TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, December 6, 2011

House and Senate Hold Joint Hearing Today on The Tax Treatment of Financial Products

CONGRESSThe House Ways & Means Committee and Senate Finance Committee hold a joint hearing today on Tax Reform and the Tax Treatment of Financial Products:

The hearing, which continues both committees' work on tax reform, will examine the complex relationship between the tax code and financial products. The committees will consider how Congress should respond to the potentially inconsistent tax treatment of economically similar financial products, so that such products are structured to meet economic and business purposes rather than to meet tax planning objectives. The hearing will also focus on how well the tax code has responded to the evolving financial products market and how tax reform can help the Congress and Treasury stay informed of, and keep pace with, that evolution. [See Government Accountability Office, Financial Derivatives: Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse (GAO-11-750)]

In connection with the hearing, the Joint Committee on Taxation has released Present Law and Issues Related to the Taxation of Financial Instruments and Products (JCX-56-11) (107 pages):

This report proceeds in the following manner. Section I describes economic, financial accounting, and regulatory considerations related to holding, issuing, and structuring financial instruments. Section II describes in broad terms the basic U.S. income tax principles of timing, character, and source that underlie the taxation of financial instruments. Section III provides an overview of the timing, character, and source rules for five financial instruments – equity, debt, options, forward contracts, and notional principal contracts. That section also describes economic relationships among various financial instruments (so-called put-call parity) and the financial accounting treatment of financial instruments. Section IV is a discussion of selected timing, character, source, and categorization issues in the taxation of financial instruments. This section includes background on problems that have arisen related to taxpayer trading in financial instruments and how those problems have been addressed (or have not been addressed) by legislation and regulation. An appendix presents data about holdings and issuances of financial instruments.

In connection with the hearing, the ABA Tax Section has submitted Options for Tax reform Relating to Financial Transactions (64 pages):

Our goal for this report was to identify areas of the tax law related to financial transactions that we believe should be reformed. We did not attempt a complete overhaul of the tax rules applicable to financial transactions; rather, we attempted to address discrete issues that we believe arise regularly under the current statutory framework. Although in places we identified areas where regulations could be helpful or necessary, we strove to discuss problems that can, and should, be addressed legislatively.

The report is broken up into four sections. The first section deals with debt instruments. ... The second section of the report relates to the character of gain and loss on derivatives. ... The third section of the report relates to mark-to-market treatment for financial transactions. ... The final section contains three options that do not fit into any of the previous sections.

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