26 CFR Part 1 secs. 1.475 et al.

§ 1.475–0

26 CFR Ch. I (4–1–14 Edition)

be unavailable to the transferor without securing consent from the Commissioner). In determining the principal
purpose of a transfer, consideration
will be given to all of the facts and circumstances. However, a transfer is
deemed made with the principal purpose to avail the transferee of a method of accounting that would be unavailable to the transferor without securing consent from the Commissioner
if the transferor acquired inventory in
a bargain purchase within the five taxable years preceding the year of the
transfer and used a dollar-value LIFO
method to account for that inventory
that did not treat the bargain purchase
inventory and physically identical inventory acquired at market prices as
separate items. Inventory is deemed
acquired in a bargain purchase if the
actual cost of the inventory (or, if appropriate, the allocated cost of the inventory) was less than or equal to 50
percent of the replacement cost of
physically identical inventory. Inventory is not considered acquired in a
bargain purchase if the actual cost of
the inventory (or, if appropriate, the
allocated cost of the inventory) was
greater than or equal to 75 percent of
the replacement cost of physically
identical inventory.
(4) Effective date. The rules of this
paragraph (h) are applicable for transfers that occur during a taxable year
ending on or after December 31, 2001.
[T.D. 6539, 26 FR 518, Jan. 20, 1961, as amended by T.D. 7814, 47 FR 11272, Mar. 16, 1982;
T.D. 8976, 67 FR 1082, Jan. 9, 2002; 67 FR 5062,
5148, Feb. 4, 2002]

§ 1.475–0 Table of contents.
This section lists the major captions
in §§ 1.475(a)–3, 1.475(a)–4, 1.475(b)–1,
1.475(b)–2, 1.475(b)–4, 1.475(c)–1, 1.475(c)–
2, 1.475(d)–1 and 1.475(g)–1.
§§ 1.475(a)–1—1.475(a)–2 [Reserved]
§ 1.475(a)–3 Acquisition by a dealer of a
security with a substituted basis.
(a) Scope.
(b) Rules.

ehiers on DSK2VPTVN1PROD with CFR

§ 1.475(a)–4

Safe Harbor for Valuation Under
Section 475.

(a) Overview.
(1) Purpose.
(2) Dealer business model.

(3) Summary of paragraphs.
(b) Safe harbor.
(1) General rule.
(2) Example. Use of eligible and non-eligible methods.
(3) Scope of the safe harbor.
(c) Eligible taxpayer.
(d) Eligible method.
(1) Sufficient consistency.
(2) General requirements.
(i) Frequency.
(ii) Recognition at the mark.
(iii) Recognition on disposition.
(iv) Fair value standard.
(3) Limitations.
(i) Bid-ask method.
(A) General Rule.
(B) Safe harbor.
(ii) Valuations based on present values of
projected cash flows.
(iii) Accounting for costs and risks.
(4) Examples.
(e) Compliance with other rules.
(f) Election.
(1) Making the election.
(2) Duration of the election.
(3) Revocation.
(i) By the taxpayer.
(ii) By the Commissioner.
(4) Re-election.
(g) Eligible positions.
(h) Applicable financial statement.
(1) Definition.
(2) Primary financial statement.
(i) Statement required to be filed with Securities and Exchange Commission (SEC).
(ii) Statement filed with a Federal agency
other than the IRS.
(iii) Certified audited financial statement.
(3) Example. Primary financial statement.
(4) Financial statements of equal priority.
(5) Consolidated groups.
(6) Supplement or amendment to a financial statement.
(7) Certified audited financial statement.
(i) [Reserved]
(j) Significant business use.
(1) In general.
(2) Financial statement value.
(3) Management of a business as a dealer.
(4) Significant use.
(k) Retention and production of records.
(1) In general.
(2) Specific requirements.
(i) Reconciliation.
(A) In general.
(B) Values on books and records with supporting schedules.
(C) Consolidation schedules.
(ii) Instructions provided by the Commissioner.
(3) Time for producing records.
(4) Retention period for records.
(5) Agreements with the Commissioner.
(l) [Reserved]
(m) Use of different values.

570

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00580

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

Internal Revenue Service, Treasury
§ 1.475(b)–1

§ 1.475–0

Scope of exemptions from mark-tomarket requirement.

(c) Effect of corrections.

(a) Securities held for investment or not
held for sale.
(b) Securities deemed identified as held for
investment.
(1) In general.
(2) Relationships.
(i) General rule.
(ii) Attribution.
(iii) Trusts treated as partnerships.
(3) Securities traded on certain established
financial markets.
(4) Changes in status.
(i) Onset of prohibition against marking.
(ii) Termination of prohibition against
marking.
(iii) Examples.
(c) Securities deemed not held for investment; dealers in notional principal contracts
and derivatives.
(d) Special rule for hedges of another member’s risk.
(e) Transitional rules.
(1) Stock, partnership, and beneficial ownership interests in certain controlled corporations, partnerships, and trusts before
January 23, 1997.
(i) In general.
(ii) Control defined.
(iii) Applicability.
(2) Dealers in notional principal contracts
and derivatives acquired before January 23,
1997.
(i) General rule.
(ii) Exception for securities not acquired in
dealer capacity.
(iii) Applicability.
§ 1.475(b)–2

Exemptions—identification
requirements.

(a) Identification of the basis for exemption.
(b) Time for identifying a security with a
substituted basis.
(c) Integrated transactions under § 1.1275–6.
(1) Definitions.
(2) Synthetic debt held by a taxpayer as a
result of legging in.
(3) Securities held after legging out.
§ 1.475(b)–3 [Reserved]

ehiers on DSK2VPTVN1PROD with CFR

§ 1.475(b)–4 Exemptions—transitional issues.
(a) Transitional identification.
(1) Certain securities previously identified
under section 1236.
(2) Consistency requirement for other securities.
(b) Corrections on or before January 31,
1994.
(1) Purpose.
(2) To conform to § 1.475(b)–1(a).
(i) Added identifications.
(ii) Limitations.
(3) To conform to § 1.475(b)–1(c).

§ 1.475(c)–1

Definitions—dealer in securities.

(a) Dealer-customer relationship.
(1) [Reserved]
(2) Transactions described in section
475(c)(1)(B).
(i) In general.
(ii) Examples.
(3) Related parties.
(i) General rule.
(ii) Special rule for members of a consolidated group.
(iii) The intragroup-customer election.
(A) Effect of election.
(B) Making and revoking the election.
(iv) Examples.
(b) Sellers of nonfinancial goods and services.
(1) Purchases and sales of customer paper.
(2) Definition of customer paper.
(3) Exceptions.
(4) Election not to be governed by the exception for sellers of nonfinancial goods or
services.
(i) Method of making the election.
(A) Taxable years ending after December
24, 1996.
(B) Taxable years ending on or before December 24, 1996.
(ii) Continued applicability of an election.
(c) Taxpayers that purchase securities
from customers but engage in no more than
negligible sales of the securities.
(1) Exemption from dealer status.
(i) General rule.
(ii) Election to be treated as a dealer.
(2) Negligible sales.
(3) Special rules for members of a consolidated group.
(i) Intragroup-customer election in effect.
(ii) Intragroup-customer election not in effect.
(4) Special rules.
(5) Example.
(d) Issuance of life insurance products.
§ 1.475(c)–2

Definitions—security.

(a) Items that are not securities.
(b) Synthetic debt that § 1.1275–6(b) treats
the taxpayer as holding.
(c) Negative value REMIC residuals acquired before January 4, 1995.
(1) Description.
(2) Special rules applicable to negative
value REMIC residuals acquired before January 4, 1995.
§ 1.475(d)–1

Character of gain or loss.

(a) Securities never held in connection
with the taxpayer’s activities as a dealer in
securities.
(b) Ordinary treatment for notional principal contracts and derivatives held by dealers in notional principal contracts and derivatives.

571

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00581

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

§§ 1.475(a)–1—1.475(a)–2
§ 1.475(g)–1

26 CFR Ch. I (4–1–14 Edition)

Effective dates.

[T.D. 8700, 61 FR 67719, Dec. 24, 1996, as
amended by T.D. 9328, 72 FR 32177, June 12,
2007]

§§ 1.475(a)–1—1.475(a)–2

[Reserved]

§ 1.475(a)–3 Acquisition by a dealer of
a security with a substituted basis.
(a) Scope. This section applies if—
(1) A dealer in securities acquires a
security that is subject to section
475(a) and the dealer’s basis in the security is determined, in whole or in
part, by reference to the basis of that
security in the hands of the person
from whom the security was acquired;
or
(2) A dealer in securities acquires a
security that is subject to section
475(a) and the dealer’s basis in the security is determined, in whole or in
part, by reference to other property
held at any time by the dealer.
(b) Rules. If this section applies to a
security—
(1) Section 475(a) applies only to
changes in value of the security occurring after the acquisition; and
(2) Any built-in gain or loss with respect to the security (based on the difference between the fair market value
of the security on the date the dealer
acquired it and its basis to the dealer
on that date) is taken into account at
the time, and has the character, provided by the sections of the Internal
Revenue Code that would apply to the
built-in gain or loss if section 475(a) did
not apply to the security.
[T.D. 8700, 61 FR 67720, Dec. 24, 1996]

ehiers on DSK2VPTVN1PROD with CFR

§ 1.475(a)–4

Valuation safe harbor.

(a) Overview—(1) Purpose. This section sets forth a safe harbor that,
under certain circumstances, permits
taxpayers to elect to use the values of
positions reported on certain financial
statements as the fair market values of
those positions for purposes of section
475. This safe harbor is based on the
principle that, if a mark-to-market
method used for financial reporting is
sufficiently consistent with the requirements of section 475 and if the financial statement employing that
method has certain indicia of reliability, then the values used on that fi-

nancial statement may be used for purposes of section 475. If other provisions
of the Internal Revenue Code or regulations require adjustments to fair market value, use of the safe harbor does
not eliminate the need for those adjustments. See paragraph (e) of this
section.
(2) Dealer business model. The safe
harbor is based on the business model
for a derivatives dealer. Under this
model, the dealer seeks to capture and
profit from bid-ask spreads in the marketplace by entering into substantially
offsetting positions with customers
that will remain on the derivatives
dealer’s books over their terms. Because the positions in the aggregate
tend to offset each other, the dealer
has achieved a predictable net cash
flow (for example, a synthetic annuity)
that reflects the captured bid-ask
spread. This net cash flow is generally
impervious to market fluctuations in
the values on which the component derivatives are based. Section 475 requires current recognition of the
present value of the net cash flow attributable to the capture of these
spreads.
(3) Summary of paragraphs. Paragraph
(b) of this section sets forth the safe
harbor. To determine who may use the
safe harbor, paragraph (c) of this section defines the term ‘‘eligible taxpayer.’’ Paragraph (d) of this section
sets forth the basic requirements for
determining whether the method used
for financial reporting is sufficiently
consistent with the requirements of
section 475. Paragraph (e) of this section describes adjustments to the financial statement values that may be
required for purposes of applying this
safe harbor. Paragraph (f) of this section describes the procedure for making the safe harbor election and the
conditions under which the election
may be revoked. Paragraph (g) of this
section provides that the Commissioner will issue a revenue procedure
that lists the types of securities and
commodities that are eligible positions
for purposes of the safe harbor. Using
rules for determining priorities among
financial statements, paragraph (h) of
this section defines the term ‘‘applicable financial statement’’ and so describes the financial statement, if any,

572

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00582

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

Internal Revenue Service, Treasury

§ 1.475(a)–4

whose values may be used in the safe
harbor. In some cases, as required by
paragraph (j) of this section, the safe
harbor is available only if the taxpayer’s operations make significant
business use of financial statement values. Paragraph (k) of this section sets
forth requirements for record retention
and record production. Paragraph (m)
of this section provides that the Commissioner may use fair market values
that clearly reflect income, but which
differ from values used on the applicable financial statement, if an electing
taxpayer fails to comply with the recordkeeping and record production requirements of paragraph (k) of this section.
(b) Safe harbor—(1) General rule. Subject to any adjustment required by
paragraph (e) of this section, if an eligible taxpayer uses an eligible method
for the valuation of an eligible position
on its applicable financial statement
and the eligible taxpayer is subject to
the election described in paragraph (f)
of this section, the value that the eligible taxpayer assigns to that eligible position on its applicable financial statement is the fair market value of the eligible position for purposes of section
475 and must be used for purposes of
section 475, even if that value is not
the fair market value of the position
for any other purpose of the internal
revenue laws. Notwithstanding the rule
set forth in this paragraph, the Commissioner
may,
in
certain
circumstances, use fair market values
that clearly reflect income but differ
from the values used on the applicable
financial statement. See paragraph (m)
of this section.
(2) Example. Use of eligible and non-eligible methods. X uses eligible methods
on its applicable financial statement
for some, but not all, securities and
commodities that are eligible positions. When X elects into the safe harbor, the election applies to all eligible
positions for which X has an eligible
method. Therefore, once the election is
in effect, the financial statement values for eligible positions for which X
has an eligible method are the fair
market values of those eligible positions for purposes of section 475. Since
X, however, does not have an eligible
method for all eligible positions, those

eligible positions for which X does not
have an eligible method remain subject
to the fair market value requirements
of section 475 as set out in case law and
otherwise.
(3) Scope of the safe harbor. The safe
harbor may be used only to determine
values for eligible positions that are
properly marked to market under section 475. It does not determine whether
any positions may or may not be subject to mark-to-market accounting
under section 475.
(c) Eligible taxpayer. An eligible taxpayer is—
(1) A dealer in securities, as defined
in section 475(c)(1); or
(2) A dealer in commodities, as defined in section 475(e), that is subject
to an election under section 475(e).
(d) Eligible method—(1) Sufficient consistency. An eligible method is a markto-market method that is sufficiently
consistent with the requirements of a
mark-to-market method under section
475. To be sufficiently consistent with
the requirements of a mark-to-market
method under section 475, the eligible
method must satisfy all of the requirements of paragraph (d)(2) and paragraph (d)(3) of this section.
(2) General requirements. The method—
(i) Frequency. Must require a valuation of the eligible position no less
frequently than annually, including a
valuation as of the last business day of
the taxable year;
(ii) Recognition at the mark. Must recognize into income on the income
statement for each taxable year markto-market gain or loss based upon the
valuation or valuations described in
paragraph (d)(2)(i) of this section;
(iii) Recognition on disposition. Must
require, on disposition of the eligible
position, recognition into income (on
the income statement for the taxable
year of disposition) as if a year-end
mark occurred immediately before
such disposition; and
(iv) Fair value standard. Must require
use of a valuation standard that arrives at fair value in accordance with
U.S. Generally Accepted Accounting
Principles (U.S. GAAP).
(3) Limitations—(i) Bid-ask method—
(A) General rule. Except for eligible positions that are traded on a qualified

573

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00583

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

§ 1.475(a)–4

26 CFR Ch. I (4–1–14 Edition)

board or exchange, as defined in section 1256(g)(7), or eligible positions that
the Commissioner designates in a revenue procedure or other published guidance, the valuation standard used must
not, other than on a de minimis portion
of a taxpayer’s positions, permit values
at or near the bid or ask value. Consequently, the valuation method described in § 1.471–4(a)(1) fails to satisfy
this paragraph (d)(3)(i)(A).
(B) Safe harbor. The restriction in
paragraph (d)(3)(i)(A) of this section is
satisfied if the method consistently
produces values that are closer to the
mid-market values than they are to
the bid or ask values.
(ii) Valuations based on present values
of projected cash flows. If the method of
valuation consists of projecting cash
flows from an eligible position or positions and determining the present
value of those cash flows, the method
must not take into account any cash
flows attributable to a period or time
on or before the valuation date. In addition, adjustment of the gain or loss
recognized on the mark may be required with respect to payments that
will be made after the valuation date
to the extent that portions of the payments have been recognized for tax
purposes before the valuation and appropriate adjustment has not been
made for purposes of determining financial statement value.
(iii) Accounting for costs and risks.
Valuations may account for appropriate costs and risks, but no cost or
risk may be accounted for more than
once, either directly or indirectly. Further, no valuation adjustment for any
cost or risk may be made for purposes
of this safe harbor if that valuation adjustment is not also permitted by, and
taken for, U.S. GAAP purposes on the
taxpayer’s applicable financial statement. If appropriate, the costs and
risks that may be accounted for include, but are not limited to, credit
risk (appropriately adjusted for any
credit enhancement), future administrative costs, and model risk. An adjustment for credit risk is implicit in
computing the present value of cash
flows using a discount rate greater
than a risk-free rate. Accordingly, a
determination of whether any further
downward adjustment to value for

credit risk is warranted, or whether an
upward adjustment is required, must
take that implicit adjustment into
consideration.
(4) Examples. The following examples
illustrate this paragraph (d):
Example 1. (i) X, a calendar year taxpayer,
is a dealer in securities within the meaning
of section 475(c)(1). X generally maintains a
balanced portfolio of interest rate swaps and
other interest rate derivatives, capturing
bid-ask spreads and keeping its market exposure within desired limits (using, if necessary, additional derivatives for this purpose). X uses a mark-to-market method on a
statement that it is required to file with the
United States Securities and Exchange Commission and that satisfies paragraph (d)(2) of
this section with respect to both the contracts with customers and the additional derivatives. When determining the amount of
any gain or loss realized on a sale, exchange,
or termination of a position, X makes a
proper adjustment for amounts taken into
account respecting payments or receipts. X
and all of its counterparties on the derivatives have the same general credit quality as
each other.
(ii) Under X’s valuation method, as of each
valuation date, X determines a mid-market
probability distribution of future cash flows
under the derivatives and computes the
present values of these cash flows. In computing these present values, X uses an industry standard yield curve that is appropriate
for obligations by persons with this same
general credit quality. In addition, based on
information that includes its own knowledge
about the counterparties, X adjusts some of
these present values either upward or downward to reflect X’s reasonable judgment
about the extent to which the true credit
status of each counterparty’s obligation,
taking credit enhancements into account,
differs from the general credit quality used
in the yield curve to present value the derivatives.
(iii) X’s methodology does not violate the
requirement in paragraph (d)(3)(iii) of this
section that the same cost or risk not be
taken into account, directly or indirectly,
more than once.
(iv) Applicability date. This Example 1 applies to valuations of securities on or after
July 6, 2011.
Example 2. (i) The facts are the same as in
Example 1, except that X uses a better credit
quality in determining the yield curve to discount the payments to be received under the
derivatives. Based on information that includes its own knowledge about the counterparties, X adjusts these present values to reflect X’s reasonable judgment about the extent to which the true credit status of each

574

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00584

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

Internal Revenue Service, Treasury

§ 1.475(a)–4

counterparty’s obligation, taking credit enhancements into account, differs from this
better credit quality obligation.
(ii) X’s methodology does not violate the
requirement in paragraph (d)(3)(iii) of this
section that the same cost or risk not be
taken into account, directly or indirectly,
more than once.
(iii) Applicability date. This Example 2 applies to valuations of securities on or after
July 6, 2011.
Example 3. (i) The facts are the same as in
Example 1, except that, after computing
present values using the discount rates that
are appropriate for obligors with the same
general credit quality, and based on information that includes X’s own knowledge about
the counterparties, X adjusts some of these
present values either upward or downward to
reflect X’s reasonable judgment about the
extent to which the true credit status of
each counterparty’s obligation, taking credit
enhancements into account, differs from a
better credit quality.
(ii) X’s methodology violates the requirement in paragraph (d)(3)(iii) of this section
that the same cost or risk not be taken into
account, directly or indirectly, more than
once. By using the same general credit quality discount rate, X’s method takes into account the difference between risk-free obligations and obligations with that lower credit quality. By adjusting values for the difference between a higher credit quality and
that lower credit quality, X takes into account risks that it had already accounted for
through the discount rates that it used. The
same result would occur if X judged some of
its counterparties’ obligations to be of a
higher credit quality but X failed to adjust
the values of those obligations to reflect the
difference between a higher credit quality
and the lower credit quality.
(iii) Applicability date. This Example 3 applies to valuations of securities on or after
July 6, 2011.
Example 4. (i) The facts are the same as in
Example 1, except that X determines the midmarket value for each derivative and then
subtracts the corresponding part of the bidask spread.
(ii) X’s methodology violates the rule in
paragraph (d)(3)(i) of this section that forbids
valuing positions at or near the bid or ask
value.
Example 5. (i) The facts are the same as in
Example 1, and, in addition, X’s adjustments
for all risks and costs, including credit risk,
future administrative costs and model risk,
may occasionally cause the adjusted value of
an eligible position to be at or near the bid
value or ask value.
(ii) X’s methodology does not violate the
rule in paragraph (d)(3)(i)(A) of this section
that forbids valuing eligible positions at or
near the bid or ask value.

(e) Compliance with other rules. Notwithstanding any other provisions of
this section, the fair market values for
purposes of the safe harbor must be
consistent with section 482, or rules
that adopt section 482 principles, when
applicable. For example, if a notional
principal contract is subject to section
482 or section 482 principles, the values
of future cash flows taken into account
in determining the value of the contract for purposes of section 475 must
be consistent with section 482.
(f) Election—(1) Making the election.
Unless the Commissioner prescribes
otherwise, an eligible taxpayer elects
under this section by filing with the
Commissioner a statement declaring
that the taxpayer makes the safe harbor election in this section for all eligible positions for which it has an eligible method. In addition to any other
information that the Commissioner
may require, the statement must describe the taxpayer’s applicable financial statement for the first taxable
year for which the election is effective
and must state that the taxpayer
agrees to provide upon the request of
the Commissioner all information,
records, and schedules in the manner
required by paragraph (k) of this section. The statement must be attached
to a timely filed Federal income tax return (including extensions) for the taxable year for which the election is first
effective.
(2) Duration of the election. Once
made, the election continues in effect
for all subsequent taxable years unless
revoked.
(3) Revocation—(i) By the taxpayer. An
eligible taxpayer that is subject to an
election under this section may revoke
the election only with the consent of
the Commissioner.
(ii) By the Commissioner. The Commissioner, after consideration of the relevant facts and circumstances, may revoke an election under this section, effective beginning with the first open
year for which the election is effective
or with any subsequent year, if—
(A) The taxpayer fails to comply with
paragraph (k) of this section (concerning record retention and production) and the taxpayer does not show
reasonable cause for this failure;

575

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00585

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

§ 1.475(a)–4

26 CFR Ch. I (4–1–14 Edition)

(B) The taxpayer ceases to have an
applicable financial statement or
ceases to use an eligible method; or
(C) For any other reason, no more
than a de minimis number of eligible
positions, or no more than a de minimis fraction of the taxpayer’s eligible
positions, are covered by the safe harbor in paragraph (b) of this section.
(4) Re-election. If an election is revoked, either by the Commissioner or
by the taxpayer, the taxpayer (or any
successor in interest of the taxpayer)
may not make the election without the
consent of the Commissioner for any
taxable year that begins before the
date that is six years after the first day
of the earliest taxable year affected by
the revocation.
(g) Eligible positions. For any taxpayer, an eligible position is any security or commodity that the Commissioner in a revenue procedure or other
published guidance designates as an eligible position with respect to that taxpayer for purposes of this safe harbor.
(h) Applicable financial statement—(1)
Definition. An eligible taxpayer’s applicable financial statement for a taxable
year is the taxpayer’s primary financial statement for that year if that primary financial statement is described
in paragraph (h)(2)(i) of this section
(concerning statements required to be
filed with the SEC) or if that primary
financial statement both meets the requirements of paragraph (j) of this section (concerning significant business
use) and is described in either paragraph (h)(2)(ii) or (iii) of this section.
Otherwise, or if the taxpayer does not
have a primary financial statement for
the taxable year, the taxpayer does not
have an applicable financial statement
for the taxable year.
(2) Primary financial statement. For
any taxable year, an eligible taxpayer’s
primary financial statement is the financial statement, if any, described in
one or more of paragraphs (h)(2)(i), (ii),
and (iii) of this section. If more than
one financial statement of the taxpayer for the year is so described, the
primary financial statement is the one
first described in paragraphs (h)(2)(i),
(ii), and (iii) of this section. A taxpayer
has only one primary financial statement for any taxable year.

(i) Statement required to be filed with
the Securities and Exchange Commission
(SEC). A financial statement that is
prepared in accordance with U.S.
GAAP and that is required to be filed
with the SEC, such as the 10–-K or the
Annual Statement to Shareholders.
(ii) Statement filed with a Federal agency other than the Internal Revenue Service. A financial statement that is prepared in accordance with U.S. GAAP
and that is required to be provided to
the Federal government or any of its
agencies other than the Internal Revenue Service (IRS).
(iii) Certified audited financial statement. A certified audited financial
statement that is prepared in accordance with U.S. GAAP; that is given to
creditors for purposes of making lending decisions, given to equity holders
for purposes of evaluating their investment in the eligible taxpayer, or provided for other substantial non-tax
purposes; and that the taxpayer reasonably anticipates will be directly relied on for the purposes for which it
was given or provided.
(3) Example. Primary financial statement. X prepares financial statement
FS1, which is required to be filed with
a Federal government agency other
than the SEC or the IRS. FS1 is thus
described in paragraph (h)(2)(ii) of this
section. X also prepares financial statement FS2, which is a certified audited
financial statement that is given to
creditors and that X reasonably anticipates will be relied on for purposes of
making lending decisions. FS2 is thus
described in paragraph (h)(2)(iii) of this
section. Because FS1, which is described in paragraph (h)(2)(ii) of this
section, is described before FS2, which
is described in paragraph (h)(2)(iii) of
this section, FS1 is X’s primary financial statement.
(4) Financial statements of equal priority. If the rules of paragraph (h)(2) of
this section cause two or more financial statements to be of equal priority,
then the statement that results in the
highest aggregate valuation of eligible
positions being marked to market
under section 475 is the primary financial statement.
(5) Consolidated groups. If the taxpayer is a member of an affiliated
group that files a consolidated return,

576

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00586

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

Internal Revenue Service, Treasury

§ 1.475(a)–4

the primary financial statement of the
taxpayer is the primary financial
statement, if any, of the common parent (within the meaning of section
1504(a)(1)) of the consolidated group.
(6) Supplement or amendment to a financial statement. A financial statement includes any supplement or
amendment to the financial statement.
(7) Certified audited financial statement. For purposes of this paragraph
(h), a financial statement is a certified
audited financial statement if it is certified by an independent certified public accountant from a Registered Public Accounting firm, as defined in section 2(a)(12) of the Sarbanes-Oxley Act
of 2002, Public Law 107–204, 116 Stat. 746
(July 30, 2002), 15 U.S.C. § 7201(a)(12),
and rules promulgated under that Act,
and is—
(i) Certified to be fairly presented (a
‘‘clean’’ opinion);
(ii) Certified to be fairly presented
subject to a concern about a contingency, other than a contingency relating to the value of eligible positions (a
qualified ‘‘subject to’’ opinion); or
(iii) Certified to be fairly presented
except for a method of accounting with
which the Certified Public Accountant
disagrees and which is not a method
used to determine the value of an eligible position held by the eligible taxpayer (a qualified ‘‘except for’’ opinion).
(i) [Reserved]
(j) Significant business use—(1) In general. A financial statement is described
in this paragraph (j) if—
(i) The financial statement contains
values for eligible positions;
(ii) The eligible taxpayer makes significant use of financial statement values in most of the significant management functions of its business; and
(iii) That use is related to the management of all or substantially all of
the eligible taxpayer’s business.
(2) Financial statement value. For purposes of this paragraph (j), the term financial statement value means—
(i) A value that is taken from the financial statement; or
(ii) A value that is produced by a
process that is in all respects identical
to the process that produces the values
that appear on the financial statement

but that is not taken from the statement because either—
(A) The value was determined as of a
date for which the financial statement
does not value eligible positions; or
(B) The value is used in the management of the business before the financial statement has been prepared.
(3) Management functions of a business.
For purposes of this paragraph (j), the
term management functions of a business
refers to the financial and commercial
oversight of the business. Oversight includes, but is not limited to, senior
management review of business-unit
profitability, market risk measurement or management, credit risk
measurement or management, internal
allocation of capital, and compensation
of personnel. Management functions of
a business do not include either tax accounting or reporting the results of operations to persons other than directors or employees.
(4) Significant use. If an eligible taxpayer uses financial statement values
for some significant management functions and uses values that are not financial statement values for other significant management functions, then
the determination of whether the taxpayer has made significant use of the
financial statement values is made on
the basis of all the facts and circumstances. This determination must
particularly take into account whether
the taxpayer’s reliance on the financial
statement values exposes the taxpayer
to material adverse economic consequences if the values are incorrect.
(k) Retention and production of
records—(1) In general. In addition to all
records that section 6001 otherwise requires to be retained, an eligible taxpayer subject to the election provided
by this section must keep, and timely
provide to the Commissioner upon request, records and books of account
that are sufficient to establish that the
financial statement to which the income tax return conforms is the taxpayer’s applicable financial statement,
that the method used on that statement is an eligible method, and that
the values used for eligible positions
for purposes of section 475 are the values used in the applicable financial
statement. This obligation extends to
all records and books that are required

577

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00587

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

§ 1.475(a)–4

26 CFR Ch. I (4–1–14 Edition)

to be maintained for any period for financial or regulatory reporting purposes, even if these records or books
may not otherwise be specifically covered by section 6001. All records and
books described in this paragraph (k)
must be maintained for the period described in paragraph (k)(4) of this section, even if a lesser period of retention
applies for financial statement or regulatory purposes.
(2)
Specific
requirements—(i)
Verification and reconciliation. Unless
the Commissioner otherwise provides—
(A) In general. An eligible taxpayer
must provide books and records to
verify the appropriate use of the safe
harbor and reconciliation schedules between the applicable financial statement for the taxable year and the Federal income tax return for that year.
The required verification materials and
reconciliation schedules include all
supporting schedules, exhibits, computer programs, and any other information used in producing the values
and schedules, including the documentation of rules and procedures governing determination of the values.
The required reconciliation schedules
must also include a detailed explanation of any adjustments necessitated
by the imperfect overlap between the
eligible positions that the taxpayer
marks to market under section 475 and
the eligible positions for which the applicable financial statement uses an eligible method. In the time and manner
provided by the Commissioner, a corporate taxpayer subject to this paragraph (k) must reconcile the net income amount reported on its applicable financial statement to the amount
reported on the applicable forms and
schedules on its Federal income tax return (such as the Schedule M–1, ‘‘Net
Income(Loss) Reconciliation for Corporations With Total Assets of $10 Million or More’’; Schedule M–3, ‘‘Net Income(Loss) Reconciliation for Corporations With Total Assets of $10 Million
or More’’; and Form 1120F, ‘‘U.S. Income Tax Return of a Foreign Corporation’’). Eligible taxpayers that are not
otherwise required to file a Schedule
M–1 or Schedule M–3 must reconcile
net income using substitute schedules
similar to Schedule M–1 and Schedule

M–3, and these substitute schedules
must be attached to the return.
(B) Values on books and records with
supporting schedules. The books and
records must state the value used for
each eligible position separately from
the value used for any other eligible
position. However, an eligible taxpayer
may make adjustments to values on a
pooled basis, if the taxpayer demonstrates that it can compute gain or
loss attributable to the sale or other
disposition of an individual eligible position.
(C) Consolidation schedules. An eligible taxpayer must provide a schedule
showing the consolidation and de-consolidation that is used in preparing the
applicable financial statement, along
with exhibits and subordinate schedules. This schedule must provide information that addresses the differences
for consolidation and de-consolidation
between the applicable financial statement and the Federal income tax return.
(ii) Instructions provided by the Commissioner. The Commissioner may provide an alternative time or manner in
which an eligible taxpayer subject to
this paragraph (k) must establish that
the same values used for eligible positions on the applicable financial statement are also the values used for purposes of section 475 on the Federal income tax return.
(3) Time for producing records. All documents described in this paragraph (k)
must be produced within 30 days of a
request by the Commissioner, unless
the Commissioner grants a written extension. Generally, the Commissioner
will exercise his discretion to excuse a
minor or inadvertent failure to provide
requested documents if the taxpayer
shows reasonable cause for the failure,
has made a good faith effort to comply
with the requirement to produce
records, and promptly remedies the
failure. For failures to maintain, or
timely produce, records, see paragraph
(f)(3)(ii) of this section (allowing the
Commissioner to revoke the election),
and see paragraph (m) of this section
(allowing the Commissioner, but not
the taxpayer, to use for eligible positions that otherwise might be subject
to the safe harbor fair market values
that clearly reflect income but that are

578

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00588

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

Internal Revenue Service, Treasury

§ 1.475(b)–1

different from the values used on the
applicable financial statement).
(4) Retention period for records. All
materials required by this paragraph
(k) and section 6001 must be retained as
long as their contents may become material in the administration of any internal revenue law.
(5) Agreements with the Commissioner.
The Commissioner and an eligible taxpayer may enter into a written agreement that establishes, for purposes of
this paragraph (k), which records must
be maintained, how they must be maintained, and for how long they must be
maintained.
(l) [Reserved]
(m) Use of different values. If, with respect to the records that relate to certain eligible positions for a taxable
year, the taxpayer fails to satisfy paragraph (k) of this section (concerning
record retention and record production), then, for those eligible positions
for that year, the Commissioner may
use values that the Commissioner determines to be fair market values that
are appropriate to clearly reflect income, even if the values so determined
are different from the values reported
for those positions on the applicable financial statement. See also paragraph
(f)(3)(ii) of this section (concerning revocation of the election by the Commissioner when a taxpayer does not
produce required records and fails to
demonstrate reasonable cause for the
failure).

ehiers on DSK2VPTVN1PROD with CFR

[T.D. 9328, 72 FR 32177, June 12, 2007, as
amended by T.D. 9533, 76 FR 39281, July 6,
2011; T.D. 9637, 78 FR 54760, Sept. 6, 2013]

§ 1.475(b)–1 Scope of exemptions from
mark-to-market requirement.
(a) Securities held for investment or not
held for sale. Except as otherwise provided by this section and subject to the
identification requirements of section
475(b)(2), 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.
(b) Securities deemed identified as held
for investment—(1) In general. The following items held by a dealer in securi-

ties are per se held for investment
within
the
meaning
of
section
475(b)(1)(A) and are deemed to be properly identified as such for purposes of
section 475(b)(2)—
(i) Except as provided in paragraph
(b)(3) of this section, stock in a corporation, or a partnership or beneficial
ownership interest in a widely held or
publicly traded partnership or trust, to
which the taxpayer has a relationship
specified in paragraph (b)(2) of this section; or
(ii) A contract that is treated for federal income tax purposes as an annuity, endowment, or life insurance contract (see sections 72, 817, and 7702).
(2) Relationships—(i) General rule. The
relationships specified in this paragraph (b)(2) are—
(A) Those described in section 267(b)
(2), (3), (10), (11), or (12); or
(B) Those described in section
707(b)(1)(A) or (B).
(ii) Attribution. The relationships described in paragraph (b)(2)(i) of this
section are determined taking into account sections 267(c) and 707(b)(3), as
appropriate.
(iii) Trusts treated as partnerships. For
purposes of this paragraph (b)(2), the
phrase partnership or trust is substituted for the word partnership in sections 707(b) (1) and (3), and a reference
to beneficial ownership interest is
added to each reference to capital interest or profits interest in those sections.
(3) Securities traded on certain established financial markets. Paragraph
(b)(1)(i) of this section does not apply
to a security if—
(i) The security is actively traded
within the meaning of § 1.1092(d)–1(a)
taking into account only established financial
markets
identified
in
§ 1.1092(d)–1(b)(1) (i) or (ii) (describing
national securities exchanges and
interdealer quotation systems);
(ii) Less than 15 percent of all of the
outstanding shares or interests in the
same class are held by the taxpayer
and all persons having a relationship to
the taxpayer that is specified in paragraph (b)(2) of this section; and
(iii) If the security was acquired (e.g.,
on original issue) from a person having
a relationship to the taxpayer that is

579

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00589

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

§ 1.475(b)–1

26 CFR Ch. I (4–1–14 Edition)

ehiers on DSK2VPTVN1PROD with CFR

specified in paragraph (b)(2) of this section, then, after the time the security
was acquired—
(A) At least one full business day has
passed; and
(B) There has been significant trading involving persons not having a relationship to the taxpayer that is specified in paragraph (b)(2) of this section.
(4) Changes in status—(i) Onset of prohibition against marking. (A) Once paragraph (b)(1) of this section begins to
apply to the security and for so long as
it continues to apply, section 475(a)
does not apply to the security in the
hands of the taxpayer.
(B) If a security has not been timely
identified under section 475(b)(2) and,
after the last day on which such an
identification would have been timely,
paragraph (b)(1) of this section begins
to apply to the security, then the dealer must recognize gain or loss on the
security as if it were sold for its fair
market value as of the close of business
of the last day before paragraph (b)(1)
of this section begins to apply to the
security, and gain or loss is taken into
account at that time.
(ii) Termination of prohibition against
marking. If a taxpayer did not timely
identify a security under section
475(b)(2), and paragraph (b)(1) of this
section applies to the security on the
last day on which such an identification would have been timely but thereafter ceases to apply—
(A) An identification of the security
under section 475(b)(2) is timely if
made on or before the close of the day
paragraph (b)(1) of this section ceases
to apply; and
(B) Unless the taxpayer timely identifies the security under section
475(b)(2) (taking into account the additional time for identification that is
provided by paragraph (b)(4)(ii)(A) of
this section), section 475(a) applies to
changes in value of the security after
the cessation in the same manner as
under section 475(b)(3).
(iii) Examples. These examples illustrate this paragraph (b)(4):
Example 1. Onset of prohibition against marking. (A) Facts. Corporation H owns 75 percent
of the stock of corporation D, a dealer in securities within the meaning of section
475(c)(1). On December 1, 1995, D acquired less
than half of the stock in corporation X. D

did not identify the stock for purposes of section 475(b)(2). On July 17, 1996, H acquired
from other persons 70 percent of the stock of
X. As a result, D and X became related within the meaning of paragraph (b)(2)(i) of this
section. The stock of X is not described in
paragraph (b)(3) of this section (concerning
some securities traded on certain established
financial markets).
(B) Holding. Under paragraph (b)(4)(i) of
this section, D recognizes gain or loss on its
X stock as if the stock were sold for its fair
market value at the close of business on July
16, 1996, and the gain or loss is taken into account at that time. As with any application
of section 475(a), proper adjustment is made
in the amount of any gain or loss subsequently realized. After July 16, 1996, section
475(a) does not apply to D’s X stock while
paragraph (b)(1)(i) of this section (concerning
the relationship between X and D) continues
to apply.
Example 2. Termination of prohibition against
marking; retained securities identified as held
for investment. (A) Facts. On July 1, 1996, corporation H owned 60 percent of the stock of
corporation Y and all of the stock of corporation D, a dealer in securities within the
meaning of section 475(c)(1). Thus, D and Y
are related within the meaning of paragraph
(b)(2)(i) of this section. Also on July 1, 1996,
D acquired, as an investment, 10 percent of
the stock of Y. The stock of Y is not described in paragraph (b)(3) of this section
(concerning some securities traded on certain established financial markets). When D
acquired its shares of Y stock, it did not
identify them for purposes of section
475(b)(2). On December 24, 1996, D identified
its shares of Y stock as held for investment
under section 475(b)(2). On December 30, 1996,
H sold all of its shares of stock in Y to an unrelated party. As a result, D and Y ceased to
be related within the meaning of paragraph
(b)(2)(i) of this section.
(B) Holding. Under paragraph (b)(4)(ii)(A) of
this section, identification of the Y shares is
timely if done on or before the close of December 30, 1996. Because D timely identified
its Y shares under section 475(b)(2), it continues after December 30, 1996, to refrain
from marking to market its Y stock.
Example 3. Termination of prohibition against
marking; retained securities not identified as
held for investment. (A) Facts. The facts are
the same as in Example 2 above, except that
D did not identify its stock in Y for purposes
of section 475(b)(2) on or before December 30,
1996. Thus, D did not timely identify these
securities under section 475(b)(2) (taking into
account the additional time for identification provided in paragraph (b)(4)(ii)(A) of
this section).
(B) Holding. Under paragraph (b)(4)(ii)(B) of
this section, section 475(a) applies to changes
in value of D’s Y stock after December 30,

580

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00590

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

Internal Revenue Service, Treasury

§ 1.475(b)–1

1996, in the same manner as under section
475(b)(3).
Thus, any appreciation or depreciation
that occurred while the securities were prohibited from being marked to market is suspended. Further, section 475(a) applies only
to those changes occurring after December
30, 1996.
Example 4. Acquisition of actively traded
stock from related party. (A) Facts. Corporation P is the parent of a consolidated group
whose taxable year is the calendar year, and
corporation M, a member of that group, is a
dealer in securities within the meaning of
section 475(c)(1). Corporation M regularly
acts as a market maker with respect to common and preferred stock of corporation P.
Corporation P has outstanding 2,000,000
shares of series X preferred stock, which are
traded on a national securities exchange.
During the business day on December 29,
1997, corporation P sold 100,000 shares of series X preferred stock to corporation M for
$100 per share. Subsequently, also on December 29, 1997, persons not related to corporation M engaged in significant trading of the
series X preferred stock. At the close of business on December 30, 1997, the fair market
value of series X stock was $99 per share. At
the close of business on December 31, 1997,
the fair market value of series X stock was
$98.50 per share. Corporation M sold the series X stock on the exchange on January 2,
1998. At all relevant times, corporation M
and all persons related to M owned less than
15% of the outstanding series X preferred
stock.
(B) Holding. The 100,000 shares of series X
preferred stock held by corporation M are
not subject to mark-to-market treatment
under section 475(a) on December 29, 1997, because at that time the stock was held for
less than one full business day and is therefore treated as properly identified as held for
investment. At the close of business on December 30, 1997, that prohibition on marking
ceases to apply, and section 475(b)(3) begins
to apply. The built-in loss is suspended, and
subsequent appreciation and depreciation
are subject to section 475(a). Accordingly,
when corporation M marks the series X
stock to market at the close of business on
December 31, 1997, under section 475(a) it recognizes and takes into account a loss of $.50
per share. Under section 475(b)(3), when corporation M sells the series X stock on January 2, 1998, it takes into account the suspended loss, that is, the difference between
the $100 per share it paid corporation P for
that stock and the $99-per-share fair market
value when section 475(b)(1) ceased to be applied to the stock. No deduction, however, is
allowed for that loss. (See § 1.1502–13(f)(6),
under which no deduction is allowed to a
member of a consolidated group for a loss
with respect to a share of stock of the parent
of that consolidated group, if the member

does not take the gain or loss into account
pursuant to section 475(a).)

(c) Securities deemed not held for investment; dealers in notional principal
contracts and derivatives. (1) Except as
otherwise determined by the Commissioner in a revenue ruling, revenue procedure, or letter ruling, section
475(b)(1)(A) (exempting from mark-tomarket accounting certain securities
that are held for investment) does not
apply to a security if—
(i) The security is described in section 475(c)(2) (D) or (E) (describing certain notional principal contracts and
derivative securities); and
(ii) The taxpayer is a dealer in such
securities.
(2) See § 1.475(d)–1(b) for a rule concerning the character of gain or loss on
securities described in this paragraph
(c).
(d) Special rule for hedges of another
member’s risk. A taxpayer may identify
under section 475(b)(1)(C) (exempting
certain hedges from mark-to-market
accounting) a security that hedges a
position of another member of the taxpayer’s consolidated group if the security meets the following requirements—
(1) The security is a hedging transaction within the meaning of § 1.1221–
2(b);
(2) The security is timely identified
as a hedging transaction under § 1.1221–
2(f) (including identification of the
hedged item); and
(3) The security hedges a position
that is not marked to market under
section 475(a).
(e) Transitional rules—(1) Stock, partnership, and beneficial ownership interests in certain controlled corporations,
partnerships, and trusts before January
23, 1997—(i) In general. The following
items held by a dealer in securities are
per se held for investment within the
meaning of section 475(b)(1)(A) and are
deemed to be properly identified as
such for purposes of section 475(b)(2)—
(A) Stock in a corporation that the
taxpayer controls (within the meaning
of paragraph (e)(1)(ii) of this section);
or
(B) A partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust that
the taxpayer controls (within the

581

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00591

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

§ 1.475(b)–2

26 CFR Ch. I (4–1–14 Edition)

meaning of paragraph (e)(1)(ii) of this
section).
(ii) Control defined. Control means the
ownership,
directly
or
indirectly
through persons described in section
267(b) (taking into account section
267(c)), of—
(A) 50 percent or more of the total
combined voting power of all classes of
stock entitled to vote; or
(B) 50 percent or more of the capital
interest, the profits interest, or the
beneficial ownership interest in the
widely held or publicly traded partnership or trust.
(iii) Applicability. The rules of this
paragraph (e)(1) apply only before January 23, 1997.
(2) Dealers in notional principal contracts and derivatives acquired before
January 23, 1997—(i) General rule. Section 475(b)(1)(A) (exempting certain securities from mark-to-market accounting) does not apply to a security if—
(A) The security is described in section 475(c)(2) (D) or (E) (describing certain notional principal contracts and
derivative securities); and
(B) The taxpayer is a dealer in such
securities.
(ii) Exception for securities not acquired
in dealer capacity. This paragraph (e)(2)
does not apply if the taxpayer establishes unambiguously that the security
was not acquired in the taxpayer’s capacity as a dealer in such securities.
(iii) Applicability. The rules of paragraph (e)(2) apply only to securities acquired before January 23, 1997.

ehiers on DSK2VPTVN1PROD with CFR

[T.D. 8700, 61 FR 67720, Dec. 24, 1996, as
amended by T.D. 8985, 67 FR 12865, Mar. 20,
2002]

§ 1.475(b)–2 Exemptions—identification requirements.
(a) Identification of the basis for exemption. An identification of a security as
exempt from mark to market does not
satisfy section 475(b)(2) if it fails to
state whether the security is described
in—
(1) Either of the first two subparagraphs of section 475(b)(1) (identifying
a security as held for investment or
not held for sale); or
(2) The third subparagraph thereof
(identifying a security as a hedge).
(b) Time for identifying a security with
a substituted basis. For purposes of de-

termining the timeliness of an identification under section 475(b)(2), the
date that a dealer acquires a security
is not affected by whether the dealer’s
basis in the security is determined, in
whole or in part, either by reference to
the basis of the security in the hands of
the person from whom the security was
acquired or by reference to other property held at any time by the dealer.
See § 1.475(a)–3 for rules governing how
the dealer accounts for such a security
if this identification is not made.
(c)
Integrated
transactions
under
§ 1.1275–6—(1) Definitions. The following
terms are used in this paragraph (c)
with the meanings that are given to
them by § 1.1275–6: integrated transaction, legging into, legging out, qualifying debt instrument, § 1.1275–6 hedge,
and synthetic debt instrument.
(2) Synthetic debt held by a taxpayer as
a result of legging in. If a taxpayer is
treated as the holder of a synthetic
debt instrument as the result of legging into an integrated transaction,
then, for purposes of the timeliness of
an
identification
under
section
475(b)(2), the synthetic debt instrument
is treated as having the same acquisition date as the qualifying debt instrument. A pre-leg-in identification of the
qualifying debt instrument under section 475(b)(2) applies to the integrated
transaction as well.
(3) Securities held after legging out. If a
taxpayer legs out of an integrated
transaction, then, for purposes of the
timeliness of an identification under
section 475(b)(2), the qualifying debt instrument, or the § 1.1275–6 hedge, that
remains in the taxpayer’s hands is generally treated as having been acquired,
originated, or entered into, as the case
may be, immediately after the leg-out.
If any loss or deduction determined
under § 1.1275–6(d)(2)(ii)(B) is disallowed
by § 1.1275–6(d)(2)(ii)(D) (which disallows deductions when a taxpayer legs
out of an integrated transaction within
30 days of legging in), then, for purposes of this section and section
475(b)(2), the qualifying debt instrument that remains in the taxpayer’s
hands is treated as having been acquired on the same date that the synthetic debt instrument was treated as
having been acquired.
[T.D. 8700, 61 FR 67722, Dec. 24, 1996]

582

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00592

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

Internal Revenue Service, Treasury
§ 1.475(b)–3

[Reserved]

§ 1.475(b)–4
issues.

Exemptions—transitional

§ 1.475(c)–1

(a) Transitional identification—(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).
(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
paragraph (a)(1) of this section 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
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
(c)(2)(F)(iii) must be applied consistently from one security to another.
(b) Corrections on or before January 31,
1994—(1) Purpose. This paragraph (b) allows a taxpayer to add or remove certain
identifications
covered
by
§ 1.475(b)–1.
(2) To conform to § 1.475(b)–1(a)—(i)
Added identifications. To the extent permitted by paragraph (b)(2)(ii) of this
section, a taxpayer may identify as
being described in section 475(b)(1) (A)
or (B)—
(A) A security that was held for immediate sale but was not held primarily for sale to customers in the ordinary course of the taxpayer’s trade
or business (for example, a trading security); or
(B) An evidence of indebtedness that
was not held for sale to customers in
the ordinary course of the taxpayer’s

trade or business and that the taxpayer
intended to hold for less than one year.
(ii) Limitations. An identification described in paragraph (b)(2)(i) of this
section is permitted only if—
(A) Prior to December 28, 1993, the
taxpayer did not identify as being described in section 475(b)(1) (A) or (B)
any of the securities described in paragraph (b)(2)(i) of this section;
(B) The taxpayer identifies every security described in paragraph (b)(2)(i)
of this section for which a timely identification of the security under section
475(b)(2) cannot be made after the date
on which the taxpayer makes these
added identifications; and
(C) The identification is made on or
before January 31, 1994.
(3) To conform to § 1.475(b)–1(c). On or
before January 31, 1994, a taxpayer described in § 1.475(b)–1(e)(2)(i)(B) may remove an identification under section
475(b)(1)(A) of a security described in
§ 1.475(b)–1(e)(2)(i)(A).
(c) Effect of corrections. An identification added under paragraph (a)(2) or
(b)(2) of this section is timely for purposes
of
section
475(b)(2)
or
(c)(2)(F)(iii). An identification removed
under paragraph (a)(2) or (b)(3) of this
section does not subject the taxpayer
to the provisions of section 475(d)(2).
[T.D. 8700, 61 FR 67722, Dec. 24, 1996]

§ 1.475(c)–1 Definitions—dealer in securities.
(a)
Dealer-customer
relationship.
Whether a taxpayer is transacting
business with customers is determined
on the basis of all of the facts and circumstances.
(1) [Reserved]
(2) Transactions described in section
475(c)(1)(B)—(i) In general. For purposes
of section 475(c)(1)(B), the term dealer
in securities includes, but is not limited
to, a taxpayer that, in the ordinary
course of the taxpayer’s trade or business, regularly holds itself out as being
willing and able to enter into either
side of a transaction enumerated in
section 475(c)(1)(B).
(ii) Examples. The following examples
illustrate the rules of this paragraph
(a)(2). In the following examples, B is a
bank and is not a member of a consolidated group:

583

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00593

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

§ 1.475(c)–1

26 CFR Ch. I (4–1–14 Edition)

ehiers on DSK2VPTVN1PROD with CFR

Example 1. B regularly offers to enter into
interest rate swaps with other persons in the
ordinary course of its trade or business. B is
willing to enter into interest rate swaps
under which it either pays a fixed interest
rate and receives a floating rate or pays a
floating rate and receives a fixed rate. B is a
dealer in securities under section 475(c)(1)(B),
and the counterparties are its customers.
Example 2. B, in the ordinary course of its
trade or business, regularly holds itself out
as being willing and able to enter into either
side of positions in a foreign currency with
other banks in the interbank market. B’s activities in the foreign currency make it a
dealer in securities under section 475(c)(1)(B),
and the other banks in the interbank market
are its customers.
Example 3. B engages in frequent transactions in a foreign currency in the interbank market. Unlike the facts in Example 2,
however, B does not regularly hold itself out
as being willing and able to enter into either
side of positions in the foreign currency, and
all of B’s transactions are driven by its internal need to adjust its position in the currency. No other circumstances are present to
suggest that B is a dealer in securities for
purposes of section 475(c)(1)(B). B’s activity
in the foreign currency does not qualify it as
a dealer in securities for purposes of section
475(c)(1)(B), and its transactions in the interbank market are not transactions with customers.

(3) Related parties—(i) General rule.
Except as provided in paragraph
(a)(3)(ii) of this section (concerning
transactions between members of a
consolidated group, as defined in
§ 1.1502–1(h)), a taxpayer’s transactions
with related persons may be transactions with customers for purposes of
section 475. For example, if a taxpayer,
in the ordinary course of the taxpayer’s trade or business, regularly
holds itself out to its foreign subsidiaries or other related persons as being
willing and able to enter into either
side of transactions enumerated in section 475(c)(1)(B), the taxpayer is a dealer in securities within the meaning of
section 475(c)(1), even if it engages in
no other transactions with customers.
(ii) Special rule for members of a consolidated group. Solely for purposes of
paragraph (c)(1) of section 475 (concerning the definition of dealer in securities) and except as provided in paragraph (a)(3)(iii) of this section, a taxpayer’s transactions with other members of its consolidated group are not
with customers. Accordingly, notwithstanding paragraph (a)(2) of this sec-

tion, the fact that a taxpayer regularly
holds itself out to other members of its
consolidated group as being willing and
able to enter into either side of a transaction
enumerated
in
section
475(c)(1)(B) does not cause the taxpayer
to be a dealer in securities within the
meaning of section 475(c)(1)(B).
(iii) The intragroup-customer election—
(A) Effect of election. If a consolidated
group makes the intragroup-customer
election, paragraph (a)(3)(ii) of this section (special rule for members of a consolidated group) does not apply to the
members of the group. Thus, a member
of a group that has made this election
may be a dealer in securities within
the meaning of section 475(c)(1) even if
its only customer transactions are
with other members of its consolidated
group.
(B) Making and revoking the election.
Unless the Commissioner otherwise
prescribes, the intragroup-customer
election is made by filing a statement
that says, ‘‘[Insert name and employer
identification number of common parent] hereby makes the Intragroup-Customer Election (as described in
§ 1.475(c)–1(a)(3)(iii) of the income tax
regulations) for the taxable year ending [describe the last day of the year]
and for subsequent taxable years.’’ The
statement must be signed by the common parent and attached to the timely
filed federal income tax return for the
consolidated group for that taxable
year. The election applies for that year
and continues in effect for subsequent
years until revoked. The election may
be revoked only with the consent of the
Commissioner.
(iv) Examples. The following examples
illustrate this paragraph (a)(3):
GENERAL FACTS. HC, a hedging center, provides interest rate hedges to all of the members of its affiliated group (as defined in section 1504(a)(1)). Because of the efficiencies
created by having a centralized risk manager, group policy prohibits members other
than HC from entering into derivative interest rate positions with outside parties. HC
regularly holds itself out as being willing
and able to, and in fact does, enter into either side of interest rate swaps with its fellow members. HC periodically computes its
aggregate position and hedges the net risk
with an unrelated party. HC does not otherwise enter into interest rate positions with
persons that are not members of the affiliated group. HC attempts to operate at cost,

584

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00594

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

Internal Revenue Service, Treasury

§ 1.475(c)–1

and the terms of its swaps do not factor in
any risk of default by the affiliate. Thus,
HC’s affiliates receive somewhat more favorable terms then they would receive from an
unrelated swaps dealer (a fact that may subject HC and its fellow members to reallocation of income under section 482). No other
circumstances are present to suggest that
HC is a dealer in securities for purposes of
section 475(c)(1)(B).
Example 1. General rule for related persons.
In addition to the General Facts stated above,
assume that HC’s affiliated group has not
elected under section 1501 to file a consolidated return. Under paragraph (a)(3)(i) of
this section, HC’s transactions with its affiliates can be transactions with customers for
purposes of section 475(c)(1). Thus, under
paragraph (a)(2)(i) of this section, HC is a
dealer in securities within the meaning of
section 475(c)(1)(B), and the members of the
group with which it does business are its customers.

ehiers on DSK2VPTVN1PROD with CFR

Example 2. Special rule for members of a consolidated group. In addition to the General
Facts stated above, assume that HC’s affiliated group has elected to file consolidated
returns and has not made the intragroupcustomer election. Under paragraph (a)(3)(ii)
of this section, HC’s interest rate swap
transactions with the members of its consolidated group are not transactions with
customers for purposes of determining
whether HC is a dealer in securities within
the meaning of section 475(c)(1). Further, the
fact that HC regularly holds itself out to
members of its consolidated group as being
willing and able to enter into either side of
a
transaction
enumerated
in
section
475(c)(1)(B) does not cause HC to be a dealer
in securities within the meaning of section
475(c)(1)(B). Because no other circumstances
are present to suggest that HC is a dealer in
securities for purposes of section 475(c)(1)(B),
HC is not a dealer in securities.
Example 3. Intragroup-customer election. In
addition to the General Facts stated above,
assume that HC’s affiliated group has elected
to file a consolidated return but has also
made the intragroup-customer election
under paragraph (a)(3)(iii) of this section.
Thus, the analysis and result are the same as
in Example 1.

(b) Sellers of nonfinancial goods and
services—(1) Purchases and sales of customer paper. Except as provided in paragraph (b)(3) of this section, if a taxpayer would not be a dealer in securities within the meaning of section
475(c)(1) but for its purchases and sales
of debt instruments that, at the time
of purchase or sale, are customer paper
with respect to either the taxpayer or
a corporation that is a member of the

same consolidated group (as defined in
§ 1.1502–1(h)) as the taxpayer, then for
purposes of section 475 the taxpayer is
not a dealer in securities.
(2) Definition of customer paper. A debt
instrument is customer paper with respect to a person at a point in time if—
(i) The person’s principal activity is
selling nonfinancial goods or providing
nonfinancial services;
(ii) The debt instrument was issued
by a purchaser of the goods or services
at the time of the purchase of those
goods or services in order to finance
the purchase; and
(iii) At all times since the debt instrument was issued, it has been held
either by the person selling those goods
or services or by a corporation that is
a member of the same consolidated
group as that person.
(3) Exceptions. Paragraph (b)(1) of this
section does not apply if—
(i) For purposes of section 471, the
taxpayer accounts for any security (as
defined in section 475(c)(2)) as inventory;
(ii) The taxpayer is subject to an
election under paragraph (b)(4) of this
section; or
(iii) The taxpayer is not described in
paragraph (b)(2)(i) of this section and
one or more debt instruments that are
customer paper with respect to a corporation that is a member of the same
consolidated group as the taxpayer are
accounted for by the taxpayer, or by a
corporation that is a member of the
same consolidated group as the taxpayer, in a manner that allows recognition of unrealized gains or losses or deductions for additions to a reserve for
bad debts.
(4) Election not to be governed by the
exception for sellers of nonfinancial goods
or services—(i) Method of making the
election. Unless the Commissioner otherwise prescribes, an election under
this paragraph (b)(4) must be made in
the manner, and at the time, prescribed in this paragraph (b)(4)(i). The
taxpayer must file with the Internal
Revenue Service a statement that says,
‘‘[Insert name and taxpayer identification number of the taxpayer] hereby
elects not to be governed by § 1.475(c)–
1(b)(1) of the income tax regulations
for the taxable year ending [describe

585

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00595

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

§ 1.475(c)–1

26 CFR Ch. I (4–1–14 Edition)

the last day of the year] and for subsequent taxable years.’’
(A) Taxable years ending after December 24, 1996. If the first taxable year
subject to an election under this paragraph (b)(4) ends after December 24,
1996, the statement must be attached
to a timely filed federal income tax return for that taxable year.
(B) Taxable years ending on or before
December 24, 1996. If the first taxable
year subject to an election under this
paragraph (b)(4) ends on or before December 24, 1996 and the election
changes the taxpayer’s taxable income
for any taxable year the federal income
tax return for which was filed before
February 24, 1997, the statement must
be attached to an amended return for
the earliest such year that is so affected, and that amended return (and
an amended return for any other such
year that is so affected) must be filed
not later than June 23, 1997. If the first
taxable year subject to an election
under this paragraph (b)(4) ends on or
before December 24, 1996 but the taxpayer is not described in the preceding
sentence, the statement must be attached to the first federal income tax
return that is for a taxable year subject to the election and that is filed on
or after February 24, 1997.
(ii) Continued applicability of an election. An election under this paragraph
(b)(4) continues in effect for subsequent
taxable years until revoked. The election may be revoked only with the consent of the Commissioner.
(c) Taxpayers that purchase securities
from customers but engage in no more
than negligible sales of the securities—(1)
Exemption from dealer status—(i) General
rule. A taxpayer that regularly purchases securities from customers in the
ordinary course of a trade or business
(including regularly making loans to
customers in the ordinary course of a
trade or business of making loans) but
engages in no more than negligible
sales of the securities so acquired is
not a dealer in securities within the
meaning of section 475(c)(1) unless the
taxpayer elects to be so treated or, for
purposes of section 471, the taxpayer
accounts for any security (as defined in
section 475(c)(2)) as inventory.
(ii) Election to be treated as a dealer. A
taxpayer
described
in
paragraph

(c)(1)(i) of this section elects to be
treated as a dealer in securities by filing a federal income tax return reflecting the application of section 475(a) in
computing its taxable income.
(2) Negligible sales. Solely for purposes
of paragraph (c)(1) of this section, a
taxpayer engages in negligible sales of
debt instruments that it regularly purchases from customers in the ordinary
course of its business if, and only if,
during the taxable year, either—
(i) The taxpayer sells all or part of
fewer than 60 debt instruments, regardless how acquired; or
(ii) The total adjusted basis of the
debt instruments (or parts of debt instruments), regardless how acquired,
that the taxpayer sells is less than 5
percent of the total basis, immediately
after acquisition, of the debt instruments that it acquires in that year.
(3) Special rules for members of a consolidated group—(i) Intragroup-customer
election in effect. If a taxpayer is a
member of a consolidated group that
has made the intragroup-customer
election
(described
in
paragraph
(a)(3)(iii) of this section), the negligible
sales test in paragraph (c)(2) of this
section takes into account all of the
taxpayer’s sales of debt instruments to
other group members.
(ii) Intragroup-customer election not in
effect. If a taxpayer is a member of a
consolidated group that has not made
the intragroup-customer election (described in paragraph (a)(3)(iii) of this
section), the taxpayer satisfies the negligible sales test in paragraph (c)(2) of
this section if either—
(A) The test is satisfied by the taxpayer, taking into account sales of
debt instruments to other group members (as in paragraph (c)(3)(i) of this
section); or
(B) The test is satisfied by the group,
treating the members of the group as if
they were divisions of a single corporation.
(4) Special rules. Whether sales of securities are negligible is determined
without regard to—
(i) Sales of securities that are necessitated by exceptional circumstances
and that are not undertaken as recurring business activities;
(ii) Sales of debt instruments that decline in quality while in the taxpayer’s

586

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00596

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

Internal Revenue Service, Treasury

§ 1.475(d)–1

hands and that are sold pursuant to an
established policy of the taxpayer to
dispose of debt instruments below a
certain quality; or
(iii) Acquisitions and sales of debt instruments that are qualitatively different from all debt instruments that
the taxpayer purchases from customers
in the ordinary course of its business.
(5) Example. The following example illustrates paragraph (c)(4)(iii) of this
section:
Example. I, an insurance company, regularly makes policy loans to its customers
but does not sell them. I, however, actively
trades Treasury securities. No other circumstances are present to suggest that I is a
dealer in securities for purposes of section
475(c)(1). Since the Treasuries are qualitatively different from the policy loans that
I originates, under paragraph (c)(4)(iii) of
this section, I disregards the purchases and
sales of Treasuries in applying the negligible
sales test in paragraph (c)(2) of this section.

(d) Issuance of life insurance products.
A life insurance company that is not
otherwise a dealer in securities within
the meaning of section 475(c)(1) does
not become a dealer in securities solely
because it regularly issues life insurance products to its customers in the
ordinary course of a trade or business.
For purposes of the preceding sentence,
the term life insurance product means a
contract that is treated for federal income tax purposes as an annuity, endowment, or life insurance contract.
See sections 72, 817, and 7702.

ehiers on DSK2VPTVN1PROD with CFR

[T.D. 8700, 61 FR 67723, Dec. 24, 1996]

§ 1.475(c)–2 Definitions—security.
(a) Items that are not securities. The
following items are not securities within the meaning of section 475(c)(2) with
respect to a taxpayer and, therefore,
are not subject to section 475—
(1) A security (determined without
regard to this paragraph (a)) if section
1032 prevents the taxpayer from recognizing gain or loss with respect to that
security;
(2) A debt instrument issued by the
taxpayer (including a synthetic debt
instrument, within the meaning of
§ 1.1275–6(b)(4), that § 1.1275–6(b) treats
the taxpayer as having issued); or
(3) A REMIC residual interest, or an
interest or arrangement that is determined by the Commissioner to have

substantially the same economic effect, if the residual interest or the interest or arrangement is acquired on or
after January 4, 1995.
(b) Synthetic debt that § 1.1275–6(b)
treats the taxpayer as holding. If § 1.1275–
6 treats a taxpayer as the holder of a
synthetic debt instrument (within the
meaning of § 1.1275–6(b)(4)), the synthetic debt instrument is a security
held by the taxpayer within the meaning of section 475(c)(2)(C).
(c) Negative value REMIC residuals acquired before January 4, 1995. A REMIC
residual interest that is described in
paragraph (c)(1) of this section or an
interest or arrangement that is determined by the Commissioner to have
substantially the same economic effect
is not a security within the meaning of
section 475(c)(2).
(1) Description. A residual interest in
a REMIC is described in this paragraph
(c)(1) if, on the date the taxpayer acquires the residual interest, the
present value of the anticipated tax liabilities associated with holding the
interest exceeds the sum of—
(i) The present value of the expected
future distributions on the interest;
and
(ii) The present value of the anticipated tax savings associated with holding the interest as the REMIC generates losses.
(2) Special rules applicable to negative
value REMIC residuals acquired before
January 4, 1995. Solely for purposes of
this paragraph (c)—
(i) If a transferee taxpayer acquires a
residual interest with a basis determined by reference to the transferor’s
basis, then the transferee is deemed to
acquire the interest on the date the
transferor acquired it (or is deemed to
acquire it under this paragraph
(c)(2)(i)).
(ii) Anticipated tax liabilities, expected future distributions, and anticipated tax savings are determined under
the rules in § 1.860E–2(a)(3) and without
regard to the operation of section 475.
(iii) Present values are determined
under the rules in § 1.860E–2(a)(4).
[T.D. 8700, 61 FR 67725, Dec. 24, 1996]

§ 1.475(d)–1 Character of gain or loss.
(a) Securities never held in connection
with the taxpayer’s activities as a dealer

587

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00597

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

§ 1.475(g)–1

26 CFR Ch. I (4–1–14 Edition)

in securities. If a security is never held
in connection with the taxpayer’s activities as a dealer in securities, section 475(d)(3)(A) does not affect the
character of gain or loss from the security, even if the taxpayer fails to identify
the
security
under
section
475(b)(2).
(b) Ordinary treatment for notional
principal contracts and derivatives held
by dealers in notional principal contracts
and derivatives. Section 475(d)(3)(B)(ii)
(concerning the character of gain or
loss with respect to a security held by
a person other than in connection with
its activities as a dealer in securities)
does not apply to a security if
§ 1.475(b)–1(c) and the absence of a determination by the Commissioner prevent section 475(b)(1)(A) from applying
to the security.

ehiers on DSK2VPTVN1PROD with CFR

[T.D. 8700, 61 FR 67725, Dec. 24, 1996]

§ 1.475(g)–1 Effective dates.
(a)–(b) [Reserved]
(c) Section 1.475(a)–3 (concerning acquisition by a dealer of a security with
a substituted basis) applies to securities acquired, originated, or entered
into on or after January 4, 1995.
(d) Section 1.475(a)–4 (concerning a
safe harbor to use applicable financial
statement values for purposes of section 475) applies to taxable years ending on or after June 12, 2007.
(e) Except as provided elsewhere in
this paragraph (d), § 1.475(b)–1 (concerning the scope of exemptions from
the mark-to-market requirement) applies to taxable years ending on or
after December 31, 1993.
(1) Section 1.475(b)–1(b) applies as follows:
(i) Section 1.475(b)–1(b)(1)(i) (concerning equity interests issued by a related person) applies beginning June 19,
1996. If, on June 18, 1996, a security is
subject to mark-to-market accounting
and, on June 19, 1996, § 1.475(b)–1(b)(1)
begins to apply to the security solely
because of the effective dates in this
paragraph (d) (rather than because of a
change in facts), then the rules of
§ 1.475(b)–1(b)(4)(i)(A) (concerning the
prohibition against marking) apply,
but § 1.475(b)–1(b)(4)(i)(B) (imposing a
mark-to-market on the day before the
onset of the prohibition) does not
apply.

(ii) Section 1.475(b)–1(b)(2) (concerning relevant relationships for purposes of determining whether equity
interests in related persons are prohibited from being marked to market) applies beginning June 19, 1996.
(iii) Section 1.475(b)–1(b)(3) (concerning certain actively traded securities) applies beginning June 19, 1996, to
securities held on or after that date,
except for securities described in
§ 1.475(b)–1(e)(1)(i) (concerning equity
interests issued by controlled entities).
If a security is described in § 1.475(b)–
1(e)(1)(i), § 1.475(b)–1(b)(3) applies only
on or after January 23, 1997 if the security is held on or after that date. If
§ 1.475(b)–1(b)(1) ceases to apply to a security by virtue of the operation of
this paragraph (d)(1)(iii), the rules of
§ 1.475(b)–1(b)(4)(ii) apply to the cessation.
(iv) Except to the extent provided in
paragraph (d)(1) of this section,
§ 1.475(b)–1(b)(4) (concerning changes in
status) applies beginning June 19, 1996.
(2) Section 1.475(b)–1(c) (concerning
securities deemed not held for investment by dealers in notional principal
contracts and derivatives) applies to
securities acquired on or after January
23, 1997.
(3) Section 1.475(b)–1(d) (concerning
the special rule for hedges of another
member’s risk) is effective for securities acquired, originated, or entered
into on or after January 23, 1997.
(f) Section 1.475(b)–2 (concerning
identification of securities that are exempt from mark-to-market treatment)
applies as follows:
(1) Section 1.475(b)–2(a) (concerning
the general rules for identification of
basis for exemption from mark to market treatment) applies to identifications made on or after July 1, 1997.
(2) Section 1.475(b)–2(b) (concerning
time for identifying a security with a
substituted basis) applies to securities
acquired, originated, or entered into on
or after January 4, 1995.
(3) Section 1.475(b)–2(c) (concerning
identification in the context of integrated transactions under § 1.1275–6) applies on and after August 13, 1996 (the
effective date of § 1.1275–6).
(g) [Reserved]

588

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00598

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094

ehiers on DSK2VPTVN1PROD with CFR

Internal Revenue Service, Treasury

§ 1.481–1

(h) Section 1.475(b)–4 (concerning
transitional issues relating to exemptions) applies to taxable years ending
on or after December 31, 1993.
(i) Section 1.475(c)–1 applies as follows:
(1) Except as otherwise provided in
this paragraph (h)(1), § 1.475(c)–1(a)
(concerning the dealer-customer relationship) applies to taxable years beginning on or after January 1, 1995.
(i) [Reserved]
(ii) Section 1.475(c)–1(a)(2)(ii) (illustrating rules concerning the dealercustomer relationship) applies to taxable years beginning on or after June
20, 1996.
(iii)(A) Section 1.475(c)–1(a)(3) applies
to taxable years beginning on or after
June 20, 1996, except for transactions
between members of the same consolidated group.
(B) For transactions between members of the same consolidated group,
paragraph § 1.475(c)–1(a)(3) applies to
taxable years beginning on or after December 24, 1996.
(2) Section 1.475(c)–1(b) (concerning
sellers of nonfinancial goods and services) applies to taxable years ending on
or after December 31, 1993.
(3) Except as otherwise provided in
this paragraph (h)(3), section 1.475(c)–
1(c) (concerning taxpayers that purchase securities but engage in no more
than negligible sales of the securities)
applies to taxable years ending on or
after December 31, 1993.
(i) Section 1.475(c)–1(c)(3) (special
rules for members of a consolidated
group) is effective for taxable years beginning on or after December 24, 1996.
(ii) A taxpayer may rely on the rules
set out in § 1.475(c)–1T(b) (as contained
in 26 CFR part 1 revised April 1, 1996)
for taxable years beginning before January 23, 1997, provided the taxpayer applies that paragraph reasonably and
consistently.
(4) Section 1.475(c)–1(d) (concerning
the issuance of life insurance products)
applies to taxable years beginning on
or after January 1, 1995.
(j) Section 1.475(c)–2 (concerning the
definition of security) applies to taxable years ending on or after December
31, 1993. By its terms, however,
§ 1.475(c)–2(a)(3) applies only to residual
interests or to interests or arrange-

ments that are acquired on or after
January 4, 1995; and the integrated
transactions that are referred to in
§§ 1.475(c)–2(a)(2) and 1.475(c)–2(b) exist
only after August 13, 1996 (the effective
date of § 1.1275–6).
(k) Section 1.475(d)–1 (concerning the
character of gain or loss) applies to
taxable years ending on or after December 31, 1993.
[T.D. 8700, 61 FR 67725, Dec. 24, 1996. Redesignated and amended by T.D. 9328, 72 FR 32181,
June 12, 2007]

ADJUSTMENTS
§ 1.481–1

Adjustments in general.

(a)(1) Section 481 prescribes the rules
to be followed in computing taxable income in cases where the taxable income of the taxpayer is computed
under a method of accounting different
from that under which the taxable income was previously computed. A
change in method of accounting to
which section 481 applies includes a
change in the over-all method of accounting for gross income or deductions, or a change in the treatment of
a material item. For rules relating to
changes in methods of accounting, see
section 446(e) and paragraph (e) of
§ 1.446–1. In computing taxable income
for the taxable year of the change,
there shall be taken into account those
adjustments which are determined to
be necessary solely by reason of such
change in order to prevent amounts
from being duplicated or omitted. The
‘‘year of the change’’ is the taxable
year for which the taxable income of
the taxpayer is computed under a
method of accounting different from
that used for the preceding taxable
year.
(2) Unless the adjustments are attributable to a change in method of accounting initiated by the taxpayer, no
part of the adjustments required by
subparagraph (1) of this paragraph
shall be based on amounts which were
taken into account in computing income (or which should have been taken
into account had the new method of accounting been used) for taxable years
beginning before January 1, 1954, or
ending before August 17, 1954 (hereinafter referred to as pre-1954 years).

589

VerDate Mar<15>2010

11:52 May 07, 2014

Jkt 232094

PO 00000

Frm 00599

Fmt 8010

Sfmt 8010

Y:\SGML\232094.XXX

232094