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override these in-house guidelines and to require no adjustment
to petitioner’s annual statement estimates, largely because
Coopers did not consider the effects of any overstatement of
these estimates to be “significant” for financial disclosure
purposes.22 The mere fact that a potential overstatement in
unpaid loss estimates is not deemed significant or material for
financial statement purposes, however, does not mean that the
estimates are fair and reasonable within the meaning of the
applicable regulations. In fact, Coopers specifically noted that
the “impact on current year net income is significant”. Of
course, failure to clearly reflect net income is at the heart of
our concerns here.
Regarding petitioner’s 1994 financial statements, Coopers
noted that “A portion of the reserve redundancy is maintained to
offset potential tax exposure” relating to IRS audits of
petitioner for prior years. This comment strongly suggests that
petitioner’s estimates of its unpaid losses did not comprise
“only actual unpaid losses” on its insurance contracts, as
required by the applicable regulations. Sec. 1.832-4(a)(5) and
(b), Income Tax Regs.; see State of Md. Deposit Ins. Fund v.
22 Among the reasons stated for the Coopers & Lybrand
decision that no unpaid loss adjustments were required for
petitioner’s financial statements were the following: “The
impact on retained earnings (slightly over 5%) is not considered
overly significant”; there would be no “significant impact” on
bonus plans; and petitioner “is not publicly traded and there is
currently no active market for the existing shares.”
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