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rules, Congress included two relief provisions in the
legislation--the "transition rule" and the "fresh start".
A. The Change From Undiscounted to Discounted Reserve
Accounting
Section 832(c)(4) permits P&C insurers to deduct "losses
incurred", as defined in section 832(b)(5), in each taxable year.
Under section 832(b)(5), losses incurred are defined as the
excess of (1) the sum of (a) losses paid during the current tax
year and (b) yearend reserves in the current tax year over
(2) yearend reserves in the preceding tax year. Prior to 1986,
section 832 provided P&C insurers with a significant tax benefit.
It permitted them to take current deductions for future payments
without requiring them to make any adjustments for the time value
of money. To eliminate this benefit, TRA '86 added section 846.
Section 846 requires reserves for taxable years beginning after
December 31, 1986, to be discounted and thus reduces the losses
incurred deduction (as calculated under section 832(b)(5)) to
reflect the time value of money.
Without a relief provision, section 846 would have required
P&C insurers to compare undiscounted 1986 reserves with
discounted 1987 reserves for purposes of computing their losses
incurred deductions for 1987. Such an "apples-to-oranges"
comparison would have significantly reduced the losses incurred
deduction for the 1987 tax year. To illustrate, assume a P&C
insurer had loss reserves of $100 million at the end of 1986 and
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