Service Postpones Effective Date of Salvage and Reinsurance Rules Until Tax Years Beginning After After Dec. 31, 1989

 [4830-01]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the treatment of salvage and reinsurance under section 832(b)(5) of the Internal Revenue Code. The regulations affect property and casualty insurance companies, and are necessary to provide them with guidance in computing the losses incurred deduction of that section. The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations for the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATES: Section 1.832-7T is effective for taxable years beginning before January 1, 1990. The amendments to section 1.832-4T are effective for taxable years beginning after December 31, 1989.

 FOR FURTHER INFORMATION CONTACT: William L. Blagg of the Office of the Assistant Chief Counsel (Financial Institutions and Products), Branch 4 (CC:FI&P:4), P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044, (202) 566-3294 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document amends the Income Tax Regulations (26 CFR Part 1) to provide temporary rules relating to the treatment of salvage and reinsurance under section 832(b)(5) of the Internal Revenue Code.

EXPLANATION OF PROVISIONS

 The losses incurred deduction described in section 832(b)(5) includes both losses paid and unpaid losses. Section 832(b)(5) requires that the losses paid component of the deduction be reduced by any increase in salvage and reinsurance recoverable.

 The regulations under section 832 were amended by the Internal Revenue Service on January 5, 1988, to require that salvage recoverable be taken into account in the computation of both losses paid and unpaid losses. Although section 882(b)(5) requires this treatment with respect to losses paid, the prior regulations allowed taxpayers to exclude any salvage not permitted to be taken into account for state insurance regulatory purposes. The regulations were amended to delete this exclusion and thereby produce a clearer reflection of income.

 The regulations also were amended in 1988 to clarify that a reasonable estimate of the amount of unpaid losses that a taxpayer will be required to pay must take into account expected recoveries on account of salvage and reinsurance attributable to such losses. In addition, the 1988 amendments provided guidance on accounting adjustments to be made by taxpayers not already in compliance with the amended regulations, and clarified that the term "salvage" includes subrogation claims.

 On September 22, 1989, the Internal Revenue Service issued temporary regulations postponing the effective date of the 1988 amendments until taxable years beginning after December 31, 1988, and reinstating the prior regulations for taxable years beginning before January 1, 1989.

 The temporary regulations published in this treasury decision further postpone the effective date of the 1988 amendments until taxable years beginning after December 31, 1989, and continue the application of the prior regulations for taxable years beginning before January 1, 1990. For taxable years beginning before January 1, 1990, a taxpayer complying with the provisions of section 1.832-4T is deemed to have used a proper method of accounting for salvage.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. Chapter 5) and the Regulatory Flexibility Act (5 U.S.C. Chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulations was submitted to the Administrator of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these proposed regulations is William L. Blagg of the Office of the Assistant Chief Counsel (Financial Institutions and Products), Internal Revenue Service. However, other personnel from the Internal Revenue Service and Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR 1.801-1 through 1.832-7T

Income taxes; Insurance companies.

Treasury Decision 8293

ADOPTION OF AMENDMENTS TO THE REGULATIONS

For the reasons set out in the preamble, Part 1 of Title 26 of the Code of Federal Regulations is amended as set forth below:

INCOME TAX REGULATIONS (26 CFR Part 1)

Paragraph 1. The authority for Part 1 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 2. Section 1.832-4T is amended by revising paragraphs (d)(1) and (e) to read as follows:

SECTION 1.832-4T GROSS INCOME (TEMPORARY).

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(d)(1) The treatment of salvage and reinsurance is a method of accounting. Every insurance company to which this section applies that did not treat salvage and reinsurance as provided in this section for the last taxable year beginning before January 1, 1990, must change its method of accounting with respect to salvage and reinsurance in the first taxable year beginning after December 31, 1989. The change in method of accounting will result in a section 481(a) adjustment. The fresh start provision of section 1023(e) of the Tax Reform Act of 1986 does not apply to the change in method of accounting required by this paragraph (d)(1).

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(e) Paragraphs (b), (c), and (d) of this section are effective for taxable years beginning after December 31, 1989. Taxpayers complying with the provisions of this section for taxable years beginning before January 1, 1990, are deemed to have used a proper method of accounting for salvage for such taxable years. In computing unpaid losses for taxable years beginning before January 1, 1990, an insurance company to which this section applies is not required to take into account estimated recoveries on account of salvage attributable to unpaid losses. In addition, the provisions of section 1.832-7T apply to the treatment of salvage recoverable in the computation of paid losses for such taxable years.

Par. 3. Section 1.832-7T is amended by revising the caption and paragraph (d) to read as follows:

SECTION 1.832-7T TREATMENT OF SALVAGE AND REINSURANCE IN COMPUTING "LOSSES INCURRED" DEDUCTION, TAXABLE YEARS BEGINNING BEFORE JANUARY 1, 190 (TEMPORARY)

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(d) This section is effective for taxable years beginning before January 1, 1990.

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There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason it is impracticable to issue this Treasury decision with notice and public procedure under section (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.