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OPINION
The issue for decision is whether petitioner correctly
reported its undiscounted unpaid losses for purposes of computing
its deduction for losses incurred, pursuant to section
832(b)(5).10 Petitioner contends that because it reported the
same estimates of unpaid losses on its annual statements and tax
returns, and because it estimated these unpaid losses in a
reasonable manner, using sound business practices, these
estimates should be accorded deference for Federal income tax
purposes. Respondent contends that petitioner’s estimates of
unpaid losses were not fair and reasonable.
Applicable Law
Petitioner, as a nonlife insurance company, must compute its
taxable income under section 832. See sec. 831. Under these
statutory provisions, gross income includes amounts earned from
investment and underwriting income, “computed on the basis of the
underwriting and investment exhibit of the annual statement
approved by the National Association of Insurance Commissioners”.
Sec. 832(b)(1)(A). Underwriting income is defined as “the
premiums earned on insurance contracts during the taxable year
less losses incurred and expenses incurred.” Sec. 832(b)(3).
10 For each year in issue, petitioner claimed deductions for
increases in its discounted unpaid losses pursuant to sec.
832(b)(5) after discounting the amounts reported as undiscounted
unpaid losses. The parties have not raised any issue regarding
the method of discounting these losses.
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