-30-
5. Whether Petitioner's Reserves Must Be Probable To Be
Fair and Reasonable
Respondent argues that petitioner's reserves were not fair
and reasonable because it is improbable that petitioner's losses
will reach Tillinghast's highest estimates for 6 or 7 consecutive
years. Respondent contends that, to be fair and reasonable, the
estimates of unpaid losses selected by the taxpayer must be at
least equally likely to occur as any other estimate of unpaid
loss.
We disagree. The regulations require that the taxpayer make
a fair and reasonable estimate of losses based on the facts of
each case and on the taxpayer's experience with similar cases.
Sec. 1.832-4(b), Income Tax Regs. The regulations do not provide
or even suggest that only one estimate is correct.
6. Whether Petitioner's Lookback Method Was Proper
Respondent argues that Hurley's lookback method22 for
estimating the high end of its range ignored the most recent
actual loss data and included the preceding year's overstated
initial estimate in the initial high end estimate for the next
year. For example, respondent contends that Hurley used his
initial $16 million high end estimate made at the end of 1990
rather than using the most recent estimate for 1990 ($15.2
million), reestimated at the end of 1991.
22 Hurley looked back at prior years' losses to estimate
current loss reserves.
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