IRS MODIFIES RULES FOR COMPLYING WITH NEW MARK-TO-MARKET REGS.

Rev. Rul. 94-7

PURPOSE

This revenue ruling provides guidance concerning the identification of securities as "held for investment" for purposes of section 475 of the Internal Revenue Code. It modifies Rev. Rul. 93- 76, 1993-35 I.R.B. 11, to conform to sections 1.475(b)-1T and -2T of the temporary Income Tax Regulations.

BACKGROUND

Paragraph (a) of section 1.475(b)-1T provides that a security is held for investment (within the meaning of section 475(b)(1)(A)) or not held for sale (within the meaning of section 475(b)(1)(B)) if it is not held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business. This definition corresponds to the meaning of "held for investment" for purposes of section 1236(a)(1).

In general, under both sections 475 and 1236, an identification of a security as held for investment is timely only if the identification is made before the close of the day on which the security is acquired. In some cases, however, the required time for identification under one of the sections differs from that under the other.

Paragraph (a) of section 1.475(b)-2T of the temporary regulations provides special rules concerning the identification of securities held by the taxpayer as of the close of the last taxable year ending before December 31, 1993.

Rev. Rul. 93-76, among other things, describes the manner of making an identification under section 475, including identification by placing a security in an identified account.

REVISIONS TO REV. RUL. 93-76

ISSUE 5

Issue 5 of Rev. Rul. 93-76 continues to read:

ISSUE 5: Does an identification of a security as "held for investment" under section 1236 of the Code serve to identify that security as "held for investment" (within the meaning of section 475(b)(1)(A)) or as "not held for sale" (within the meaning of section 475(b)(1)(B))?

Holding 5 of Rev. Rul. 93-76 is modified to read as follows:

HOLDING 5: No. Taxpayers may choose not to identify under section 475(b)(2) some or all of the securities that they identify under section 1236(a)(1). (But see Holding 9(1) below and section 1.475(b)-2T(a)(1) of the temporary regulations for a special transition rule.) Accordingly, even if a section 1236 identification has been made, an identification of a security or hedge is a valid identification for purposes of section 475(b)(2) only if it contains a specific reference to section 475; this specific reference, however, may be effected by any reasonable method. For instance, certain accounts may be identified in such a way that placing a security or hedge in the account identifies the security or hedge for purposes of both section 1236(a)(1) and section 475(b)(1)(A), (B), or (C). See Holding 6 below.

ISSUE 6

Rev. Rul. 93-76 is clarified by replacing the last sentence of Holding 6 with the following paragraphs:

Analogously, under Rev. Rul. 64-160, 1964-1 (Part I) C.B. 306, modified, Rev. Rul. 76-489, 1976-2 C.B. 250, dealers can identify specified accounts as containing only securities held for investment for purposes of section 1236(a)(1). Accordingly, dealers can satisfy the identification requirements of section 475(b)(2) by unambiguously indicating that all of the securities or hedges in one or more of these accounts are also described in section 475(b)(1)(A), (B), or (C). Once such an identification of an account is made, placing a security or hedge in the account identifies the security or hedge not only as being "held for investment" for purposes of section 1236 but also as being described in the applicable subparagraph of section 475(b)(1).

In addition, rather than identifying specific securities, hedges, or accounts as being covered by an exception described in section 475(b)(1), a dealer may comply with the identification requirement under section 475(b) by clearly indicating the specific securities, hedges, or accounts that are not covered by an exception and identifying all other securities, hedges, or accounts as being excepted.

ISSUE 9

Issue 9 of Rev. Rul. 93-76 continues to read:

ISSUE 9: If, for the first taxable year ending on or after December 31, 1993 ("the year of change"), a taxpayer is required to change its method of accounting for securities to comply with section 475 and take into account any resulting net section 481(a) adjustment, how does the taxpayer determine which of the securities it held at the close of the taxable year immediately preceding the year of change must be marked to market under the new method of accounting?

Holding 9 of Rev. Rul 93-76 is clarified to read as follows:

HOLDING 9: To compute a net section 481(a) adjustment, a taxpayer needs to determine which of the securities it held at the close of the taxable year immediately preceding the year of change are marked to market as of the beginning of the year of change. Any security not treated as identified as being covered by an exception to the mark-to-market rules must be marked to market as of the beginning of the year of change and thus must be taken into account in computing the amount of the net section 481(a) adjustment. Pursuant to the legislative history, and solely for purposes of determining the securities that are to be marked to market as of the beginning of the year of change, a dealer in securities that is required to change its method of accounting for securities must apply the standards that follow.

(1) CERTAIN SECURITIES PREVIOUSLY IDENTIFIED UNDER SECTION 1236. If, as of the close of the last taxable year ending before December 31, 1993, a security was identified under section 1236 as a security held for investment, the security is treated as being identified as held for investment for purposes of section 475(b). Section 1.475(b)-2T(a)(1) of the temporary regulations.

(2) CONSISTENCY REQUIREMENT FOR OTHER SECURITIES. In the case of a security (including a security described in section 475(c)(2)(F)) that is not described in the preceding paragraph and that was held by the taxpayer as of the close of the last taxable year ending before December 31, 1993, the security is treated as having been properly identified under section 475(b)(2) or section 475(c)(2)(F)(iii) if the information contained in the dealer's books and records as of the close of that year supports the identification. If there is any ambiguity in those records, the taxpayer must, no later than January 31, 1994, place in its records a statement resolving this ambiguity and indicating unambiguously which securities are to be treated as properly identified. Any information that supports treating a security as having been properly identified under section 475(b)(2) or section 475(c)(2)(F)(iii) must be applied consistently from one security to another. Section 1.475(b)- 2T(a)(2) of the temporary regulations.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 93-76, 1993-35 I.R.B. 11, is modified and clarified. Rev. Rul 93-76 will reflect these changes when it is republished in 1993-2 C.B.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Robert B. Williams and Jo Lynn Ricks of the Office of the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Mr. Williams at (202) 622-3960 or Ms. Ricks at (202) 622-3920 (not a toll-free call).