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operating performance as B++ (Very Good). Best’s 1994 report
(with reference to petitioner’s 1993 annual statement) indicated
that in 1993 petitioner had recorded its largest net operating
gain of the last 5 years and stated: “Based on favorable
development of its conservatively stated loss reserves,
[petitioner’s] management took down $4.5 million of aggregate
reserves in 1993.” Best’s 1995 report (with reference to
petitioner’s 1994 annual statement) indicated that petitioner
“has generated very profitable operating results in recent years
as net investment income was enhanced by favorable loss reserve
development” and predicted that petitioner’s strong earnings
would continue in the near term, partly because petitioner
“conservatively reserves for its underwriting exposures”.
Petitioner’s Tax Returns and Respondent’s Determinations
On its Federal income tax returns for taxable years 1993 and
1994, petitioner reported undiscounted unpaid losses in the same
amounts shown on its annual statements.
Using a computer program known as Exhibitmaker, which was
developed by Coopers, respondent determined that petitioner’s
undiscounted unpaid losses were overstated and should be reduced
to the levels shown below:
As Reported As Determined
Year by Petitioner by Respondent
1993 $81,391,000 $46,508,000
1994 84,559,000 45,549,000
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