Mark-to-Market Accounting for Dealers in
Commodities & Traders in Securities or Commodities

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-104924-98] RIN 1545-AW06

TITLE: Mark-to-Market Accounting for Dealers in Commodities and
Traders in Securities or Commodities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations for dealers in
commodities and traders in securities or commodities regarding the
election to use the mark-to-market method of accounting for their
businesses. Section 1001(b) of the Taxpayer Relief Act of 1997
amended the applicable tax law for these taxpayers. This document
also contains proposed regulations providing guidance on statutory
changes to section 475 contained in the Internal Revenue Service
Restructuring and Reform Act of 1998 (IRS Restructuring Act). This
guidance is necessary because section 7003 of the IRS Restructuring
Act generally prohibited the application of mark-to-market
accounting to nonfinancial customer paper. Among other things, the
proposed regulations provide guidance to taxpayers who are using
mark-to-market accounting for nonfinancial customer paper. This
document also provides notice of a public hearing on these proposed
regulations.

DATES: Written comments and outlines of topics to be discussed at
the public hearing scheduled for June 3, 1999, at 10 a.m. must be
received by May 13, 1999.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-104924-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG-104924-98), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the A Tax Regs @ option on the IRS Home Page,
or by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The public
hearing will be held in room 2615, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations about
elections by commodities dealers and securities and commodities
traders, Jo Lynn Ricks, 202-622-3920; concerning the regulations
about nonfinancial customer paper, Pamela Lew, 202- 622-3950;
concerning submissions and the hearing, Michael L.

Slaughter, Jr., 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the collection of information
should be sent to the Office of Management and Budget, Attn: Desk
Officer for the Department of Treasury, Office of Information and
Regulatory Affairs, Washington, DC, 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224. Comments concerning the collection
of information must be received by [INSERT DATE 60 DAYS AFTER THE
DATE OF PUBLICATION IN THE FEDERAL REGISTER].

The first collection of information in this proposed regulation is
described in the Explanation of Provisions section of this document
(rather than being included in the text of the proposed
regulations). That description indicates that the elections under
section 475(e)(1) and (f)(1) and (2) may be required to be made on a
form to be developed by the IRS. This burden will be reflected on
that new form.

The second collection of information in this proposed regulation is
in ��1.475(e)-1 and 1.475(f)-2. The information required to be
recorded under ��1.475(e)-1 and 1.475(f)-2 is required by the IRS to
determine whether an exemption from mark-to- market accounting is
properly claimed. This information will be used to make that
determination upon audit of taxpayers' books and records. The likely
recordkeepers are businesses or other for-profit institutions.

Estimated total annual recordkeeping burden: 1,000 hoU.S. The
estimated annual burden per recordkeeper varies from 15 minutes to 3
hours, depending on individual circumstances, with an estimated
average of 1 hour.

Estimated number of recordkeepers: 1,000.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
valid control number assigned by the Office of Management and
Budget.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

Section 475 provides that dealers in securities generally must use
mark-to-market accounting for all securities.

Exceptions from the mark-to-market requirement are generally
provided for securities not held for sale to customers and certain
securities held as a hedge, provided that the securities are
identified as exempt in a proper and timely manner.

For purposes of section 475, a security includes any note, bond,
debenture, or other evidence of indebtedness. Revenue Ruling 97-37
(1997-39 I.R.B. 4), clarified that A other evidence of indebtedness
@ includes customer paper, commonly referred to as trade accounts
receivable. The IRS provided procedures for a taxpayer to change its
method of accounting for customer paper in Revenue Procedure 97-43
(1997-39 I.R.B. 12).

The IRS Restructuring Act modified the definition of security for
purposes of section 475 to exclude nonfinancial customer paper. For
this purpose, nonfinancial customer paper is any receivable arising
out of the sale of nonfinancial goods or services by a person the
principal activity of which is the selling or providing of
nonfinancial goods or services if the receivable is held by that
person (or a related person) at all times since its issuance.
Section 475(c)(4), added by the IRS Restructuring Act, precludes a
taxpayer from using mark-to-market accounting under section 475 for
nonfinancial customer paper. In addition, the legislative history of
the IRS Restructuring Act indicates that taxpayers may not account
for nonfinancial customer paper using a mark-to-market or lower-of-
cost-or-market method of accounting under other sections of the
Code. See H.R.

Conf. Rep. No. 599, 105 Cong., 2d Sess. 353-54 (1998).

th Congress, however, authorized the Secretary to issue regulations
describing situations where taxpayers must use mark-to-market
accounting for nonfinancial customer paper in order to prevent
taxpayers from using the exclusion in section 475(c)(4) to avoid
marking to market receivables that are inventory in the hands of the
taxpayer or a related person.

Section 475(e) and (f), added by section 1001(b) of the Taxpayer
Relief Act of 1997, allows securities traders and commodities
traders and dealers to elect mark-to-market accounting similar to
that currently required for securities dealers. These provisions are
effective for all taxable years ending after August 5, 1997, the
date of enactment of the Taxpayer Relief Act. The proposed
regulations clarify several issues relating to these elections,
including the identification of securities and commodities as exempt
from mark-to-market accounting, the character of marked securities
and commodities, and the time and manner for making the elections.

Explanation of Provisions

Nonfinancial Customer Paper Sections 1.446-1(c)(2)(iii), 1.471-12,
and 1.475(c)-2(d) of the proposed regulations provide that taxpayers
may not use mark-to- market or lower-of-cost-or-market accounting
for any nonfinancial customer paper unless a regulation
affirmatively provides that the nonfinancial customer paper is to be
marked to market as inventory.

The remaining proposed regulations pertaining to section 475(c)(4)
are cross references or minor technical changes required by the
addition of �1.475(c)-2(d).

Dealers in Commodities

The proposed regulations generally provide that, except as provided
in guidance prescribed by the Commissioner, the rules for mark-to-
market accounting for securities dealers apply to commodities
dealers that make an election under section 475(e)(1) (electing
commodities dealers). Comments are requested whether there are
circumstances where the specific rules applicable to securities
dealers should not be applied to electing commodities dealers.

Under the proposed regulations, unless the Commissioner otherwise
provides in a revenue ruling, revenue procedure, or letter ruling,
the exemption from mark-to-market accounting for assets held for
investment does not apply to a commodity derivative held by an
electing dealer in commodities. If the rule described in the
preceding sentence applies (and consequently requires a commodity
derivative to be marked to market), the gain or loss is ordinary.
The IRS and the Treasury Department believe that it would be
extremely rare for a commodity derivative held by a commodities
derivative dealer to be acquired other than in a dealer capacity.
See �1.475(c)-1( a)(2). Moreover, the IRS and the Treasury
Department believe that a dealer in physical commodities generally
engages in derivatives activities that are virtually
indistinguishable from its dealings in physical commodities. This
situation invokes many of the practical concerns that led Congress
to enact section 475(b)(4). The IRS and the Treasury Department
welcome comments on whether, and under what circumstances, it may be
appropriate for a dealer in physical commodities to identify
commodity derivatives as held for investment.

The proposed regulations also provide that, in all cases, if a
dealer in commodities identifies a commodity as exempt from mark-to-
market accounting under section 475(b)(2), the identification is
ineffective unless it is made before the close of the day on which
the commodity was acquired, originated, or entered into. Thus, a
rule similar to the 30-day identification rule for certain
securities in Holding 8 of Rev. Rul. 97-39 (1997-39 I.R.B. 4), does
not apply to commodities dealers.

Traders in Securities or Commodities

The proposed regulations provide that the principles underlying the
rules and administrative interpretations applicable to securities
dealers also apply to electing traders, unless the proposed
regulations or the Commissioner provides otherwise. The IRS and the
Treasury Department request comments on whether there are
circumstances under which a specific rule applicable to securities
dealers should not apply to electing securities traders.

The proposed regulations provide rules for the identification of
investment securities as exempt from mark-to-market accounting. The
proposed regulations clarify that a trader in securities who elects
mark-to-market accounting under section 475(f)(1) for its trading
business (an electing trader) must identify, in accordance with
section 475(f)(1)(B)(ii), any security held other than in connection
with the trading business.

If the electing trader is also a dealer in securities, the trader
need only identify under section 475(f)(1)(B)(ii) securities that
are not held in connection with the trading business and that are
also described in section 475(b)(1) (without regard to section
475(b)(2)). That is, the trader need not identify securities that
could not properly be identified as being exempt from section
475(a).

The IRS and the Treasury Department believe that in making the
section 475 election available to securities traders, Congress did
not want taxpayers selectively to mark to market some securities but
selectively to identify other securities as exempt from this
treatment. Congress addressed this concern by establishing a higher
burden of proof for electing securities traders to identify
securities as not subject to section 475 than is applicable to
securities dealers. The IRS and the Treasury Department share this
concern, particularly because it traditionally has been easier to
distinguish investment securities from dealer securities than to
distinguish investment securities from trading securities.
Accordingly, the proposed regulations provide that in no event is
the requirement of section 475(f)(1)(B)(i) satisfied unless the
electing trader demonstrates by clear and convincing evidence that a
security has no connection to its trading activities. The IRS and
Treasury Department request comments on whether any trader of
securities could meet this burden and under what circumstances.

In addition, the IRS and the Treasury Department seek comments on
the manner in which securities are identified as not held in
connection with trading activities and, in particular, comments that
focus on the administrability of rules in this area.

Because of the fungible nature of certain securities, the proposed
regulations provide a special rule for identifying securities held
other than in connection with the electing trader's trading business
when the electing trader also trades other of the same or
substantially similar securities. In this circumstance, the electing
trader does not satisfy section 475(f)(1)(B)(i) unless the security
is held in a separate, nontrading account maintained with a third
party. The IRS and the Treasury Department are considering extending
this special identification rule to all securities, rather than
solely to those that are fungible, and request comments on the
advisability of doing so.

Under the proposed regulations, all identifications under section
475(f)(1)(B)(ii) must be made on the same day the electing trader
acquires, originates, or enters into the security. Thus, a rule
similar to the 30-day identification rule for certain securities in
Holding 8 of Rev. Rul. 97-39 does not apply to electing traders.

Because the principles of the rules and administrative
interpretations applicable to securities dealers apply to electing
traders, if an electing trader improperly identifies as exempt a
security that is actually held in connection with that business, the
gain or loss with respect to the security is ordinary, and the
consequences described in section 475(d)(2) apply to the security
(i.e., the security is marked to market and any losses realized with
respect to the security prior to its disposition are recognized only
to the extent of gain previously recognized with respect to the
security). Similarly, under the proposed regulations, if an electing
trader fails to identify a security that is not held in connection
with its trading business, the consequences of section 475(d)(2)
apply to the security, and the gain or loss with respect to the
security is ordinary. Moreover, in the event of this failure, the
Commissioner may nevertheless treat the security as if the
requirements for exemption from mark-to-market accounting were
satisfied.

The proposed regulations further provide that the gain or loss with
respect to a security that is marked to market under section 475(f)
(1)(A) is ordinary. Under this rule, if an electing trader disposes
of a security before the close of the taxable year, proposed
�1.475(a)-2 applies, and the gain or loss is ordinary income or
loss. See sections 475(f)(1)(D) and 475(d)(3) and the legislative
history to section 475(f). H.R.

Rep. No. 148, 105th Cong., 1st Sess. 445 (1997).

Under the proposed regulations, the above rules for electing
securities traders also apply to electing commodities traders. In
addition, the proposed regulations provide a special character rule
for traders in section 1256 commodity contracts who elect mark-to-
market accounting for their businesses. For these traders, the
proposed regulations clarify that the capital character rule of
section 1256 does not apply to these contracts and, thus, the gain
or loss with respect to such contracts is ordinary.

Making the Elections

The proposed regulations clarify that if a dealer in securities also
has a securities or commodities trading business or a commodities
dealing business, the dealer may make an election for that business.

The proposed regulations also provide that the mark-to-market
elections for dealers in commodities and for traders in securities
or commodities must be made in the time and manner prescribed by the
Commissioner. The IRS and the Treasury Department anticipate
requiring taxpayers to make the election by filing a form, to be
developed by the IRS, not later than 21/2 months after the beginning
of the taxable year for which the election is made. (See the
Paperwork Reduction Act section of this preamble, which requests
comments on the burden that may be imposed by this requirement.)
Interim procedures are being provided in a revenue procedure.

Proposed Effective Dates

The proposed regulations in �1.475(c)-2(d)(1) apply to every
taxpayer who is required by section 475(c)(4) to cease using mark-
to-market accounting for nonfinancial customer paper. These
regulations are applicable for all taxable years ending after July
22, 1998. Proposed ��1.446-1(c)(2)(iii), 1.471-12, and 1.475(c)-2(d)
(2) are applicable for all taxable years ending on or after January
28, 1999. The proposed regulations in ��1.475(e)-1 and 1.475(f)-2
generally apply to securities or commodities acquired on or after
March 1, 1999. The rules concerning the time and manner for making
the mark-to-market elections for commodities dealers and securities
and commodities traders are generally applicable for taxable years
ending on or after January 28, 1999.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory impact analysis is not required. It is
hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. As previously noted, in those
instances where a small entity elects to apply the rules in these
regulations, the burden of the collection of information is not
significant. Accordingly, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f), this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed
original and eight (8) copies) that are submitted timely to the IRS.
The IRS and the Treasury Department specifically request comments on
the clarity of the proposed regulations and how they can be made
easier to understand. All comments will be available for public
inspection and copying.

A public hearing has been scheduled for June 3, 1999, beginning at
10 a.m. in room 2615 of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10 Street entrance, located
between Constitution and th Pennsylvania Avenues, NW. In addition,
all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be
admitted beyond the immediate entrance area more than 15 minutes
before the hearing starts.

For information about having your name placed on the building access
list to attend the hearing, see the A FOR FURTHER INFORMATION
CONTACT @ section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons who wish to present oral comments at the hearing must submit
written comments and an outline of the topics to be discussed and
the time to be devoted to each topic (signed original and eight (8)
copies) by May 13, 1999. A period of 10 minutes will be allotted to
each person for making comments. An agenda showing the scheduling of
the speakers will be prepared after the deadline for receiving
outlines has passed. Copies of the agenda will be available free of
charge at the hearing.

Drafting Information

The principal authors of these regulations are Jo Lynn Ricks and
Pamela Lew of the Office of Assistant Chief Counsel (Financial
Institutions & Products). However, other personnel from the IRS and
the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is
proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
removing the entries for ��1.475(a)-3 through 1.475(e)-1 and adding
the following entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.475(a)-3 also issued under 26 U.S.C. 475(g).

Section 1.475(b)-1 also issued under 26 U.S.C. 475(b)(4) and 26
U.S.C. 475(g).

Section 1.475(b)-2 also issued under 26 U.S.C. 475(b)(2) and 26
U.S.C. 475(g).

Section 1.475(b)-4 also issued under 26 U.S.C. 475(b)(2), 26 U.S.C.
475(g), and 26 U.S.C. 6001.

Section 1.475(c)-1 also issued under 26 U.S.C. 475(g).

Section 1.475(c)-2 also issued under 26 U.S.C. 475(g) and 26 U.S.C.
860G(e).

Section 1.475(d)-1 also issued under 26 U.S.C. 475(g).

Section 1.475(e)-1 also issued under 26 U.S.C. 475(g).

Section 1.475(f)-1 also issued under 26 U.S.C. 475(g).

Section 1.475(f)-2 also issued under 26 U.S.C. 475(g).***

Par. 2. In �1.446-1, paragraph (c)(2)(iii) is added to read as
follows:

�1.446-1 General rule for methods of accounting.

* * * * *

(c) * * *

(2) * * *

(iii) Section 475 is the exclusive authority on which a taxpayer may
rely to use the mark-to-market method of accounting for nonfinancial
customer paper, as defined in section 475(c)(4)(B). Thus, except to
the extent provided in �1.475(c)-2(d), the mark-to-market method of
accounting is not a permissible method of accounting for
nonfinancial customer paper.

In addition, the lower-of-cost-or-market method of accounting is not
a permissible method of accounting for these assets. See �1.471-12.
This paragraph (c)(2)(iii) applies to all tax years ending on or
after January 28, 1999.

* * * * * Par. 3. Section 1.471-12 is added as follows:

�1.471-12 Nonfinancial customer paper.

Nonfinancial customer paper, as defined in section 475(c)(4)(B), may
not be treated as inventory except as provided in �1.475(c)-2(d).
This section applies to taxable years ending on or after January 28,
1999.

Par. 4. In �1.475(c)-1, paragraphs (b)(3)(i) and (b)(4)(ii) are
revised to read as follows:

�1.475(c)-1 Definitions--dealer in securities.

* * * * *

(b) * * *

(3) * * *

(i) For purposes of section 471, the taxpayer accounts for any
security (as defined in section 475(c)) as inventory;

* * * * *

(4) * * *

(ii) Continued applicability of an election--(A) In general.

Except as provided in paragraph (b)(4)(ii)(B) of this section, an
election under this paragraph (b)(4) continues in effect for
subsequent taxable years until revoked. The election may be revoked
only with the consent of the Commissioner.

(B) Taxable years ending after July 22, 1998. An election under this
paragraph (b)(4) is ineffective for taxable years ending after July
22, 1998.

* * * * *

Par. 5. In �1.475(c)-2, paragraph (d) is added to read as follows:

�1.475(c)-2 Definitions--security.

* * * * *

(d) Inventory--(1) Nonfinancial customer paper is generally not
marked to market under section 475. Except as provided in paragraph
(d)(3) of this section, nonfinancial customer paper (as defined in
section 475(c)(4)(B)) is not a security even if it is inventory.

(2) Treatment of nonfinancial customer paper under other sections of
the Internal Revenue Code. For nonfinancial customer paper that is
not a security, the mark-to-market method of accounting and the
lower-of-cost-or-market method of accounting are not permissible
methods of accounting. See ��1.446- 1(c)(2)(iii) and 1.471-12.

(3) Nonfinancial customer paper treated as inventory.

[Reserved].

�1.475(e)-1 [Redesignated as �1.475(g)-1] Par. 6. Section 1.475(e)-1
is redesignated as �1.475(g)-1.

Par. 7. New �1.475(e)-1 and ��1.475(f)-1 and 1.475(f)-2 are added to
read as follows:

�1.475(e)-1 Election of mark-to-market accounting for dealers in
commodities.

(a) Time and manner of making election. An election under section
475(e)(1) must be made in the time and manner prescribed by the
Commissioner.

(b) Application of securities dealer rules to electing commodities
dealers. Except as otherwise provided in this section or in other
guidance prescribed by the Commissioner, the rules and
administrative interpretations under section 475 for dealers in
securities apply to dealers in commodities that make an election
under section 475(e)(1).

(c) Commodity derivatives deemed not held for investment--

(1) In general. Except as otherwise determined by the Commissioner
in a revenue ruling, revenue procedure, or letter ruling, if a
dealer in commodities that made an election under section 475(e)(1)
holds a commodity described in section 475(e)(2)(B) or (C)
(describing certain notional principal contracts and commodity
derivatives), section 475(b)(1)(A) (exempting from mark-to-market
accounting certain positions that are held for investment) does not
apply to that commodity.

(2) Character of commodity derivatives required to be marked to
market. If a commodity is required to be marked to market because of
the application of paragraph (c)(1) of this section, the gain or
loss with respect to that commodity is ordinary.

(d) Same day identification. An identification of a commodity as
exempt from mark-to-market accounting under section 475(b)(2) is not
effective unless it is made before the close of the day on which the
commodity was acquired, originated, or entered into.

�1.475(f)-1 Procedures for electing mark-to-market accounting for
traders.

(a) Time and manner of making election. An election under section
475(f)(1) or (2) must be made in the time and manner prescribed by
the Commissioner.

(b) Coordination with section 475(a). If a dealer in securities also
has a securities or commodities trading business or a commodities
dealing business, the dealer may make an election under section
475(e)(1), (f)(1), or (f)(2) for that business.

�1.475(f)-2 Election of mark-to-market accounting for traders in
securities or commodities.

(a) Securities not held in connection with trading activities--(1)
Taxpayer identification of investment securities.

If a trader in securities makes an election under section 475(f)(1)
(A) (electing trader) and holds a security other than in connection
with that trading business, the electing trader must identify that
security in accordance with section 475(f)(1)(B)(ii). If the
electing trader is also a dealer in securities, however, the
preceding sentence applies only to securities described in section
475(b)(1) (without regard to section 475(b)(2)).

(2) Satisfaction of Commissioner. In no event is the requirement of
section 475(f)(1)(B)(i) satisfied unless the electing trader
demonstrates by clear and convincing evidence that a security has no
connection to its trading activities.

(3) Substantially similar securities held for trading and
investment. An electing trader that holds a security other than in
connection with its trading business and also trades the same or
substantially similar securities in no event satisfies the
requirement of section 475(f)(1)(B)(i) unless the security is held
in a separate, nontrading account maintained with a third party.

(4) Consequences of failure to identify investment securities. If an
electing trader holds a security that is not held in connection with
its trading business and fails to identify the security in a manner
that satisfies the requirements of section 475(f)(1)(B)(ii)--

(i) The consequences described in section 475(d)(2) apply to the
security; and

(ii) The character of the gain or loss with respect to the security
is ordinary.

(5) Commissioner identification of investment securities.

Notwithstanding paragraph (a)(4) of this section, the Commissioner
may treat a security described in that paragraph as meeting the
requirements of section 475(f)(1)(B)(i) and (ii).

(b) Character of securities marked to market. The gain or loss with
respect to a security that is marked to market under section 475(f)
(1)(A) is ordinary.

(c) Application of securities dealer rules to electing traders.
Except as otherwise provided in this section or in other guidance
prescribed by the Commissioner, the principles of the rules and
administrative interpretations under section 475 for dealers in
securities apply to traders in securities that make an election
under section 475(f)(1).

(d) Same day identification. An identification of a security as
exempt from mark-to-market accounting under section 475(f)(1)(B) is
not effective unless it is made before the close of the day on which
the security was acquired, originated, or entered into.

(e) Application to traders in commodities--(1) General rule.

If a trader in commodities makes an election under section 475(f)
(2), paragraphs (a), (b), (c), and (d) of this section apply to the
trader in the same manner that they apply to a trader in securities
who makes an election under section 475(f)(1).

(2) Coordination with section 1256. If a trader in commodities makes
an election under section 475(f)(2) and trades section 1256
contracts that are commodities as defined in section 475(e)(2), then
the rules of section 475(f) and paragraph (e)(1) of this section
apply to those contracts, and not the capital character rules of
section 1256.

Par. 8. Newly designated �1.475(g)-1 is amended by revising
paragraphs (h)(2) and (i) and adding paragraphs (k), (l), and (m) to
read as follows:

�1.475(g)-1 Effective dates.

* * * * *

(h) * * *

(2) Section 1.475(c)-1(b) (concerning sellers of nonfinancial goods
and services) applies as follows:

(i) Except as otherwise provided in this paragraph (h)(2),
�1.475(c)-1(b) applies to taxable years ending on or after December
31, 1993.

(ii) Section 1.475(c)-1(b)(4)(ii)(B) applies to taxable years ending
after July 22, 1998.

* * * * *

(i) Section 1.475(c)-2 (concerning the definition of security)
applies as follows:

(1) Section 1.475(c)-2(a), (b), and (c) (concerning the definition
of security) applies to taxable years ending on or after December
31, 1993. By its terms, however, �1.475(c)-2( a)(3) applies only to
residual interests or to interests or arrangements acquired on or
after January 4, 1995; and the integrated transactions that are
referred to in �1.475(c)-2(a)(2) and (b) exist only after August 13,
1996 (the effective date of �1.1275-6).

(2) Section 1.475(c)-2(d) applies as follows:

(i) Section 1.475(c)-2(d)(1) applies to taxable years ending after
July 22, 1998.

(ii) Section 1.475(c)-2(d)(2) applies to taxable years ending on or
after January 28, 1999.

* * * * *

(k) Section 1.475(e)-1(a) (concerning the time and manner for making
the mark-to-market election for dealers in commodities) applies to
taxable years ending on or after January 28, 1999. Section
1.475(e)-1(b), (c) and (d) applies to commodities acquired on or
after March 1, 1999.

(l) Section 1.475(f)-1 (procedures for electing mark-to-market
accounting for traders in securities or commodities) applies to
taxable years ending on or after January 28, 1999.

(m) Section 1.475(f)-2 (concerning the mark-to-market rules for
traders in securities or commodities) applies to securities or
commodities acquired on or after March 1, 1999.

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

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