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26 U.S. Code § 475 - Mark to market accounting method for dealers in securities

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(a) General ruleNotwithstanding any other provision of this subpart, the following rules shall apply to securities held by adealer in securities:

(1)

Anysecurity which is inventory in the hands of the dealer shall be included in inventory at its fair market value.

(2) In the case of anysecurity which is not inventory in the hands of the dealer and which is held at the close of any taxable year—

(A)

the dealer shall recognize gain or loss as if suchsecurity were sold for its fair market value on the last business day of such taxable year, and

(B)

any gain or loss shall be taken into account for such taxable year.

Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this paragraph at times other than the times provided in this paragraph.

(b) Exceptions

(1) In generalSubsection (a) shall not apply to—

(A)

anysecurity held for investment,

(B)

(i)

anysecurity described in subsection (c)(2)(C) which is acquired (including originated) by the taxpayer in the ordinary course of a trade or business of the taxpayer and which is not held for sale, and (ii) any obligation to acquire asecurity described in clause (i) if such obligation is entered into in the ordinary course of such trade or business and is not held for sale, and

(i)

asecurity to which subsection (a) does not apply, or

(ii)

a position, right to income, or a liability which is not asecurity in the hands of the taxpayer.

To the extent provided in regulations, subparagraph (C) shall not apply to anysecurity held by a person in its capacity as adealer in securities.

(2) Identification required

Asecurity shall not be treated as described in subparagraph (A), (B), or (C) of paragraph (1), as the case may be, unless suchsecurity is clearly identified in the dealer’s records as being described in such subparagraph before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe).

(3) Securities subsequently not exempt

If asecurity ceases to be described in paragraph (1) at any time after it was identified as such under paragraph (2), subsection (a) shall apply to any changes in value of thesecurity occurring after the cessation.

(4) Special rule for property held for investment

To the extent provided in regulations, subparagraph (A) of paragraph (1) shall not apply to anysecurity described in subparagraph (D) or (E) of subsection (c)(2) which is held by a dealer in such securities.

(1) Dealer in securities definedThe term “dealer in securities” means a taxpayer who—

(A)

regularly purchases securities from or sells securities to customers in the ordinary course of a trade or business; or

(B)

regularly offers to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of a trade or business.

(2) Security definedThe term “security” means any—

(A)

share of stock in a corporation;

(B)

partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust;

(C)

note, bond, debenture, or other evidence of indebtedness;

(D)

interest rate, currency, or equity notional principal contract;

(E)

evidence of an interest in, or a derivative financial instrument in, anysecurity described in subparagraph (A), (B), (C), or (D), or any currency, including any option, forward contract, short position, and any similar financial instrument in such asecurity or currency; and

(F) position which—

(i)

is not asecurity described in subparagraph (A), (B), (C), (D), or (E),

(ii)

is ahedge with respect to such asecurity, and

(iii)

is clearly identified in the dealer’s records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).

Subparagraph (E) shall not include any contract to whichsection 1256(a) applies.

(3) Hedge

The term “hedge” means any position which manages the dealer’s risk of interest rate or price changes or currency fluctuations, including any position which is reasonably expected to become ahedge within 60 days after the acquisition of the position.

(4) Special rules for certain receivables

(A) In general

Paragraph (2)(C) shall not include anynonfinancial customer paper.

(B) Nonfinancial customer paperFor purposes of subparagraph (A), the term “nonfinancial customer paper” means any receivable which—

(i)

is a note, bond, debenture, or other evidence of indebtedness;

(ii)

arises out of the sale of nonfinancial goods or services by a person the principal activity of which is the selling or providing of nonfinancial goods or services; and

(iii)

is held by such person (or a person who bears a relationship to such person described in section267(b) or707(b)) at all times since issue.

(d) Special rulesFor purposes of this section—

(1) Coordination with certain rules

The rules of sections263(g),263A, and1256(a) shall not apply to securities to which subsection (a) applies, and section 1091 shall not apply (and section 1092 shall apply) to any loss recognized under subsection (a).

(2) Improper identificationIf a taxpayer—

(A)

identifies anysecurity under subsection (b)(2) as being described in subsection (b)(1) and suchsecurity is not so described, or

(B)

fails under subsection (c)(2)(F)(iii) to identify any position which is described in subsection (c)(2)(F) (without regard to clause (iii) thereof) at the time such identification is required,

the provisions of subsection (a) shall apply to suchsecurity or position, except that any loss under this section prior to the dispositionof thesecurity or position shall be recognized only to the extent of gain previously recognized under this section (and not previously taken into account under this paragraph) with respect to suchsecurity or position.

(3) Character of gain or loss

(A) In generalExcept as provided in subparagraph (B) orsection 1236(b)—

(i) In general

Any gain or loss with respect to asecurity under subsection (a)(2) shall be treated as ordinary income or loss.

(ii) Special rule for dispositionsIf—

(I)

gain or loss is recognized with respect to asecurity before the close of the taxable year, and

(II)

subsection (a)(2) would have applied if thesecurity were held as of the close of the taxable year,

such gain or loss shall be treated as ordinary income or loss.

(B) ExceptionSubparagraph (A) shall not apply to any gain or loss which is allocable to a period during which—

(i)

thesecurity is described in subsection (b)(1)(C) (without regard to subsection (b)(2)),

(ii)

thesecurity is held by a person other than in connection with its activities as adealer in securities, or

(iii)

thesecurity is improperly identified (within the meaning of subparagraph (A) or (B) of paragraph (2)).

(e) Election of mark to market for dealers in commodities

(1) In general

In the case of a dealer in commodities who elects the application of this subsection, this section shall apply to commodities held by such dealer in the same manner as this section applies to securities held by adealer in securities.

(2) CommodityFor purposes of this subsection and subsection (f), the term “commodity” means—

(A)

anycommodity which is actively traded (within the meaning ofsection 1092(d)(1));

(B)

any notional principal contract with respect to anycommodity described in subparagraph (A);

(C)

any evidence of an interest in, or a derivative instrument in, anycommodity described in subparagraph (A) or (B), including any option, forward contract, futures contract, short position, and any similar instrument in such acommodity; and

(D) any position which—

(i)

is not acommodity described in subparagraph (A), (B), or (C),

(ii)

is ahedge with respect to such acommodity, and

(iii)

is clearly identified in the taxpayer’s records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).

(3) Election

An election under this subsection may be made without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

(f) Election of mark to market for traders in securities or commodities

(1) Traders in securities

(A) In generalIn the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph apply to such trade or business—

(i)

such person shall recognize gain or loss on anysecurity held in connection with such trade or business at the close of any taxable year as if suchsecurity were sold for its fair market value on the last business day of such taxable year, and

(ii)

any gain or loss shall be taken into account for such taxable year.

Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this subparagraph at times other than the times provided in this subparagraph.

(B) ExceptionSubparagraph (A) shall not apply to anysecurity—

(i)

which is established to the satisfaction of the Secretary as having no connection to the activities of such person as a trader, and

(ii)

which is clearly identified in such person’s records as being described in clause (i) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe).

If asecurity ceases to be described in clause (i) at any time after it was identified as such under clause (ii), subparagraph (A) shall apply to any changes in value of thesecurity occurring after the cessation.

Anysecurity to which subparagraph (A) applies and which was acquired in the normal course of the taxpayer’s activities as a trader in securities shall not be taken into account in applyingsection 1259 to any position to which subparagraph (A) does not apply.

(D) Other rules to apply

Rules similar to the rules of subsections (b)(4) and (d) shall apply to securities held by a person in any trade or business with respect to which an election under this paragraph is in effect. Subsection (d)(3) shall not apply under the preceding sentence for purposes of applying sections 1402 and 7704.

(2) Traders in commodities

In the case of a person who is engaged in a trade or business as a trader in commodities and who elects to have this paragraph apply to such trade or business, paragraph (1) shall apply to commodities held by such trader in connection with such trade or business in the same manner as paragraph (1) applies to securities held by a trader in securities.

(3) Election

The elections under paragraphs (1) and (2) may be made separately for each trade or business and without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

(g) Regulatory authorityThe Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including rules—

(1)

to prevent the use of year-end transfers, related parties, or other arrangements to avoid the provisions of this section,

(2)

to provide for the application of this section to anysecurity which is a hedgewhich cannot be identified with a specificsecurity, position, right to income, or liability, and

(3)

to prevent the use by taxpayers of subsection (c)(4) to avoid the application of this section to a receivable that is inventory in the hands of the taxpayer (or a person who bears a relationship to the taxpayer described in section267(b) or707(b)).

(AddedPub. L. 103–66, title XIII, § 13223(a),Aug. 10, 1993,107 Stat. 481; amendedPub. L. 105–34, title X, § 1001(b),Aug. 5, 1997,111 Stat. 906;Pub. L. 105–206, title VI, § 6010(a)(3), title VII, § 7003(a), (b),July 22, 1998,112 Stat. 813, 832;Pub. L. 106–170, title V, § 532(b)(1),Dec. 17, 1999,113 Stat. 1930;Pub. L. 106–554, § 1(a)(7) [title III, § 319(4)],Dec. 21, 2000,114 Stat. 2763, 2763A–646;Pub. L. 107–147, title IV, § 417(10),Mar. 9, 2002,116 Stat. 56.)

Editorial Notes

Amendments

2002—Subsec. (g)(3).Pub. L. 107–147 substituted “described in section” for “described in sections”.

2000—Subsec. (g)(3).Pub. L. 106–554 substituted “267(b) or” for “267(b) of”.

1999—Subsec. (c)(3).Pub. L. 106–170 substituted “manages” for “reduces”.

1998—Subsec. (c)(4).Pub. L. 105–206, § 7003(a), added par. (4).

Subsec. (f)(1)(D).Pub. L. 105–206, § 6010(a)(3), inserted at end “Subsection (d)(3) shall not apply under the preceding sentence for purposes of applying sections 1402 and 7704.”

Subsec. (g)(3).Pub. L. 105–206, § 7003(b), added par. (3).

1997—Subsecs. (e) to (g).Pub. L. 105–34 added subsecs. (e) and (f) and redesignated former subsec. (e) as (g).

Statutory Notes and Related Subsidiaries

Effective Date of 1999 Amendment

Amendment byPub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or afterDec. 17, 1999, seesection 532(d) of Pub. L. 106–170, set out as a note undersection 170 of this title.

Effective Date of 1998 Amendment

Amendment bysection 6010(a)(3) of Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of theTaxpayer Relief Act of 1997,Pub. L. 105–34, to which such amendment relates, seesection 6024 of Pub. L. 105–206, set out as a note undersection 1 of this title.

Pub. L. 105–206, title VII, § 7003(c),July 22, 1998,112 Stat. 833, provided that:

“(1) In general.—

The amendments made by this section [amending this section] shall apply to taxable years ending after the date of the enactment of this Act [July 22, 1998].

“(2) Change in method of accounting.—In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year ending after the date of the enactment of this Act—

“(A)

such change shall be treated as initiated by the taxpayer;

“(B)

such change shall be treated as made with the consent of the Secretary of the Treasury; and

“(C)

the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of theInternal Revenue Code of 1986 shall be taken into account ratably over the 4-taxable-year period beginning with such first taxable year.”

Effective Date of 1997 Amendment

Pub. L. 105–34, title X, § 1001(d),Aug. 5, 1997,111 Stat. 907, as amended byPub. L. 105–206, title VI, § 6010(a)(4),July 22, 1998,112 Stat. 813, provided that:

“(1) In general.—

Except as otherwise provided in this subsection, the amendments made by this section [enactingsection 1259 of this title and amending this section] shall apply to any constructive sale afterJune 8, 1997.

“(2) Exception for sales of positions, etc. held before june 9, 1997.—If—

“(A)

beforeJune 9, 1997, the taxpayer entered into any transaction which is a constructive sale of any appreciated financial position, and

“(B)

before the close of the 30-day period beginning on the date of the enactment of this Act [Aug. 5, 1997] or before such later date as may be specified by the Secretary of the Treasury, such transaction and position are clearly identified in the taxpayer’s records as offsetting,

such transaction and position shall not be taken into account in determining whether any other constructive sale afterJune 8, 1997, has occurred. The preceding sentence shall cease to apply as of the date such transaction is closed or the taxpayer ceases to hold such position.

“(3) Special rule.—In the case of a decedent dying afterJune 8, 1997, if—

“(A)

there was a constructive sale on or before such date of any appreciated financial position,

“(B) the transaction resulting in such constructive sale of such position remains open (with respect to the decedent or any related person)—

“(i)

for not less than 2 years after the date of such transaction (whether such period is before or afterJune 8, 1997), and

“(ii)

at any time during the 3-year period ending on the date of the decedent’s death, and

“(C)

such transaction is not closed before the close of the 30th day after the date of the enactment of this Act,

then, for purposes of such Code [probably means theInternal Revenue Code of 1986], such position (and the transaction resulting in such constructive sale) shall be treated as property constituting rights to receive an item of income in respect of a decedent under section 691 of such Code. Section 1014(c) of such Code shall not apply to so much of such position’s or property’s value (as included in the decedent’s estate for purposes of chapter 11 of such Code) as exceeds its fair market value as of the date such transaction is closed.

“(4) Election of mark to market by securities traders and traders and dealers in commodities.—

“(A) In general.—

The amendments made by subsection (b) [amending this section] shall apply to taxable years ending after the date of the enactment of this Act.

“(B) 4-year spread of adjustments.—In the case of a taxpayer who elects under subsection (e) or (f) of section 475 of theInternal Revenue Code of 1986 (as added by this section) to change its method of accounting for the taxable year which includes the date of the enactment of this Act—

“(i)

any identification required under such subsection with respect to securities and commodities held on the date of the enactment of this Act shall be treated as timely made if made on or before the 30th day after such date of enactment, and

“(ii)

the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of such Code shall be taken into account ratably over the 4-taxable year period beginning with such first taxable year.”

Effective Date

Pub. L. 103–66, title XIII, § 13223(c),Aug. 10, 1993,107 Stat. 484, provided that:

“(1) In general.—

The amendments made by this section [enacting this section and amendingsection 988 of this title] shall apply to all taxable years ending on or afterDecember 31, 1993.

“(2) Change in method of accounting.—In the case of any taxpayer required by this section to change its method of accounting for any taxable year—

“(A)

such change shall be treated as initiated by the taxpayer,

“(B)

such change shall be treated as made with the consent of the Secretary, and

“(C)

except as provided in paragraph (3), the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of theInternal Revenue Code of 1986 shall be taken into account ratably over the 5-taxable year period beginning with the first taxable year ending on or afterDecember 31, 1993.

“(3) Special rule for floor specialists and market makers.—

“(A) In general.—If—

“(i)

a taxpayer (or any predecessor) used the last-in first-out (LIFO) method of accounting with respect to any qualified securities for the 5-taxable year period ending with its last taxable year ending beforeDecember 31, 1993, and

“(ii)

any portion of the net amount described in paragraph (2)(C) is attributable to the use of such method of accounting,

then paragraph (2)(C) shall be applied by taking such portion into account ratably over the 15-taxable year period beginning with the first taxable year ending on or afterDecember 31, 1993.

“(B) Qualified security.—For purposes of this paragraph, the term ‘qualifiedsecurity’ means anysecurity acquired—

“(i)

by a floor specialist (as defined in section 1236(d)(2) of theInternal Revenue Code of 1986) in connection with the specialist’s duties as a specialist on an exchange, but only if the securityis one in which the specialist is registered with the exchange, or

“(ii) by a taxpayer who is a market maker in connection with the taxpayer’s duties as a market maker, but only if—

“(I)

thesecurity is included on the National Association ofSecurity Dealers Automated Quotation System,

“(II)

the taxpayer is registered as a market maker in suchsecurity with the National Association ofSecurity Dealers, and

“(III)

as of the last day of the taxable year preceding the taxpayer’s first taxable year ending on or afterDecember 31, 1993, the taxpayer (or any predecessor) has been actively and regularly engaged as a market maker in such securityfor the 2-year period ending on such date (or, if shorter, the period beginning 61 days after the securitywas listed in such quotation system and ending on such date).”

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26 U.S. Code § 475 - Mark to market accounting method for dealers in securities

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