Banks, thrifts and other firms that sell mortgages in the secondary market may find themselves classified as "securities dealers" and subject to onerous new tax and accounting rules.
The Treasury Department has told tax accountants in Washington that it plans to interpret the Omnibus Budget Reconciliation Act as requiring mark-to-market accounting for the securities portfolios of a wide array of financial institutions.
The budget bill, signed by President Clinton Aug. 10, requires securities dealers to carry their inventories at fair value and, with certain exceptions, to pay taxes on capital gains as if their securities had been sold on the last day of the year.
During the budget debate, bank industry lobbyists assumed the term "securities dealers" would be defined narrowly. But this is not the case.
The definition in the law is broad enough to take in firms that originate mortgages and sell them in the secondary market. The law also allows the IRS to require mark-to-market accounting at other times, a staffer at the Independent Bankers Association of America said. The staffer also noted that a firm's entire securities portfolio, not just the mortgages, would fall under mark-to-market rules.
"Reports reaching us suggest that action would be required over a very short time frame, would compel bankers to address complexities of tax and accounting systems with which they are unfamiliar and to do so in the absence of written guidance from responsible tax authorities," Kenneth A, Guenther, IBAA executive vice president, said in Aug. 25 letters to the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.
"We were shocked to learn that the Treasury Department 'indicated' its intention to interpret the new mark-to-market provision as requiring all financial institutions to identify the assets on their books which are held for sale or investment within 30 days of the enactment of the law, or by Sept. 9," he added.
Under the new tax provision, (Section 13223 of Public Law 103-66, new Internal Revenue Code Section 475), a dealer in securities is any taxpayer that either regularly purchases securities from, or sells securities to, customers in the ordinary course of business, or regularly offers to enter into, assume, offset, assign, or otherwise terminate positions in securities with customers.
The IBAA asked that Treasury issue a statement "that Section 13223 will not be applied to banks until there has been a full discussion of the implications."
The IBAA is also questioning the consistency between the regulatory tax treatment and the recent statement issued by the Financial Accounting Standards Board, Accounting for Debt and Equity Securities.