WASHINGTON - The Internal Revenue Service issued guidelines yesterday aimed at helping securities firms and other financial institutions comply with the tax laws new mark-to-market requirements for securities and loans.
The guidelines, which are contained in Revenue Ruling 93-76, cover which financial institutions must comply with the new requirements and which securities and loans do not have to be marked to market.
The guidelines also clarify that firms that are not sure whether they are subject to the new requirements can still identify which of their securities they believe are exempt without increasing the likelihood that the firms would be subject to the requirements.
Under the mark-to-market requirements, which were enacted on Aug. 10, securities firms, banks, and other financial institutions must take into account the market value, rather than the cost, of the securities and loans they hold at the end of the year in determining whether they have experienced gains or losses for tax purposes.
Certain securities and loans are exempt, but only if the financial institutions that acquire or originate them identify them as being exempt from the new requirements. In a notice issued last month, the IRS gave financial institutions until Oct. 31 to identify which of their securities and loans do not have to be marked to market.
In the revenue ruling issued yesterday, the IRS said that a bank or insurance company may be subject to the new requirements if it regularly originates and sells loans, even if it does not fall within the definition of a securities dealer in Section 475 of the tax law.
However, a taxpayer whose sole business is trading securities may not be subject to the new requirements if it does not purchase from, sell to, or enter into transactions with customers in the ordinary course of a trade or business, the IRS said.
The agency said that the classifications of securities under financial accounting principles and under section 1236 of the tax law should not be used to determine whether a security is subject to, or exempted from, the new requirements.
The IRS said also that until further guidance is published, firms can use "any reasonable method" for identifying the securities and loans that are exempt from the requirements.
The tax law exempts from the mark-to-market requirements: securities held for investment; debt acquired in the course of a taxpayer's business and not held for sale; and securities that hedge either debt or securities that are not required to be marked to market.
