Minnesota Lawyers Mutual Insurance Company and Subsidiaries - Page 23

                  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.” [Sec. 1.832-4(a)(5) and (b), Income Tax Regs.]                            
                  The validity of these longstanding regulations is well                               
            established, see, e.g., Hanover Ins. Co. v. Commissioner, 69                               
            T.C. 260, 272 (1977), affd. 598 F.2d 1211 (1st Cir. 1979);                                 
            Hanover Ins. Co. v. Commissioner, 65 T.C. 715, 719 (1976), and                             
            is not in dispute.                                                                         
                  Although the annual statement methodology is normally                                
            controlling for tax purposes, when the annual statement                                    
            methodology is predicated upon the use of estimates, those                                 
            estimates must be the “best possible.”  Bituminous Cas. Corp. v.                           
            Commissioner, 57 T.C. 58, 78 (1971).                                                       
                  A reserve for unpaid losses is an estimate of the insurer’s                          
            liability for claims that it will be required to pay in future                             
            years.  See Western Cas. & Sur. Co. v. Commissioner, 65 T.C.                               
            897, 917 (1976), affd. on another issue 571 F.2d 514 (10th Cir.                            
            1978).  Unpaid losses may not be based on estimates of potential                           
            losses that might be incurred in future years but instead must                             

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Last modified: May 25, 2011