpaid loss reserves are needed to make the reserves fair and
reasonable as required by section 1.832-4(b), Income Tax Regs.
Respondent argues that respondent's proposed reduction of
petitioner's undiscounted unpaid losses for 1991 and 1992 is
reasonable.
A taxpayer's reserve for unpaid losses must be fair and
reasonable based on the facts in each case and the company's
experience with similar cases. Sec. 1.832-4(b), Income Tax Regs.
Petitioner could not offset reserve deficits with reserve
surpluses in another line of insurance because it wrote a single,
relatively volatile line of business in a limited market. The
inability to offset deficits with surpluses makes petitioner's
business more risky and reasonably led petitioner to establish
higher reserves.
For the years in issue, the medical malpractice industry
overstated reserves to virtually the same extent as petitioner.
This suggests that petitioner's estimates were fair and
reasonable.
UDI made a triennial examination of petitioner's 1990-93
annual statements. It did not adjust petitioner's reporting of
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