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discounting the amounts shown in the foregoing chart, respondent
determined that petitioner understated its 1987 income as
follows:
Line of Business Income Adjustment
Auto liability ...................... ($1,211,842)
Other liability ..................... (309,970)
Workers' compensation ............... 1,211,652
Multiple peril ...................... 1,783,897
Schedule O (1985) ................... (239,446)
Schedule O (pre-1985) ............... 104,748
Net total ........................ 1,339,039
Respondent further determined that this $1,339,039 understatement
of petitioner's 1987 income resulted in a $519,987 understatement
of petitioner's 1987 income tax liability.
Discussion
I. Overview
TRA '86 substantially revised the rules that govern the
taxation of P&C insurance companies by requiring P&C insurers to
discount loss reserves for purposes of section 832(b)(5)
(discussed below). The change from undiscounted to discounted
methodology eliminated a tax benefit attributable to the time
value of money. It also required taxpayers to change their
accounting methods. To facilitate a smooth transition to the new
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