TREATMENT OF SALVAGE RECOVERABLE.

SEC. 11305. TREATMENT OF SALVAGE RECOVERABLE. (a) General Rule.— Subparagraph (A) of section 832(b)(5) (defining losses incurred) is amended to read as follows: “(A) In general.— The term ‘losses incurred’ means losses incurred during the taxable year on insurance contracts computed as follows: “(i) To losses paid during the taxable year, deduct salvage and reinsurance recovered during the taxable year. “(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct all unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year. “(iii) To the results so obtained, add estimated salvage and reinsurance recoverable as of the end of the preceding taxable year and deduct estimated salvage and reinsurance recoverable as of the end of the taxable year. The amount of estimated salvage recoverable shall be determined on a discounted basis in accordance with procedures established by the Secretary.” (b) Conforming Amendment.— Subsection (g) of section 846 is amended by adding “and” at the end of paragraph (1), by striking paragraph (2), and by redesignating paragraph (3) as paragraph (2). (c) Effective Date.— (1) In general.— The amendments made by this section shall apply to taxable years beginning after December 31, 1989. (2) Amendments treated as change in method of accounting.— (A) In general.— In the case of any taxpayer who is required by reason of the amendments made by this section to change his method of computing losses incurred— (i) such change shall be treated as a change in a method of accounting, (ii) such change shall be treated as initiated by the taxpayer, and 104 STAT. 1388–452 (iii) such change shall be treated as having been made with the consent of the Secretary. (B) Adjustments.— In applying section 481 of the Internal Revenue Code of 1986 with respect to the change referred to in subparagraph (A)— (i) only 13 percent of the net amount of adjustments (otherwise required by such section 481 to be taken into account by the taxpayer) shall be taken into account, and (ii) the portion of such net adjustments which is required to be taken into account by the taxpayer (after the application of clause (i)) shall be taken into account over a period not to exceed 4 taxable years beginning with the taxpayer’s 1st taxable year beginning after December 31, 1989. (3) Treatment of companies which took into account salvage recoverable.— In the case of any insurance company which took into account salvage recoverable in determining losses incurred for its last taxable year beginning before January 1, 1990, 87 percent of the discounted amount of estimated salvage recoverable as of the close of such last taxable year shall be allowed as a deduction ratably over its 1st 4 taxable years beginning after December 31, 1989. (4) Special rule for overestimates.— If for any taxable year beginning after December 31, 1989— (A) the amount of the section 481 adjustment which would have been required without regard to paragraph (2) and any discounting, exceeds (B) the sum of the amount of salvage recovered taken into account under section 832(b)(5)(A)(i) for the taxable year and any preceding taxable year beginning after December 31, 1989, attributable to losses incurred with respect to any accident year beginning before 1990 and the undiscounted amount of estimated salvage recoverable as of the close of the taxable year on account of such losses, 87 percent of such excess (adjusted for discounting used in determining the amount of salvage recoverable as of the close of the last taxable year of the taxpayer beginning before January 1, 1990) shall be included in gross income for such taxable year. (5) Effect on earnings and profits.— The earnings and profits of any insurance company for its 1st taxable year beginning after December 31, 1989, shall be increased by the amount of the section 481 adjustment which would have been required but for paragraph (2). For purposes of applying sections 56, 902, 952(c)(D, and 960 of the Internal Revenue Code of 1986, earnings and profits of a corporation shall be determined by applying the principles of paragraph (2)(B).