The ABA Tax Section has submitted comments to the Treasury Department and IRS on Proposed Safe Harbor Regulations under Section 475.  Here is the Executive Summary:

Our comments address two concerns. The first is the relationship of the scope of the proposed safe harbor for determining fair market value to the underlying policy goal. The second is the application of the safe harbor as it relates to current industry practices.

In brief:

1.  The Scope of the Proposed Safe Harbor is Unduly Narrow

A.  The definition of an eligible method should not limit application of the safe harbor to those mark-to-market adjustments which are recognized through the income statement. This limitation will effectively preclude application of the safe harbor rule in many situations in which it would be beneficial to both the taxpayer and the Government.

B.  If a taxpayer consistently uses a verifiable methodology for calculating market values for some financial statement purpose, the regulations should permit use of this methodology for recognition of taxable income. The regulations should provide a mechanism or explanation as to how the data supporting financial statement valuations are to be used to support tax valuations.

2.  The Safe Harbor Regulation Should Allow the Use of “Bid” or “Ask” Prices So Long as Such Prices Are Consistently Applied

The use of bid or ask prices, when consistently applied, will produce a result that clearly reflects income. Although the Government seems to perceive a potential for abuse in the use of bid or ask prices, we believe the Government’s concern is misplaced. In any case, we believe the approach taken in the Proposed Regulations to prevent this perceived abuse is unnecessarily restrictive. We believe the perceived abuse can be addressed by permitting dealers to use bid or ask prices, but requiring consistent application.