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$125 million at the end of 1987. But for section 846, the losses
incurred deduction attributable to unpaid losses would have been
$25 million (i.e., $125 million - $100 million). If pursuant to
section 846 the $125 million of reserves at the end of 1987 were
discounted to $110 million, the P&C insurer's losses incurred
deduction would have been reduced from $25 million to $10 million
(i.e., $110 million - $100 million).
To address this problem, Congress included a transition rule
in TRA '86. The transition rule provided that, for purposes of
computing the losses incurred deduction at yearend 1987, 1986
reserves also would be discounted. TRA '86 sec. 1023(e)(2), 100
Stat. 2404. As a result of this transition rule, discounted 1987
reserves were compared with discounted 1986 reserves in computing
the losses incurred deduction for the 1987 taxable year.
B. The Application of Section 481
Even with the transition rule described above, P&C insurance
companies remained subject to adverse tax consequences due to the
application of section 481. When a taxpayer changes its method
of accounting, section 481 generally requires that the taxpayer
make adjustments to prevent amounts from being duplicated in or
omitted from its taxable income. Compliance with the requirement
that P&C insurers change the basis for computing their losses
incurred deductions from an undiscounted to a discounted
methodology constituted a change in accounting method. Thus,
section 481 would have required P&C insurers to recognize as
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