Taxpayer Bill of Rights  

Joint Committee on Taxation

Description of Senate Finance Committee Chairman's Mark Relating To
Reform and Restructuring of The Internal Revenue Service

Effective date of Item V.B. Modify Foreign Tax Credit Carryover Rules should be revised to read as follows:

The proposal would apply to foreign tax credits arising in taxable years ending after the date of enactment.

Insert at the end of the document the following new item (and add heading to the Contents):

E. Make Certain Trade Receivables Ineligible for Mark-to-Market Treatment

Present Law

In general, dealers in securities are required to use a mark-to-market method of accounting for securities (Sec. 475). Exceptions to the mark-to-market rule are provided for securities held for investment, certain debt instruments and obligations to acquire debt instruments and certain securities that hedge securities. A dealer in securities is a taxpayer who regularly purchases securities from or sells securities to customers in the ordinary course of a trade or business, or who regularly offers to enter into, assume, offset, assign, or otherwise terminate positions in certain types of securities with customers in the ordinary course of a trade or business. A security includes (1) a share of stock, (2) an interest in a widely held or publicly traded partnership or trust, (3) an evidence of indebtedness, (4) an interest rate, currency, or equity notional principal contract, (5) an evidence of an interest in, or derivative financial instrument in, any of the foregoing securities, or any currency, including any option, forward contract, short position, or similar financial instrument in such a security or currency, or (6) a position that is an identified hedge with respect to any of the foregoing securities.

Treasury regulations provide that if a taxpayer would be a dealer in securities only because of its purchases and sales of debt instruments that, at the time of purchase or sale, are customer paper with respect to either the taxpayer or a corporation that is a member of the same consolidated group, the taxpayer will not normally be treated as a dealer in securities. However, the regulations allow such a taxpayer to elect out of this exception to dealer status. For this purpose, a debt instrument is customer paper with respect to a person if: (1) the person's principal activity is selling nonfinancial goods or providing nonfinancial services; (2) the debt instrument was issued by the purchaser of the goods or services at the time of the purchase of those goods and services in order to finance the purchase; and (3) at all times since the debt instrument was issued, it has been held either by the person selling those goods or services or by a corporation that is a member of the same consolidated group as that person.

Description of Proposal

The proposal would provide that certain trade receivables would not be eligible for mark-to market treatment, whether the taxpayer is a securities dealer required to use mark-to-market treatment or elects such treatment under the Treasury regulation. The trade receivables that would be excluded would include non-interest bearing receivables, and account, note and trade receivables unrelated to an active business of a securities dealer. The proposal would grant the Treasury regulatory authority to carry out the purposes of the proposal. The proposal would not affect the non-accrual experience method of accounting for service providers.

Effective Date

The proposal generally would be effective for taxable years ending after the date of enactment. Adjustments required under section 481 as a result of the change in method of accounting would be required to be taken into account ratably over the four-year period beginning in the first taxable year for which the proposal is in effect.

Previous| First | Next

1998 Hearings Main | Taxpayer Bill of Rights Main | Home

  to download the Adobe Acrobat PDF Reader