Hearing on Ways and Means Financial Products Tax Reform Discussion DraftHearing on Ways and Means Financial Products Tax Reform Discussion Draft
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CONTENTS _____________________
WITNESSES Ms. Viva Hammer Mr. Steven Rosenthal Mr. David C. Garlock Mr. William M. Paul Mr. Shawn P. Travis ____________________________________________
Hearing on Ways and Means Financial Products Tax Reform Discussion Draft Wednesday, March 20, 2013
U.S. House of Representatives, Committee on Ways and Means, Washington, D.C. ____________________
The subcommittee met, pursuant to notice, at 1:21 p.m. in Room 1100, Longworth House Office Building, Hon. Pat Tiberi [chairman of the subcommittee] presiding. [The advisory of the hearing follows:] __________________________________________________________________ *Chairman Tiberi. Our second hearing will come to order. Good afternoon. Thank you for joining us for the Subcommittee's first official hearing of the 113th Congress. I commend Chairman Camp for his continued efforts and leadership to overhaul our Tax Code. We as a subcommittee, I can speak for everyone, look forward to working with him and Ranking Member Levin to do that this session of Congress. Today we examine the financial products discussion draft released by Chairman Camp in the Ways and Means Committee in January. The financial products discussion draft is a starting point for how the Committee can modernize the taxation of financial products as part of comprehensive tax reform. Simplifying the taxation of financial products is long overdue. However, it should also be done in the context of broader legislation that would amongst other things lower statutory tax rates. Indeed, these changes would have a different impact on financial products if the draft was enacted as a one off revenue raiser or tax increase, something that neither Chairman Camp nor I would support. The changes proposed in the discussion draft have received support from both sides of the aisle. I am looking forward to a great bipartisan discussion today with our witnesses and members. I thank our witnesses for being here, and now yield to Ranking Member Neal for his opening statement. *Mr. Neal. Thank you, Mr. Chairman, for calling this important hearing. As you know, the taxation of derivatives is an issue that I have worked on for many years. In fact, when I was Chairman of the Subcommittee, we held hearings on the tax treatment of derivatives and exchange‑traded notes or ETNs, as they are known. I have also introduced legislation to address the tax treatment of exchange‑ traded notes, but going back even further in 1998, following the collapse of long term capital management and a Federal bail out in the billions, I joined Barbara Kennelly in filing legislation to shut down the tax avoidance transaction set up through derivatives. With that experience, I can tell you that this topic is not for the faint of heart. Just explaining the different types of derivatives can fill volumes, plus the market is constantly evolving and growing. This is an important area of our tax law and one that is in need of reform. I applaud Chairman Camp for taking up the challenge and releasing a discussion draft that has had a lot of merit. Chairman Camp's legislation updates the antiquated tax treatment of financial derivatives and replaces it with a single set of rules. Under current law, you can have two types of derivatives that are economically similar but are taxed differently. The Camp proposal would eliminate this distinction by requiring investors to use mark‑to‑market for all derivatives, except for business hedging. I think harmonizing those rules makes a lot of sense. Today we are going to hear from witnesses who will outline some of the technical issues with the bill. I have also heard from some of my insurance company constituents who may need us to amend the proposal to ensure that legitimate hedging transactions commonly used in the industry to ensure against business risk do not get swept into the mark‑to‑market provisions of the bill. I hope to work with Chairman Camp and Chairman Tiberi to address these issues. Let me conclude by saying this is an area where there is agreement between the parties on how to address a problem with our tax rules. I would also encourage my Republican friends to work with us on these proposals, and let's get it done. Thank you, Mr. Chairman. *Chairman Tiberi. Thank you. Before I introduce today's witnesses, I would ask unanimous consent that all members' written statements will be included in the record. Without objection, so ordered. *Chairman Tiberi. We now turn to our panel of distinguished witnesses. I will introduce you all first and we will begin with Ms. Hammer. Ms. Viva Hammer of the Hadassah‑Brandeis Institute at Brandeis University in Waltham, Massachusetts. Thank you for being here today. Second, Mr. Steven Rosenthal, Visiting Fellow at the Tax Policy Center in Washington, D.C. Thank you. Third, Mr. David Garlock, Director of Financial Services, National Tax, Ernst & Young here in Washington, D.C. Thank you. Fourth, Mr. William Paul, Partner at Covington & Burling here in Washington, D.C. Thank you. Finally, Shawn Travis, Principal in the Global Tax Department at the Vanguard Group in Valley Forge, Pennsylvania. Thank you for being here. With that, Ms. Hammer, you may begin. You have five minutes. STATEMENT OF VIVA HAMMER, HADASSAH‑BRANDEIS INSTITUTE, BRANDEIS UNIVERSITY *Ms. Hammer. Chairman Tiberi, honored Ranking Member Neal, and distinguished members of the Subcommittee, I am here today to support the Ways and Means Committee's comprehensive tax reform and especially simplifying the taxation of financial transactions. For 22 years, I have practiced U.S. tax law, serving on Government and all manner of taxpayers. Today, my constituents are my children who sit behind me and your children who will live with the Tax Code far longer than we will. Derivatives are contracts agreed to between free parties, nimble and changing. Laws taxing derivatives are enacted after long contemplation by Congress and are rarely discarded. What happens when mostly fixed, ever accumulating tax rules govern nimble, changing derivatives? The old tax system does not work for derivatives. Tax liability is measured once a year after realization events, and there is a sharp division between ordinary income and capital gains. Derivatives are flexible about when and how often payments are made, and they make a mockery of the antiquated divide between capital and ordinary assets, and derivative income can be easily realized or avoided. The tax laws are always playing catch up with the derivatives market, with lightning bolt fixes for transactions it does not like. The result is a jumble of rules. Clever people shape the rules to suit them, but for most Americans, the taxation of financial products is incomprehensible. When I talk to my clients about the laws for the options, prepaid, future swaps, straddle's, mixed straddle's, short sells, constructive sells, their jaws drop open and often do not close. Alternatively, they fall asleep. Taxes are necessary for civilized society, but civilized tax laws should intrude into society as little as possible. Good tax laws should be equitable. They should be efficient. They should be easy to understand and easy to administer. Today's jumble of derivatives laws fails all these principles. The financial products tax reform discussion draft is the beginning of a journey to simplify the taxation of derivatives, starting with mark‑to‑market. It will reduce advantages to the sophisticated as well as traps for the unweary. People worry about how to value derivatives when they are mark‑to‑market, but on that question, we ride together with the whole financial world. Mark‑to‑market is used for accounting, regulatory, risk management, credit, and compensation purposes. For most derivatives, valuation is clear, and for the complex and obscure ones that raise valuation questions, I guarantee you the current law does not know what to do with them either. We have had 30 years of experience with mark‑to‑market under Section 1256 and 20 years under 475, both with exchange‑traded and non‑exchange‑traded derivatives. People complained about them before these sections were passed, but no one lobbies for their repeal today. Remember, mark‑to‑market means taxpayers can take losses as well as gains and many will welcome that. The discussion draft makes clear the character is ordinary. This has advantages to corporations and disadvantages to individuals, and the biggest benefit is simplicity. The discussion draft had a new approach for taxpayers that have derivatives linked to other assets and liabilities it owes. Today there are too many regimes to govern this and Congress needs to bring it all under one umbrella, perhaps by offering an election for taxpayers to mark all their positions to market, a solution I would suggest for your clients, Mr. Neal, both derivative and non‑derivative ‑‑ *Mr. Neal. Can I just offer a thought? They are my constituents. I am not in that market. [Laughter.] *Ms. Hammer. Like my children are my constituents. I need more time now. [Laughter.] *Ms. Hammer. Everyone loves an election. Investments that wrap derivatives into one package with non‑derivatives called "hybrids,'' like for example, convertible bonds, will be difficult to tackle in the modern world, but do not let hybrids kill mark‑to‑market. Cap them out if you need to. The discussion draft has no rule about withholding on derivatives, and I was very disappointed about that. I hope as Congress moves forward with reform, it develops comprehensive rules on withholding, not anti‑abuse rules, robust, substantive rules. People will fret about the change in the taxation of derivatives, but be not dismayed by the naysayers. Change is painful, even change for the greater good. Who was in favor of the income tax when it was first imposed? Yet, we live with it still, changing it as it changes us. Mark‑to‑market is a change whose time has come. Thank you. [The statement of Ms. Hammer follows:]
*Chairman Tiberi. Thank you. May I just ask one question? Is that a Boston accent or Springfield accent? [Laughter.] *Ms. Hammer. Am I under oath here? It is deep South. *Mr. Larson. South Boston. *Chairman Tiberi. South Boston. Mr. Larson contends it is South Boston. Mr. Rosenthal, you are recognized for five minutes. STATEMENT OF STEVEN ROSENTHAL, VISITING FELLOW, TAX POLICY CENTER *Mr. Rosenthal. Thank you. Chairman Tiberi, Member Neal, and members of the Committee, my name is Steve Rosenthal. I am a Visiting Fellow at the Tax Policy Center. I have practiced tax law in D.C. for over 25 years, both in private practice and for the Joint Committee on Taxation in the 1990s. Thank you for allowing me to share my views on the proposed tax reforms for financial products. I applaud the bold steps in the discussion draft. The discussion draft simplifies the many choices that now confront taxpayers. In my view, our tax rules accommodate too many choices for too many special interests. There are many constituencies for every provision in the Code, but there are few constituencies for simplification. I am pleased to see the Committee pursue that less traveled road. I want to highlight three suggestions from my written testimony which I believe will further the Committee's goals. First, I wholeheartedly endorse as has Ms. Hammer, the mark‑to‑market method of accounting for derivatives. A mark‑to‑market method of accounting would tax each derivative as if it were sold at the end of the year and gains and losses recognized accordingly. An uniform approach to taxing derivatives has long been the Holy Grail of tax policy for financial products. The Committee is almost there. I believe the Committee can get there with just a little help on the valuation of derivatives, which as Ms. Hammer observed, is the key to a success of a mark‑to‑market method of accounting. To help, I believe the Committee should require swap dealers to share their valuations of derivatives with their customers. That will help customers value these derivatives for purposes of the customers' tax returns. Swap dealers already mark‑to‑market all of their derivatives for their own tax returns under Code Section 475. Under the recent Dodd‑Frank legislation, swap dealers must already share the values of many of their derivatives with their customers to improve transparency. Next, I agree that investors should use a single basis method to calculate their stock gains and losses. The discussion draft would repeal FIFO specific identification and other methods and require the average cost method. Currently, brokers must ask their customers to choose a method in order for the broker to report the customer's basis correctly, which customers use to calculate their gains and losses. I agree that we should allow only one choice and eliminate the current menu. I have a small suggestion. I think we should shift to the use of FIFO as that single basis choice rather than average cost. I believe FIFO would be simpler for investors to understand and to use. Finally, I understand the desire for a related party rule for wash sale losses. A wash sale loss arises when a taxpayer sells a stock at a loss and acquires substantially identical stock within 30 days. Technically, a taxpayer could avoid the wash sale rules by selling stock at a loss and arranging for a related party to the taxpayer rather than the taxpayer itself to repurchase the stock. The discussion draft extends the wash sale rules to reacquisitions by related parties such as spouses or IRAs. However, unlike present law, a wash sale loss that resulted from a reacquisition by a related party would be permanently disallowed, not merely temporarily disallowed. I believe a permanent disallowance creates a trap for the unsuspecting, and I suggest we merely suspend the loss for the original seller and when the related party sells the position again, resells the stock again, we free up the loss for the original seller. I think that would accomplish the closing of the loopholes that the Committee anticipates and furthers the tax policy of the wash out rules. Thank you. [The statement of Mr. Rosenthal follows:] *Chairman Tiberi. Thank you, sir. Mr. Garlock, you are recognized for five minutes. STATEMENT OF DAVID C. GARLOCK, DIRECTOR OF FINANCIAL SERVICES, NATIONAL TAX, ERNST & YOUNG *Mr. Garlock. Thank you, Mr. Chairman, members of the Subcommittee. Good afternoon. As Chairman Tiberi mentioned, I am a Principal in the National Tax Department of Ernst & Young and I am based here in Washington, D.C. My practice is devoted almost entirely to the taxation of financial instruments with a particular focus on taxation of debt. I am testifying today on my own behalf and not on behalf of Ernst & Young or any of its clients. My focus is somewhat different than that of the other panelists. The discussion draft includes four provisions relating to the taxation of debt instruments. Two are relatively minor provisions and I will not discuss those today, but I will discuss the other two provisions briefly. The other two provisions dealing with debt instruments in the discussion draft are designed to address problems under current law with the tax treatment of so‑called "distressed debt.'' That phrase refers to debt that is owned by a borrower that is having financial difficulties, so there is a serious risk that the borrower will not be able to pay the full amount owed on the debt. Both of these provisions are drawn from a report of the American Bar Association Tax Section Committee on Financial Instruments submitted to Congress in December 2011. I was one of the co‑authors of that report, as are several of the other panelists, and had significant responsibilities, so it is not surprising that I will be supportive of some of the provisions in the discussion draft. The first major debt related provision in the discussion draft deals with the consequences of debt modification. Generally, this provision prevents a borrower from having taxable income from cancellation of indebtedness when its debt is modified merely because it is publicly trading at a discount. Congress provided a temporary fix to this problem in 2009 with the enactment of Code Section 108(I), but that provision expired at the end of 2010. I believe the discussion draft provides a better approach to this problem than Section 108(I) and should be enacted. The discussion draft does not, unfortunately, address the corresponding problem for investors in distressed debt, and I believe that companion provision which was included in the ABA report to address this problem should be added to legislation as it moves forward. Briefly, that suggested rule would conform the treatment of all debt modifications and changes to the treatment accorded to exchanges involving corporate securities. That is in most all cases, no gain or loss would be recognized at the time of the exchange, and the investor's basis would carry over to the new debt. The second of the two major debt provisions addresses the treatment of market discounts. Market discount arises when debt changes hands in the secondary market at a price that is lower than the debt's face amount. Market discount can arise either because prevailing interest rates have risen since the debt was issued or because the borrower is in financial distress or some combination of the two. As a general matter, the problem with the current laws governing market discount is they do not distinguish between the two potential sources of market discount. The provisions in the Code governing the taxation of debt were enacted mostly in 1982 and 1984, and at that time, prevailing interest rates were at historic highs rather than the current historic lows. When interest rates are high, notes, bonds and other debt instruments trade at significant discounts, having nothing to do with the financial distress, and accordingly, the rules governing debt trading at a discount were written based on the implicit assumption that discount was attributable exclusively to high interest rates. As a staff person at the time, I can assume my share of responsibility for that default in the rules. In the current interest rate environment, essentially the opposite is true, making the current rules governing the taxation of debt particularly in need of refinement. The discussion draft would address this problem by placing a cap on the rate at which market discount accrues, which is designed to differentiate between discount arising from higher interest rates and financial distress. I think this would be a significant step in the right direction, and I support its enactment. Another aspect of the discussion draft would require taxpayers to include market discount in income as it accrues, subject to the yield cap. Under current law, this is elective. I feel there is considerable merit to this proposed rule as well, but I think it requires further discussion and analysis, as I explain in my written submission. The principal concern I raise is even with the yield cap, not all market discount has an interest equivalent that should accrue and be includable in income based on yield to maturity concepts. I appreciate the opportunity to appear before the Subcommittee. I hope my input has been helpful. Thank you. [The statement of Mr. Garlock follows:] *Chairman Tiberi. Thank you. Mr. Paul, you are recognized for five minutes. STATEMENT OF WILLIAM M. PAUL, PARTNER, COVINGTON & BURLING, LLP *Mr. Paul. Thank you. Mr. Chairman, Ranking Member Neal, members of the Committee, my name is William Paul. I am a partner with the law firm of Covington & Burling LLP. Thank you for inviting me here today to testify on Chairman Camp's draft proposals for financial products tax reform. I appear before you today on my own behalf. Although I represent clients that have an interest in the draft proposals, I am not representing them here today. My testimony should not be construed as reflecting their views or those of my law firm or any other organization with which I am affiliated. As a preliminary matter, I would like to add my voice to the choir of praise that Chairman Camp has received for the open and transparent process he is following in developing comprehensive tax reform legislation. I also applaud the Committee for holding this hearing today as part of the effort to receive input on the draft proposals in an open and public manner. My testimony today will focus on technical and practical issues raised by the draft proposal to adopt an uniform approach to the taxation of derivatives. The draft proposal would require that all derivatives be mark‑to‑market. That is treated as sold on the last day of the taxable year. All gain or loss on derivatives will be treated as ordinary income or loss. The definition of "derivatives'' in the draft proposal is very broad. This definition may sweep in a variety of situations that are not intended to be covered. Examples include securities loans under Section 1058, American Depository Receipts, which represent beneficial ownership of stock issued by foreign corporations, employee stock options and other stock based compensation, and variable annuities. It would probably be helpful if a list of instruments that are not intended to be covered were added to the legislative language. The broad definition of "derivatives'' includes derivatives embedded in instruments treated as debt for tax purposes, such as the conversion feature in convertible debt instruments. The definition does not include derivatives embedded in other instruments, such as stock. Often there is a conversion feature in preferred stock and it is referred to as "convertible preferred stock.'' It also does not apply to embedded derivatives in partnership interests. That is common in a structure known as an "UPREIT'' structure. It is unclear if these omissions are intended, but I recommend they be addressed. The draft proposal would not apply mark‑to‑market, ordinary treatment to direct ownership of stock, bonds or commodities. This conclusion is understandable. However, it will mean that the goal of uniform treatment for economically similar positions will not be achieved in significant respects. To take the most obvious example, direct ownership of stock would be taxed differently from synthetic ownership of stock through a combination of derivatives, such as a forward contract to purchase stock coupled with a zero coupon bond. This difference of tax treatment will result in clientele effects as taxpayers who want ordinary income and loss treatment will use synthetic stock and taxpayers preferring capital gain or loss treatment will own stock directly. The exclusion of stocks and bonds also raises questions about how to deal with transactions that in form, are not derivatives, but are economically equivalent to derivatives. For example, an equity swap is economically equivalent to a fully leveraged stock purchase. If A lends B $1,000 which B uses to buy stock from A, the cash flows are essentially the same as if A and B entered into an equity swap. Similar issues arise with regard to non‑recourse debt. For example, if A's loan to B is non‑recourse, B has the equivalent of long stock in a put option. As yet another example, consider a two person partnership that holds dividend paying stock. The partnership allocates the dividend income to one partner and gain or loss on the stock to the other partner. Treasury regulations make clear that such allocations may be permitted under current law. On these facts, these partnership interests and other partnership interests that slice and dice economic returns from stock, bonds, and other underlier's, can be viewed as very similar to derivatives. Now that we have opened the question of whether such economically equivalent positions should be taxed as derivatives, it will be helpful if the legislation addressed this question directly. The final issue I wish to raise today relates to valuation. The draft proposal is not limited to publicly traded derivatives or to derivatives with respect to which underlying property is publicly traded. It is not clear how the parties will determine fair market value or how the IRS will efficiently and effectively audit valuations the parties come up with. In this regard, it is worth noting that in the 1990s, the IRS attempted to develop software to assist it in valuing derivatives. The effort was known as the "Los Alamos Project,'' because nuclear physicists at Los Alamos Laboratories were engaged to assist in the effort. The project went on for several years but ultimately failed. This is not to say that a similar effort would necessarily fail again, but it is critical that the IRS be consulted to determine the extent to which a broad mark‑to‑market approach to derivatives will be administratable. In closing, I would refer the Committee to my written testimony which elaborates on the points I have made here today. Thank you. I will be happy to respond to questions. [The statement of Mr. Paul follows:] *Chairman Tiberi. Thank you, Mr. Paul. Mr. Travis, you are recognized for five minutes. STATEMENT OF SHAWN P. TRAVIS, PRINCIPAL, GLOBAL TAX, THE VANGUARD GROUP, INC. *Mr. Travis. Chairman Tiberi, Ranking Member Neal, and distinguished members of the Subcommittee, I am a Principal and senior counsel at Vanguard and want to start by conveying how grateful Vanguard is to appear today. We approached the discussion draft from a distinctive business perspective. We are one of the largest mutual fund complexes, managing more than $2.1 trillion in roughly 180 U.S. mutual funds and serving about 25 million shareholder accounts. We are also the only mutually owned mutual fund company. The Funds we manage own Vanguard giving us a singular purpose to provide our Fund shareholders the best chance for long term investment success. In pursuing our mission, we do use plain vanilla derivatives in managing our Funds, primarily swaps, currency forward's, and futures contracts. These derivatives help our Funds reduce transaction costs, construct portfolio's more efficiently, and accommodate large cash flows with minimal disruption to fund long term investment strategies. At the same time, we do not find much alignment between our client focused approach and current derivatives tax law. We encourage our clients to take a straightforward approach to investing, to stay the course over the long term, and to expect plain talk about capital markets. By contrast, the derivatives tax laws are complex, elective in outcome, and not easily explained to our clients. We spend more resources than we would like keeping up with this complex tax regime, avoiding its pitfalls, and ensuring our systems comply. We find it curious and discomforting that this regime allows taxpayers to elect their tax treatment, that economically similar derivatives can result in alternatively long term capital gain, a mixture of long term and short term capital gain, or ordinary income. We believe we should compete on how effectively we manage our Funds and serve our clients rather than how creative we can be with the tax laws. We are, therefore, encouraged that the discussion draft aims to take tax largely out of the investment decision, at least with respect to derivatives, and it reflects our belief that the Code should provide clear rules that apply uniformly and give businesses like ours a durable regime we can easily comply with. We do want to provide a few remarks on the mark‑to‑market and average cost basis proposals in the draft. First, mutual funds mark their derivatives to market daily for risk management and Fund valuation purposes, marking them to market for tax purposes should be a manageable extension of what Funds already do. Second, we know many worry that marking to market leaves people without cash to pay tax. We have not yet seen this concern play out in actual investor behavior. The vast majority of retail Fund shareholders across the industry elect to reinvest their dividends, allowing them to grow their savings over time. Requiring them to pay current tax without cash, their perspectives may differ. Ours leads us to believe that people buying retail derivatives would similarly pay tax from other sources. While supporting mark‑to‑market as a framework for taxing derivatives, we do recommend further discussion in a couple of areas. First, taxing derivatives as ordinary income may create mismatches in our portfolio's where the stocks and bonds are entirely capital assets. Secondly, expanding the definition of "tax hedge'' to include investment assets may be more straightforward than revising the already complex straddle rules. This would allow derivatives to match the timing and character of the bonds and stocks they offset as opposed to requiring the bonds and stocks to match the character and timing of the derivatives. As for the average cost basis proposal, we commend your effort to simplify these rules, and we note that the overwhelming majority of our Fund shareholders use average cost for their mutual fund shares. We do recommend further discussion in a few areas, including eliminating specific i.d. would make a significant change for brokerage clients in particular, and would have operational and economic consequences for mutual funds. Calculating average cost at the account level rather than a taxpayer level may dilute the impact of the proposal, investors could presumably open multiple accounts, perhaps at multiple brokers, to recreate tax flexibility. Finally, firms in the industry have just built systems to report cost basis to investors as required by recent changes in law. It may surprise you to learn how expensive doing so was. We alone spent tens of millions of dollars. These new systems do not report average cost for stocks and bonds because doing so was not previously allowed. Adding this functionality now would involve considerable additional costs, and we ask Congress to weigh and evaluate any new approach. I would be happy to take any questions you may have. [The statement of Mr. Travis follows:] *Chairman Tiberi. Thank you, Mr. Travis. I want to begin with you and then ask each of you to comment on this, if I may. It appears that each of you in your written testimony believe that current tax rules have not kept up with the innovation within the financial services product lines. Can you expand, Mr. Travis, a little bit deeper on suggestions that you have to us as to how we can be helpful? *Mr. Travis. What would be most helpful to us as a business is having a set of rules that apply uniformly across all products, all derivative products, so we are not faced with multiple regimes where a new product comes up, it fits in one of these aspects of our derivatives tax regime, maybe not in another, or maybe provides a tax benefit that becomes attractive without regard to the investment merits or other aspects of the product. We previously commented on exchange‑traded notes and we are concerned about the credit risk that investors in those products take without any compensation for doing so, and the driver there, we think, is primarily the favorable tax treatment. *Chairman Tiberi. Mr. Paul? *Mr. Paul. I would start by saying there is a reason why the tax law has not kept up with financial product innovation, and I am not sure there is a good answer to your question. There are various approaches people can take. One is the uniform approach that the draft proposals take. Another is to focus on derivatives or financial instruments that have the same economics, and at least try to get those taxed the same way so people cannot pick and choose a particular product based on the tax treatment they want to receive when there are other products of the same economics that are being treated otherwise. It has also been proposed that the system could be protected adequately as long as balance is applied, so that gains and losses on a particular type of product are treated evenly, and therefore, the fist cannot be whipsawed. I would merely say there are various approaches, none of them are easy. *Chairman Tiberi. Thank you. Mr. Garlock? *Mr. Garlock. I would say in general I think the Internal Revenue Code could be improved by more reliance on general principles and less reliance on specific rules. For example, the mark‑to‑market proposal is a good example of a principle of general applicability. If you start having specific rules for options, forwards and so on, you are almost doomed to have a system that cannot keep up with the market. I think the mark‑to‑market proposal is a good example of moving in the direction of the general principle rather than specific rules. *Chairman Tiberi. Thank you. Mr. Rosenthal? *Mr. Rosenthal. Yes, Chairman Tiberi, I agree that our tax laws have not kept up with the markets. Our tax laws date back to the early 1900s. We have arcane notions of realization, that is you do not pay a tax until you actually sell something, but unfortunately, information technology and financial engineers have out paced those notions. Now, rather than say drill a well to strive for tax benefits, you just add a few zeroes to pieces of paper to carefully designed structures. I think the answer is actually the answer that is in Chairman Camp's proposal, that is can we mark‑to‑market derivatives and arrive at the Holy Grail of uniform taxation of these instruments. I think it would solve problems across the board in terms of the complexity and the manipulation of these products. The key to a mark‑to‑market method of accounting is valuation. When I was at the Joint Committee on Taxation staff, we worked for several years on how to think about requiring securities dealers to mark‑to‑market their derivatives, and we settled on an approach that I think has been robust over the last 20 years and has worked. I think again the key is valuation. We have had so much benefit from the accountants, financial accounting over the last 20 years, now have FAS‑133, and by and large, almost every derivative is mark‑to‑market, and Dodd‑Frank also requires mark‑to‑market for collateral purposes, and offers a lot more transparency that we never had before. *Chairman Tiberi. Thank you. Ms. Hammer? *Ms. Hammer. Being an academic, I am going to give an answer that nobody is going to like, which is we need more law and more often. Today, mark‑to‑market is the right thing to do. Tomorrow, it is going to be something else. You guys cannot just sit around and wait for things to change. You need to re‑think the laws on a regular basis. As several members have said, my colleagues have said, we have laws here that have been around for 100 years. What else has been around for 100 years? I think the question is not what is the right answer today. The question is how to get the methods for making laws more liquid, more nimble, just like the people who do the derivatives every day. They are sitting down thinking what can we do today, how we can make something more marketable, more creative. I would love to sit down every down with the Committee and say what can we do today that is more marketable now. The other thing that I want to say is Treasury needs to be more nimble as well. I was at Treasury. Everyone was nervous as anything to come out with a law just in case it is wrong. Okay, it is wrong. Do it again. I think people are very nervous when they are making laws about doing the wrong thing, but if they re‑did them on a regular basis, they would not be so nervous about it. *Chairman Tiberi. Thank you. I let you go a little longer since the guy who has been around here for a number of years interrupted you earlier. Speaking of the guy who has been around here a long number of years, I will yield to him. *Mr. Neal. Thank you, Mr. Chairman. In 2007, I introduced legislation to address the tax treatment of exchange‑traded notes or ETNs. Although ETNs are issued by banks in the form of a debt instrument, they are not treated as debt for tax purposes. Instead, investors are told these ETNs will defer tax and investment income earned all along the way for as long as 30 years, and then all that income will turn into a long term capital gain. One concern about ETNs is their current tax treatment leads people to invest in them without fully appreciating the credit risks involved. In particular, the bank issuing an ETN may not be around when the ETN matures many years in the future. This point was brought home to us when Lehman Brothers declared bankruptcy and its ETNs became worthless. The ETN market has shrunk somewhat since the Lehman bankruptcy and financial crisis, but it is expanding again despite credit risk. In fact, the amount invested in ETNs has more than tripled in the past five years to $17 billion. The current tax treatment is not the result of any legislation by Congress but instead results from a gap in the tax law. My bill intended to fill that gap, and I am pleased that Chairman Camp's legislation would require ETN holders to determine the product's value each year and pay taxes at ordinary income rates on any change, even if they have not sold the securities. Mr. Travis, do you agree the current gap in our tax laws make ETNs more attractive to investors, notwithstanding the credit risks involved, and do you think policy makers should fill this gap similar to the approach taken by myself and Dave Camp? Do any of the other witnesses have comments? You are invited to offer them. *Mr. Travis. Mr. Neal, thank you. We are concerned that retail investors are buying ETNs in part because of the tax benefits under current law. There is also credit risk that they take. The troubling thing about the credit risk they are taking is it is not compensated, they are not receiving any return for taking that risk as they would if they were buying a bond issued by the same bank. This is terrific for the banks, they get cheap capital, inexpensive capital, but it is at the price of retail investors taking this uncompensated risk. We are very concerned. We share your concern there. We do think Chairman Camp's approach, mark‑to‑market, would address the issue. We also thought your interest accrual was another way of addressing it as well. Thank you. *Mr. Neal. Mr. Rosenthal? *Mr. Rosenthal. I agree with Mr. Travis. Exchange‑traded notes are just one variant of the way derivatives can be used to manage tax liability. The note simply is wrapped around another strategy, perhaps the strategy would have thrown off short term capital gains that would be expensive in the near term. An exchange‑traded note pays off over a year away and converts that short term gain into long term gain and defers that gain. Your approach in 2007 was a solid approach to require current accrual in these circumstances. I also favor Chairman Camp's approach, which I think goes beyond just the problems of exchange‑traded notes to a wider range of derivatives, but yes, I agree, that problem should be addressed in a comprehensive fashion. *Mr. Neal. I am surprised you have an opinion on this, Ms. Hammer. [Laughter.] *Ms. Hammer. The problem of exchange‑traded notes is one of a myriad of problems we have on instruments with multiple characteristics, and even if we adopt the most radical version of Chairman Camp's proposal, we are still going to have the issue of legacy laws. I do not think anyone is going to suggest that we change the law for stocks and bonds completely. The issue of hybrids or mixed character instruments is going to be with us for a long time until we are ready to make radical moves. *Mr. Neal. Mr. Travis, you state in your testimony with respect to the mark‑to‑market proposal that taxing derivatives as ordinary income may create mismatches with existing treatment of stocks and bonds in your portfolio's. I am hearing the same point of view from many of my Massachusetts mutual fund constituents as well. Can you expand on this point, explain to the Committee what you would recommend doing instead? The other witnesses will be given an opportunity as well. *Mr. Travis. Thank you, Mr. Neal. While we can support the mark‑to‑market approach as a framework for taxing derivatives, we are concerned with potential mismatches that could be created in our investment portfolio's, timing and character on the mark‑to‑market of derivatives will not match the timing and character of the capital assets we hold in the Funds, stocks and bonds. We think there are a couple of easy fixes. We think consideration could be given to whether the mark on the derivatives should be short term capital gain instead of ordinary income. There may be pro's and con's there. We could also think about the hedge accounting rules and perhaps extend those to investment assets so when our portfolio managers are viewing a portfolio as a whole and adjusting the financial properties through use of a derivative, the taxation on the derivative will follow the taxation of the thing that is being adjusted, the stock or bonds. Is there anybody else who would like to comment on that? *Mr. Rosenthal. This is an issue, and this issue, mixed character, will be addressed, I believe, by the ABA report that we are going to submit later in a different format. I would say I think the solution that Mr. Travis outlined second is better, that is to try to create a regime in which you match the character of a derivative with the offsetting position. We currently have such a regime to match derivatives against ordinary income and ordinary expenses, and that works very effectively. I suggest that we look to how we can extend that regime to match derivatives to hedge capital assets, and I think if we undertook that approach, we would solve a lot of these problems. There still is a tension sometimes in tracing between a derivative and the hedged position to determine whether it is matching the ordinary income asset or a capital asset or not. I know Mr. Garlock, for instance, has worked on that issue for years and years. I think we could address that issue at least sufficiently to put ourselves in a better spot than we are today, through a variety of up front identifications and drafting approaches. *Mr. Neal. Thank you. Thank you, Mr. Chairman. *Chairman Tiberi. Mr. Paulsen is recognized for five minutes. *Mr. Paulsen. Thank you, Mr. Chairman. Obviously, a very complicated area of the Tax Code. I remember having our hearing jointly with the Senate just a year and a half ago. I remember learning there are definitely some areas of the Code that are being abused for tax purposes, for instance, which is a goal of the draft, to kind of narrow down and zero in on some of those areas. I do have a question. There are a couple of basic principles of the draft. One is it is to avoid burdening average retail investors, for instance, as much as possible. Stocks and bonds are not covered under the draft, for instance. Secondly, another basic principle in general is distinguishing between financial transactions, which are covered by the draft, and then common business transactions, which would not be covered under that. From your perspective, are there other kinds of transactions that are covered by the draft that common average investors should be excluded from under this principle? Are we missing anything here? Mr. Travis? *Mr. Travis. Nothing comes to mind right now. *Mr. Paulsen. Mr. Paul? *Mr. Paul. If you are talking about excluding ‑‑ let me say first I do think the definition of "derivatives'' in the bill is broad enough that it will affect some transactions that so‑called "retail investors'' use frequently. The best examples are exchange‑traded options and investors who hold stock and are nervous about the stock market going down may buy a put option to protect their position. It is a form of hedging. Another is an investor's stock, including retail investors, frequently buy call options on their stock, called "covered calls,'' in order to have additional income on their stock positions. Under the draft proposals, buying a protective put option or writing covered calls would pull you into these rules, and not only would the option be mark‑to‑market and treated as ordinary income or loss, but the stock that you hold would be mark‑to‑market, and you have ordinary income and loss on your stock while you had the option outstanding. I think convertible bonds may be another example where regular investors, not just wealthy investors, hold those. Under the proposal, the conversion feature, the embedded option to convert the debt into stock of the issuer, would have to be separately valued and then marked to market each year with the gain being reported currently as ordinary income and loss. *Mr. Paulsen. Mr. Garlock? *Mr. Garlock. I am not aware of common business transactions that need to be excluded. I would generally agree with Mr. Paul. I think it is appropriate to have derivatives in general that pertain to stock, securities and commodities and so on, to generally be subject to mark‑to‑market rules. Although it may filter down to a fairly low level of the retail investment market, and if an investor is investing in those kinds of derivatives, they should be prepared to deal with the tax consequences that come with mark‑to‑market. *Mr. Paulsen. Mr. Rosenthal? *Mr. Rosenthal. Yes, Congressman Paulsen. I think there will be some common business transactions that might yet be inadvertently swept into this provision. I think the mark‑to‑market provision, and I think we ought to be very mindful of that, to try to restrict ourselves to financial and not normal business transactions. This problem was addressed by our brethren in the financial accounting community, the accountants, when they promulgated FAS‑133 that required mark‑to‑market accounting for derivatives. They excluded from their definition of a "derivative'' what they labeled either normal or common business transactions, which included things like the forward, delivery or receipt of commodities. Those were excluded in many circumstances. I think the approach of trying to exclude common business transactions is sensible, but more importantly, I think we should look to what the accountants have already done in terms of pioneering this approach for us. FAS‑133 has been in place now for 15 years with really good experience. I would start there to try to sensibly tackle what is in and what should not be in a mark‑to‑market for tax purposes. An added advantage, if it is marked for book, that eases the administrative burdens that you highlighted earlier. I think again there is all sorts of value to tapping into what our colleagues, either the regulators or the accountants, have been up to over the last several years. *Mr. Paulsen. Good. Ms. Hammer? *Ms. Hammer. Thank you, Mr. Paulsen. You asked a very complicated question because I think the concept of retail investor, I do not even know what that means. The average grandmother, what are they doing in the derivatives market? Maybe you could say convertible bonds. I am going to suggest to you that the average retail grandmother who is in the market is there because there are perhaps unusual tax advantages. You have to ask why they have unusual tax advantages. That is the first thing. The second thing is is the current system so good that we should be retaining it when we have something that is being suggested that has theoretical reasoning behind it? The first question is why is the current system good, and why is not the new system which has theoretical basis better. I think there is a lot in your question that probably needs to be teased out. Thank you. *Mr. Paulsen. Thank you. I yield back. *Chairman Tiberi. Thank you. Mr. Gerlach is recognized for five minutes. *Mr. Gerlach. Thank you, Mr. Chairman. Thank you all for testifying today. When I was in the State Senate in Pennsylvania and we would get a complex piece of legislation in front of us, I would always turn to a colleague of mine from Lancaster County, and I would ask him why should we vote for this, and he would say because it does good. What I am hearing from you all is you think the discussion draft does good, even though it is a very complex area of tax law and something from a lay person's standpoint is hard to get your head around. From your perspective, you clearly indicate this does good and is something we should certainly consider. Can you give me a macro kind of response to just the basic question as to if this legislation would be enacted, what would be the real world impact ultimately on your clients' returns on investment, and what would be the impact on our general economy if we were to change this area of the tax law, and your clients would move forward with the use of that tax law in terms of their investments? Ms. Hammer? We will work down the line. *Ms. Hammer. Thank you. I think that to generalize on the impact on taxpayers will be almost impossible, although you have economists no doubt that can do that. We have corporations. You have pass through's. You have individuals. You have foreigners. I do not know I could honestly tell you what the impact would be. I think the most important impact is it would cost less to find out what the tax law is than to actually pay the tax. That would be a good result of this, simplification to the extent that the inquiry would not take six hours, and half an hour to pay the tax. That would be a benefit, I think. *Mr. Gerlach. Great. Thank you. Mr. Rosenthal? *Mr. Rosenthal. I think the broad impact would be rather modest, but narrow niches would be affected. The market for structured financial products on Wall Street, I think, would be curtailed to a great extent. The services that all of us have provided while we have been in private practice to unravel these complicated tax issues for derivatives, I think also would be diminished, probably to the benefit of the economy overall. I would say one last point, which is when I worked on the staff to help the Congress develop Code Section 475, the mark‑to‑market for securities dealers, that legislation was passed three times before the President signed it into law, not because of any controversy of the legislation, but because there were other provisions and the provisions were vetoed and the like. Every time that legislation was taken up by the House or Senate or in Conference, we improved that legislation because the problem was so difficult. Likewise, as you extend mark‑to‑market more broadly, this problem is so difficult, it will take a fair amount of effort to get through, but it does good. *Mr. Gerlach. Thank you. Mr. Garlock, I am sure we are connected somewhere along the family tree. *Mr. Garlock. Sixth cousins, something like that. *Mr. Gerlach. Seventeen times removed. Go ahead. *Mr. Garlock. I am going to confine my response to the debt provisions because that is my particular focus. I would generally agree with Mr. Rosenthal that I do not think it is going to have a huge impact. I would say in general I believe the debt provisions will bring taxpayers taxable income closer to their true economic income. I think that is generally an improvement in the Tax Code, when taxable income is closer to economic income. I think they would be better in that respect. *Mr. Gerlach. Thank you. Mr. Paul? *Mr. Paul. Thank you. I will just preface my response by saying the legislation is a discussion draft, so when one talks about what will the impact be if it were enacted, there are a lot of glitches there. But if the main features are retained, and you asked how my clients would in particular be affected, the main thing I see is treatment of exchange‑traded options. As I mentioned, they are used by retail investors, and this would dramatically accelerate the tax and increase the tax for people who use those options. *Mr. Gerlach. Thank you. Mr. Travis? *Mr. Travis. Thank you, Mr. Gerlach. I think the mark‑to‑market proposal if enacted would bring much more certainty to the tax treatment of the derivatives in our portfolio's. We take a lot of time researching what the law is, what different guidance may mean or may not mean for a particular transaction. Understanding new instruments that are suggested to us, and taking a position on them. It is an involved, lengthy effort to ensure that we are complying if not with guidance, because it is not there, at least with the spirit of the other guidance that we do have. I think a lot of that effort would fall to the side. If we know for certain going forward what the correct treatment of this transaction, this derivative is, that would be a huge benefit to us as a business. We could spend more time focusing on serving our clients and less time researching and documenting the positions we take. *Mr. Gerlach. Thank you. Thank you all for testifying. I yield back. *Chairman Tiberi. Mr. Larson is recognized for five minutes. *Mr. Larson. Thank you very much, Mr. Chairman. I want to commend the Chairman and Mr. Neal for this opening session and hearing. I would also like to commend Chairman Camp as well for not only his work in this particular area but designating the Committee to work on select issues. I want to acknowledge the efforts of Mr. Smith and Mr. Schock who we have been working with in the area of financial services. Of course, my colleagues, Mr. Neal, who since the time I came to Congress ‑‑ he is not quite that old, Mr. Tiberi ‑‑ he has led the way with tax simplification and has worked very closely as well with Mr. Camp on the matters that we have before us. In this capacity, one of the things we have done is spent a lot of time with the Joint Tax Committee. In the process of what I think all of you have acknowledged and certainly the members here, of what is a complicated area. Part of it is not only de‑mysterization of the terminology that is out there, but also the unintended consequences. My question may be a little bit more specific but one of the things that came up in Joint Tax is the further we peeled away the veneer of what Mr. Paul has already recognized as a draft proposal, was in abiding to the principles of marking to market, there can be unintended consequences. I learned more about put's or covered call options than I wanted to know, but nonetheless, I can understand the concerns this raises on several fronts. I want to ask specifically of everybody if from the perspective of taxpayers who utilize put or covered call options, that they will not just be mark‑to‑market, as is our understanding in listening to the Committee and also from outside sources that have come before us, but the underlying stock will be considered to be sold and taxed as ordinary income, even if the taxpayer has not sold it. I believe, Mr. Paul, you got to some of that in your testimony. I will defer to our academic and start over here and ask all of you to respond. *Ms. Hammer. Thank you, Mr. Larson. I think you are referring to the mixed straddle provisions. They are amongst the most difficult provisions. The core of many of these questions is the fact that we have legacy laws that are sacrosanct, and that we do not quite know how to melt the old world of conventional treatment of debt and equity with the new world, potential new world of mark‑to‑market. Also at the core of that is Congress' intense concern with straddle's, which used to eat up a huge amount of time and Treasury money in the 1970s. All the time, when we are working on these financial provisions, we are concerned about straddle's which taxpayers use to shelter their income. When you talk about this mixed straddle provision, which is what I think you are talking about here, they are struggling to find a solution ‑‑ *Mr. Larson. In our efforts to simplify, do you think unintended consequences can result from this that will put the taxpayer at a disadvantage? *Ms. Hammer. Taxpayers are at a disadvantage already under the straddle rules. We always have to ask is this worse than the baseline. Is it worse than current law. That is the first question we have to ask. The straddle rules are onerous under current law. I am going to leave it with that. *Mr. Larson. Thank you. Mr. Rosenthal? *Mr. Rosenthal. Certainly, Congressman Larson, there will be unintended consequences of a discussion draft. I am optimistic that each of these problems can be addressed. To take, for example, the problem of qualified calls or the use of put's to hedge a capital asset in an investment position, the Camp proposal, the Committee's proposal, addresses the timing issues that arise out of straddle's by requiring both instruments, both sides, to be marked. That is the problem of a straddle. Back in the late 1970s and early 1980s, there was a lot of straddle activity where losses were recognized ahead of unrecognized gains. You want a time and match the two offsetting positions in situations in which there is risk management. Mr. Travis earlier described to you a suggestion that you extend the hedging rules to allow derivatives that hedge investment positions to be coupled as a tax hedge so you can link the timing of the gains and losses. I suggest in the situation you just described, if we had such a rule, we could take both positions, both a put or the qualified call and the stock, out of the mark‑to‑market regime, allow them to be exempted as hedges, and match the disposition gains and losses together. *Mr. Larson. My time has run out. I wonder, Mr. Chairman, if I could get it in writing. *Chairman Tiberi. That would be great, if you all could respond in writing to Mr. Larson. That was a bell for us to go vote. We have a witness who is heading South soon. We will not get back in time to hear from her. We have Mr. Schock, Mr. Young, Mr. Smith on our side, Ms. Sanchez on the other side. If you could answer the questions as quickly as possible so we can try to get everybody in. Mr. Schock. Actually, ironically, Mr. Larson asked my question. I would like to use my time to follow up on that. Once again, formalities, I appreciate your calling this hearing. I hope it is the first of many. I, too, Mr. Larson, have enjoyed with you on the financial products issues, but specifically the rough draft that we are going over now. I specifically am interested in the put/call scenario you had brought up earlier, Mr. Rosenthal. Please continue with your answer. *Mr. Rosenthal. I have used a lot of minutes. I would like to share some with my colleagues. *Mr. Schock. That is very nice of you. You get extra points. *Mr. Rosenthal. I feel guilty. *Mr. Schock. You can provide additional information in writing. Mr. Garlock? *Mr. Garlock. I would agree that using the hedging approach is a better way to deal with the covered call and use of put's than marking both positions to market and treating them as ordinary. I also think as the legislation moves forward, serious consideration needs to be given to the effect of in effect marking to market built in gains on stock positions. That would be a big expansion of the constructive sale rules that Congress enacted back in 1997. It might be a good or bad thing, but I do not think it has been given adequate discussion so far. *Mr. Schock. If you have ideas, please forward them. Mr. Paul? *Mr. Paul. I would agree. I do not think the legislation intended to have this consequence on effective put options and covered call writing. I think the drafters were sort of forced to address them given the threshold decision to mark all derivatives to market as ordinary. I think the suggestion that has been floating around of expanding the business hedging rules, which are quite sensible and seek to achieve clear reflection of income, through at least some form of investment hedges, which are currently taxed under the straddle rules and are basically anti‑taxpayer, I think that would be a huge step forward if we could do that. It is not easy. All this stuff we are talking about doing is not easy. I think the other unintended consequences in terms of valuation of instruments, particularly non‑traded instruments, concerns that there will be tax planning at year end, enter into a derivative, and then get a valuation that gives you a loss. We can get into that in more detail if you would like. *Mr. Schock. Mr. Travis? *Mr. Travis. Thank you. I want to echo Ms. Hammer's point that there are unintended consequences of current law, perhaps more than there will be of this. We may be able to spend our time better working here than trying to perfect current law. I think that is a very good point. I just want to mention one example that we have thought about, not exactly covered calls or put's, let's take a portfolio of municipal bonds that produce tax exempt interest. There may be 1,000, 500,000, maybe a lot of them that you hold in a large fund, and you may be looking at the financial properties of your portfolio overall, and thinking about where those bonds in the aggregate position to fund on the interest rate curve, and maybe it is slightly the wrong spot. You want to use a Treasury future contract to adjust where on the interest rate curve all the bonds in the aggregate are, it would seem that the draft as written would cause you to mark‑to‑market the entire portfolio and treat what was tax exempt income as taxable income. I do not think that is intended. I think it will be addressed by the hedging rule. I think we would all be happy to work with you identifying situations like this and make sure they are addressed appropriately going forward. *Mr. Schock. Thank you. I yield back. *Chairman Tiberi. Mr. Young, you are recognized. *Mr. Young. Thank you, Mr. Chairman. I very quickly would like to delve into this issue of the rapidly advancing innovations within financial markets and the seeming slowness of our Federal Government in responding to these various innovations with respect to taxation. We have heard a few different approaches, and they may be consistent or articulated today. Mr. Garlock, you emphasized the importance of focusing on a principle based as opposed to a rule based approach. I think that might just be an operating principle as we draft what are essentially rules, laws, to deal with these different things, sort of ensure that we are not creating all sorts of complicated exceptions here and there, and instead, prefer the elegant and simple approach, the principle, over sometimes nuance perhaps. I will allow you to clarify it if that is inaccurate. Mr. Paul, you have noted Treasury lacks sufficient authority to deal with some of these innovations. I would be curious as to whether or not you believe this draft proposal with respect to financial services strikes the right balance in terms of giving Treasury sufficient authority to deal with new innovations in the future. Ms. Hammer, you indicated that we should basically have more laws, more changes to laws, more frequently. By that, I am curious, were you basically agreeing with Mr. Paul's position, that is we need to give Treasury more flexibility to respond or instead do you think perhaps, for example, we ought to have sunset provisions on some of the things that we are proposing here today, so we can revisit them and institutionalize that re‑visitation from the outset. I will allow each of you to respond. *Mr. Paul. The draft proposal, as I read it, does not really address Treasury authority. It tries to basically deal with the issue by statute in terms of the mark‑to‑market provision. I think it would be very robust, any new product that came in, as long as you could determine it was a derivative as defined would be under that regime. You might find issues about products and whether they come within the definition or fall outside, and there are a lot of definitional issues. That would be my quick response. Mr. Garlock. Mr. Young, I think you did a very good job summarizing my thoughts and even expanding on them. I do think a bit more authority to Treasury and the IRS to write rules would be helpful. Sometimes you get the response when you go into them that well, we see your point economically, but we just do not think we have the authority to fix it. I would support greater authority. *Mr. Young. Ms. Hammer? *Ms. Hammer. Mr. Young, again, wonderful summary. Two things. First of all, Treasury has tons of authority and they never exercise it. I was at Treasury. We were all equally guilty and we all got nervous about making rules. Remember, they were wrong. As I said, just fix them. Nobody wants to do that. I do not think authority is always the issue. For character purposes and mark‑to‑market, people were worried about that. I think what you need is some imperative to do something, and I have never thought of the sunsetting provisions, it is an excellent idea, but the question is are you going to do something with it. I am very encouraged of you forcing yourselves to re‑think things that are being re‑thought in the marketplace every hour of every day. *Mr. Young. At least if we kick the can down the road under a sunsetting provision, it would be quite transparent that we did so, right? I yield back. *Chairman Tiberi. Thank you. Ms. Sanchez is recognized. *Ms. Sanchez. Thank you. We are in the midst of a vote. I will ask my question. I do not expect I will get to hear answers from all of you. I would just ask that you please provide an answer in writing. I am interested in getting your perspectives on the Chairman's average cost basis. Some have expressed the opinion that this new proposal will be easier for consumers, brokers and the industry once it is in place, and once there is one method instead of three. My concern lies in the transition and how that will work specifically, particularly given that there is a grandfather provision for pre‑January 1, 2014 purchases. I would just appreciate it if in writing you all could give your perspectives on the transition. With that, I will yield back to the Chairman. *Chairman Tiberi. Thank you, Ms. Sanchez. Thank you all for coming. Mr. Smith was here, who is leading the financial services working group with Mr. Larson. Sorry he was not able to ask questions. We look forward to working with all of you throughout this process. Hopefully, you will be back from down South and can come back again, Ms. Hammer. That concludes today's hearing. Please be advised that members may submit written questions to the witnesses. Those questions and the witnesses' answers will be made part of the record. I would like to thank all of you for your time today as witnesses. It has been an educational discussion. I think we as Committee members, speaking for both sides of the aisle, look forward to continuing to work with you on this comprehensive tax reform legislation that helps do what you talked about doing today. Thank you all. That concludes today's hearing. Thank you, Mr. Neal. [Whereupon, at 2:30 p.m., the hearing was concluded.] |
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