26 U.S.C. § 475 — Mark to market accounting method for

Page 1651 TITLE 26—INTERNAL REVENUE CODE § 475 tories under method provided by section 472(b) of this title to use one inventory pool for any trade or business of such eligible small business. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title VIII, § 802(c), Oct. 22, 1986, 100 Stat. 2350, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section] shall apply to taxable years beginning after December 31, 1986. ‘‘(2) TREATMENT OF TAXPAYERS WHO MADE ELECTIONS UNDER EXISTING SECTION 474.—The amendments made by this section shall not apply to any taxpayer who made an election under section 474 of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act [Oct. 22, 1986]) for any period during which such election is in effect. Notwith- standing any provision of such section 474 (as so in ef- fect), an election under such section may be revoked without the consent of the Secretary.’’ EFFECTIVE DATE Pub. L. 97–34, title II, § 237(c), Aug. 13, 1981, 95 Stat. 253, provided that: ‘‘The amendments made by this sec- tion [enacting this section] shall apply to taxable years beginning after December 31, 1981.’’ § 475. Mark to market accounting method for dealers in securities (a) General rule Notwithstanding any other provision of this subpart, the following rules shall apply to secu- rities held by a dealer in securities: (1) Any security which is inventory in the hands of the dealer shall be included in inven- tory at its fair market value. (2) In the case of any security which is not inventory in the hands of the dealer and which is held at the close of any taxable year— (A) the dealer shall recognize gain or loss as if such security were sold for its fair mar- ket value on the last business day of such taxable year, and (B) any gain or loss shall be taken into ac- count for such taxable year. Proper adjustment shall be made in the amount of any gain or loss subsequently real- ized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this paragraph at times other than the times provided in this paragraph. (b) Exceptions (1) In general Subsection (a) shall not apply to— (A) any security held for investment, (B)(i) any security described in subsection (c)(2)(C) which is acquired (including origi- nated) by the taxpayer in the ordinary course of a trade or business of the taxpayer and which is not held for sale, and (ii) any obligation to acquire a security described in clause (i) if such obligation is entered into in the ordinary course of such trade or business and is not held for sale, and (C) any security which is a hedge with re- spect to— (i) a security to which subsection (a) does not apply, or (ii) a position, right to income, or a li- ability which is not a security in the hands of the taxpayer. To the extent provided in regulations, sub- paragraph (C) shall not apply to any security held by a person in its capacity as a dealer in securities. (2) Identification required A security shall not be treated as described in subparagraph (A), (B), or (C) of paragraph (1), as the case may be, unless such security is clearly identified in the dealer’s records as being described in such subparagraph before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations pre- scribe). (3) Securities subsequently not exempt If a security ceases to be described in para- graph (1) at any time after it was identified as such under paragraph (2), subsection (a) shall apply to any changes in value of the security occurring after the cessation. (4) Special rule for property held for invest- ment To the extent provided in regulations, sub- paragraph (A) of paragraph (1) shall not apply to any security described in subparagraph (D) or (E) of subsection (c)(2) which is held by a dealer in such securities. (c) Definitions For purposes of this section— (1) Dealer in securities defined The term ‘‘dealer in securities’’ means a tax- payer who— (A) regularly purchases securities from or sells securities to customers in the ordinary course of a trade or business; or (B) regularly offers to enter into, assume, offset, assign or otherwise terminate posi- tions in securities with customers in the or- dinary course of a trade or business. (2) Security defined The term ‘‘security’’ means any— (A) share of stock in a corporation; (B) partnership or beneficial ownership in- terest in a widely held or publicly traded partnership or trust; (C) note, bond, debenture, or other evi- dence of indebtedness; (D) interest rate, currency, or equity no- tional principal contract; (E) evidence of an interest in, or a deriva- tive financial instrument in, any security described in subparagraph (A), (B), (C), or (D), or any currency, including any option, forward contract, short position, and any similar financial instrument in such a secu- rity or currency; and (F) position which— (i) is not a security described in subpara- graph (A), (B), (C), (D), or (E), (ii) is a hedge with respect to such a se- curity, and (iii) is clearly identified in the dealer’s records as being described in this subpara- graph before the close of the day on which Page 1652 TITLE 26—INTERNAL REVENUE CODE § 475 it was acquired or entered into (or such other time as the Secretary may by regu- lations prescribe). Subparagraph (E) shall not include any con- tract to which section 1256(a) applies. (3) Hedge The term ‘‘hedge’’ means any position which manages the dealer’s risk of interest rate or price changes or currency fluctuations, includ- ing any position which is reasonably expected to become a hedge within 60 days after the ac- quisition of the position. (4) Special rules for certain receivables (A) In general Paragraph (2)(C) shall not include any non- financial customer paper. (B) Nonfinancial customer paper For purposes of subparagraph (A), the term ‘‘nonfinancial customer paper’’ means any receivable which— (i) is a note, bond, debenture, or other evidence of indebtedness; (ii) arises out of the sale of nonfinancial goods or services by a person the principal activity of which is the selling or pro- viding of nonfinancial goods or services; and (iii) is held by such person (or a person who bears a relationship to such person de- scribed in section 267(b) or 707(b)) at all times since issue. (d) Special rules For purposes of this section— (1) Coordination with certain rules The rules of sections 263(g), 263A, and 1256(a) shall not apply to securities to which sub- section (a) applies, and section 1091 shall not apply (and section 1092 shall apply) to any loss recognized under subsection (a). (2) Improper identification If a taxpayer— (A) identifies any security under sub- section (b)(2) as being described in sub- section (b)(1) and such security is not so de- scribed, or (B) fails under subsection (c)(2)(F)(iii) to identify any position which is described in subsection (c)(2)(F) (without regard to clause (iii) thereof) at the time such identification is required, the provisions of subsection (a) shall apply to such security or position, except that any loss under this section prior to the disposition of the security or position shall be recognized only to the extent of gain previously recog- nized under this section (and not previously taken into account under this paragraph) with respect to such security or position. (3) Character of gain or loss (A) In general Except as provided in subparagraph (B) or section 1236(b)— (i) In general Any gain or loss with respect to a secu- rity under subsection (a)(2) shall be treat- ed as ordinary income or loss. (ii) Special rule for dispositions If— (I) gain or loss is recognized with re- spect to a security before the close of the taxable year, and (II) subsection (a)(2) would have ap- plied if the security were held as of the close of the taxable year, such gain or loss shall be treated as ordi- nary income or loss. (B) Exception Subparagraph (A) shall not apply to any gain or loss which is allocable to a period during which— (i) the security is described in subsection (b)(1)(C) (without regard to subsection (b)(2)), (ii) the security is held by a person other than in connection with its activities as a dealer in securities, or (iii) the security is improperly identified (within the meaning of subparagraph (A) or (B) of paragraph (2)). (e) Election of mark to market for dealers in commodities (1) In general In the case of a dealer in commodities who elects the application of this subsection, this section shall apply to commodities held by such dealer in the same manner as this section applies to securities held by a dealer in securi- ties. (2) Commodity For purposes of this subsection and sub- section (f), the term ‘‘commodity’’ means— (A) any commodity which is actively trad- ed (within the meaning of section 1092(d)(1)); (B) any notional principal contract with respect to any commodity described in sub- paragraph (A); (C) any evidence of an interest in, or a de- rivative instrument in, any commodity de- scribed in subparagraph (A) or (B), including any option, forward contract, futures con- tract, short position, and any similar instru- ment in such a commodity; and (D) any position which— (i) is not a commodity described in sub- paragraph (A), (B), or (C), (ii) is a hedge with respect to such a commodity, and (iii) is clearly identified in the tax- payer’s records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe). (3) Election An election under this subsection may be made without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subse- quent taxable years unless revoked with the consent of the Secretary. Page 1653 TITLE 26—INTERNAL REVENUE CODE § 475 (f) Election of mark to market for traders in se- curities or commodities (1) Traders in securities (A) In general In the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph apply to such trade or business— (i) such person shall recognize gain or loss on any security held in connection with such trade or business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year, and (ii) any gain or loss shall be taken into account for such taxable year. Proper adjustment shall be made in the amount of any gain or loss subsequently re- alized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the applica- tion of this subparagraph at times other than the times provided in this subpara- graph. (B) Exception Subparagraph (A) shall not apply to any security— (i) which is established to the satisfac- tion of the Secretary as having no connec- tion to the activities of such person as a trader, and (ii) which is clearly identified in such person’s records as being described in clause (i) before the close of the day on which it was acquired, originated, or en- tered into (or such other time as the Sec- retary may by regulations prescribe). If a security ceases to be described in clause (i) at any time after it was identified as such under clause (ii), subparagraph (A) shall apply to any changes in value of the security occurring after the cessation. (C) Coordination with section 1259 Any security to which subparagraph (A) applies and which was acquired in the nor- mal course of the taxpayer’s activities as a trader in securities shall not be taken into account in applying section 1259 to any posi- tion to which subparagraph (A) does not apply. (D) Other rules to apply Rules similar to the rules of subsections (b)(4) and (d) shall apply to securities held by a person in any trade or business with re- spect to which an election under this para- graph is in effect. Subsection (d)(3) shall not apply under the preceding sentence for pur- poses of applying sections 1402 and 7704. (2) Traders in commodities In the case of a person who is engaged in a trade or business as a trader in commodities and who elects to have this paragraph apply to such trade or business, paragraph (1) shall apply to commodities held by such trader in connection with such trade or business in the same manner as paragraph (1) applies to secu- rities held by a trader in securities. (3) Election The elections under paragraphs (1) and (2) may be made separately for each trade or busi- ness and without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subse- quent taxable years unless revoked with the consent of the Secretary. (g) Regulatory authority The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including rules— (1) to prevent the use of year-end transfers, related parties, or other arrangements to avoid the provisions of this section, (2) to provide for the application of this sec- tion to any security which is a hedge which cannot be identified with a specific security, position, right to income, or liability, and (3) to prevent the use by taxpayers of sub- section (c)(4) to avoid the application of this section to a receivable that is inventory in the hands of the taxpayer (or a person who bears a relationship to the taxpayer described in section 267(b) or 707(b)). (Added Pub. L. 103–66, title XIII, § 13223(a), Aug. 10, 1993, 107 Stat. 481; amended Pub. L. 105–34, title X, § 1001(b), Aug. 5, 1997, 111 Stat. 906; Pub. L. 105–206, title VI, § 6010(a)(3), title VII, § 7003(a), (b), July 22, 1998, 112 Stat. 813, 832; Pub. L. 106–170, title V, § 532(b)(1), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 106–554, § 1(a)(7) [title III, § 319(4)], Dec. 21, 2000, 114 Stat. 2763, 2763A–646; Pub. L. 107–147, title IV, § 417(10), Mar. 9, 2002, 116 Stat. 56.) Editorial Notes AMENDMENTS 2002—Subsec. (g)(3). Pub. L. 107–147 substituted ‘‘de- scribed in section’’ for ‘‘described in sections’’. 2000—Subsec. (g)(3). Pub. L. 106–554 substituted ‘‘267(b) or’’ for ‘‘267(b) of’’. 1999—Subsec. (c)(3). Pub. L. 106–170 substituted ‘‘man- ages’’ for ‘‘reduces’’. 1998—Subsec. (c)(4). Pub. L. 105–206, § 7003(a), added par. (4). Subsec. (f)(1)(D). Pub. L. 105–206, § 6010(a)(3), inserted at end ‘‘Subsection (d)(3) shall not apply under the pre- ceding sentence for purposes of applying sections 1402 and 7704.’’ Subsec. (g)(3). Pub. L. 105–206, § 7003(b), added par. (3). 1997—Subsecs. (e) to (g). Pub. L. 105–34 added subsecs. (e) and (f) and redesignated former subsec. (e) as (g). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1999 AMENDMENT Amendment by Pub. L. 106–170 applicable to any in- strument held, acquired, or entered into, any trans- action entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title. EFFECTIVE DATE OF 1998 AMENDMENT Amendment by section 6010(a)(3) of Pub. L. 105–206 ef- fective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title. Pub. L. 105–206, title VII, § 7003(c), July 22, 1998, 112 Stat. 833, provided that: Page 1654 TITLE 26—INTERNAL REVENUE CODE § 475 ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section] shall apply to taxable years ending after the date of the enactment of this Act [July 22, 1998]. ‘‘(2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year ending after the date of the enactment of this Act— ‘‘(A) such change shall be treated as initiated by the taxpayer; ‘‘(B) such change shall be treated as made with the consent of the Secretary of the Treasury; and ‘‘(C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the 4-taxable-year period beginning with such first taxable year.’’ EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title X, § 1001(d), Aug. 5, 1997, 111 Stat. 907, as amended by Pub. L. 105–206, title VI, § 6010(a)(4), July 22, 1998, 112 Stat. 813, provided that: ‘‘(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section [enacting section 1259 of this title and amending this section] shall apply to any constructive sale after June 8, 1997. ‘‘(2) EXCEPTION FOR SALES OF POSITIONS, ETC. HELD BE- FORE JUNE 9, 1997.—If— ‘‘(A) before June 9, 1997, the taxpayer entered into any transaction which is a constructive sale of any appreciated financial position, and ‘‘(B) before the close of the 30-day period beginning on the date of the enactment of this Act [Aug. 5, 1997] or before such later date as may be specified by the Secretary of the Treasury, such transaction and posi- tion are clearly identified in the taxpayer’s records as offsetting, such transaction and position shall not be taken into account in determining whether any other constructive sale after June 8, 1997, has occurred. The preceding sen- tence shall cease to apply as of the date such trans- action is closed or the taxpayer ceases to hold such po- sition. ‘‘(3) SPECIAL RULE.—In the case of a decedent dying after June 8, 1997, if— ‘‘(A) there was a constructive sale on or before such date of any appreciated financial position, ‘‘(B) the transaction resulting in such constructive sale of such position remains open (with respect to the decedent or any related person)— ‘‘(i) for not less than 2 years after the date of such transaction (whether such period is before or after June 8, 1997), and ‘‘(ii) at any time during the 3-year period ending on the date of the decedent’s death, and ‘‘(C) such transaction is not closed before the close of the 30th day after the date of the enactment of this Act, then, for purposes of such Code [probably means the In- ternal Revenue Code of 1986], such position (and the transaction resulting in such constructive sale) shall be treated as property constituting rights to receive an item of income in respect of a decedent under section 691 of such Code. Section 1014(c) of such Code shall not apply to so much of such position’s or property’s value (as included in the decedent’s estate for purposes of chapter 11 of such Code) as exceeds its fair market value as of the date such transaction is closed. ‘‘(4) ELECTION OF MARK TO MARKET BY SECURITIES TRADERS AND TRADERS AND DEALERS IN COMMODITIES.— ‘‘(A) IN GENERAL.—The amendments made by sub- section (b) [amending this section] shall apply to tax- able years ending after the date of the enactment of this Act. ‘‘(B) 4-YEAR SPREAD OF ADJUSTMENTS.—In the case of a taxpayer who elects under subsection (e) or (f) of section 475 of the Internal Revenue Code of 1986 (as added by this section) to change its method of ac- counting for the taxable year which includes the date of the enactment of this Act— ‘‘(i) any identification required under such sub- section with respect to securities and commodities held on the date of the enactment of this Act shall be treated as timely made if made on or before the 30th day after such date of enactment, and ‘‘(ii) the net amount of the adjustments required to be taken into account by the taxpayer under sec- tion 481 of such Code shall be taken into account ratably over the 4-taxable year period beginning with such first taxable year.’’ EFFECTIVE DATE Pub. L. 103–66, title XIII, § 13223(c), Aug. 10, 1993, 107 Stat. 484, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [enacting this section and amending section 988 of this title] shall apply to all taxable years ending on or after December 31, 1993. ‘‘(2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any taxpayer required by this section to change its method of accounting for any taxable year— ‘‘(A) such change shall be treated as initiated by the taxpayer, ‘‘(B) such change shall be treated as made with the consent of the Secretary, and ‘‘(C) except as provided in paragraph (3), the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the In- ternal Revenue Code of 1986 shall be taken into ac- count ratably over the 5-taxable year period begin- ning with the first taxable year ending on or after December 31, 1993. ‘‘(3) SPECIAL RULE FOR FLOOR SPECIALISTS AND MARKET MAKERS.— ‘‘(A) IN GENERAL.—If— ‘‘(i) a taxpayer (or any predecessor) used the last- in first-out (LIFO) method of accounting with re- spect to any qualified securities for the 5-taxable year period ending with its last taxable year ending before December 31, 1993, and ‘‘(ii) any portion of the net amount described in paragraph (2)(C) is attributable to the use of such method of accounting, then paragraph (2)(C) shall be applied by taking such portion into account ratably over the 15-taxable year period beginning with the first taxable year ending on or after December 31, 1993. ‘‘(B) QUALIFIED SECURITY.—For purposes of this paragraph, the term ‘qualified security’ means any security acquired— ‘‘(i) by a floor specialist (as defined in section 1236(d)(2) of the Internal Revenue Code of 1986) in connection with the specialist’s duties as a spe- cialist on an exchange, but only if the security is one in which the specialist is registered with the exchange, or ‘‘(ii) by a taxpayer who is a market maker in con- nection with the taxpayer’s duties as a market maker, but only if— ‘‘(I) the security is included on the National As- sociation of Security Dealers Automated Quotation System, ‘‘(II) the taxpayer is registered as a market maker in such security with the National Asso- ciation of Security Dealers, and ‘‘(III) as of the last day of the taxable year pre- ceding the taxpayer’s first taxable year ending on or after December 31, 1993, the taxpayer (or any predecessor) has been actively and regularly en- gaged as a market maker in such security for the 2-year period ending on such date (or, if shorter, the period beginning 61 days after the security was listed in such quotation system and ending on such date).’’ PART III—ADJUSTMENTS Sec. 481. Adjustments required by changes in method of accounting.