Treasury regulations finalized under the Bush Administration provided a mark-to-market safe harbor for broker-dealers who mark their holdings to market under section 475. The safe harbor essentially allows the banks to use the financial accounting measures as their measures for tax purpose.
I wrote a lengthy (ok--too lengthy) commentary on the issue before the regulations were finalized, tracing the history of tax accounting rules and some fundamental principles that underlay the overall tax system. See Book-Tax Conformity and the Corporate Tax Shelter Debate: Assessing the Proposed Section 475 Mark-to-Market Safe Harbor, 24 Virginia Tax Review 301 (2004). I pointed out that accounting scandals have shown that large corporations use complex financial products and transactions to puff or hid income, making it imperative to do an in-depth assessment of any plan to use financial accounting for tax purposes. From examining a history of various proposals for conforming financial accounting (book) and tax accountting, I concluded that two concerns are paramount--whether conformity will enhance or reduce the structural coherence of the tax system and whether it supports the self-assessment principle that underlies our "voluntary" compliance scheme without unduly increasing the potential for manipulation of income determinations. I concluded that the regulatory safe harbor conforming tax to financial accounting fell far short of normative requirements. "The case for conformity in this context rests almost entirely on lessening dealers' compliance burdens by eliminating the need for separate tax valuations." That simply isn't a strong enough basis--given modern electronic devices for computations and storage--to permit the use of financial accounting rules for marking to market.
This credit crisis has certainly caused us to realize that the financial accounting standards for "fair value" are not yet what they need to be to deal with even the financial issues, much less the tax issues. The Financial Accounting Standards Board continues to refine its fair value guidance, in the midst of intense lobbying from various perspectives about the ways that it should deal with market disruptions. A key problem with fair value accounting for financial statement purposes --and perhaps even more worrisome for taxable income purposes--is the "lack of comparability resulting from the use of different measurement attributes." (Staff Position, below) The FASB staff thinks increasing frequency and transparency of disclosures will help, since that will lead to "robust" discussions. Of course, such robust discussions are not what is needed for tax purposes--uniformity among taxpayers is much more important.
There are a number of other questions that are relevant. Are the prices for which one can sell a suspect asset during a market disruption the "fair value" of the asset? Or should some other yardstick be used during such periods? How should investments in hedge funds and private equity funds be valued? How do we know when a transaction is distressed? For the latest from FASB on possible additional guidance connected to fair value accounting (and other issues involving going concerns and subsequent events treatment) under consideration, see the following links:
- press release on the new fair value project (Feb. 18, 2009)
- Proposed FASB Staff Position No. FAS 107-b and APB 28-a (Mar. 2, 2009 deadline for comments)
- the proposed FASB standard on going concern
- text of the exposure draft on subsequent events
As FASB considers further developments, it is clear that having pegged a tax value to the accounting value means that accountants will be determining the answer to the "what is taxable income" question. It may be necessary for Congress or Treasury to step in and modify the conformity rule, depending on the ultimate conclusions that FASB reaches about the proper way to value assets. Perhaps that's just another reason that we should never have pegged taxation to financial accounting values, which have different purposes.
Recent Comments