The idea of requiring mark-to-market was introduced in the straddle hearings of 1981. John Chapoton of Treasury said that the balanced (offsetting) position rule could not apply for taxpayers with a significant volume of commodities transactions because it required ‘‘the identification of particular positions [and would be] cumbersome to apply.’’ Treasury proposed instead that these persons be subject to a mandatory mark-to-market rule for their positions in futures contracts traded on an
organized futures exchange. Because futures positions are marked to market daily under the normal operating rules of the exchange with actual cash settlements, this rule would make the tax laws reflective of the underlying market transactions. Treasury proposed to tax the
mark-to-market gains and losses as ordinary.
Taxpayers targeted by the new rule were predictably offended. Donald Schapiro, representing the New York State Bar Association (NYSBA) Tax Section, knew Congress would have to offer some enticement to lure taxpayers into the new regime. He and the NYSBA advocated long-term capital character for the mark. The argument was that because gains and losses were a zero-sum in the futures markets, Treasury should be indifferent to character. It was expected that taxpayers, in contrast, would consider capital character so attractive that they would cooperate with mark-to-market.
A certain Michael L. Maduff of Chicago protested vociferously against mark-to-market in testimony before the Senate Finance Committee, calling it a ‘‘very bad scheme’’ and a ‘‘radical departure from our system of
taxation.’’ However, he confessed, ‘‘If… Congress were to pass a bill which incorporated [mark-to-market] at a very favorable tax rate, I would be delighted to conduct my business under such a bill, under such a law.’’
And so it transpired that mark-to-market came into being, with the enticement of a 60 percent long-term and 40 percent short-term capital gains and loss rates, in section 1256. In an era when there was a possible 42 percent rate differential between ordinary income and long-term capital gains, that was sweet indeed.
Congress knew mark-to-market was a radical departure from the U.S. tax system. To survive, the new law would have to be framed in a way to avoid challenges under the Constitution. Eisner v. Macomber was heavily
diluted by 1981 but had never been overruled. The realization principle was still part of tax jurisprudence, and mark-to-market had to be dressed up to fall within the ambit of that principle.