-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.Page: Previous 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 Next
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