REVENUE RULING 57-279
1957-1 C.B. 213

[IRS Annotation]
The term "administrative or clerical expenses of a nature that can be actually determined," as used in Revenue Ruling 55-580, means "statistically determined" expenses, which are to be considered separately, and not combined with estimates of future costs of adjusting claims, in determining "expenses incurred" under section 832(b)(6) of the Internal Revenue Code of 1954.

Revenue Ruling 55-580, C.B. 1955-2, 282, amplified.

[Rev. Rul. 57-279]
The Internal Revenue Service has been requested to clarify the last sentence of the fourth paragraph of Revenue Ruling 55-580, C.B. 1955-2, 282, relative to the computation of "expenses incurred" of insurance companies under the provisions of section 832 of the Internal Revenue Code of 1954.

Section 832(b) of the Code provides, in part, as follows:

(6) Expenses Incurred.—The term "expenses incurred" means all expenses shown on the annual statement approved by the National Convention of Insurance Commissioners, and shall be computed as follows: To all expenses paid during the taxable year, add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the taxable income subject to the tax imposed by section 831, there shall be deducted from expenses incurred (as defined in this paragraph) all expenses incurred which are not allowed as deductions by subsection (c).

At issue is the meaning of the above-mentioned sentence contained in Revenue Ruling 55-580, supra, which states:

The question here relates to "expenses incurred" involving estimates of future costs of adjusting claims and similar types of expenses but does not include administrative or clerical expenses of a nature that can be actually determined. [Underscoring supplied.]

Revenue Ruling 55-580 was issued to entitle insurance companies, taxable under the provisions of section 831 of the Internal Revenue Code of 1954, to a deduction under section 832(b)(6) for "expenses incurred" involving estimates of future costs of adjusting claims and similar types of expenses, according to the accounting method adopted [214] by the National Convention of Insurance Commissioners used in filing the companies' annual statements.

The underscored portion of the above quoted sentence should not be considered as implying that "administrative or clerical expenses of a nature that can be actually determined" are not allowable. It was inserted to assure that determinable administrative and clerical expenses would not be combined with estimates of future costs of adjusting claims and similar types of expenses, but would be considered separately in determining "expenses incurred" under section 832(b)(6) of the Code.

By way of explanation, the term "administrative or clerical expenses of the nature that can be actually determined" means "statistically determined" expenses which can be formulated in the same manner in which the Service has approved the determination of "unpaid losses" under the "case basis" (i.e., the method used in arriving at their estimates by averaging the expenses of settling claims over a five-year period based on the company's actual past experience as shown in their prior annual statements for such years).

Accordingly, the term "administrative or clerical expenses of a nature that can be actually determined," as used in Revenue Ruling 55-580, supra, means "statistically determined" expenses, which are to be considered separately and not combined with estimates of future costs of adjusting claims, in determining "expenses incurred" under section 832(b)(6) of the Code.