In a Tax Court decision issued on September 4, Acuity Insurance lodged a victory against the Internal Revenue Service in a case which involved dueling actuarial opinions. Acuity v. Commissioner, T.C. Memo. 2013-209 The IRS had asserted that Acuity owed more than $31 million in additional federal income tax on income which was wrongfully suppressed by unreasonable additions to loss reserves. Acuity defended that its reserves were reasonable, developed by an appropriately qualified actuary and computed in accordance with Actuarial Standards of Practice and NAIC requirements..

The case involved the testimony of multiple actuaries for both the IRS and Acuity. The decision of the Tax Court presents a nice description for the lay person of the task of the actuary in establishing loss reserves for a property and casualty company, including the inherent variability of that task.

The court commented favorably on the testimony of one witness that "[e]very single actuary is always wrong, because no one knows for sure with 100 percent certainty that ... [a loss] reserve is adequate until the time passes."

In the end, the Tax Court was persuaded that Acuity's reserves were computed in good faith, certified by an actuary and computed in accordance with Actuarial Standards of Practice. Having found that Acuity's reserves were so computed, the Tax Court judge ruled that he did not need to determine whether the opinions of the IRS actuaries were right or wrong, reasonable or unreasonable. The test was whether the insurer's reserves were supportable, not whether there was a "better" estimate of reserves.

In other words, the taxpayer does not have the burden to establish that the amount put forward by the IRS as a fair and reasonable estimate of loss reserves is not fair or reasonable. Instead, IRS regulations only require the taxpayer to show that its own loss reserves are fair and reasonable and represent only actual unpaid losses. According to the Tax Court, when the taxpayer makes such a showing, the inquiry ends.

A copy of the opinion may be found here.

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