-26-
Certain guarantees, which are contingent, must be reported
as a liability under GAAP. Therefore, whether an obligation,
such as a guarantee, is a “true” contingent liability cannot be
ascertained without an examination of the nature of the
contingency.14 Although the accrual or nonaccrual of a liability
on a taxpayer's balance sheet may provide evidence as to whether
the taxpayer will be called upon to pay that liability, such
reporting for financial accounting purposes is not dispositive.
The treatment of contingent liabilities under GAAP is consistent
with the examination required of obligations claimed to be
liabilities for purposes of the statutory insolvency calculation,
see supra sec. II.C.3.; however, this Court shall not abdicate
its responsibility to examine such obligations independently.
13(...continued)
(GAAP) with respect to guarantees is as follows:
It is accepted current practice that a guarantor
does not report on its balance sheet a liability for
the obligation under guarantee; typically, however,
there is disclosure of guarantees in footnotes. If it
is determined “probable” that the guarantor will have
to perform under the guarantee agreement (i.e., pay the
lender on behalf of the borrower), an accrual for such
amounts should be established by the guarantor in
accordance with the principles of FASB Statement 5,
“Accounting for Contingencies.”
FASB Emerging Issues Task Force, Issue Summary No. 85-20
(emphasis added).
14 The Commissioner apparently recognizes that principle. See
Rev. Rul. 97-3, 1997-2 I.R.B. 5, 6 (“Affixing a label to an
undertaking (for example, referring to an arrangement as a
`guarantee') does not alone decide its character.”).
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