SEC. 2. BACKGROUND — Internal Revenue Bulletin 2007-3

Section 832(b)(5)(A) requires that all estimated salvage recoverable (including that which cannot be treated as an asset for state accounting purposes) be taken into account in computing the deduction for losses incurred. Under § 832(b)(5)(A), paid losses are to be reduced by salvage and reinsurance recovered during the taxable year. This amount is adjusted to reflect changes in discounted unpaid losses on nonlife insurance contracts and in unpaid losses on life insurance contracts. An adjustment is then made to reflect any changes in discounted estimated salvage recoverable and in reinsurance recoverable.

2007–3 I.R.B. 289 January 16, 2007

Rev. Proc. 2003–18, 2003–1 C.B. 439, for background regarding the tables.

.02 These tables must be used by taxpayers irrespective of whether they elected to discount unpaid losses using their own historical experience under § 846.

.03 Section V of Notice 88–100, 1988–2 C.B. 439, provides a composite discount factor to be used in determining the discounted unpaid losses for accident years that are not separately reported on the NAIC Annual Statement. The tables separately provide discount factors for taxpayers who elect to use the composite method. Rev. Proc. 2002–74, 2002–2 C.B. 980, clarifies that for certain insurance companies subject to tax under § 831 the composite method for discounting unpaid losses set forth in Notice 88–100, section V, 1988–2 C.B. 439, is permitted but not required. This revenue procedure further provides alternative methods for computing discounted unpaid losses that are permitted for insurance companies not using the composite method, and sets forth a procedure for insurance companies to obtain automatic consent of the Commissioner to change to one of the methods described in Rev. Proc. 2002–74.

.04 Tables.

Tables of Factors to be Used to Discount Salvage Recoverable With Respect to Losses Incurred in Accident Year 2006

(Interest rate: 3.98 percent)

Accident and Health (Other Than Disability Income or Credit Disability Insurance)

Taxpayers that do not use the composite method of Notice 88–100 should use 98.0675 percent to discount salvage recoverable with respect to losses incurred in this line of business in the 2006 accident year as of the end of the 2006 and later taxable years.

Taxpayers that use the composite method of Notice 88–100 should use 98.0675 percent to discount all salvage recoverable in this line of business as of the end of the 2006 taxable year.

Auto Physical Damage

Tax Year

Discount Factors (%)

2006 97.1334 2007 96.1907

Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2006 accident year.

Commercial Auto/Truck Liability/Medical

2016 and later years

98.0675

2008 and later years

98.0675

Taxpayers that use the composite method of Notice 88–100 should use 98.0675 percent to discount salvage recoverable as of the end of the 2008 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

Commercial Auto/Truck Liability/Medical

Taxpayers that use the composite method of Notice 88–100 should use 98.0675 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

Composite

2006 92.0337 2007 90.8802 2008 90.4072 2009 89.8712 2010 88.8367 2011 88.9101 2012 88.6960 2013 88.6734 2014 88.8118 2015 90.4886

Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2006 accident year.

2016 92.2048 2017 93.9577 2018 95.7372 2019 97.4944 2020 and later 98.0675 years

Tax Year

Discount Factors (%)

Tax Year

Discount Factors (%)

2006 92.1380 2007 91.8882 2008 91.6949 2009 92.1286 2010 92.5860 2011 92.1065 2012 93.1945 2013 94.1358 2014 94.3956 2015 96.2168

January 16, 2007 290 2007–3 I.R.B.

Composite

Taxpayers that use the composite method of Notice 88–100 should use 93.6350 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

Fidelity/Surety

Financial Guaranty/Mortgage Guaranty

2008 and later years

98.0675

Tax Year

Discount Factors (%)

International (Composite)

2019 97.4944 2020 and later 98.0675 years

Medical Malpractice — Claims-Made

2006 94.2975 2007 96.1907

International (Composite)

Tax Year

Discount Factors (%)

Tax Year

Discount Factors (%)

2006 87.6804 2007 83.3538 2008 87.7437 2009 85.5621 2010 86.5072 2011 81.4476 2012 90.5680 2013 93.2658 2014 96.4532 2015 98.0675

2008 and later years

98.0675

Financial Guaranty/Mortgage Guaranty

2006 92.0337 2007 90.8802 2008 90.4072 2009 89.8712 2010 88.8367 2011 88.9101 2012 88.6960 2013 88.6734 2014 88.8118 2015 90.4886

2016 92.2048 2017 93.9577 2018 95.7372

2016 and later years

98.0675

Tax Year

Discount Factors (%)

2006 95.5547 2007 96.1907

2007–3 I.R.B. 291 January 16, 2007

Medical Malpractice — Occurrence

Miscellaneous Casualty

Other (Including Credit)

98.0675

2008 and later years

Discount Factors (%)

Tax Year

Discount Factors (%)

Tax Year

2006 83.9442 2007 85.0591 2008 88.4295 2009 89.8198 2010 78.2945 2011 87.5838 2012 92.3237 2013 95.1299 2014 96.7311 2015 98.0675

Multiple Peril Lines (Homeown- ers/Farmowners, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery))

2006 96.8727 2007 96.1907

98.0675

2008 and later years

Tax Year

Discount Factors (%)

Other Liability — Claims-Made

2016 and later years

98.0675

Miscellaneous Casualty

Tax Year

Discount Factors (%)

Tax Year

Discount Factors (%)

2006 96.6963 2007 96.1907

2006 92.9300 2007 91.3642 2008 92.0510 2009 91.7902 2010 91.4227 2011 92.5705 2012 92.6261 2013 92.8131 2014 94.2424 2015 96.0540

2016 97.8851 2017 and later 98.0675 years

Taxpayers that use the composite method of Notice 88–100 should use 97.8836 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

2006 91.5341 2007 82.9787 2008 70.3678 2009 89.1316 2010 85.8677 2011 85.2144 2012 90.8949 2013 94.0739 2014 91.1910 2015 92.9193

January 16, 2007 292 2007–3 I.R.B.

Other Liability — Claims-Made

2016 94.6785 2017 96.4455 2018 and later 98.0675 years

Taxpayers that use the composite method of Notice 88–100 should use 95.5684 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

Other Liability — Occurrence

Private Passenger Auto Liability/Medical

Products Liability — Claims-Made

Tax Year

Discount Factors (%)

Tax Year

Discount Factors (%)

2006 88.1034 2007 88.1497 2008 89.6228 2009 21.8302 2010 82.4271 2011 88.1330 2012 92.1902 2013 95.8876 2014 37.3999 2015 96.2692

Products Liability — Occurrence

Tax Year

Discount Factors (%)

2006 86.8418 2007 88.1391 2008 89.1356 2009 86.1576 2010 89.3069 2011 91.5372 2012 91.8852 2013 93.7371 2014 94.9176 2015 96.6537

2006 94.7409 2007 94.5642 2008 94.3153 2009 93.5866 2010 93.3908 2011 92.4796 2012 92.4373 2013 92.5029 2014 93.5781 2015 95.3333

2016 97.0529 2017 and later 98.0675 years

Taxpayers that use the composite method of Notice 88–100 should use 97.2228 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

2016 and later years

98.0675

Discount Factors (%)

2016 and later years

98.0675

Tax Year

2006 83.0564 2007 85.4302 2008 86.0203 2009 88.3994 2010 86.1113 2011 89.2324 2012 91.9553 2013 92.5997 2014 87.8074 2015 89.4589

2007–3 I.R.B. 293 January 16, 2007

Products Liability — Occurrence

2016 91.1499 2017 92.8787 2018 94.6400 2019 96.4133 2020 and later 98.0675 years

Taxpayers that use the composite method of Notice 88–100 should use 92.7786 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

Reinsurance A (Nonproportional Assumed Property)

Reinsurance B (Nonproportional Assumed Liability)

Reinsurance C (Nonproportional Assumed Financial Lines)

2016 and later years

Tax Year

Discount Factors (%)

Tax Year

Discount Factors (%)

2006 86.8509 2007 87.5301 2008 90.6247 2009 88.3441 2010 91.1866 2011 85.1209 2012 87.9777 2013 94.0073 2014 95.2074 2015 96.9266

98.0675

Tax Year

Discount Factors (%)

2006 87.5637 2007 85.0097 2008 88.6909 2009 92.0150 2010 92.5920 2011 94.1411 2012 95.7082 2013 96.8174 2014 97.3356 2015 98.0675

2006 86.9992 2007 84.9315 2008 87.8351 2009 85.8777 2010 79.6478 2011 82.8774 2012 82.3201 2013 84.3658 2014 79.9064 2015 86.6394

2016 88.5090 2017 90.5090 2018 92.6892 2019 95.1430 2020 and later 98.0675 years

Taxpayers that use the composite method of Notice 88–100 should use 91.2561 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)

Tax Year

Discount Factors (%)

2006 94.6724 2007 96.1907

2016 and later years

98.0675

January 16, 2007 294 2007–3 I.R.B.

Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)

a simplified cost based method (SCBM) intended to preserve some benefits of the current Treas. Reg. § 1.482–2(b) cost safe harbor. A number of commentators noted that SCBM called for quantitative judgments that business people are not qualified to make by themselves. As a practical matter, taxpayers would be required to devote significant compliance resources to enlist outside consultants or otherwise to develop support for those judgments.

In 2006, the Treasury Department and the IRS issued temporary regulations that eliminated the SCBM and replaced it with the services cost method (SCM), as set forth in Temp. Treas. Reg. § 1.482–9T(b). The Treasury Department and IRS recognized that because the section 482 services regulations potentially affect a large volume of intragroup back office services that are common across many industries, it is in the interest of sound tax administration to minimize the compliance burden of such services, which would typically bear low arm’s length markups.

The SCM evaluates whether the price for covered services, as defined, is arm’s length by reference to the total services costs with no markup. Section 1.482–9T(b)(4) of the temporary regulations provides for two categories of covered services eligible for the SCM. The first category is described in Temp. Treas. Reg. § 1.482–9T(b)(4)(i) and consists of specified covered services that will be identified in this revenue procedure. These specified covered services are so identified because they constitute support services of a type common across industry sectors that generally do not involve a significant arm’s length markup on total services costs. A second category of services described in Temp. Treas. Reg. § 1.482–9T(b)(4)(ii), low margin covered services, has a median comparable arm’s length markup on total services costs of less than or equal to 7 percent. The second category is not addressed in this revenue procedure.

The Internal Revenue Service identified forty-eight activities that constitute specified covered services in a proposed revenue procedure included in Announcement 2006–50, 2006–34 I.R.B. 321, which was published in the Internal Revenue Bulletin on August 21, 2006. A number of public comments were received with

2008 and later years

98.0675

Workers’ Compensation

Tax Year

Discount Factors (%)

2006 87.6219 2007 88.7710 2008 89.1706 2009 89.1058 2010 88.5191 2011 89.2639 2012 89.0972 2013 89.2683 2014 90.0193 2015 91.7175

2016 93.4488 2017 95.2002 2018 96.9195 2019 and later 98.0675 years

Workers’ Compensation

Taxpayers that use the composite method of Notice 88–100 should use 94.5920 percent to discount salvage recoverable as of the end of the 2016 taxable year with respect to losses incurred in this line of business in 2006 and prior years.

DRAFTING INFORMATION

The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Hossofsky at (202) 622–8435 (not a toll-free call).

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also: Part I, §§ 482; 1.482–9T.)

Rev. Proc. 2007–13