-181-
(Musgrave & Shoup eds. 1959); Simons, Personal Income Taxation
103 (1938); see also Brown & Bulow, The Definition of Taxable
Business Income, in Comprehensive Income Taxation 241, 242-43
(J. Pechman ed. 1977); Shakow, “Taxation Without Realization: A
Proposal For Accrual Taxation”, 134 U. Pa. L. Rev. 1111 (1986).
In the academic and policy literature dealing with the taxation
of swaps and other financial products, commentators have
regularly mentioned a superiority of mark-to-market accounting in
measuring income and the significant defects of competing
systems. E.g., Scarborough, “Different Rules for Different
Players and Products: The Patchwork Taxation of Derivatives”,
72 Taxes 1031, 1049 (1994); Shuldiner, “Consistency and the
Taxation of Financial Products”, 70 Taxes 781 (1992); Warren,
“Financial Contract Innovation and Income Tax Policy”, 107 Harv.
L. Rev. 460 (1993). As used by tax policymakers, mark-to-market
accounting is the paradigm of clear reflection of income to which
traditional accrual methods aspire.
Mark-to-market accounting is particularly appropriate for
OTC derivatives dealers. Swaps dealers employ mark-to-market
accounting for commercial and financial purposes because, they
believe, mark-to-market accounting is a superior method of
clearly reflecting a swaps dealer’s annual income. Swaps dealers
rely extensively on hedging techniques to reduce or eliminate
their exposure primarily to interest rate changes and other
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