Modification of Discounting Rules for Insurance Companies
| Citation | 84 FR 27947 |
| Record Number | 2019-12172 |
| Published date | 17 June 2019 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 84 Issue 116 (Monday, June 17, 2019)
[Federal Register Volume 84, Number 116 (Monday, June 17, 2019)]
[Rules and Regulations]
[Pages 27947-27952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12172]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9863]
RIN 1545-BO50
Modification of Discounting Rules for Insurance Companies
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations on discounting rules
for unpaid losses and estimated salvage recoverable of insurance
companies for Federal income tax purposes. The final regulations update
and replace existing regulations to implement recent legislative
changes to the Internal Revenue Code (Code) and make a technical
improvement to the derivation of loss payment patterns used for
discounting. The final regulations affect entities taxable as insurance
companies.
DATES:
Effective Date: These regulations are effective June 17, 2019.
Applicability Date: For dates of applicability, see Sec. 1.846-
1(e)(2).
FOR FURTHER INFORMATION CONTACT: Kathryn M. Sneade, (202) 317-6995 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1 under section
846 of the Code. Section 846 was added to the Code by section 1023(c)
of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2085,
2399). Final regulations under section 846 were published in the
Federal Register (57 FR 40841) on
[[Page 27948]]
September 8, 1992 (T.D. 8433). See Sec. Sec. 1.846-0 through 1.846-4
(1992 Final Regulations). The discounting rules under section 846 were
amended for taxable years beginning after December 31, 2017, by section
13523 of the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054,
2152) (TCJA). The discounting rules of section 846, both prior to and
after amendment by the TCJA, are used to determine discounted unpaid
losses and estimated salvage recoverable of property and casualty (P&C)
insurance companies and discounted unearned premiums of title insurance
companies for Federal income tax purposes under section 832, as well as
discounted unpaid losses of life insurance companies for Federal income
tax purposes under sections 805(a)(1) and 807(c)(2).
The Department of the Treasury (Treasury Department) and the IRS
published proposed regulations under section 846 (REG-103163-18) in the
Federal Register (83 FR 55646) on November 7, 2018 (Proposed
Regulations). The Treasury Department and the IRS received public
comments on the Proposed Regulations and held a public hearing on
December 20, 2018.
On January 7, 2019, the Treasury Department and the IRS published
Rev. Proc. 2019-06, 2019-02 I.R.B. 284, which prescribes unpaid loss
discount factors for the 2018 accident year and earlier accident years
for use in computing discounted unpaid losses under section 846. The
unpaid loss discount factors also serve as salvage discount factors for
the 2018 accident year and earlier accident years for use in computing
discounted estimated salvage recoverable under section 832. The
discount factors prescribed in Rev. Proc. 2019-06 were determined under
section 846, as amended by section 13523 of the TCJA, and the Proposed
Regulations. In Rev. Proc. 2019-06, the Treasury Department and the IRS
announced the intent to publish revised unpaid loss discount factors,
if necessary, following the publication of the Proposed Regulations as
final regulations. The Treasury Department and the IRS also announced
the intent to issue guidance on the use of revised discount factors,
including the adjustment to be taken into account by certain taxpayers
that used the discount factors prescribed in Rev. Proc. 2019-06 in a
taxable year ending before the date of publication of final
regulations. The Treasury Department and the IRS requested and received
public comments on Rev. Proc. 2019-06.
After consideration of all of the comments on the Proposed
Regulations and Rev. Proc. 2019-06, the Proposed Regulations are
adopted as amended by this Treasury decision (Final Regulations).
Summary of Comments and Explanation of Revisions
This section discusses the public comments received on the Proposed
Regulations and Rev. Proc. 2019-06, explains the revisions adopted by
the Final Regulations in response to those comments, and describes
guidance the Treasury Department and the IRS intend to issue following
publication of the Final Regulations in the Federal Register.
1. Determination of Applicable Interest Rate
Under section 846(a)(2) and (c)(1), the ``applicable interest
rate'' used to determine the discount factors associated with any
accident year and line of business is the ``annual rate'' determined
under section 846(c)(2).
Before amendment by section 13523(a) of the TCJA, section 846(c)(2)
provided that the annual rate for any calendar year was a rate equal to
the average of the applicable Federal mid-term rates (as defined in
section 1274(d) but based on annual compounding) effective as of the
beginning of each of the calendar months in the most recent 60-month
period ending before the beginning of the calendar year for which the
determination is made. The applicable Federal mid-term rate is
determined by the Secretary based on the average market yield on
outstanding marketable obligations of the United States with remaining
periods of over three years but not over nine years. See section
1274(d)(1).
As amended by section 13523(a) of the TCJA, section 846(c)(2)
provides that the annual rate for any calendar year will be determined
by the Secretary based on 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 corporate bond yield curve,
commonly referred to as the high quality market (HQM) corporate bond
yield curve, is published on a monthly basis by the Treasury Department
and the IRS. It reflects the average of monthly yields on investment
grade corporate bonds with varying maturities that are in the top three
quality levels available, and it consists of spot interest rates for
each stated time to maturity. See, for example, Notice 2019-13, 2019-8
I.R.B. 580. The spot rate for a given time to maturity represents the
yield on a bond that gives a single payment at that maturity. For the
stated yield curve, times to maturity are specified at half-year
intervals from one-half year through 100 years. Section 846(c)(2) does
not specify how the Secretary is to determine the annual rate for any
calendar year based on the corporate bond yield curve.
Section 1.846-1(c) of the Proposed Regulations provides that the
``applicable interest rate'' used to determine the discount factors
associated with any accident year and line of business 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
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 (that
is, when applied to the HQM corporate bond yield curve, times to
maturity from one-half year to 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.
Consistent with the text of section 846, as amended by the TCJA,
and the statutory structure as a whole, the Proposed Regulations
provide for the use of a single annual rate applicable to all lines of
business, as was the case under section 846 prior to amendment by the
TCJA. Commenters agreed with this approach. One commenter asserted that
a single rate approach continues to be mandated by the statutory
language and Congressional intent. This commenter also noted that the
use of a single rate is a continuance of longstanding practice related
to the discounting of insurance loss reserves, and the TCJA did not
specify a change to this practice.
The preamble to the Proposed Regulations states that the change
from a rate based on the applicable Federal mid-term rates to a rate
based on the corporate bond yield curve indicates that the annual rate
should be determined in a manner that more closely matches the
investments in bonds used to fund the undiscounted losses to be paid in
the future by insurance companies. Several commenters agreed that the
annual rate should be determined in a manner that more closely matches
the investments of insurance companies.
The maturity range in the Proposed Regulations (that is, times to
maturity from one-half year to seventeen and one-half years) was
selected to produce a single discount rate that would provide
approximately the same present
[[Page 27949]]
value of taxable income, in the aggregate, as would be obtained by
applying the 60-month average corporate bond yield curve (forecast
through 2028) directly to the future loss payments expected for each
line of business (determined using the loss payment patterns applicable
to the 2018 accident year). That is, the selected maturity range
approximates, in terms of the present value of taxable income, the
overall result of discounting each projected loss payment using the
spot rate from the corporate bond yield curve with a time to maturity
that matches the time between the end of the accident year and the
middle of the year of the projected loss payment.
Several commenters expressed concern with the selection of the
maturity range used to determine the single rate applicable to all
unpaid losses for all lines of business under the Proposed Regulations.
A commenter addressing the application of the Proposed Regulations to
certain non-life insurance reserves held by life insurance companies
requested a single section 846 discount rate determined by reference to
shorter maturities than those specified in the Proposed Regulations to
more clearly reflect the income of life insurance companies related to
these reserves. Several commenters addressing the application of the
Proposed Regulations to P&C insurance companies requested that the
discount rate instead be determined by reference to the maturity range
of three and one-half to nine years that was used under section 846
prior to amendment by the TCJA. Some of the commenters asserted a lack
of clear congressional intent to use a different maturity range than
the maturity range used under section 846 prior to amendment by the
TCJA. The commenters also asserted that the shorter range with a lower
average maturity would more closely match the maturity of the P&C
insurance industry's investments and offered alternative approaches to
selecting a maturity range should a different maturity range be
selected.
Some of the commenters addressing the application of the Proposed
Regulations to P&C insurance companies acknowledged that the annual
rate calculated under the Proposed Regulations approximates the P&C
industry's current investment yield in the current bond market.
However, the commenters generally asserted that an annual rate based on
the maturity range in the Proposed Regulations would overstate the
industry's investment yield in other interest rate environments because
the average maturity and average duration of the bonds reflected in
that segment of the HQM corporate bond yield curve are longer than both
the average maturity and average duration of the industry's actual bond
investments. The commenters asserted that the weighted average
maturities of bonds held by P&C insurance companies are notably lower
than the nine-year average of the maturity range suggested in the
Proposed Regulations. According to one commenter, the weighted average
maturities of bonds held by P&C insurance companies have ranged between
6.4 and 7.1 years since 2008. The commenters asserted that P&C
companies generally do not seek to match the maturities of their
investments with the expected payment dates of their liabilities. One
commenter stated that P&C insurers' bond portfolios are more skewed to
the short end of the curve to ensure sufficient liquidity to pay
claims, especially for catastrophic events.
The commenters also explained that the average duration of bond
payments held by P&C insurance companies (five to six years, according
to data from one commenter) is shorter than the nine-year average
payment duration of the bonds underlying the maturity range in the
Proposed Regulations because P&C insurance companies typically invest
in coupon bonds. Unlike the zero-coupon bonds reflected in the HQM
corporate bond yield curve, coupon bonds have an average payment
duration that is less than their maturity because of the periodic
interest payments. Commenters asserted that the duration difference
between coupon bonds and zero-coupon bonds is more pronounced in an
environment with higher interest rates and a steeper yield curve.
One of the commenters requesting the use of a shorter maturity
range (three and one-half to nine years) suggested that the annual rate
should be determined in a manner that more closely matches the P&C
insurance industry's investment yield. The commenter asserted that, in
a rising rate environment, especially if there is a larger spread
between the short-term and long-term rates, the longer maturity range
in the Proposed Regulations would overstate the P&C insurance
industry's investment yield. The commenter also asserted that the
shorter maturity range would result in a better approximation of the
P&C insurance industry's investment yield over a longer period of time
and in different interest rate environments. The commenter suggested
that if the shorter maturity range is not adopted, another approach
would be to periodically adjust the maturity range. Under this
approach, every five years (that is, for each determination year under
section 846(d)(4)), the Secretary would select the maturity range that
best approximates the industry's investment yield based on publicly
available P&C insurance industry aggregate investment yield data.
However, other commenters expressed a preference for a fixed range.
Two of the commenters requesting the use of a shorter maturity
range (three and one-half to nine years) suggested that the maturity
range selected should more closely match the average maturity of the
P&C insurance industry's bond investments. The commenters asserted that
the average maturity of a range consisting of three and one-half to
nine years more closely matches the six to seven-year average maturity
of the industry's bond investments over the past decade than the nine-
year average of the longer range in the Proposed Regulations. One
commenter suggested that if the shorter maturity range is not adopted,
an alternative could be to use the maturity range from one-half to
thirteen years because that range also reflects average maturities that
more closely match the investments in bonds used to fund the
undiscounted losses of P&C insurance companies. Both commenters
suggested that if the range in the Proposed Regulations is retained, a
``guardrail'' should place an upper limit on the maturities that are
used when the bond yield curve is unusually steep. The commenters
assert that use of the maturity range in the Proposed Regulations in
such conditions would result in an annual rate that overstates the P&C
insurance industry's investment yield due to the duration and maturity
differences between the industry's bond investments and the bonds
reflected in the HQM corporate bond yield curve segment selected in the
Proposed Regulations. The commenters expressed particular concern that
use of the maturity range in the Proposed Regulations would pose a
threat to the industry's financial viability in times of economic
stress because steep yield curves historically have occurred during or
immediately after a recession and often coincide with a downturn in the
underwriting cycle.
One commenter provided recommendations regarding the ``guardrail''
adjustment to be made to the annual rate and the circumstances in which
it would apply. The commenter suggested that a guardrail adjustment
should be made when the spread between the HQM corporate bond yields at
the lower end (one-half year to maturity) and upper end (seventeen and
one-half years to maturity) of the maturity range proposed in the
[[Page 27950]]
Proposed Regulations, measured on the basis of the 12-month average, is
greater than 2.75 percentage points. The commenter explained that this
``trigger'' was selected because, compared to the other possible
triggers considered by the commenter, it has the highest correlation to
recession-related stress periods, it is simple to implement, and it
does not result in undue volatility. The commenter suggested that the
``guardrail'' be an annual interest rate based on the 60-month average
of a narrower range of bond maturities of one-half year to thirteen
years. The commenter asserted that this trigger and guardrail
adjustment proposal is reasonably simple, easily administrable, and
predictable (for both the IRS and taxpayers) in its application.
After consideration of the comments received on the Proposed
Regulations, the Treasury Department and the IRS have determined to use
a single annual rate based on a narrower range of maturities.
Specifically, the annual rate for any calendar year is the average of
the corporate bond yield curve's monthly spot rates with times to
maturity from four and one-half years to ten years, computed using the
most recent 60-month period ending before the beginning of the calendar
year for which the determination is made. In response to comments
expressing a preference for a fixed range, the Final Regulations do not
provide for periodic redetermination of the maturity range used to
determine the annual rate.
The maturity range of four and one-half years to ten years was
selected in response to comments requesting the adoption of a narrower
maturity range with an average maturity that more closely matches the
six- to seven-year average maturity of the P&C insurance industry's
bond investments. Commenters expressed concern about the inclusion of
the times-to-maturity at the upper end of the range in the Proposed
Regulations, particularly when the bond yield curve is unusually steep.
Therefore, the Final Regulations provide for a narrower maturity range
than in the Proposed Regulations (from one-half year to seventeen and
one-half years). Use of the narrower range eliminates yields for times-
to-maturity at the lower and upper ends of the range in the Proposed
Regulations from the calculation of an average annual rate.
The selected maturity range has an average maturity of seven and
one-quarter years, which is closer to the average maturity of the
industry's bond investments than the nine-year average maturity of the
maturity range in the Proposed Regulations. The Final Regulations do
not adopt either of the maturity ranges suggested by commenters (three
and one-half to nine years and one-half to thirteen years) because the
suggested ranges would typically understate the P&C industry's
investment yield as compared to the range adopted in the Final
Regulations. P&C industry investment portfolios include assets other
than high quality bonds, and the higher returns on those other assets
typically result in the industry earning a higher rate of return.
Therefore, the Final Regulations adopt a maturity range that has an
average maturity that is slightly greater than the average maturity of
the industry's bond investments.
The Treasury Department and the IRS intend to publish guidance in
the Internal Revenue Bulletin that will provide revised unpaid loss
discount factors based on the Final Regulations for each property and
casualty line of business for all accident years ending with or before
calendar year 2018. The guidance will also provide that taxpayers may
use either the revised discount factors or the discount factors
published in Rev. Proc. 2019-06 for taxable years beginning after
December 31, 2017, and ending before June 17, 2019. The guidance will
describe the adjustment to be taken into account by any taxpayer that
uses the discount factors prescribed in Rev. Proc. 2019-06 in a taxable
year. See Rev. Proc. 2019-06. Taxpayers must use the revised discount
factors in taxable years ending on or after June 17, 2019.
2. Discontinuance of Composite Method
The Treasury Department and the IRS proposed, in the preamble to
the Proposed Regulations, to discontinue the use of the ``composite
method'' described in section 3.01 of Rev. Proc. 2002-74, 2002-2 C.B.
980, and section V of Notice 88-100, 1988-2 C.B. 439.
Commenters suggested that the current rules permitting use of the
composite method should be retained. The commenters explained that if
the composite method were discontinued, compiling the data required to
compute discounted unpaid losses with respect to accident years not
separately reported on the National Association of Insurance
Commissioners (NAIC) annual statement would prove to be difficult for
some insurers given the limitations of company data for older accident
years and legacy information technology systems. One of the commenters
added that discontinuance of the composite method would cause
burdensome reporting requirements for insurers.
In response to these comments, the Treasury Department and the IRS
have determined to continue to permit the use of the composite method
and to continue to publish composite discount factors annually.
3. Smoothing Adjustments
Section 1.846-1(d)(1) of the Proposed Regulations provides that the
loss payment pattern determined by the Secretary for each line of
business generally is determined by reference to the historical loss
payment pattern applicable to such line of business. However, under
Sec. 1.846-1(d)(1) and (2) of the Proposed Regulations, 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. As explained
in section 2.03(4) of Rev. Proc. 2019-06, for the 2017 determination
year, one line of business required adjustments under the Proposed
Regulations.
Commenters expressed support for the smoothing adjustments
described in the Proposed Regulations and Rev. Proc. 2019-06.
Accordingly, the Final Regulations adopt Sec. 1.846-1(d) as proposed.
4. Determination of Estimated Discounted Salvage Recoverable
Section 1.832-4(c) provides that, except as otherwise provided in
guidance published by the Commissioner of Internal Revenue
(Commissioner) in the Internal Revenue Bulletin, estimated salvage
recoverable must be discounted either (1) by using the applicable
discount factors published by the Commissioner for estimated salvage
recoverable; or (2) by using the loss payment pattern for a line of
business as the salvage recovery pattern for that line of business and
by using the applicable interest rate for calculating unpaid losses
under section 846(c). The Treasury Department and the IRS proposed, in
the preamble to the Proposed Regulations, that estimated salvage
recoverable be discounted by using the published discount factors
applicable to unpaid losses. Section 4.02 of Rev. Proc. 2019-06
provides that the unpaid loss discount factors set forth therein also
serve as salvage discount factors for the 2018 accident year and all
prior accident years for use in computing discounted estimated salvage
recoverable under section 832.
Commenters expressed support for the proposed use of the discount
factors applicable to unpaid losses as the discount factors for
salvage. This method is permitted under section
[[Page 27951]]
832(b)(5)(A) and Sec. 1.832-4(c), and it should reduce compliance
complexity and costs. Accordingly, future guidance published in the
Internal Revenue Bulletin will continue to provide that estimated
salvage recoverable is to be discounted using the published discount
factors applicable to unpaid losses.
In the preamble to the Proposed Regulations, the Treasury
Department and the IRS requested comments on whether net payment data
(loss payments less salvage recovered) and net losses incurred data
(losses incurred less salvage recoverable) should be used to compute
loss discount factors. No commenters responded to this request. The
Treasury Department and the IRS will continue to use payment data
unreduced by salvage recovered and losses incurred data unreduced by
salvage recoverable to compute loss discount factors.
5. Reinsurance and International Lines of Business
As described in the preamble to the Proposed Regulations, as a
result of the repeal of former section 846(d)(3)(E) and (F) by section
13523 of the TCJA, section 846 no longer explicitly provides for the
determination of loss payment patterns for non-proportional reinsurance
and international lines of business extending beyond three calendar
years following the accident year. The Proposed Regulations would
remove Sec. 1.846-1(b)(3)(iv) (applicable to non-proportional
reinsurance business) and (b)(4) (applicable to international business)
of the 1992 Final Regulations due to the repeal of former section
846(d)(3)(E) and (F). The Proposed Regulations would retain Sec.
1.846-1(b)(3)(i) and (b)(3)(ii)(A) (applicable to proportional and non-
proportional reinsurance, respectively) of the 1992 Final Regulations,
however, because these rules are not affected by the repeal of former
section 846(d)(3)(E) and (F).
Commenters agreed that the repeal of former section 846(d)(3)(E)
and (F) means that the statute requires non-proportional reinsurance
and international lines of business to be treated as short-tail lines
of business with three-year loss payment patterns. The treatment of the
non-proportional reinsurance and international lines of business as
short-tail lines of business in Rev. Proc. 2019-06 is consistent with
these comments.
Accordingly, Sec. 1.846-1(b)(3)(iv) and (b)(4) of the 1992 Final
Regulations are removed as proposed in the Proposed Regulations.
6. Other Changes
The Proposed Regulations would (1) remove Sec. 1.846-1(a)(2) of
the 1992 Final Regulations because the examples are no longer relevant;
(2) remove Sec. 1.846-1(b)(3)(ii)(B) and (b)(3)(iii) of the 1992 Final
Regulations because these provisions apply only to accident years
before 1992; (3) remove Sec. 1.846-2 of the 1992 Final Regulations
because section 13523 of the TCJA repealed the section 846(e) election;
(4) remove Sec. 1.846-3 because the ``fresh start'' and reserve
strengthening rules therein are no longer applicable; (5) make
conforming changes to Sec. 1.846-1(a) and (b) of the 1992 Final
Regulations to reflect the removal of various Sec. 1.846-1 provisions,
as well as the removal of Sec. Sec. 1.846-2 and 1.846-3 of the 1992
Final Regulations; (6) remove Sec. 1.846-4 of the 1992 Final
Regulations, which provides applicability dates for Sec. Sec. 1.846-1
through 1.846-3 of the 1992 Final Regulations, and adopt proposed Sec.
1.846-1(e), which provides applicability dates for Sec. 1.846-1; and
(7) remove Sec. 1.846-0 of the 1992 Final Regulations, which provides
a list of the headings in Sec. Sec. 1.846-1 through 1.846-4 of the
1992 Final Regulations.
Additionally, the Proposed Regulations would remove Sec. Sec.
1.846-2T and 1.846-4T from the Code of Federal Regulations (CFR)
because they are obsolete. On April 10, 2006, the Treasury Department
and the IRS published in the Federal Register (71 FR 17990) a Treasury
decision (T.D. 9257) containing Sec. Sec. 1.846-2T and 1.846-4T. On
January 23, 2008, the Treasury Department and the IRS published in the
Federal Register (73 FR 3868) a Treasury decision (T.D. 9377) that
finalized the rules contained in Sec. 1.846-2T in Sec. 1.846-2 and
finalized the rules contained in Sec. 1.846-4T in Sec. 1.846-4. T.D.
9377, however, did not remove Sec. Sec. 1.846-2T and 1.846-4T from the
CFR.
No comments were received regarding any of these changes in the
Proposed Regulations. Accordingly, these changes are adopted as
proposed.
7. Change in Method of Accounting
The Treasury Department and the IRS plan to publish guidance in the
Internal Revenue Bulletin that provides simplified procedures under
section 446 and Sec. 1.446-1(e) for an insurance company to obtain
automatic consent of the Commissioner to change its method of
accounting to comply with section 846, as amended by the TCJA, for the
first taxable year beginning after December 31, 2017.
Special Analyses
I. Regulatory Planning and Review and Regulatory Flexibility Act
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
Under the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it
is hereby certified that these final regulations will not have a
significant economic impact on a substantial number of small entities
that are directly affected by the final regulations. These final
regulations update the 1992 Final Regulations to reflect statutory
changes made by the TCJA, including the applicable interest rate to be
used for purposes of section 846(c) based on a statutorily prescribed
corporate bond yield curve. In addition, these final regulations do not
impose a collection of information on any taxpayers, including small
entities. Accordingly, this rule will not have a significant economic
impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding this regulation was submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business, and no comments were received.
II. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2018, that threshold is approximately $150 million. This
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
III. Executive Order 13132: Federalism
Executive Order 13132 (titled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements
[[Page 27952]]
of section 6 of the Executive Order. This final rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Drafting Information
The principal author of these regulations is Kathryn M. Sneade,
Office of Associate Chief Counsel (Financial Institutions and
Products), IRS. However, other personnel from the Treasury Department
and the IRS participated in their development.
Statement of Availability of IRS Documents
The IRS notices and revenue procedures cited in this preamble are
published in the Internal Revenue Bulletin (or Cumulative Bulletin) and
are available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at http://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for Sec. 1.846-2(d), removing the entry for Sec. Sec.
1.846-1 through 1.846-4, and adding an entry in numerical order for
Sec. 1.846-1. The addition reads in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.846-1 also issued under 26 U.S.C. 846.
* * * * *
Sec. 1.846-0 [Removed]
0
Par. 2. Section 1.846-0 is removed.
0
Par. 3. Section 1.846-1 is amended by:
0
1. In the first sentence of paragraph (a)(1) removing ``section
846(f)(3)'' and adding in its place ``section 846(e)(3)''.
0
2. In the third sentence of paragraph (a)(1), removing the phrase ``and
Sec. 1.846-3(b) contains guidance relating to discount factors
applicable to accident years prior to the 1987 accident year''.
0
3. In paragraph (a)(1), removing the last sentence.
0
4. Removing paragraph (a)(2) and redesignating paragraphs (a)(3) and
(4) as paragraphs (a)(2) and (3), respectively.
0
5. In the first sentence of paragraph (b)(1), removing ``section
846(f)(6)'' and adding ``section 846(e)(6)'' in its place; and removing
``, in Sec. 1.846-2 (relating to a taxpayer's election to use its own
historical loss payment pattern)''.
0
6. In paragraph (b)(3)(i), removing ``for accident years after 1987''
from the heading.
0
7. In paragraph (b)(3)(ii), removing the designation ``--(A)'' and the
paragraph heading ``Accident years after 1991''.
0
8. Removing paragraphs (b)(3)(ii)(B), and (b)(3)(iii) and (iv).
0
9. Removing paragraph (b)(4) and redesignating paragraph (b)(5) as
paragraph (b)(4).
0
10. Adding paragraphs (c), (d), and (e).
The additions read as follows:
Sec. 1.846-1 Application of discount factors.
* * * * *
(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.
Sec. 1.846-2 [Removed]
0
Par. 4. Section 1.846-2 is removed.
Sec. 1.846-2T [Removed]
0
Par. 5. Section 1.846-2T is removed.
Sec. 1.846-3 [Removed]
0
Par. 6. Section 1.846-3 is removed.
Sec. 1.846-4 [Removed]
0
Par. 7. Section 1.846-4 is removed.
Sec. 1.846-4T [Removed]
0
Par. 8. Section 1.846-4T is removed.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: May 21, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-12172 Filed 6-13-19; 4:15 pm]
BILLING CODE 4830-01-P
