Mark to market securities transactions IRS Revenue Proceedure 99-17 - John R. Dundon II, Enrolled Agent
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Mark to market securities transactions IRS Revenue Proceedure 99-17

Mark to market securities transactions IRS Revenue Proceedure 99-17

This revenue procedure provides the exclusive procedure for dealers in commodities and traders in securities or commodities to make an election to use the mark-to-market method of accounting under § 475(e) or (f) of the Internal Revenue Code.

BACKGROUND

Section 475(e) allows a dealer in commodities to elect mark-to-market accounting for commodities. Mark-to-market accounting under the election, however, does not apply to commodities that meet certain criteria and are identified under § 475(b)(2) and (e). Such an identification is ineffective unless it is made before the close of the day on which the commodity was acquired, originated, or entered into. Section 475(f) grants similar treatment to traders in securities and commodities.

The legislative history to § 475(e) and (f) states that the mark-to-market election will be made in the time and manner prescribed by the Secretary and will be effective for the taxable year for which it is made and all subsequent taxable years, unless revoked with the consent of the Secretary. H.R. Rep. No. 148, 105th Cong., 1st Sess. 446 (1997).

Use of mark-to-market accounting under § 475(e) or (f) is a method of accounting. Generally, a taxpayer must obtain the consent of the Commissioner to change a method of accounting for federal income tax purposes. To obtain this consent, file IRS Form 3115, Application for Change in Accounting Method, generally this form must be filed during the taxable year in which the taxpayer desires to make the change in method of accounting. The Commissioner, however, is authorized to prescribe administrative procedures setting forth the limitations, terms, and conditions the Commissioner deems necessary to obtain consent. See § 446(e) and the regulations thereunder.

In computing taxable income, § 481(a) requires a taxpayer to take into account those adjustments necessary to prevent amounts from being duplicated or omitted when the taxpayer’s taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year.

For a taxpayer who elects under § 475(e) or (f) to change its method of accounting for the taxable year that includes August 5, 1997, § 1001(d)(4) of the Taxpayer Relief Act of 1997 (the Act), Pub. L. No. 105–34, 111 Stat. 788 (August 5, 1997), provides: (1) that any identification required with respect to securities and commodities held on August 5, 1997, is treated as timely made if made on or before September 4, 1997; and (2) that the net amount of the adjustments required to be taken into account by the taxpayer under § 481 is taken into account ratably over the 4-taxable-year period beginning with the taxable year that includes August 5, 1997.

The Conference Report to the Act states that any elections made for a year after the taxable year that includes August 5, 1997, will be governed by rules and procedures established by the Secretary. H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. 516 (1997).

SCOPE

This revenue procedure applies to commodities dealers, securities traders, and commodities traders that want to make an election to use the mark-to-market method of accounting under § 475(e) or (f).

EFFECT OF ELECTION

An election under § 475(e) or (f) determines the method of accounting that an electing taxpayer is required to use for federal income tax purposes for securities or commodities subject to the election. Thus, beginning with the first taxable year for which the election is effective (the election year) and continuing for all subsequent taxable years (unless the election is revoked with the consent of the Commissioner), a method of accounting for securities or commodities subject to the election is impermissible for an electing taxpayer unless the method is in accordance with §475 and the regulations there under. If a taxpayer described in section 3 of this revenue procedure makes an election under section 5 of this revenue procedure, and the taxpayer’s method of accounting for its taxable year immediately preceding the election year is inconsistent with § 475, the taxpayer is required to change its method of accounting to comply with its election.

Section 6 of this revenue procedure contains procedures for effecting this change. A taxpayer that makes a § 475(e) or (f) election but fails to change its method of accounting to comply with that election is using an impermissible method.

PROCEDURES FOR MAKING THE MARK-TO-MARKET ELECTIONS

Elections effective for a taxable year beginning on or after January 1, 1999.

General procedure. Except as provided in section 5.03(2) of this revenue procedure, for a taxpayer to make a § 475(e) or (f) election that is effective for a taxable year beginning on or after January 1, 1999, the taxpayer must file a statement that satisfies the requirements in section 5.04 of this revenue procedure. The statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year and must be attached either to that return or, if applicable, to a request for an extension of time to file that return.

New taxpayers. A new taxpayer is a taxpayer for which no federal income tax return was required to be filed for the taxable year immediately preceding the election year. A new taxpayer makes the election by placing in its books and records no later than 2 months and 15 days after the first day of the election year a statement that satisfies the requirements in section 5.04 of this revenue procedure. To notify the Service that the election was made, the new taxpayer must attach a copy of the statement to its original federal income tax return for the election year.

Required statement. The statement must describe the election being made, the first taxable year for which the election is effective, and, in the case of an election under § 475(f), the trade or business for which the election is made.

CHANGE IN METHOD OF ACCOUNTING

Consent. A change in a taxpayer’s method of accounting to mark-to-market accounting is a change in method of accounting to which the provisions of §§ 446 and 481 and the regulations there under apply. The Commissioner hereby grants consent for a taxpayer to change its method of accounting for securities or commodities, as appropriate, if the following conditions are satisfied:

(1) the taxpayer is described in section 3 of this revenue procedure;
(2) the taxpayer complies with the election requirements set forth in section 5 of this revenue procedure;
(3) the method of accounting to which the taxpayer is changing is in accordance with its election under § 475;
(4) the year of change is the election year; and
(5) the taxpayer complies with the applicable requirements of this section 6.

Filing requirements.

(1) Taxpayers electing under section 5.01. A taxpayer described in sections 3 and 5.01(1) of this revenue procedure that changed its method of accounting to properly reflect the application of § 475 on its original federal income tax return for the election year has satisfied the filing requirements of this section 6.02. A taxpayer described in section 3 that is required to change its method of accounting to comply with its election under section 5.01(2) must comply with the requirements of section 6.02(2) of this revenue procedure (substituting the amended return required by section 5.01(2) for the original return referred to in section 6.02(2)).

(2) Taxpayers electing under section 5.02 or 5.03. A taxpayer described in section 3 of this revenue procedure that makes an election under section 5.02 or 5.03(1) of this revenue procedure and is required to change its method of accounting must complete and file a Form 3115 for the year of change pursuant to the filing requirements in section 6.02 of Rev. Proc. 98–60, 1998–51 I.R.B. 16. Thus, the original Form 3115 must be attached to the taxpayer’s timely filed (including extensions) original federal income tax return for the year of change, and a copy of the Form 3115 must be filed with the national office no later than when the original Form 3115 is filed with the federal income tax return for the year of change. The label described in section 6.02(3) of Rev. Proc. 98–60, however, should refer to this revenue procedure rather than to the APPENDIX of Rev. Proc. 98–60. Further, in the additional statement described in section 6.02(5) of Rev. Proc. 98–60, the taxpayer must agree to all the terms and conditions in this revenue procedure rather than those in Rev. Proc. 98–60.

Section 481(a) adjustment. If a taxpayer changes its method of accounting under section 6.01 of this revenue procedure, the taxpayer must take into account the net amount of the § 481(a adjustment in the manner provided in section 5.04 of Rev. Proc. 98–60. Thus, the § 481(a)a djustment generally is taken into account ratably over four taxable years beginning with the year of change. For purposes of § 481, a change in method of accounting made under this revenue procedure is a change in method of accounting initiated by the taxpayer.

EFFECTIVE DATE

This revenue procedure is effective February 8, 1999, the date this revenue procedure was made available to the public.

DRAFTING INFORMATION

The principal author of this revenue procedure is Jo Lynn Ricks of the Office of the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure, contact Ms. Ricks on (202) 622–3920 (not a toll-free call).