The IRS has released a revenue procedure that provides simplified procedures for an insurance company to obtain the IRS’s automatic consent to change its method for discounting unpaid losses and expenses unpaid, estimated salvage recoverable and unearned premiums attributable to title insurance, to comply with Code Sec. 846, as amended by the Tax Cuts and Jobs Act (TCJA).
Background—discounting rules. Insurance companies use the discounting rules of Code Sec. 846 to determine discounted unpaid losses under Code Sec. 832(b)(5), including unpaid loss adjustment expenses included in unpaid losses under Code Sec. 832(b)(6), and estimated salvage recoverable by property and casualty insurance companies for Federal income tax purposes under Code Sec. 832(b)(5).
Section 13523 of the TCJA amended Code Sec. 846 for tax years beginning after December 31, 2017 (Amended Code Sec. 846).
Section 13523(e) of the TCJA provides a transition rule for the application of the amendments made by section 13523 to unpaid losses and expenses unpaid (as defined in Code Sec. 832(b)(5) and Code Sec. 832(b)(6)) or unpaid losses (as defined in Code Sec. 805(a)(1) and Code Sec. 807(c)(2)) (unpaid losses).
On November 7, 2018, the IRS published proposed regulations (Prop Reg §1.846-1). Under the proposed regulations, the annual rate determined under Amended Code Sec. 846(c) is based on a specific range of maturities from the corporate bond yield curve.
On January 7, 2019, the IRS published Rev Proc 2019-6 which prescribes unpaid loss discount factors for the 2018 accident year and earlier accident years for use in computing discounted unpaid losses under Amended Code Sec. 846.
On June 17, 2019, the IRS published final regulations under Amended Code Sec. 846 (Final Regulations). The Final Regulations apply to tax years beginning after December 31, 2017. Under the Final Regulations, the annual rate determined under Amended Code Sec. 846(c) is based on a specific range of maturities (from four and one-half years to ten years) from the corporate bond yield curve. The guidance regarding loss payment patterns is the same under the Proposed Regulations and the Final Regulations.
On July 22, 2019, the IRS published Rev Proc 2019-31, 2019-33 IRB, which provides revised unpaid loss discount factors for the 2018 accident year and earlier accident years, determined under Amended Code Sec. 846 and the Final Regulations (Revised Discount Factors).
Background—Change of accounting method. A change in method of discounting unpaid losses, estimated salvage recoverable, or unearned premiums attributable to title insurance to comply with Amended Code Sec. 846 changes the proper time for the inclusion of the item in income or the taking of the item as a deduction and is a change in method of accounting subject to Code Sec. 446(e) and Reg. §1.446-1.
Code Sec. 446(e) and Reg. §1.446-1(e)(2)(i) state that, except as otherwise provided, a taxpayer must secure the consent of the IRS before changing a method of accounting for any item for Federal income tax purposes. Generally, a taxpayer must file a Form 3115, Application for Change in Accounting Method, during the tax year for which the taxpayer desires to make the proposed change in method of accounting (year of change).
New procedure. The new simplified procedure waives the requirement to file Form 3115 for a taxpayer making an accounting method change under this revenue procedure. In addition, the revenue procedure provides an automatic consent under Reg. §1.446-1(e)(2)(i) for any taxpayer within the scope of this revenue procedure to change its methods of accounting for discounting unpaid losses, estimated salvage recoverable, and unearned premiums attributable to title insurance, as applicable, to comply with Amended Code Sec. 846, provided the taxpayer complies with the provisions of the revenue procedure.
This revenue procedure applies to any property and casualty insurance company that changes its method of accounting for discounting unpaid losses under Code Sec. 846, discounting salvage recoverable under Code Sec. 832, or both to comply with Amended Code Sec. 846, and to any life insurance company that changes its method of accounting for discounting unpaid losses to comply with Amended Code Sec. 846, provided the taxpayer (whether a life insurance company or property and casualty insurance company) is a calendar year taxpayer (including a calendar year taxpayer with a short tax year beginning after December 31, 2017, and ending before June 17, 2019) and satisfies the conditions set forth in this revenue procedure.
Section 26.04(1) of Rev Proc 2018-31, 2018-22 IRB 637 (as modified by Rev Proc 2019-10, 2019-2 IRB 296), is modified to provide that section 26.04 of Rev Proc 2018-31 is inapplicable to any change in method of accounting made under this revenue procedure.
Effective date. This revenue procedure is effective for tax years beginning after December 31, 2017, and ending on or before December 31, 2019.
For more information on revenue procedures for insurance companies, contact Greg Denning at gdenning@larsco.com.
Source: Checkpoint Newsstand 7/23/19
