3.8 Eligible taxpayers
The NYSBA recommends that all taxpayers (including securities traders, commodities dealers and traders), including taxpayers required to mark-to-market under Secs. 1256, 1259, 1260, and 1296, qualify for the safe harbour. The submissions of both the ISDA and the SIA refer to dealers only, and do not appear to attempt to extend the application of the safe harbour to anyone other than themselves.
3.9 Eligible Positions
According to the SIA, the safe harbour should apply to all securities that are subject to the mark-to-market regime under Sec. 475. Further, because commodities are similarly valued in accordance with GAAP for financial accounting purposes, and those values are used for significant, non-tax business purposes, the principles applicable to the valuation of securities are applicable to commodities, as well.
4. Proposed Regulations
On 24 May 2005, the IRS published Proposed Regulation on the safe harbour for valuation under Sec. 475. According to the overview of these regulations, the safe harbour is based on the principle that if the mark-to-market method required by Sec. 475, the values used for financial reporting should be acceptable values for purposes fo Sec. 475.
4.1 Scope of the safe harbour
The proposed safe harbour is available to any taxpayer subject to the mark-to-market regime under Sec. 475, including securities and commodities dealers and traders. Eligible securities and commodities dealers and traders. Eligible securities and commodities dealers and traders. Eligible securities and commodities positions will be listed in a Revenue Procedure which is expected to apply to every security position and every commodity position subject to mark-to-market under Sec. 475. A taxpayers election would be required and would continue indefinitely, unless revoked by the Commissioner.
4.2 Valuation Requirements
The three general requirements for valuations are reiterated, and a new one is introduced requiring that fair value be determined using GAAP:
- frequency. Taxpayers must mark eligible positions to market through valuations on the last business day of the taxable year;
- recognition at the mark. Taxpayers must recognize any gain or loss from mark on income statement;
- recognition on disposition. Taxpayers must recognize into on disposition of an eligible position as if year-end mark occurred immediately before disposition; and fair value standard. Fair value must be determined in accordance with US GAAP.
4.3 Additional valuation limitations
The Proposed Regulations impose the following additional limitations to ensure minimal divergence from fair market value:
- except for eligible positions that are traded on a qualified board or exchange as defined in Sec. 1256(g)(7), a taxpayer may not use valuation standards that result in values at or near the bid/ask value;
- the valuation method used may not take into account any cash flows (income or expense) attributable to a period of time prior to the valuation date; and
- in a determination of fair value, appropriate costs and risk may be taken into account, but no cost of risk may be accounted for more than once, either directly or indirectly.