WASHINGTON - The Internal Revenue Service issued temporary rules yesterday to help taxpayers carry out the new mark-to-market requirements that were in the tax law President Clinton signed last August.
The mark-to-market provisions, which take effect Friday, require broker-dealers, banks, and other financial institutions to use the market value of the securities and loans they hold, rather than their cost, to determine tax losses or gains at the end of the year.
The temporary rules issued yesterday clarify the meanings of the tax law terms "dealer in securities" and "held for investment," and are effective immediately. Every "dealer in securities" must comply with the requirements, but securities "held for investment" may be exempted from the requirements.
The IRS also issued a so-called notice of proposed rulemaking in which it asked the public to comment on the rules. Written comments are due by Feb. 28.
The IRS said that it plans to hold a public hearing on the temporary rules on April 12, 1994. Requests to speak at the hearing should be made by Feb. 28.
The temporary rules give broker-dealers and other financial institutions until Jan. 31, 1994, to identify which of their securities and loans are exempt from the mark-to-market requirements.
The tax law exempts from such requirements securities that are "held for investment" and "debt securities not held for sale." In the temporary rules, the IRS said that both terms "refer to a security that is not held by a taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business."
In other words, a dealer can exempt from the mark-to-market requirements trading securities or securities held primarily for sale to non-customers. This definition, the IRS said, is consistent with Section 1236 of the tax code, which specifies how dealers are to report gains and losses.
The IRS said other assets that can be treated as held for investment include: stock in a corporation that the taxpayer controls; an ownership interest in a widely held or publicly traded partnership or trust that the taxpayer controls; and, an annuity, endowment, or life insurance contract.
Notional principal contracts and other derivatives "generally are not eligible to be exempted from mark-to market treatment," the IRS said. However, they may be exempted in cases where the taxpayer establishes that it acquired the securities in some other capacity than as a dealer.
The IRS said that a taxpayer that regularly purchases securities from customers in the course of a trade or business is not a dealer in securities if it does not sell more than a negligible portion of them.
The agency said also that securities do not include a taxpayer's stock, options to buy or sell the taxpayer's stock, or liabilities.
