Abstract
This article does not endorse utilizing general book tax conformity for corporations in the United States but rather discusses current conformity and non-conformity between tax and accounting rules for financial instruments and explores possible alternatives to conform the non-conforming aspects. I do not suggest that Generally Accepted Accounting Principles (“GAAP”) will substitute tax law but only provide guidance pertaining to financial instruments. This article presents three major examples of Code provisions in which Congress’s specific intent was to conform tax rules to the then existing GAAP: section 1256, section 475, and the original issue discount (OID) rules.
Generally, there are five key tax issues involved with financial instruments: (i) classification; (ii) timing; (iii) valuation; (iv) character; and (v) source. Nevertheless, only the first three are important for GAAP, and only these three are therefore discussed herein.
As of today, not only is the tax treatment of financial instruments often different from GAAP, but it is also incoherent and based on various criteria. In addition to the traditional cash and accrual tax accounting methods for financial instruments, there are various other methods of taxing financial instruments. In particular, while several types of taxpayers, such as dealers, must mark financial instruments to market, other instruments, such as futures contracts, are marked-to-market based on the instrument’s identity. Finally, instruments used for hedging are subject to special timing rules.
The Financial Accounting Standards Board’s (FASB) increasing focus on financial instruments in recent years and, most notably, the issuance of FAS 133 (a comprehensive set of accounting standards for derivatives and hedging transactions), as amended by FAS 138 and FAS 149, provide an opportunity for Congress and Treasury to revisit their positions regarding the tax treatment of financial instruments, particularly those of hedging transactions and derivatives. This article explores potential harmonization between FAS 21133 (and other relevant accounting guidance) and the taxation rules for similar transactions.
Recommended Citation
Keinan, Yoram
(2005)
"Book Tax Conformity for Financial Instruments,"
Florida Tax Review: Vol. 6:
No.
1, Article 10.
Available at:
https://scholarship.law.ufl.edu/ftr/vol6/iss1/10