4.5. Record keeping and retention
With regard to records, the Explanation of provisions provides that a taxpayer must clearly show that:
- the same value used for financial reporting was used on the return;
- no eligible position subject to Se 475 is excluded from the application of the safe harbour; and
- only eligible positions are carries over to the federal return under the safe harbour.
All necessary records must be retained as long as their contents may become material in the administration of any internal revenue law. Taxpayers must provide reconciliation schedules between the financial statements for a particular year and the Federal income tax return for that year. This includes all computer programs, schedules, exhibits, and detailed explanations of any adjustments.
With regards to pooling, books and records must state the value used for each eligible position separately from the value used for any other eligible position. However, an eligible taxpayer may make adjustments to values on a pooled basis, if the taxpayer demonstrates that it can compute gain or loss attributable to the sale or other dispositions of an individual eligible position.
The taxpayer must provide records showing consolidation and deconsolidation used to prepare the financial statements and any subordinate schedules. The schedule must provide information that addresses the differences for consolidation between the applicable financial statement and the federal income tax return.
There is a 30-day timeframe within which taxpayers must produce records after a request is made by the Commissioner. The Proposed Regulations provide that the Commissioner may enter into advance agreements with individual taxpayers to determine what records must be maintained and for how long.
5. Comments on Proposed Regulations
The SIA prepared the most extensive industry submissions, providing detailed comments and recommended changes to the Proposed Regulations. In all major areas, the ISDA concurred with the recommendations of the SIA and added some independent comments for consideration by the IRS and the Treasury Department. Comments submitted by the Institute of International Bankers (IIB) and the ABA are discussed, as well. The positions presented are primarily those of SIA, supported by the ISDA, unless otherwise noted.
5.1 Income statement requirement
Many commentators objected to this requirement that a taxpayer recognize into income on the income statement the mark-to-market gain or loss for each taxable year. The SIA submission emphasizes that there are other places where reliable, audited valuations, prepared in accordance with the US GAAP, appear other than the income statement. For example banks record certain changes in mark-to-market valuations as “other comprehensive income” (OIC) on the balance sheet which do not appear on the income statement. Items included in this category are “available for sale” securities (which are marketable equity securities that a bank may sell prior to maturity), as well as certain hedges of such securities (e.g. cash flow hedges and certain currency hedges). Procedures at banks are no less rigorous for calculating OCI, even though amounts do not appear on the income statement. Positions contained within OCI and available for sale are usually straightforward instruments that are readily valued. As valuation in these areas are among a taxpayer’s least complicated and least controversial there is no reason they should be excluded from the safe harbour merely because they are not reflected on the income statement.
Call reports filed by US branches of foreign banks with the Federal Reserves or Office of the Comptroller of the Currency should also be accepted, as they are filed in accordance with GAAP and audited by outside accountants. According to the SIA, a US branch of a foreign bank will produce a US GAAP income statement for purposes of preparing its stand-alone balance sheet presented in the call report; the call reports themselves do not contain any income statement. The SIA would like IRS to amend the Proposed Regulations to clarify that call reports filed with the Federal Reserve or the Office of the Comptroller of the Currency should qualify as “applicable financial statements” under the safe harbour. The ISDA agrees with the position taken by the SIA with regard to OCI and call reports.