Proposed regulations would provide guidance on the new Section 846 discounting rules for unpaid losses and estimated salvage recoverable of insurance companies, implementing changes made by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). The proposed regulations also would make other technical improvements to the derivation and use of discount factors. The proposed regulations are proposed to apply to tax years beginning after December 31, 2017.
Section 846 Discounting Rules and TCJA Changes
The Section 846 discounting rules are used to determine:
(1) discounted unpaid losses and estimated salvage recoverable of property and casualty insurance companies and discounted unearned premiums of title insurance companies under Section 832; and
(2) discounted unpaid losses of life insurance companies under Sections 805(a)(1) and 807(c)(2).
TCJA generally made the following changes to the Section 846 rules, effective for tax years beginning after December 31, 2017:
(1) Provided a new definition of the “annual rate” to be used by taxpayers for discounting purposes.
(2) Amended the computational rules for determining loss payment patterns.
(3) Repealed the election under former Section 846(e) to use the taxpayer’s own historical loss payment pattern instead of the pattern published by the IRS.
Modification of Applicable Rate of Interest Used to Discount Unpaid Losses
Under the proposed regulations, the applicable interest rate is the annual rate determined by the IRS for any calendar year on the basis of the corporate bond yield curve. The annual rate for any calendar year is the average of the corporate bond yield curve’s monthly spot rates with times to maturity of not more than seventeen and one-half years, computed using the most recent 60-month period ending before the beginning of the calendar year for which the determination is made. The proposed regulations provide for the use of a single annual rate applicable to all lines of business.
Under the proposed regulations, the IRS may adjust the loss payment pattern for any line of business using a methodology described in other published guidance, if necessary to avoid negative payment amounts and otherwise produce a stable pattern of positive discount factors less than one.
The IRS will describe the adjustments made to the loss payment patterns produced using annual statement payment data and the methodology used to make such adjustments for each determination year in the revenue procedure publishing discount factors for that determination year. The proposed methodology that the IRS anticipates using to make adjustments to loss payment patterns for lines of business would consist of seven computational steps.
Discontinuance of Composite Method
The proposed regulations would eliminate the need to determine a second set of discount factors to be used with respect to accident years not separately reported on the NAIC annual statement. Effective for tax years beginning on or after the date the proposed regulations are published as final regulations, a taxpayer that has unpaid losses relating to an accident year not separately reported on the NAIC annual statement must compute discounted unpaid losses with respect to that year using the discount factor published for that year for the appropriate line of business.
The methods described in Rev. Proc. 2002-74, 2002-2 CB 980, and section V of Notice 88-100, 1988-2 CB 439, would not be permitted methods, effective for tax years beginning on or after the date the proposed regulations are published as final regulations.
Determination of Estimated Discounted Salvage Recoverable
The IRS will provide in future published guidance that estimated salvage recoverable is to be discounted using the published discount factors applicable to unpaid losses. This treatment of estimated salvage recoverable is equivalent to netting undiscounted unpaid losses with estimates of salvage recoverable and discounting the net amount using the unpaid loss discount factors.
Separate discount factors for estimated salvage recoverable (including anticipated recoveries on account of subrogation claims) would no longer be published by the IRS.
Effect on Other Documents
Section V of Notice 88-100 and Rev. Proc. 2002-74 are proposed to be obsolete for tax years beginning on or after the date the proposed regulations are published as final regulations in the Federal Register.
Comments and Public Hearing
Written or electronic comments must be received by December 7, 2018. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for December 20, 2018, at 10:00 a.m., must be received by December 7, 2018. Send submissions to: CC:PA:LPD:PR (REG-103163-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-103163-18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (REG-103163-18). The public hearing will be held in the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224.
Proposed Regulations, NPRM REG-103163-18
Code Sec. 846
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CCH Reference – INTLOUT: 9,106.30