The documents to be provided for reconciliation purposes include supporting schedules, exhibits, computer programs used in producing the value and schedules, and documentation of the rules and procedures governing determination of the values. The IRS requested comments on whether less burdensome recordkeeping requirements could be developed, and indicated that the IRS was considering entering into agreements with specific taxpayers establishing which particular records would have to be maintained and for how long they would need to be retained.
Eligible taxpayers. The safe harbour was under consideration for dealers in securities under Sec. 475(c)(1). Extension to securities traders would depend on whether the extension would comport with the general principles described.
Eligible securities and commodities. The need for a safe harbour was deemed most pressing with regard to positions for which pricing information is not readily available, including more complex notional principal contracts and derivatives instruments and hedges described in Sec. 475(c)(2)(D)-(F). Similar problems were raised with regards to commodities for which pricing information is not readily available. Therefore, comments regarding application of a safe harbor for commodities were requested as well.
3. Response to ANPRM
As a general matter, the ANPRM was universally welcomed. Specific comments regarding the following issues were addressed by various organizations, including the New York State Bar Association (NYSBA), the SIA, and the International Securities Dealers Association (ISDA). There are discussed below
3.1 Use of GAAP as a valuation safe harbour
There was general consensus among commentators favoring the use of GAAP to establish fair market value. According to the NYSBA, GAAP fair value may be used as a proxy for fair market value. The NYSBA suggested that the IRS evaluate the US GAAP methodology for valuing derivatives and other securities, and determine which are materially consistent with Sec. 475 principles and which are not. If any aspect of GAAP used by a taxpayer were materially inconsistent, a taxpayer would have to make a valuation adjustment in order to satisfy the consistency principle of the safe harbour.
According to the SIA, the use of GAAP valuations provides a reliable measure of value because securities dealers use the values on their financial statements for other significant business purposes. In its support of GAAP, the SIA states:
“We believe that the book-tax conformity principle set forth in the notice will lead to reliable valuations, because those valuations are used for a wide variety of day-to-day core business functions, and thus are subject to rigorous checks and balances by different influential stakeholders. Those functions include internal business management, compensation, risk measurements and regulatory supervision.”