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832(a). One of the deductions allowed is for “losses incurred”
as defined in section 832(b)(5).12 Sec. 832(c)(4).
The applicable regulations, which have remained
substantively unchanged since their promulgation in 1944, require
the taxpayer to establish that its estimate of unpaid losses is
“fair and reasonable” and represents “only actual unpaid losses.”
Sec. 1.832-4(b), Income Tax Regs. (the applicable regulations);
see State of Md. Deposit Ins. Fund v. Commissioner, 88 T.C. 1050,
1059 (1987). The applicable regulations provide as follows:
(5) In computing “losses incurred” the
determination of unpaid losses at the close of each
year must represent actual unpaid losses as nearly as
it is possible to ascertain them.
(b) Losses incurred. Every insurance company to
which this section applies must be prepared to
establish to the satisfaction of the district director
that the part of the 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
12 Although such a deduction would appear potentially
duplicative of losses incurred that are taken into account in
determining the underwriting income component of gross income
under sec. 832(b)(3), the statute specifically prohibits the same
item from being deducted more than once. See sec. 832(d).
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