Mortgage lenders won an extension on the dreaded mark-to-market provision of the new tax law when the Internal Revenue Service bowed totrade group requests to extend the startup date for a new tax and accounting law to Oct. 31 from Sept. 9.

The Internal Revenue Service, not known for its sense of humor, announced last Thursday the extension, making halloween the bewitching date by which financial instltutions must revamp their securities accounting policies for tax purposes.

The IRS said in a written statement, "Because many taxpayers are having difficulties in complying, the IRS is extending this date to Oct. 31, 1993. In addition, for any loan or other security that is acquired by a taxpayer at any time between Aug. 10, 1993, and Oct. 31, 1993, the taxpayer may make the identification by Oct. 31."

But the statement also confirmed that the mark-to-market provisions "apply to many financial institutions that have not traditionally thought of themselves as securities dealers."

It's the "the biggest single [tax] issue all year" for financial institutions, said Ian Sharpe of Price Waterhouse's Washington National Tax Service.

The budget bill, signed by President Clinton Aug. 10, requires securities dealers to carry their inventories at fair value and, with certain exceptions, to pay taxes on capital gains as if their securities had been sold on the last day of the year.

During the budget debate, many industry lobbyists incorrectly assumed that the term'securities dealers" (in section 13223 of Public Law 103-66, new Internal Revenue Code section 475) would be defined narrowly. But that's not the case.

"It's fairly clear in the statute that a dealer in securities that would be affected by this mark-to-market method is any taxpayer that regularly purchases securities from or sells securities to customers in the ordinary course of trade or business," an Internal Revenue Service spokesman said.

"When you look to the definition of a security, it's any note, bond, debenture or other evidence of indebtedness," the spokesman said. "So, to the extent that banks and thrifts regularly make and sell loans, then they would be covered under this provision."

Spokesmen for Fannie Mae and Freddie Mac said their tax accounting departments were assessing the impact of the rule.

The Mortgage Bankers Association of America, the American Bankers Association and the Independent Bankers Association of America had pushed hard for the extension. It would buy them more time to pressure the Treasury and the IRS and would relieve bankers, who have been racing to set up an added set of books that recategorize portfolios for tax purposes.

The IRS spokesman said that while the extension could be dealt with administratively by his agency, more substantive changes, would require regulatory intervention from the Treasury Department. A Treasury spokeswoman said no announcement on the issue was planned soon.

A major problem with the laws timing is that it applies to all of 1993, thus throwing off the estimated tax payments institutions have been making on a quarterly basis.

Total revenue from the new tax treatment is estimated at $3.8 billion over five years, Sharpe said. The law spreads the revenue gain evenly over five years to soften the blow. Despite this tax sting, the new law is unlikely to put financial institutions that have been enjoying strong securities investment performances out of business, he added.

One reason the issue caught everyone unaware, according to Sharpe, is that the damage was done by the insertion of a single two-letter word. Initially, the law defined securities dealers as anyone that buys and sells securities, he said, but Congress changed "and" to "or," broadening the scope.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.