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Definition of
Dealer in Securities
- The SEC
Exchange Act defines a dealer as someone who is
engaged in the business of buying and selling
securities for his own account
§3(a)(5),
15 U.S.C. 78c(a)(5)
and that would require their
registration as a dealer under
§15(b), 15
U.S.C.
78o(b).
Definition of
Dealer in Securities
- In general, a dealer in securities is required to use a mark-to-market method of accounting for 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 an evidence of indebtedness.
Congress enacted the mark-to-market rules of section 475 to provide
a more accurate reflection of the income of securities dealers. The
Congress did not believe that the mark-to-market rules were intended
to be used by taxpayers whose principal activity was the selling of
goods and services to obtain a deduction earlier than would
otherwise be permitted.
Definition of Dealer in
Securities
- IRS Regulations §
1.1402(a)-5(d) A dealer in stocks or securities is a merchant
of stocks or securities with an established place of business,
regularly engaged in the business of purchasing stocks or securities
and reselling them to customers; that is, he is one who as a
merchant buys stocks or securities and sells them to customers
with a view to the gains and profits that may be derived therefrom.
Persons who buy and sell or hold stocks or securities for investment
or speculation, irrespective of whether such buying or selling
constitutes the carrying on of a trade or business, are not dealers
in stocks or securities.
Definition of
Dealer in Securities
- IRS Regulations §
1.471-5(c) ...a dealer in securities is a merchant of
securities, whether an individual, partnership, or corporation, with
an established place of business, regularly engaged in the purchase
of securities and their resale to customers; that is, one who
as a merchant buys securities and sells them to customers
with a view to the gains and profits that may be derived therefrom.
If such business is simply a branch of the activities carried on by
such person, the securities inventoried as provided in this section
may include only those held for purposes of resale and not for
investment.
Taxpayers who buy and
sell or hold securities for investment or speculation,
irrespective of whether such buying or selling constitutes the
carrying on of a trade or business, and officers of corporations and
members of partnerships who in their individual capacities buy and
sell securities, are not dealers in securities.
Definition of
Dealer in Securities
- For purposes
of the mark-to-market rules, a dealer in
securities is a taxpayer who in the ordinary
course of the taxpayer's trade or business
regularly holds itself out as being willing and
able to purchase securities from or sell
securities to (or regularly offers to enter into,
assume, offset, assign or otherwise terminate
positions in securities with) customers. A
taxpayer who sells nonfinancial goods or provides
nonfinancial services, such as a consumer
products retailer or an accountant, does not
become a dealer in securities by the act of
extending credit for the purchase of goods or
services. Nor does a taxpayer who purchases
securities, but does not sell more than a
negligible portion of the securities.
Definition of
Dealer in Securities
- For purposes of the
mark-to-market rules, effective for tax years ending after December
30, 1993, a dealer in securities is a taxpayer who in the ordinary
course of the taxpayer's trade or business regularly holds itself
out as being willing and able to purchase securities from or sell
securities to (or regularly offers to enter into, assume, offset,
assign or otherwise terminate positions in securities with)
customers. 233
/Footnote/ 233 §475(c)(1);
Regs. §1.475(c)-1(a)(2).
For purposes of the inventory
rules for tax years ending before December 31, 1993, a dealer is
defined as a merchant in securities (whether an individual,
partnership, or corporation) with an established place of business
who regularly engages in the purchase and resale of securities
to
customers. 234 Taxpayers who buy and sell securities for investment
or speculation, irrespective of whether such buying and selling
constitutes a trade or business, are not considered dealers. 235
Other taxpayers that are not considered dealers include brokers, 236
investors, 237 floor traders, 238 underwriters, 239 and officers of
corporations and members of partnerships who in their individual
capacities buy and sell securities. 240
/Footnote/ 234 Regs.
§1.471-5.
/Footnote/ 235 Id.
/Footnote/ 236 Seely v.
Helvering, 77 F.2d 323, 324 (2d Cir. 1935); Factor v. Comr., 281
F.2d 100 (9th Cir. 1960); Hammit v. Comr., 79 F.2d 494 (3d Cir.
1935).
/Footnote/ 237 See, e.g.,
Schafer v. Helvering, 299 U.S. 171 (1936); Serris v. Comr. T.C. Memo
1978-500; Stephens, Inc. v. Comr., 464 F.2d 53 (8th Cir. 1972);
Gruver v. Comr., 142 F.2d 363 (4th Cir. 1944); U.S. v. Ross, 251
F.Supp. 175, 182 (S.D.N.Y. 1966).
/Footnote/ 238 Seely v.
Helvering, 77 F.2d 323, 324 (2d Cir. 1935).
/Footnote/ 239 Mirro-Dynamics
Corp. v. U.S., 247 F.Supp. 214 (D. Cal. 1965), aff'd, 374 F.2d 14
(9th Cir. 1967), cert. denied, 389 U.S. 896 (1967).
/Footnote/ 240 Regs.
§1.471-5.
Definition of Dealer in Securities
(official guidance as used by
Examiners during tax audits pursuant to the Internal Revenue Manual,
Part 4, Charter 37, issued after TraderStatus.com brought the
dealer-status issue to a head)
-
4.37.1.5.6 (07-31-2002)
IRC section 475 Mark to Market Accounting for Dealers in
Securities
- IRC section 475 is a
far-reaching Code Section that requires dealers in securities to
mark their securities to market. The section is far-reaching
because of the definition of a dealer in securities. The
definition goes beyond what one would think of as a traditional
dealer in securities.
The general rule of
Section 475 is two pronged.
- IRC section
475(a)(1) provides that all securities, which are inventory
in the hands of a dealer in securities, will be included in
inventory at the fair market value of the securities.
- IRC section
475(a)(2) provides that all other securities held by a
dealer in securities at the end of a tax year will be marked
to market for tax purposes.
- An adjustment will
be made for any gains or losses subsequently realized.
4.37.1.5.6.1 (07-31-2002)
IRC section 475(c)(1) Mark to Market Dealer Definition
- A dealer in securities
for purposes of IRC section 475 is a taxpayer who, in the
ordinary course of a trade or business, regularly:
- Sells securities
to or purchases securities from customers
or
- Offers to enter
into, assume, offset, assign or otherwise terminate
positions in securities with customers.
Who is a "Dealer" per the SEC?
http://www.sec.gov/divisions/marketreg/bdguide.htm#II
Unlike a broker, who acts as agent,
a dealer acts as principal. Section 3(a)(5)(A) of the Act generally
defines a "dealer" as:
any person engaged in the business of buying and selling securities for
his own account, through a broker or otherwise.
The definition of "dealer" does not include a "trader,"
that is, a person who buys and sells securities for his or her own
account, either individually or in a fiduciary capacity, but not
as part of a regular business. Individuals who
buy and sell securities for themselves generally are considered traders
and not dealers.
Sometimes you can easily tell if someone is a dealer. For example, a
firm that advertises publicly that it makes a market in securities is
obviously a dealer. Other situations can be less clear. For instance,
each of the following individuals and businesses may need to register as
a dealer, depending on a number of factors:
a person who holds himself out as being willing to buy and sell a
particular security on a continuous basis;
a person who runs a matched book of repurchase agreements; or
a person who issues or originates securities that he also buys and
sells.
Here are some of the questions you should ask to determine whether you
are acting as a dealer:
- Do you advertise or otherwise
let others know that you are in the business of buying and selling
securities?
- Do you do business with the
public (either retail or institutional)?
- Do you make a market in, or
quote prices for both purchases and sales of, one or more securities?
- Do you participate in a
"selling group" or otherwise underwrite securities?
- Do you provide services to
investors, such as handling money and securities, extending credit, or
giving investment advice?
- Do you write derivatives
contracts that are securities?
A "yes" answer to any of these
questions indicates that you may be a dealer.
With regard to the above
"with customers" requirement, what is the
difference between selling "to" a Market Maker and selling
"through" an ECN?
- Selling
"to" a Market Maker simply implies that if an order is
displayed on the bid/ask of an issue you have the
ability to "hit" that order. Selling
"through" an ECN (Electronic Communications Network) actually allows you access to
"the book" (to post your bid or
offer to the world). This increase in visibility
affords you a much higher probability to execute
your trade.
It is well established that
a Broker/Dealer can transact business as a Principal
(for his own dealer account) or as Agency (as a broker
representing the customer to another dealer). Whether
transactions executed through an ECN are similar enough to
a Broker/Dealer who is acting as Principal has not been
challenged in the courts as of yet. It is therefore arguable
that using ECNs such as ISLAND/INET or ARCA ATTN BRUT BTRD REDI
STRK & TRAC and selling directly to Customers
(as opposed to selling to a Market Maker, who in turn sells to his
customers) meets the "to customers" test qualifying you
to file as a Dealer in Securities.
Dealers or market makers typically have access to NASDAQ Level III
where they not only have all the real-time quotes available to see
(such as with Level II) but they also may enter their own
quotes and execute orders. On the surface, this is not unlike
how an ECN operates with the user. So is this taxpayer a
"trader?" or is this taxpayer a "dealer?"
It's also been said that to qualify as a dealer the taxpayer should
be providing some level of merchandising functions or other services
that the taxpayer should to be compensated for providing.
Entering one or two orders a day might not be "merchandising" very
much. But trading with enough volume that you are providing
continual liquidity to the market is a horse of a different colour.
[update:
for more education of what to do and what not to do see references to
2007 court cases below, discussing Court opinions on taxpayer positions
of trader vs. dealer - where pro se taxpayers presented good faith but
faulty arguments based partially on and similar to the concepts
discussed above]
IRS document
regarding Mark to Market for Dealers in Securities;
Equity Interests in Related Parties and the
Dealer-Customer Relationship
- This document
contains proposed regulations that make
mark-to-market accounting inapplicable to most
equity interests in related entities. The
regulations also relate to the definition of a
dealer in securities for certain federal
income tax purposes. To qualify as a dealer in
securities, a taxpayer must engage in
transactions with customers. The proposed
regulations concern the existence of
dealer-customer relationships. The Revenue
Reconciliation Act of 1993 amended the applicable
tax law. These regulations provide guidance for
taxpayers that engage in securities transactions.
View or Download full text from IRS
sites (when they are operational)
More recently the IRS issued Rev Proc 2002-11 regarding Dealer
Status.
Definition of Securities
Dealer vrs. Definition of a Securities Trader
- The critical issue in distinguishing between
securities dealers and securities traders is whether the taxpayer has "customers." Wood, 943 F.2d at 1050-53. The United States Tax Court
has taken the position that a "dealer" is a person who purchases securities or commodities with the expectation of realizing a profit, not because of a rise in value during the interval of time between purchase and resale, but merely because they have or hope to find a market of buyers who will purchase from them at a price in excess of their cost.
This excess or mark-up represents remuneration for their labors as a middle man bringing together buyer and seller, and performing the usual services of retailer or wholesaler of goods.
Definition of a Commodities Dealer
- §1258(d)(5)(B) Definitions.
--
For purposes of this paragraph --
1258(d)(5)(B)(i) Options Dealer. --
The term 'options dealer' has the meaning given such term by section
1256(g)(8).
1258(d)(5)(B)(ii) Commodities
Trader. --
The term 'commodities trader' means any person who is a member (or,
except as otherwise provided in regulations, is entitled to trade as
a member) of a domestic board of trade which is designated as a
contract market by the Commodity Futures Trading Commission.
1256(g)(8) Options Dealer
1256(g)(8)(A) In General
The term "options dealer" means any person registered with an
appropriate national securities exchange as a market maker or
specialist in listed options.
1256(g)(8)(B) Persons Trading
In Other Markets
In any case in which the Secretary makes a determination under
subparagraph (C) of paragraph (7), the term "options dealer" also
includes any person whom the Secretary determines performs functions
similar to the persons described in subparagraph (A). Such
determinations shall be made to the extent appropriate to carry out
the purposes of this section.
Commodities
Dealer information
- The commission income of
commodities and options dealers is ordinary income. Futures
contracts and options traded by commodity and options dealers are
generally called " §1256 contracts" for tax purposes. Gains and
losses of a commodity and options dealers from trading §1256
contracts are treated as capital gains and losses, and net
capital gains are treated as self-employment income for FICA
purposes. 26 An options dealer's gains and losses from transactions
carried out in the course of the trade or business of an options
dealer (market maker or specialist, depending on the exchange) are
subject to a complex set of rules. An options dealer who is
also a dealer in securities, however, is generally subject to the
same treatment as a securities dealer with respect to transactions
carried out as a securities dealer.
/Footnote/ 26 §1402(i). See
e.g., Rudman v. Comr., 118 T.C. No. 21 (4/29/02). As mentioned
above, the 1984 Bluebook, p. 313, notes that no inference is
intended as to whether options and commodity dealers are viewed as
engaged in a trade or business in connection with their transactions
in §1256 contracts as the result of the application of
self-employment taxes to such persons.
Definition of
Dealer in Securities Futures contracts:
- Rev. Rul. 2004-94 -
Dealers in securities futures contracts.
This ruling holds that Tier 1, Tier 2, and Tier 3 NQLX LLC Market
Makers that satisfy the market maker requirements described in the
ruling perform functions similar to the functions performed by
options dealers (as defined in section 1256(g)(8)(A) of the Code)
and that these NQLX LLC Market Makers are therefore dealers in
securities futures contracts within the meaning of section
1256(g)(9)(B).
An NQLX Market Maker must meet all of the following requirements:
(1) Be a member of NQLX;
(2) Be registered as a floor
trader or floor broker with the CFTC or as a dealer with the
Securities Exchange Commission (SEC);
(3) Maintain records
sufficient to prove compliance with the NQLX Market Maker
requirements, including, but not limited to, documents concerning
personnel effecting relevant orders, relevant trade and cash
blotters, relevant stock records, and documents concerning
applicable internal system capacity and performance; and
(4) Hold itself out as
willing to buy and sell SFCs for its own account on a regular or
continuous basis.
For an NQLX Market Maker to
fulfill the regular or continuous requirement in paragraph (4)
above, it must satisfy the following criteria for each of its
assigned SFC products:
(i) Provide continuous
two-sided quotations for the first two delivery months of each
assigned SFC product throughout the trading day, except during
unusual market conditions as determined by NQLX (such as a fast
market in either the SFC product or the security underlying the SFC
product) at which times the Market Maker must use its best efforts
to quote continuously and competitively;
(ii) Quote for the first two
delivery months, with (A) a Maximum Bid/Ask Spread of no more than
the greater of $0.10 or 150% of the bid/ask spread in the primary
market for the security underlying the SFC product and (B) a Minimum
Number of Contacts of no less than the lesser of 10 contracts or the
corresponding contract size equivalent of the best bid and best
offer for the security underlying the SFC product; and
(iii) Respond to requests for
quotation in each assigned SFC product within 5 seconds for all
delivery months other than the first two delivery months with a
two-sided quotation that has (A) a Maximum Bid/Ask Spread of no more
than the greater of $0.20 or 150% of the bid/ask spread in the
primary market for the security underlying the SFC product and (B) a
Minimum Number of Contracts of no less than the lesser of 5
contracts or the corresponding contract size equivalent of the best
bid and best offer for the security underlying the SFC product.
Any NQLX Market Maker that
fails to comply with the NQLX rules, CFTC rules, or SEC rules, as
applicable, is subject to disciplinary action in accordance with
NQLX rules.
-
Securities held by the taxpayer
must be held "primarily for sale to customers in the ordinary course of
his trade or business." The courts have attempted to define this
through the application of a series of factors. Typical examples of
these factors are those set forth by the Fifth Circuit in Winthrop, 417
F.2d 905 (5th Cir. 1969), as follows:
- Nature and purpose of the
acquisition of the securities and the duration of the ownership;
- Extent and nature of the
taxpayer's efforts to sell the securities;
- Number, extent,
continuity, and substantiality of the sales;
- Extent of subdividing,
developing, and advertising to increase sales;
- Use of a business office
for the sale of the property;
- Character and degree of
supervision or control exercised by the taxpayer over any
representatives selling the securities; and
- Time and effort the
taxpayer habitually devoted to the sales.
A later decision of the Fifth
Circuit, Biedenharn Realty Co., 526 F.2d 409 (5th Cir., 1976),
attempted to weigh the above factors in relative importance. It was
believed that frequent and continuous sales are the most
important indicator of dealer status. This was followed by
the extent of improvement activity, the extent of solicitation and
advertising activities, and the extent of other brokerage
activities.
Other cases have asked these
questions, looking for answers in the affirmative:
- Does the dealer advertise?;
- Does the dealer have inventory?;
- Does the dealer have a business license?;
- Does the dealer have a high volume of business?;
- Does the dealer have a public presence as a dealer?;
- Does the dealer have a customer base?
When the answers to these
questions is yes, the taxpayer could be considered to be a dealer.
Whereas, taxpayers who buy and sell securities as individuals and do not
trade directly with customers are often considered to be investors or
traders.
Recent Tax Case Suggests Subtle
Changes in Definitions:
- A taxpayer (Thomas v Comr
2003 11th Cir GA), apparently trying to follow the logic above,
tried to argue retroactively that he was entitled to ordinary loss
treatment on his securities trading of between 226 to 322 sales per
year and averaging $60,000 per sale.
While we believe the court erred in several places, the point in
bringing this up now is that the IRS is currently using this tax
case against taxpayers under audit. But this case, while
lost by this taxpayer on appeal, actually loosens the definition
of a dealer stating: "Under Section 1221(a)(1) of the Code, even
a taxpayer who buys and sells securities as part of a business must
report his gains and losses as capital rather than ordinary,
unless he trades on behalf of a customer (sic)."
Note that this court only requires one arms-length customer (for
example, your spouse, your corporation, or your brother) to qualify
yourself for securities dealer status (assuming of course you have
otherwise achieved the status a securities trade or business to
begin with).
Further, in denying the taxpayers' arguments, this court further stated: "Taxpayer was not trading securities
on behalf (sic) of any customers. He received no commissions
for his trades and stipulated that his profits depended on market
fluctuations." and again "The tax code's
distinction between ordinary and capital losses is elementary.
Sales of securities for personal gain may result in ordinary losses
only when a taxpayer conducts the sales on behalf of customers
in the ordinary course of a business activity." Note that this court considers
trading on behalf of customer(s) to qualify for ordinary loss
treatment, rather than the accepted definition of buying from
and selling to customers.
Ordinarily (not fully discussed here) we'd ignore this minor tax case as
one argued ineffectively by the taxpayer and decided by the court
with its share of errors in the opinion. But since, in 2005, the IRS has
taken the initiative and is now using this tax case to argue
against securities traders/dealers, we feel that fair's fair.
While we generally do not propose taking such a dealer status
position per se, if you are under audit don't go it alone or go with
a representative who does not do trader status tax planning as a
primary portion of his or her practice. There are simply too
many tricks and traps for the unwary as this Thomas case shows.
Rev. Proc. 2002-11, 2002-7 I.R.B. 526
(2/19/2002)
26 CFR 601.201: Rulings and determination letters
(Also Part I, Section 1256(g)(9) )
Rev. Proc. 2002-11
SECTION 1. PURPOSE
This Revenue Procedure contains procedures that an exchange may follow
to enable the Internal Revenue Service to determine whether certain
persons trading on that exchange qualify as "dealers" under section
1256(g)(9) of the Internal Revenue Code (the "Code"). It is expected
that, after the issuance of a letter ruling to a specific exchange
determining whether a specific category of persons trading securities
futures contracts (and options on such contracts) on that exchange
qualifies for dealer status under section 1256(g)(9), the Service will
publish the same conclusion in a revenue ruling.
SECTION 2. BACKGROUND
The Commodity Futures Modernization Act of 2000, enacted as part of
the Consolidated Appropriations Act, 2001 (Public Law 106-554, 114 Stat.
2763), authorizes the trading of securities futures contracts, a new
type of derivative financial product. In general, gain or loss is
recognized on securities futures contracts upon disposition, and the
character of that gain or loss is determined by newly enacted section
1234B of the Code.
The timing and character of gains and losses on dealer securities
futures contracts (and options on such contracts), however, is
determined under section 1256 . Dealer securities futures contracts are
subject to mark-to-market treatment, and gains or losses are treated as
60 percent long-term capital gain or loss and 40 percent short-term
capital gain or loss. Section 1256(a). For purposes of the application
of section 1256 to dealer securities futures contracts (and options on
such contracts), a person is a dealer if the Secretary of the Treasury
determines that the person performs functions with respect to such
options or contracts similar to the functions performed with respect to
stock options by persons registered with a national securities exchange
as a market maker or specialist in listed options.
In Notice 2001-27, 2001-13 I.R.B. 942, the Service and the Treasury
Department requested comments and suggestions regarding both the
substance of the required determinations and the manner in which they
should be made. Numerous comments have been received regarding criteria
that could be used to identify dealers in securities futures contracts
(and options on such contracts). In addition, staff of the Service and
Treasury initiated numerous conversations with both regulators and
various exchanges. These ongoing conversations are expected to continue
unabated.
The exchanges on which securities futures contracts and options may be
traded, however, are still developing rules that will govern trading. In
addition, certain of the regulatory requirements that will be imposed by
the Securities and Exchange Commission and the Commodity Futures Trading
Commission have not yet been issued in final form, and the rules
promulgated by some exchanges may differ in important respects from
those governing the trading of any other products.
During the current period, when trading rules are being developed, it is
important for the Service and Treasury to provide certainty for
taxpayers while at the same time not constraining the development of
trading structures for the new markets. Given the likely diversity of
trading platforms and the potential for new trading models, the Service
and Treasury have determined that encouraging exchanges to apply for
case-by-case determinations while they are developing their trading
rules is preferable to either writing general rules before the trading
structures are known or waiting until the structures are finally
established and then making the exchanges wait for a general rule to be
crafted.
The issuance at this time of general guidance for determining dealer
status would risk constraining the development of the structures for the
new markets. On the other hand, if general guidance is not issued now,
the absence of an interim process for securing dealer determinations
could impair the ability of the exchanges to adapt their proposed
trading systems to the requirements for achieving dealer status for
market participants. As a result of the flexibility inherent in the
process of obtaining a letter ruling, an exchange will have an
opportunity, if it so desires, to make adjustments in its proposed
trading practices should those be needed to secure dealer status for
particular groups of traders.
Under the procedures set forth below, if an exchange is one on which
securities futures contracts (or options thereon) are, or are expected
to be, traded, the exchange may request a letter ruling that, based on
its specific rules and facts and circumstances, certain persons trading
such contracts (or options thereon) on the exchange will be treated as
"dealers" under section 1256(g)(9).
The Service expects that, once it has reached a decision regarding the
request for ruling, the same conclusion will be published in a revenue
ruling, which will serve as general guidance. The Service and Treasury
are committed to expedited processing for both the letter ruling and the
revenue ruling.
SECTION 3. PROCEDURES
.01 Procedures for submitting a ruling request. An exchange desiring
a letter ruling concerning whether certain persons trading on that
exchange will qualify as dealers with respect to specific contracts
traded on that exchange is required to submit a letter ruling request
under the procedures provided in Rev. Proc. 2002-1, 2002-1 I.R.B. 1 (or
successor procedure).
.02 Time for submitting a ruling request. Ruling requests may be
submitted prior to the date on which the exchange anticipates that
trading in the securities futures contracts at issue will begin,
provided the exchange has developed a substantially definite framework
and set of rules within which these contracts are expected to trade and
has undertaken significant actions to obtain necessary regulatory
approvals and to establish requisite contractual arrangements and
trading systems. The Service will not rule on requests involving
alternative plans of proposed transactions or hypothetical situations.
See section 7.02 of Rev. Proc. 2002-1, 2002-1 I.R.B. 1, 20.
.03 Information that should be included in each ruling request. In
addition to the information required by Rev. Proc. 2002-1, the exchange
must submit any relevant information that will help the Service to
determine whether or not persons trading in securities futures contracts
on that exchange qualify as dealers under section 1256(g)(9). References
to securities futures contracts include options on such contracts.
References to rules applicable to trading in securities futures
contracts include rules that are not yet adopted in final form but that
are expected to be applicable. The current status of such rules should
be described. The ruling request should also include the following:
Copies of information filed with non-tax regulatory agencies regarding
trading on that exchange in the securities futures contracts at issue.
Information regarding whether persons trading in such contracts on that
exchange are required to register with the Securities and Exchange
Commission or the Commodity Futures Trading Commission and the nature of
any required registration.
A description of any books and records requirements under federal
securities laws or commodities laws to which persons trading on that
exchange are subject.
Information regarding whether persons trading in such contracts on that
exchange will be required to be members of the exchange and, if such
persons are not required to be members of the exchange, whether such
persons are required to be lessees or delegates of other persons
entitled to trade at member rates on the exchange.
References to the exchange's rules, if any, to which such persons will
be subject when trading in such contracts.
A description of any books and records requirements the exchange will
impose on such persons and any rules granting the exchange the right to
monitor and/or examine a person's trading activities and financial
stability.
Information regarding whether the exchange, the Securities and Exchange
Commission, or the Commodity Futures Trading Commission imposes any
licensing requirements on such persons, including a description of any
such requirements.
Information regarding whether the exchange imposes net capital
requirements on such persons, or imposes such requirements on a clearing
member firm that clears a person's trades; whether clearing firms impose
any capital requirements on persons clearing trades through those firms;
and, in either case, a description of any net capital requirements.
Information regarding whether the exchange requires such persons to
regularly and continuously hold themselves out as willing to buy and
sell securities futures contracts, regardless of market conditions; and,
if the exchange imposes no such affirmative obligation, whether those
persons will in fact make a two-sided market because of other factors or
obligations, including a description of any such other factors or
obligations.
Information regarding whether the exchange anticipates that those
persons expect to profit by entering into either side of a position to
capture a portion of the bid-ask spread, or whether the exchange
anticipates that those persons expect that most of their gross income
from trading in these securities futures contracts will be attributable
to profits from market price movements.
Information regarding whether the exchange anticipates that such persons
will enter into transactions to hedge their risks with respect to the
securities futures contracts traded on the exchanges and the nature of
such hedges.
An estimate of the average gross trading volume that the exchange
anticipates such persons will generate with regard to these contracts.
Information regarding whether the exchange anticipates that trading in
these securities futures contracts will be a substantial part of the
principal business activity of such persons. Such information might
include, for example, an estimate of the average percentage of gross
income that the exchange anticipates such persons will generate from
trading in these securities futures contracts.
Information regarding whether the exchange will impose a substantial
presence requirement or a trading activity requirement on such persons,
including a description of any such requirements.
An estimate of the volume of proprietary trading, compared to the volume
of trading for customers, that such persons are expected to generate on
the exchange.
A description of the exchange's trading environment (e.g., floor trading
or screen trading) and any special features of such environment that
differentiate the persons for whom dealer status is sought from other
exchange participants.
A discussion of the nature, extent, and frequency of material changes
that may occur in any of the above information after the requested
ruling is issued. The exchange is encouraged to include suggestions for
procedures to be followed by the exchange, its traders, and the Service
in the event that material changes in the information occur. See section
12.10 of Rev. Proc. 2002-1, 2002-1 I.R.B. 1, 52; section 7.01 of Rev.
Proc. 89-14, 1989-1 C.B. 814, 815.
The foregoing list of information should be provided with any ruling
request, along with any additional information that may help the Service
to make its determination. After its review of a request for ruling, the
Service may require the exchange to submit additional information needed
to make its determination. See section 10.06 and 10.07 of Rev. Proc.
2002-1, 2002-1 I.R.B. 1, 43-44.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective February 4, 2002, the date this
revenue procedure was made available to the public.
SECTION 5. DRAFTING INFORMATION
The principal drafter of this notice is Shawn Tetelman of the Office of
the Associate Chief Counsel (Financial Institutions and Products). For
further information regarding this notice, contact Shawn Tetelman at
(202) 622-3930 (not a toll-free call).
http://tax.cchgroup.com/news/headlines/2007/nws61207.htm
Final Regulations Set Forth Safe Harbor for Valuation Under Code Sec.
475; Procedure Issued for Designating Securities, Commodities Considered
Eligible Positions (Rev. Proc. 2007-41; T.D. 9328)
To qualify for the safe harbor, a financial accounting method must
satisfy certain basic requirements. The method must:
- mark eligible positions to
market through valuations made as of the last business day of each tax
year;
- recognize into income on the
income statements any gain or loss from marking eligible positions to
market;
- recognize into income on the
income statement any gain or loss on disposition of an eligible
position as if a year-end mark occurred immediately before the
disposition; and
- arrive at fair value in
accordance with U.S. GAAP.
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