-193-
1992), was that, for GAAP purposes, dealers had to mark to market
their inventories of marketable securities, while for tax
purposes they could (and did) use lower of cost or market or
other rules that were considerably more favorable in that they
tended to reduce taxable income. Under the caption “Conform Book
and Tax Accounting for Securities Inventories/Reasons for
Change,” that explanation noted, at 89:
Inventories of marketable securities are easily valued
at year end, and in fact are currently valued by
securities dealers in computing their income for
financial statement purposes and in adjusting their
inventory to an LCM [lower of cost or market] basis for
Federal income tax purposes. The cost method and the
LCM method tend to understate taxable income compared
to the market method that securities dealers use to
report their income to shareholders and creditors. The
market method represents the best accounting practice
in the trade or business of dealing in securities and
is the method that most clearly reflects the income of
a securities dealer.
Later, as the proposal that became section 475 wound its way
through the legislative process,62 its scope was expanded to
include not only marketable securities but also instruments such
as swaps and other financial derivatives for which no active
secondary market existed. During this process, Congress knew
that GAAP did not explicitly require mark-to-market accounting
62 The first legislative precursor of sec. 475 was sec. 372
of the Economic Growth Act of 1992 (H.R. 4150). H. Rept.
102-4150 (1991). H.R. 4150 was not enacted. However, sec. 3001
of the Revenue Bill of 1992, H.R. 11, 102d Cong. (1992),
contained similar language. H.R. 11 passed both houses of
Congress but was vetoed by the President.
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