Rev. Rul. 70-643

The purpose of this Revenue Ruling is to update and restate under the current statute and regulations the position set forth in G.C.M. 2318, C.B. VI-2, 80 (1927).

The question presented is whether "resisted losses" and "losses incurred but not reported" are deductible by certain insurance companies.

At December 31, 1969, a fire insurance company had unpaid losses that had been reported to it. The company denies liability for some and is contesting the amount of the liability for others. The company also had unpaid losses that had not yet been reported to it.

Section 831 of the Internal Revenue Code of 1954 imposes a tax on insurance companies, other than life or mutual insurance companies, that is in lieu of the tax imposed by section 11 of the Code on other corporations.

Section 832(a) of the Code provides that in the case of an insurance company subject to the tax imposed by section 831 of the Code, the term "taxable income" means the gross income as defined in section 832(b)(1) of the Code less the deductions allowed by section 832(c) of the Code.

Section 832(b)(1) of the Code provides that in such case the term "gross income" includes the combined gross amount earned during the taxable year from investment income and from underwriting income computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners.

On the underwriting exhibit of the annual statement losses paid and incurred for the year are computed by adding to the losses paid for the year the unpaid losses and unreported losses at the end of the year and deducting the unpaid losses and unreported losses at the end of the previous year.

Section 832(b)(3) of the Code provides that the term "underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.

Section 832(b)(5) of the Code provides that the term "losses incurred" means losses incurred during the taxable year on insurance contracts computed as follows:

(A) To losses paid during the taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year.

(B) To the result so obtained, add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year.

Section 832(c) of the Code provides that in computing the taxable income in such a case a deduction is allowed for losses incurred as defined in section 832(b)(5) of the Code.

Section 832(d) of the Code does not permit the same item to be deducted more than once under the provisions of the section.

Section 1.832-4(a)(2) of the Income Tax Regulations provides that the underwriting and investment exhibit is presumed to reflect the true net income of the company, and insofar as it is not inconsistent with the provisions of the Code will be recognized and used as a basis for that purpose.

Section 1.832-4(a)(5) of the regulations provides that 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.

Accordingly, in computing the amount of losses incurred under section 832(b)(5) of the Code and the regulations thereunder, the taxpayer may take into account resisted losses and losses that have been incurred but have not been reported.

G.C.M. 2318 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.