REVENUE RULING 67-129
1967-1 C.B. 170

[IRS Annotation]
A life insurance company must take into account the full amount of its reasonable estimate of losses incurred but not reported in computing its deduction for death benefits, etc., under section 809(d)(1) of the Internal Revenue Code of 1954 and must reduce its life insurance reserves by the amount attributable to such losses.

Revenue Ruling 65-33, C.B. 1965-1, 263, amplified.

[Rev. Rul. 67-129]
Advice has been requested whether, under the circumstances described below, a life insurance company must include the full amount [171] of its losses incurred but not reported as part of its deduction for death benefits, etc., under section 809(d)(1) of the Internal Revenue Code of 1954, and whether its life insurance reserves must be reduced by the amount attributable to such unreported losses.

The taxpayer is a life insurance company as defined in section 801 of the Code and is subject to the tax imposed under section 802 of the Code. In computing its gain or loss from operations under section 809 of the Code the taxpayer claimed, as part of its deduction for death benefits, etc., under section 809(d)(1) of the Code, its estimate of "losses incurred but not reported" reduced by the portion of its life insurance reserves attributable to such unreported losses.

Section 801(b) of the Code provides, in pertinent part, that the term "life insurance reserves" means amounts which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims.

Section 809(d)(1) of the Code allows as a deduction, in computing gain or loss from operations, all claims and benefits accrued, and "all losses incurred (whether or not ascertained)," during the year.

Section 1.809-5(a) of the Income Tax Regulations provides that for this purpose the term "losses incurred (whether or not ascertained)" includes a reasonable estimate of the amount of the losses (based upon the facts in each case and the company's experience with similar cases) incurred but not reported by the end of the taxable year as well as losses reported but where the amount thereof cannot be ascertained by the end of the taxable year.

Section 818(a) of the Code provides the general rule that all computations entering into the determination of taxes imposed by part I, subchapter L, chapter 1, of the Code, shall be made under an accrual method of accounting.

All losses occurring before the end of the taxable year whether reported or unreported are, on the basis of the facts in each case and the company's experience with similar cases, fixed liabilities reasonably ascertainable in amount. Such reported and unreported losses are thus part of losses incurred and may be taken into account in computing the deduction under section 809(d)(1) for death benefits, etc.

In view of the fact that losses incurred represent matured liabilities, the life insurance reserves attributable to such losses no longer pertain to future unaccrued insurance claims. The reserves must therefore be reduced by the amount attributable to the losses incurred, which, losses include a reasonable estimate of reported and unreported claims, and such reduction must be taken into income as a decrease in reserves under section 809(c)(2) of the Code.

Revenue Ruling 65-33, C.B. 1965-1, 263, which holds, in effect, that unpaid losses are taken into account under section 809(d)(1) of the Code in the computation of the deduction allowed for death benefits, etc., rather than taken into account as an increase in reserves under section 810 of the Code, is hereby amplified.