The preference for fair value accounting, for marking items to market for financial reporting or tax purposes, has been particularly strong in the last decade, and has become almost doctrine among accounting standards setters as the preferred method of accounting for financial instruments. Though a similar trend can be documented for tax accounting, the longstanding preference for correlating tax liability with realization events continues to prevent consistency. Also preventing consistency are the myriad difficulties in distinguishing capital gain from ordinary income (where embedded derivatives seem to make the result almost arbitrary), those equally subtle difficulties in distinguishing debt from equity (where derivatives appear often to be neither or both), and, particularly recently, the differences between tax systems of different countries in which transactions are made to occur (with some countries still struggling to educate tax officials about derivatives). These inconsistencies, which in the fertile imaginations of tax lawyers become tax shelters, would largely disappear if fair value accounting were universal in the tax law. One could argue for a sort of global marking to market on December 31 -a single calendar year for all taxpayers would also be helpful-with all countries agreeing to tax the difference from the year before at 28 percent, allocating the result between themselves under some universally applied transfer pricing formula. Assuming that this approach is politically impossible in every country, and that even if a few countries agreed to it, others would not, one can still validly ask whether the advances that have recently been made in financial accounting hold any lessons for tax accounting. To be somewhat more limited, can the Statement of Financial Accounting Standard No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, provide any guidance for Congress as to some appropriate alterations of the U.S. tax system? It will be. the purpose of this paper to review the deferral system provided by the hedge accounting allowed by SFAS 133, and to compare this system against those tax deferrals that can be obtained under the U.S. tax system.

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