§846 — Discounted unpaid losses defined
70 citing cases
Statute Text — 26 U.S.C. §846
The amount of the discounted unpaid losses as of the end of any taxable year shall be the sum of the discounted unpaid losses (as of such time) separately computed under this section with respect to unpaid losses in each line of business attributable to each accident year.
The amount of the discounted unpaid losses as of the end of any taxable year attributable to any accident year shall be the present value of such losses (as of such time) determined by using—
the amount of the undiscounted unpaid losses as of such time,
the applicable interest rate, and
the applicable loss payment pattern.
In no event shall the amount of the discounted unpaid losses with respect to any line of business attributable to any accident year exceed the aggregate amount of unpaid losses with respect to such line of business for such accident year included on the annual statement filed by the taxpayer for the year ending with or within the taxable year.
In determining the amount of the discounted unpaid losses attributable to any accident year—
the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and
the applicable loss payment pattern shall be the loss payment pattern determined under subsection (d) which is in effect for the calendar year with which such accident year ends.
For purposes of this section—
Except as otherwise provided in this subsection, the term “undiscounted unpaid losses” means the unpaid losses shown in the annual statement filed by the taxpayer for the year ending with or within the taxable year of the taxpayer.
If—
the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and
the extent to which the losses were discounted can be determined on the basis of information disclosed on or with the annual statement,
the amount of the unpaid losses shall be determined without regard to any reduction attributable to such discounting.
For purposes of this section, the rate of interest determined under this subsection shall be the annual rate determined by the Secretary under paragraph (2).
The annual rate determined by the Secretary under this paragraph for any calendar year shall be a rate determined on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting “60-month period” for “24-month period” therein).
For each determination year, the Secretary shall determine a loss payment pattern for each line of business by reference to the historical loss payment pattern applicable to such line of business. Any loss payment pattern determined by the Secretary shall apply to the accident year ending with the determination year and to each of the 4 succeeding accident years.
Determinations under paragraph (1) for any determination year shall be made by the Secretary—
by using the aggregate experience reported on the annual statements of insurance companies,
on the basis of the most recent published aggregate data from such annual statements relating to loss payment patterns available on the 1st day of the determination year,
as if all losses paid or treated as paid during any year are paid in the middle of such year, and
in accordance with the computational rules prescribed in paragraph (3).
For purposes of this subsection—
Except as otherwise provided in this paragraph, the loss payment pattern for any line of business shall be based on the assumption that all losses are paid—
during the accident year and the 3 calendar years following the accident year, or
in the case of any line of business reported in the schedule or schedules of the annual statement relating to auto liability, other liability, medical malpractice, workers’ compensation, and multiple peril lines, during the accident year and the 10 calendar years following the accident year.
In the case of any line of business not described in subparagraph (A)(ii), losses paid after the 1st year following the accident year shall be treated as paid equally in the 2nd and 3rd year following the accident year.
The period taken into account under subparagraph (A)(ii) shall be extended to the extent required under subclause (II).
The amount of losses which would have been treated as paid in the 10th year after the accident year shall be treated as paid in such 10th year and each subsequent year in an amount equal to the amount of the average of the losses treated as paid in the 7th, 8th, and 9th years after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account). To the extent such unpaid losses have not been treated as paid before the 24th year after the accident year, they shall be treated as paid in such 24th year.
For purposes of this section, the term “determination year” means calendar year 1987 and each 5th calendar year thereafter.
For purposes of this section—
The term “accident year” means the calendar year in which the incident occurs which gives rise to the related unpaid loss.
The term “unpaid losses” includes any unpaid loss adjustment expenses shown on the annual statement.
The term “annual statement” means the annual statement approved by the National Association of Insurance Commissioners which the taxpayer is required to file with insurance regulatory authorities of a State.
The term “line of business” means a category for the reporting of loss payment patterns determined on the basis of the annual statement for fire and casualty insurance companies for the calendar year ending with or within the taxable year, except that the multiple peril lines shall be treated as a single line of business.
The term “multiple peril lines” means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery.
Any determination under subsection (a) with respect to unpaid losses relating to accident and health insurance lines of businesses (other than credit disability insurance) shall be made—
in the case of unpaid losses relating to disability income, by using the general rules prescribed under section 807(d) applicable to noncancellable accident and health insurance contracts and using a mortality or morbidity table reflecting the taxpayer’s experience; except that the limitation of subsection (a)(3) shall apply, and
in all other cases, by using an assumption (in lieu of a loss payment pattern) that unpaid losses are paid in the middle of the year following the accident year.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—
regulations providing proper treatment of allocated reinsurance, and
regulations providing appropriate adjustments in the application of this section to a taxpayer having a taxable year which is not the calendar year.
Treasury Regulations
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Treas. Reg. §1.846-1Application of discount factors
(a) In general—(1) Rules. A separate series of discount factors are computed for, and applied, to undiscounted unpaid losses attributable to each accident year of each line of business shown on the annual statement (as defined by section 846(e)(3)) filed by that taxpayer for the calendar year ending with or within the taxable year of the taxpayer. See § 1.832-4(b) relating to the determination of unpaid losses. Paragraph (b) of this section provides rules relating to applicable discount factors. Once a taxpayer applies a series of discount factors to unpaid losses attributable to an accident year of a line of business, that series of discount factors must be applied to discount the unpaid losses for that accident year for that line of business for all future taxable years. The discount factors cannot be changed to reflect a change in the taxpayer's loss payment pattern during a subsequent year or to reflect a different interest rate assumption.
(2) Increase in discounted unpaid losses shown on the annual statement. If the amount of unpaid losses shown on the annual statement is determined on a discounted basis, and the extent to which the unpaid losses were discounted can be determined on the basis of information disclosed on or with the annual statement, the amount of the unpaid losses to which the discount factors are applied shall be determined without regard to any reduction attributable to the discounting reflected on the annual statement.
(3) Increase in unpaid losses which take into account estimated salvage recoverable. If the amount of unpaid losses shown on the annual statement reflects a reduction for estimated salvage recoverable and the extent to which the unpaid losses were reduced by estimated salvage recoverable is appropriately disclosed as required by § 1.832-4(d)(2), the amount of unpaid losses shall be determined without regard to the reduction for salvage recoverable.
(b) Applicable discount factors—(1) In general. Except as otherwise provided in section 846(e)(6) (relating to certain accident and health lines of business), in this paragraph (b), or in other guidance published in the Internal Revenue Bulletin, the following factors must be used—
(i) Discount factors published by the Service. If the Service has published discount factors for a line of business, a taxpayer must discount unpaid losses attributable to that line by applying those discount factors; and
(ii) Composite discount factors. If the Service has not published discount factors for a line of business, a taxpayer must discount unpaid losses attributable to that line by applying composite discount factors.
(iii) Annual statement changes. If the groupings of individual lines of business on the annual statement changes, taxpayers must discount the unpaid losses on the resulting lines of business with the discounting patterns that would have applied to those unpaid losses based on their annual statement classification prior to the change.
(2) Title insurance company reserves. A title insurance company may only take into account case reserves (relating to claims which have been reported to the insurance company). Unless the Service publishes other guidance, the reserves must be discounted using the “Miscellaneous Casualty” discount factors published by the Service. Section 832(b)(8) provides rules for determining the discounted unearned premiums of a title insurance company.
(3) Reinsurance business—(i) Proportional reinsurance. For the 1988 accident year and subsequent accident years, unpaid losses for proportional reinsurance must be discounted using discount factors applicable to the line of business to which those unpaid losses are allocated as required on the annual statement.
(ii) Non-proportional reinsurance For the 1992 accident year and subsequent accident years, unpaid losses for non-proportional reinsurance must be discounted using the applicable discount factors published by the Service for the appropriate reinsurance line of business.
(4) Composite discount factors. For purposes of the regulations under section 846, “composite discount factors” means the series of discount factors published annually by the Service determined on the basis of the appropriate composite loss payment pattern.
(c) Determination of annual rate. The applicable interest rate is the annual rate determined by the Secretary for any calendar year on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting “60-month period” for “24-month period” therein). The annual rate for any calendar year is determined on the basis of a yield curve that reflects the average, for the most recent 60-month period ending before the beginning of the calendar year, of monthly yields on corporate bonds described in section 430(h)(2)(D)(i). The annual rate is the average of that yield curve's monthly spot rates with times to maturity from four and one-half years to ten years.
(d) Determination of loss payment pattern—(1) In general. Under section 846(d)(1), the loss payment pattern determined by the Secretary for each line of business is determined by reference to the historical loss payment pattern applicable to such line of business determined in accordance with the method of determination set forth in section 846(d)(2) and the computational rules prescribed in section 846(d)(3) on the basis of the annual statement data from annual statements described in section 846(d)(2)(A) and (B). However, the Secretary may adjust the loss payment pattern for any line of business as provided in paragraph (d)(2) of this section.
(2) Smoothing adjustments. The Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance if necessary to avoid negative payment amounts and otherwise produce a stable pattern of positive discount factors less than one.
(e) Applicability dates. (1) Except as provided in paragraph (e)(2) of this section, this section applies to taxable years beginning after December 31, 1986.
(2) Paragraphs (c) and (d) of this section apply to taxable years beginning after December 31, 2017.
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Treas. Reg. §1.846-1(a)In general—(1) Rules.
In general—(1) Rules. A separate series of discount factors are computed for, and applied, to undiscounted unpaid losses attributable to each accident year of each line of business shown on the annual statement (as defined by section 846(e)(3)) filed by that taxpayer for the calendar year ending with or within the taxable year of the taxpayer. See § 1.832-4(b) relating to the determination of unpaid losses. Paragraph (b) of this section provides rules relating to applicable discount factors. Once a taxpayer applies a series of discount factors to unpaid losses attributable to an accident year of a line of business, that series of discount factors must be applied to discount the unpaid losses for that accident year for that line of business for all future taxable years. The discount factors cannot be changed to reflect a change in the taxpayer's loss payment pattern during a subsequent year or to reflect a different interest rate assumption.
(2) Increase in discounted unpaid losses shown on the annual statement. If the amount of unpaid losses shown on the annual statement is determined on a discounted basis, and the extent to which the unpaid losses were discounted can be determined on the basis of information disclosed on or with the annual statement, the amount of the unpaid losses to which the discount factors are applied shall be determined without regard to any reduction attributable to the discounting reflected on the annual statement.
(3) Increase in unpaid losses which take into account estimated salvage recoverable. If the amount of unpaid losses shown on the annual statement reflects a reduction for estimated salvage recoverable and the extent to which the unpaid losses were reduced by estimated salvage recoverable is appropriately disclosed as required by § 1.832-4(d)(2), the amount of unpaid losses shall be determined without regard to the reduction for salvage recoverable.
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Treas. Reg. §1.846-1(b)Applicable discount factors—(1) In general.
Applicable discount factors—(1) In general. Except as otherwise provided in section 846(e)(6) (relating to certain accident and health lines of business), in this paragraph (b), or in other guidance published in the Internal Revenue Bulletin, the following factors must be used—
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Treas. Reg. §1.846-1(c)Determination of annual rate.
Determination of annual rate. The applicable interest rate is the annual rate determined by the Secretary for any calendar year on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting “60-month period” for “24-month period” therein). The annual rate for any calendar year is determined on the basis of a yield curve that reflects the average, for the most recent 60-month period ending before the beginning of the calendar year, of monthly yields on corporate bonds described in section 430(h)(2)(D)(i). The annual rate is the average of that yield curve's monthly spot rates with times to maturity from four and one-half years to ten years.
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Treas. Reg. §1.846-1(d)Determination of loss payment pattern—(1) In general.
Determination of loss payment pattern—(1) In general. Under section 846(d)(1), the loss payment pattern determined by the Secretary for each line of business is determined by reference to the historical loss payment pattern applicable to such line of business determined in accordance with the method of determination set forth in section 846(d)(2) and the computational rules prescribed in section 846(d)(3) on the basis of the annual statement data from annual statements described in section 846(d)(2)(A) and (B). However, the Secretary may adjust the loss payment pattern for any line of business as provided in paragraph (d)(2) of this section.
(2) Smoothing adjustments. The Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance if necessary to avoid negative payment amounts and otherwise produce a stable pattern of positive discount factors less than one.
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Treas. Reg. §1.846-1(e)Applicability dates.
Applicability dates. (1) Except as provided in paragraph (e)(2) of this section, this section applies to taxable years beginning after December 31, 1986.
(2) Paragraphs (c) and (d) of this section apply to taxable years beginning after December 31, 2017.
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Treas. Reg. §1.846-1(i)Discount factors published by the Service.
Discount factors published by the Service. If the Service has published discount factors for a line of business, a taxpayer must discount unpaid losses attributable to that line by applying those discount factors; and
(ii) Composite discount factors. If the Service has not published discount factors for a line of business, a taxpayer must discount unpaid losses attributable to that line by applying composite discount factors.
(iii) Annual statement changes. If the groupings of individual lines of business on the annual statement changes, taxpayers must discount the unpaid losses on the resulting lines of business with the discounting patterns that would have applied to those unpaid losses based on their annual statement classification prior to the change.
(2) Title insurance company reserves. A title insurance company may only take into account case reserves (relating to claims which have been reported to the insurance company). Unless the Service publishes other guidance, the reserves must be discounted using the “Miscellaneous Casualty” discount factors published by the Service. Section 832(b)(8) provides rules for determining the discounted unearned premiums of a title insurance company.
(3) Reinsurance business—(i) Proportional reinsurance. For the 1988 accident year and subsequent accident years, unpaid losses for proportional reinsurance must be discounted using discount factors applicable to the line of business to which those unpaid losses are allocated as required on the annual statement.
(ii) Non-proportional reinsurance For the 1992 accident year and subsequent accident years, unpaid losses for non-proportional reinsurance must be discounted using the applicable discount factors published by the Service for the appropriate reinsurance line of business.
(4) Composite discount factors. For purposes of the regulations under section 846, “composite discount factors” means the series of discount factors published annually by the Service determined on the basis of the appropriate composite loss payment pattern.
70 Citing Cases
On Schedule F, Losses Incurred-Section 832, petitioner reported.discounted unpaid losses of$622,717,658.48 That figure represents Acuity's carried loss resòrves of $660,639,385 for 2006 discounted pursuant to section 846.
Plea Agreement, United States v. Penland, No. 7:05-cr-00710-HFF (Mar. 14, 2006), ECF No. 234. Charles Penland agreed to forfeit hatever interests he had in the properties listed in the agreement. Id. at 2-5. The list of properties coincided with the properties the government alleged in the bill of particulars to be forfeitable on convic
Petitioner also cites section 846 (b) (1) , which provides the details for the computation of "discounted unpaid' losses" used in .section 832 ( ) (5) (A) .
section 846 (2000) with conspiring to possess with the intent to distribute 200 pounds of marijuana with regard to the May 1988 drug transaction. Petitioner pleaded guilty to the above Federal criminal charge, and petitioner was sentenced to a prison term of 52 months and was fined $100,000. See United States v. McHan, 920 F.2d 244, 245 (4th Cir. 1
ave not raised any issue regarding the method of discounting these losses. - 18 - “Losses incurred” means losses incurred during the taxable year on insurance contracts and includes increases for the year in “discounted unpaid losses (as defined in section 846)”. Sec. 832(b)(5)(A).11 As defined in section 846(b)(1), “unpaid losses” generally means “unpaid losses shown in the annual statement filed by the taxpayer for the year ending with or within the taxable year of the taxpayer.” Unpaid losses
(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct all unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year.
Third, respondent's contention that section 846 requires reinsurance companies to discount their unpaid losses (or reserves) to take into account the time value of money misses the mark.
(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct all unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year.
(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year.
(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year.
Respondent then discounted, pursuant to section 846, the amount determined as "reserve strengthening" in order to calculate the effect on petitioner's gross income.1 After 1For a discussion of sec.