Mark to Market for Dealers in Securities

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8700]

RIN 1545-AS30

Mark to Market for Dealers in Securities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations providing guidance to

enable taxpayers to comply with the mark-to-market requirements

applicable to dealers in securities. The Revenue Reconciliation Act of

1993 amended the applicable tax law. These regulations provide guidance

to dealers in securities.

DATES: These final regulations are effective December 24, 1996, except

paragraph (a) of Sec. 1.475(c)-1T is removed effective December 24,

1996, and the remainder of Sec. 1.475(c)-1T is removed effective

January 23, 1997.

For dates of applicability, see Sec. 1.475(e)-1.

FOR FURTHER INFORMATION CONTACT: Robert B. Williams at (202) 622-3960

or Jo Lynn Ricks at (202) 622-3920 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations

has been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under

control number 1545-1496. Responses to this collection of information

are required for a taxpayer to obtain the benefit of an exemption from

marking to market under section 475 for those securities (see

Sec. 1.475(b)-2) and for a consolidated group of taxpayers to obtain

the benefit of treating inter-member transactions as customer

transactions for purposes of the definition of dealer in securities

(the intragroup-customer election, Sec. 1.475(c)-1(a)(3)(iii)).

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

The estimated annual burden per recordkeeper regarding

Sec. 1.475(b)-2 varies from .25 to 3 hours, depending on individual

circumstances, with an estimated average of 1 hour. Section 1.475(b)-4

(formerly Sec. 1.475(b)-2T), which permitted a taxpayer to add or

remove certain identifications on or before January 31, 1994, does not

impose a recordkeeping burden into the future. The estimated burden per

respondent in making the intragroup- customer election in

Secs. 1.475(c)-1(a)(3)(iii) varies from .25 to 1 hour, depending on

individual circumstances, with an estimated average of .5 hour.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,

DC 20224, and to the Office of Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and

Regulatory Affairs, Washington, DC 20503.

Books or records relating to this 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

This document contains final regulations under section 475

(relating to mark-to-market accounting for dealers in securities).

Section 475 was added by section 13223 of the Revenue Reconciliation

Act of 1993, Public Law 103-66, 107 Stat. 481, and is effective for all

taxable years ending on or after December 31, 1993.

On December 29, 1993, temporary regulations (TD 8505, 58 FR 68747)

(hereinafter sometimes referred to as the temporary regulations) and

cross-referenced proposed regulations (FI-72-93, 58 FR 68798)

(hereinafter sometimes referred to as the 1993 proposed regulations)

were published to furnish guidance on several issues, including the

scope of exemptions from the mark- to-market requirements, certain

transitional issues relating to the scope of exemptions, and the

meaning of the statutory terms security, dealer in securities, and held

for investment. Various comments were received regarding those

regulations, and a hearing was held on April 12, 1994.

Additional regulations were proposed on January 4, 1995 (60 FR 397)

(hereinafter sometimes referred to as the 1995 proposed regulations),

and on June 20, 1996 (61 FR 31474) (hereinafter sometimes referred to

as the 1996 proposed regulations). The 1995 and 1996 proposed

regulations supplemented, and in a few cases revised, the 1993 proposed

regulations. Hearings on the 1995 and 1996 proposed regulations were

held on May 3, 1995, and October 15, 1996, respectively.

The final regulations in this document generally adopt the 1993

proposed regulations, as revised by the 1995 and 1996 proposed

regulations, with certain changes reflecting comments that were

received. These final regulations also adopt additional portions of the

1995 proposed regulations. The sections that are not adopted at this

time remain proposed.

The provisions governing mark to market of debt instruments, which

were proposed in January 1995, attracted substantial comment. The IRS

and Treasury intend to finalize those regulations in a substantially

revised form in response to those taxpayer comments.

Explanation of Provisions

Acquisition by a Dealer of a Security With a Substituted Basis

The final regulations adopt without change the provisions in the

1995 proposed regulations that provide rules for situations where a

dealer in securities receives a security with a basis in its hands that

is determined, in whole or in part, either by reference to the basis of

the security in the hands of the transferor or by reference to other

property held at any time by the dealer. In these cases, section 475(a)

applies only to post-acquisition gain and loss with respect to the

security. That is, section 475(a) applies only to changes in value of

the security occurring after its acquisition. See section 475(b)(3).

The character of the mark-to-market gain or loss is determined as

provided under section 475(d)(3). The character of pre-acquisition gain

or loss (that is, the built-in gain or loss at the date the dealer

acquires the security) and the time for taking that gain or loss into

account are determined without regard to section 475. The fact that a

security has a substituted basis in the dealer's hands does not affect

the security's date of acquisition for purposes of

[[Page 67716]]

determining the timeliness of an identification under section 475(b).

Scope of Exemptions From Mark-to-Market Requirement

Section 475(b) exempts certain securities from mark-to-market

accounting under section 475(a). Among the exempted securities are

those held for investment and debt securities not held for sale.

Section 1.475(b)-1(a) of the regulations, like the temporary rule that

preceded it, provides that held for investment, as used in section

475(b)(1)(A), and not held for sale, as used in section 475(b)(1)(B),

have the same meaning. The regulations provide that both terms refer to

a security that is not held by a taxpayer primarily for sale to

customers in the ordinary course of the taxpayer's trade or business.

By providing that a security is held for investment (or not held for

sale) if it is not held primarily for sale to customers in the ordinary

course of a trade or business, the regulations adopt the concept of

held for investment in section 1236(a). Thus, under these regulations,

a dealer in securities may identify as held for investment a security

that it holds primarily for sale to non-customers (for example, a

trading security). The IRS and the Treasury believe that providing a

single standard for purposes of sections 475 and 1236 is consistent

with the purpose of section 475. These rules apply to taxable years

ending on or after December 31, 1993.

The final regulations require a taxpayer that identifies a security

as exempt from being marked to market to state (on its books and

records) whether the security is, on the one hand, exempt as held for

investment or not held for sale or, on the other hand, exempt because

it is a hedge of an item not subject to mark to market. This regulation

applies to identifications made on or after July 1, 1997.

The temporary and 1993 proposed regulations provide that stock in a

50-percent-controlled subsidiary, and interests in 50-percent-

controlled partnerships and trusts, are deemed properly identified as

held for investment and thus are excluded from mark-to-market

accounting. The 1996 proposed regulations reproposed this rule with two

changes. First, the IRS believed that the rationale for the rule

applies equally to equity interests in most related persons and not

just to persons controlled by the taxpayer. Second, after considering

various comments received, the IRS proposed that this rule prohibiting

marking a security to market should not apply if two requirements are

met: (1) The security is actively traded on a national securities

exchange or through an interdealer quotation system; and (2) the

taxpayer who marks owns less than 5 percent of all shares or interests

of the same class. Comments were requested as to whether it is

appropriate to allow any equity interests in related parties to be

marked to market, and, if so, whether the proposed limitations are the

most appropriate ones.

After considering the comments received in response, the IRS and

the Treasury have decided to adopt the provisions in the 1996 proposed

regulations with certain modifications. First, the general threshold

above which even actively traded stock in a related party may not be

marked to market has been increased from 5% to 15%. The 15% limit,

however, includes shares held both by the dealer and by certain related

parties. Second, shares that a dealer acquires from a related party

cannot be marked to market unless, after the time they were acquired,

both one full business day has passed and there has been significant

trading in the security involving persons who are not related to the

taxpayer.

Section 475(b)(3) applies when a security has been exempt from

marking to market and the exemption then ceases to apply. Thus, changes

in a security's value that occur while section 475(a) does not apply

are suspended. This rule has additional significance for certain

members of consolidated groups because Sec. 1.1502-13(f)(6) disallows

certain losses recognized by members of consolidated groups on common

parent stock if the loss is not taken into account pursuant to section

475(a).

The final regulations provide that, except as determined by the

Commissioner, notional principal contracts and derivative securities

described in section 475(c)(2) (D) or (E) that are held by a dealer in

those securities are not eligible to be exempted from mark-to-market

treatment as held for investment.

Under the temporary and 1993 proposed regulations, however, an

analogous barrier to exemption from mark-to-market treatment did not

apply if the taxpayer established unambiguously that the security was

acquired other than in the taxpayer's capacity as a dealer in such

securities. It was anticipated that this exception would apply only in

rare instances. Commenters suggested an easing of the standard for

establishing that a security was acquired other than in the taxpayer's

capacity as a dealer in such securities.

These suggestions are specifically rejected in the final

regulations set forth in Sec. 1.475(b)-1(c). Instead, as described

above, to avoid uncertainty and ambiguity, the rule barring exemption

from mark-to-market treatment for certain notional principal contracts

and derivative securities applies unless the Commissioner explicitly

determines otherwise. For securities acquired or entered into before

January 23, 1997, however, the final regulations continue the rule

found in the temporary regulations.

Commenters suggested that changes are needed to allow taxpayers

that are dealers in notional principal contracts and derivative

securities (described in section 475(c)(2) (D) or (E)) to identify as

exempt from mark-to-market treatment a notional principal contract or

derivative that is held as a hedge of a position that is not marked to

market.

No change was made to the temporary regulations to reflect these

comments because none was necessary. Section 1.475(b)-1(c) limits

exemptions only under section 475(b)(1)(A) (concerning securities held

for investment). Section 1.475(b)-1(c) does not limit exemptions under

section 475(b)(1)(C) (concerning securities that are hedges of non-

mark-to-market positions). Although the flush language at the end of

section 475(b)(1) authorizes analogous regulatory limitations on

exemption under section 475(b)(1)(C), as of this time, no such

regulation has been issued or proposed. Accordingly, if a dealer in

notional principal contracts or derivatives enters into a notional

principal contract or derivative as a hedge of a position that is not

marked to market, the dealer may properly identify it under section

475(b)(1)(C) as exempt from mark-to-market treatment.

In response to comments, the final regulations expand the

securities that a taxpayer may identify under section 475(b)(1)(C) as

exempt from mark-to-market accounting. Under the final regulations, a

taxpayer can identify as exempt from mark-to-market treatment under

section 475(b)(1)(C) a security that hedges a position of another

member of the taxpayer's consolidated group and meets the following

three requirements: the security is a hedging transaction within the

meaning of Sec. 1.1221-2(b); the security is timely identified as a

hedging transaction under Sec. 1.1221-2(e) (including satisfaction of

the requirement that the hedged item be identified); and the security

hedges a position that is not marked to market under section 475(a).

Although identification of the hedged item is not required under

Sec. 1.1221-2 until some time after the day the hedging transaction is

entered into, the identification of the hedge under section 475(b)(2)

must still be made no later

[[Page 67717]]

than the close of the day on which the hedge is acquired, originated,

or entered into.

Permitting taxpayers to identify these securities as exempt from

mark-to-market accounting is consistent with the single-entity approach

of the consolidated group hedging regulations under Sec. 1.1221-

2(d)(1). As a result of the identification, the timing of the gain or

loss on the hedge is matched with the timing of the gain or loss on the

hedged item without forcing taxpayers to use back-to-back hedges and

the separate-entity election under Sec. 1.1221-2(d)(2). This rule is

effective for hedges entered into on or after January 23, 1997.

Exemptions--Transitional Issues

The final regulations adopt without substantive change a number of

transitional rules relating to various exemption and identification

issues. These transitional rules, now found in Sec. 1.475(b)-4, were

contained in Sec. 1.475(b)-2T of the temporary regulations. A more

complete description of these provisions may be found in the preamble

of TD 8505 at 58 FR 68747 (1994-1 C.B. 152).

Dealer in Securities--The Dealer-Customer Relationship

The final regulations retain the rules in the 1995 proposed

regulations concerning the dealer-customer relationship. Thus, the

final regulations provide that determination of whether a transaction

is with a customer is based on all of the facts and circumstances.

Further, under section 475(c)(1)(B), the term dealer in securities

includes a taxpayer that, in the ordinary course of its trade or

business, regularly holds itself out as being willing and able to enter

into either side of a transaction enumerated in section 475(c)(1)(B).

The final regulations retain the general rule in the 1996 proposed

regulations that transactions with related persons may be transactions

with customers for purposes of section 475. In response to comments,

however, in Sec. 1.475(c)-1(a)(3) the final regulations provide both a

special rule for members of a consolidated group and an election for

the rule not to apply. If the special rule applies, then, solely for

purposes of determining whether the taxpayer meets the definition of a

dealer in securities, a taxpayer's transactions with other members of

its consolidated group are not transactions with customers. Thus, a

member whose only customers are other members of its consolidated group

generally is not a dealer in securities. Treating intragroup

transactions as noncustomer transactions is consistent with the single-

entity approach of Secs. 1.1221-2(d)(1) and 1.1502-13. (The IRS expects

to provide additional guidance on whether there are any circumstances

in which the special rule applies for other purposes, such as whether a

security may be exempted from mark-to-market treatment because it is

not held for sale to customers.)

A consolidated group may elect not to apply the special rule. If a

group has made this intragroup customer election, a member of a group

may be a dealer in securities even if its only customer transactions

are with other members of its consolidated group. Once made, the

election continues for all subsequent taxable years and may be revoked

only with the consent of the Commissioner.

These final regulations significantly alter the proposed default

rule for intragroup transactions. Under the proposed regulations, a

taxpayer's intragroup transactions would have been customer

transactions for purposes of section 475. Because the final regulations

reverse this rule (making noncustomer status the default and requiring

an affirmative election to consider intragroup transactions in applying

the dealer definition), the rules for intragroup transactions are

effective for taxable years beginning on or after December 24, 1997.

(The general rule for related party transactions other than intragroup

transactions is effective for taxable years beginning on or after June

20, 1996.) The IRS will soon publish guidance to assist taxpayers who

may have to change their methods of accounting because their status as

a dealer changes as a result of the application of Sec. 1.475(c)-

1(a)(3).

For prior years, the Service generally will not challenge a

taxpayer's treatment of intragroup transactions as customer or

noncustomer transactions, provided the taxpayer had a reasonable basis

for its treatment of the transactions and consistently applied that

basis from year to year. In this regard, a taxpayer does not fail this

consistency requirement solely because it changed its treatment of its

intragroup transactions in order: (1) to avail itself of the separate-

entity election under the consolidated group hedging regulations, or

(2) to coincide with the expected effective date of either Notice 96-12

(1996-10 I.R.B. 29) or the related party rules in the 1996 proposed

regulations. (If a taxpayer wishes to change its treatment of prior

open years to be consistent with its status during the first year that

Sec. 1.475(c)-1(a)(3) applies, see Sec. 301.9100-1T(a).) Dealer in

securities--sellers of nonfinancial goods and services

In general, the final regulations exclude from dealer status any

taxpayer that would not be a dealer in securities but for its purchases

and sales of debt instruments that, at the time of purchase or sale,

are customer debt with respect to the taxpayer or another member of the

taxpayer's consolidated group. A debt instrument is customer debt at a

particular time with respect to a person if three conditions are met:

(1) The person's principal activity is selling nonfinancial goods or

providing nonfinancial services; (2) the debt instrument was issued by

a purchaser of the goods or services at the time of purchase of those

items in order to finance their purchase; and (3) at all times after

the debt instrument was issued, it has been owned by the person who

sold the goods or services or by a member of its consolidated group.

If, however, a taxpayer is a dealer in securities despite this

provision, customer debt remains a security in the taxpayer's hands and

must be marked to market unless exempted by another rule.

The temporary regulations contain a narrower provision--that a

seller of nonfinancial goods or services is not a dealer in securities

for purposes of section 475 solely by virtue of extending credit to its

nonfinancial customers (even if it sells the debt instruments so

acquired). In response to comments, the final regulations extend this

principle to accommodate consolidated groups that include both a seller

of nonfinancial goods or services and a captive finance subsidiary.

The rule in the final regulations exempting from dealer status most

captive finance subsidiaries of retailers and other sellers of

nonfinancial goods and services applies to all taxable years ending on

or after December 31, 1993, unless the taxpayer elects for the

exemption not to apply. If the election is made, it continues for all

subsequent taxable years and may be revoked only with the consent of

the Commissioner.

Under the final regulations, there are two additional circumstances

in which this exemption from dealer status does not apply. The first is

when, for purposes of the inventory accounting rules under section 471,

the taxpayer accounts for any security (as defined in section

475(c)(2)) as inventory. The second circumstance is when the taxpayer

is not itself the seller of nonfinancial goods and services and the

customer debt is accounted for by the taxpayer or by a member of its

consolidated group under a method that permits either the recognition

of unrealized gains or losses or deductions for additions to a reserve

for bad debts. This rule does not affect the seller of nonfinancial

goods and services itself

[[Page 67718]]

but is designed to prevent groups from having one captive finance

subsidiary that is treated as a nondealer and another member of the

group that is a dealer or a financial institution that accounts for

customer debt under a method that takes into account mark-to-market

gains or losses or reserve deductions.

Dealer in Securities--The Negligible Sales Exemption

Under the final regulations, in general, if a taxpayer purchases

securities from customers (including originating loans in the ordinary

course of the taxpayer's trade or business of originating loans) but

engages in no more than negligible sales of the securities so acquired,

the purchases do not cause the taxpayer to be a dealer in securities.

This negligible sales rule does not apply if the taxpayer so elects or

accounts for any security as inventory for purposes of section 471. A

taxpayer that would be a dealer in securities but for the negligible

sales rule elects to be a dealer simply by filing a federal income tax

return reflecting the application of section 475(a) in computing its

taxable income. The final regulations differ from the proposed

regulations by explicitly making the negligible sales rule elective.

In response to comments, the final regulations clarify the test for

determining negligible sales of debt instruments acquired from

customers. Under this rule, a taxpayer has engaged in no more than

negligible sales of the debt instruments (or portions of the debt

instruments) that it regularly purchases from customers in the ordinary

course of its business if, and only if, during the year, either (1) it

sells all or part of fewer than 60 debt instruments (regardless how

acquired), or (2) the total adjusted basis of the debt instruments or

portions of debt instruments (regardless how acquired) that it sells is

less than 5 percent of the total basis, immediately after acquisition,

of the debt instruments that it acquires during the year.

This special test replaces the examples in the temporary

regulations illustrating the negligible sales provision. Some

commenters noted that Sec. 1.475(c)-1T(b)(2) Example 1 of the temporary

regulations is ambiguous because it refers to a taxpayer that both

``retains almost all of the loans that it acquires'' and ``sells fewer

than 60 loans.'' The final regulations eliminate the ambiguity by

making no reference to how many loans are retained.

In response to comments, the final regulations contain two special

rules for applying the negligible sales test to members of a

consolidated group. Under the first rule, if a taxpayer is a member of

a consolidated group that has made the intragroup-customer election,

described above, it must apply the negligible sales test for debt

instruments by taking into account all of its sales of debt instruments

to other group members. On the other hand, if the taxpayer is a member

of a consolidated group that has not made the intragroup-customer

election, the negligible sales test is satisfied if either of two

criteria is met: first, if the taxpayer satisfies the negligible sales

test, taking into account all sales of debt instruments including sales

to other group members; or second, if the taxpayer's consolidated group

would satisfy the test if it were a single corporation and the members

of the group were divisions of that corporation. This group-wide

approach to the negligible sales test is consistent with the single-

entity approach of Secs. 1.1221-2(d)(1) and 1.1502-13.

Under a new rule in the final regulations, if a debt instrument is

qualitatively different from all of the debt instruments that the

taxpayer purchases from customers, a sale of that debt instrument does

not count as one of the 60 instruments sold, and that debt instrument

is not included in either the numerator or the denominator under the 5%

test. The regulations contain an example that illustrates this

principle.

The rules regarding the negligible sales exemption are generally

effective for taxable years ending on or after December 31, 1993. The

special rules for members of a consolidated group, however, are

effective for taxable years beginning on or after January 23, 1997.

Further, a taxpayer may rely on the rules set out in Sec. 1.475(c)-

1T(b) (as contained in 26 CFR part 1 revised April 1, 1996) for taxable

years beginning before January 23, 1997, provided the taxpayer applies

that paragraph reasonably and consistently.

Dealer in Securities--Issuance of Life Insurance Products

The final regulations adopt without change a provision in the 1995

proposed regulations to clarify that a life insurance company does not

become a dealer in securities solely by selling annuity, endowment, or

life insurance contracts to its customers.

Under the final regulations and the December 28, 1993, proposed

regulations, a contract that is treated for federal income tax purposes

as an annuity, endowment, or life insurance contract is deemed to have

been identified as held for investment, and is therefore not marked to

market by the policy holder. This rule was necessary because variable

life and annuity products fall within the literal language of section

475(c)(2)(E). Because many life insurance companies sell these

insurance contracts to their customers, some commenters on the 1993

proposal had asked whether these life insurance companies were dealers

in securities. There is no indication that Congress intended for a life

insurance company that was not otherwise a dealer in securities to be

characterized as a dealer merely because it sells life insurance

policies to its customers.

Several commenters requested that certain activities not cause

dealer status under section 475 because those activities, although

described by section 475, traditionally had not been considered dealer

activities. Those comments were generally rejected. Congress determined

that section 475 would bestow dealer status on taxpayers who had not

been thought of as dealers prior to the enactment of section 475. Thus,

the final regulations do not adopt proposals that making and selling

policy loans should not cause an insurance company to be a dealer in

securities and that sales of student loans or auto loans and sales of

loan participations should not be taken into account in determining

whether a taxpayer is a dealer in securities. Of course, if a lead bank

never owns a particular portion of a loan for tax purposes (because

some other participating lender always had the economic benefits and

burdens of that portion), then the lead bank cannot sell that portion

to that other participating lender. Thus, the lead bank is not a dealer

in securities by reason of these participations.

Definition of Security

Under the final regulations, certain items are not securities

within the meaning of section 475(c)(2). These items include both debt

issued by the taxpayer and any security (determined without regard to

this provision) if section 1032 bars recognition of gain or loss by the

taxpayer with respect to that security.

The final regulations adopt without change the provisions in the

1995 proposed regulations that exclude from the definition of security

all REMIC residual interests acquired on or after January 4, 1995. This

rule was adopted because applying section 475 to residual interests

would undermine the Congressional design for taxing REMIC income,

including the intended operation of sections 860C and 860E (relating to

excess inclusions).

Unlike the 1995 proposed regulations, the temporary regulations

excluded only some residual interests from the definition of security.

Specifically, the

[[Page 67719]]

temporary regulations excluded only negative value residual interests

(NVRIs) in a REMIC and other arrangements that are determined to have

substantially the same economic effect as NVRIs. Under the final

regulations, this exclusion continues to apply to NVRIs acquired before

January 4, 1995.

One commenter acknowledged the tension between mark-to-market

accounting and the excess inclusion rules, but proposed to address that

problem in another way. Under the commenter's proposal, a dealer would

be permitted to mark to market a residual interest, but any loss

resulting from the mark would be taken into account only to the extent

that the loss exceeded the amount of excess inclusion with respect to

that residual interest for the taxable year.

The IRS and Treasury believe that this comment does not address the

tension between mark-to-market accounting and section 860C. Apart from

the excess inclusion rules, the REMIC provisions contemplate income

inclusions (and corresponding basis increases) that are not necessarily

associated with increases in the value of the residual interest. Under

the commenter's proposal, a dealer could claim a loss by marking to

market a residual interest where the increased basis in the interest

resulted from an allocation of REMIC income that was unaccompanied by

an increase in value. Thus, the dealer could avoid its allocable share

of REMIC income and thereby frustrate the taxing regime contemplated

for residual interests.

Moreover, adopting this comment would require additional, complex

rules, and the burden of administering those rules would not be

justified by the potential benefit. For example, under the proposal, a

taxpayer would have one basis in a residual interest for purposes of

section 475 and a different basis in the residual interest for purposes

of section 860C(d). Also, adopting the proposal would require rules to

coordinate losses that are limited under section 475 with losses that

are limited under section 860C(e)(2).

Some commenters suggested that certain types of assets should not

be marked to market because they may be difficult to value. Under

section 475, however, ease of valuation is not relevant in determining

whether a security is required to be marked to market.

Character of Gain or Loss

The regulations adopt without change the proposed provision to

clarify that marking to market a security that is not held in

connection with a taxpayer's activities as a dealer in securities does

not affect the character of gain or loss from that security.

In addition, under a new provision in the final regulations that

responds to comments from taxpayers, if a dealer in certain notional

principal contracts or derivative securities (described in section

475(c)(2) (D) or (E)) marks those securities to market because it is

precluded from identifying them as exempt from mark-to-market treatment

on the grounds that they are held for investment, the dealer recognizes

ordinary gain or loss with respect to those securities.

Effective Dates

These final regulations generally apply to taxable years ending on

or after December 31, 1993, except as otherwise noted.

Miscellaneous

Some of the 1993 and 1995 proposed regulations are reordered.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations. The collection of information

required by Sec. 1.475(b)-2 was contained in a notice of proposed

rulemaking preceding these regulations that was issued prior to March

29, 1996. Moreover, it is hereby certified that the collection of

information required by Sec. 1.475(c)-1 of these regulations (regarding

the intragroup customer election) does not have a significant economic

impact on a substantial number of small entities. This certification is

based upon the fact that the election is generally attractive only to

an affiliated group of taxpayers that files a consolidated return

(generally large businesses), that has elected separate entity

treatment under Sec. 1.1221-2, and that has an in-house hedge center or

securities dealer which deals solely with other group members and which

uses mark-to-market accounting for book purposes. Thus, the election is

likely to be made only by, and the collection of information applies

only to, a very small number of large taxpayers. Therefore, a

Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5

U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the

Internal Revenue Code, the notice of proposed rulemaking preceding

these regulations was submitted to the Small Business Administration

for comment on its impact on small business.

Drafting Information: The principal authors of these regulations

are Robert B. Williams and Jo Lynn Ricks, Office of Assistant Chief

Counsel (Financial Institutions and Products), IRS. However, other

personnel from the IRS and Treasury Department participated in their

development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by

removing the entries for Secs. 1.475(b)-1T, 1.475(b)-2T, 1.475(c)-1T,

1.475(c)-2T, 1.475(d)-1T, and 1.475(e)-1T and adding 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(e).

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

U.S.C. 475(e).

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

U.S.C. 475(e).

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

U.S.C. 475(e), and 26 U.S.C. 6001.

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

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

U.S.C. 860G(e).

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

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

Sec. 1.475(b)-1T, 1.475(b)-2T, 1.475(c)-1T, 1.475(c)-2T, 1.475(d)-1T,

and 1.475(e)-1T [Removed]

Par. 2. Sections 1.475(b)-1T, 1.475(b)-2T, 1.475(c)-2T, 1.475(d)-

1T, and 1.475(e)-1T are removed.

Par. 2a. Paragraph (a) of Sec. 1.475(c)-1T is removed effective

December 24, 1996, and the remainder of Sec. 1.475(c)-1T is removed

January 23, 1997.

Par. 3. Sections 1.475-0, 1.475(a)-3, 1.475(b)-1, 1.475(b)-(2),

1.475(b)-4, 1.475(c)-1, 1.475(c)-2, 1.475(d)-1, and 1.475(e)-1 are

added to read as follows:

Sec. 1.475-0 Table of contents.

This section lists the major captions in Secs. 1.475(a)-3,

1.475(b)-1, 1.475(b)-2, 1.475(b)-4, 1.475(c)-1, 1.475(c)-2, 1.475(d)-1,

and 1.475(e)-1.

[[Page 67720]]

Sec. 1.475(a)-1 [Reserved]

Sec. 1.475(a)-2 [Reserved]

Sec. 1.475(a)-3 Acquisition by a dealer of a security with a

substituted basis.

(a) Scope.

(b) Rules.

Sec. 1.475(b)-1 Scope of exemptions from mark-to-market

requirement.

(a) Securities held for investment or not held for sale.

(b) Securities deemed identified as held for investment.

(1) In general.

(2) Relationships.

(i) General rule.

(ii) Attribution.

(iii) Trusts treated as partnerships.

(3) Securities traded on certain established financial markets.

(4) Changes in status.

(i) Onset of prohibition against marking.

(ii) Termination of prohibition against marking.

(iii) Examples.

(c) Securities deemed not held for investment; dealers in

notional principal contracts and derivatives.

(d) Special rule for hedges of another member's risk.

(e) Transitional rules.

(1) Stock, partnership, and beneficial ownership interests in

certain controlled corporations, partnerships, and trusts before

January 23, 1997.

(i) In general.

(ii) Control defined.

(iii) Applicability.

(2) Dealers in notional principal contracts and derivatives

acquired before January 23, 1997.

(i) General rule.

(ii) Exception for securities not acquired in dealer capacity.

(iii) Applicability.

Sec. 1.475(b)-2 Exemptions--identification requirements.

(a) Identification of the basis for exemption.

(b) Time for identifying a security with a substituted basis.

(c) Integrated transactions under Sec. 1.1275-6.

(1) Definitions.

(2) Synthetic debt held by a taxpayer as a result of legging in.

(3) Securities held after legging out.

Sec. 1.475(b)-3 [Reserved]

Sec. 1.475(b)-4 Exemptions--transitional issues.

(a) Transitional identification.

(1) Certain securities previously identified under section 1236.

(2) Consistency requirement for other securities.

(b) Corrections on or before January 31, 1994.

(1) Purpose.

(2) To conform to Sec. 1.475(b)-1(a).

(i) Added identifications.

(ii) Limitations.

(3) To conform to Sec. 1.475(b)-1(c).

(c) Effect of corrections.

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

(a) Dealer-customer relationship.

(1) [Reserved].

(2) Transactions described in section 475(c)(1)(B).

(i) In general.

(ii) Examples.

(3) Related parties.

(i) General rule.

(ii) Special rule for members of a consolidated group.

(iii) The intragroup-customer election.

(A) Effect of election.

(B) Making and revoking the election.

(iv) Examples.

(b) Sellers of nonfinancial goods and services.

(1) Purchases and sales of customer paper.

(2) Definition of customer paper.

(3) Exceptions.

(4) Election not to be governed by the exception for sellers of

nonfinancial goods or services.

(i) Method of making the election.

(A) Taxable years ending after December 24, 1996.

(B) Taxable years ending on or before December 24, 1996.

(ii) Continued applicability of an election.

(c) Taxpayers that purchase securities from customers but engage

in no more than negligible sales of the securities.

(1) Exemption from dealer status.

(i) General rule.

(ii) Election to be treated as a dealer.

(2) Negligible sales.

(3) Special rules for members of a consolidated group.

(i) Intragroup-customer election in effect.

(ii) Intragroup-customer election not in effect.

(4) Special rules.

(5) Example.

(d) Issuance of life insurance products.

Sec. 1.475(c)-2 Definitions--security.

(a) Items that are not securities.

(b) Synthetic debt that Sec. 1.1275-6(b) treats the taxpayer as

holding.

(c) Negative value REMIC residuals acquired before January 4,

1995.

(1) Description.

(2) Special rules applicable to negative value REMIC residuals

acquired before January 4, 1995.

Sec. 1.475(d)-1 Character of gain or loss.

(a) Securities never held in connection with the taxpayer's

activities as a dealer in securities.

(b) Ordinary treatment for notional principal contracts and

derivatives held by dealers in notional principal contracts and

derivatives.

Sec. 1.475(e)-1 Effective dates.

Sec. 1.475(a)-3 Acquisition by a dealer of a security with a

substituted basis.

(a) Scope. This section applies if--

(1) A dealer in securities acquires a security that is subject to

section 475(a) and the dealer's basis in the security is determined, in

whole or in part, by reference to the basis of that security in the

hands of the person from whom the security was acquired; or

(2) A dealer in securities acquires a security that is subject to

section 475(a) and the dealer's basis in the security is determined, in

whole or in part, by reference to other property held at any time by

the dealer.

(b) Rules. If this section applies to a security--

(1) Section 475(a) applies only to changes in value of the security

occurring after the acquisition; and

(2) Any built-in gain or loss with respect to the security (based

on the difference between the fair market value of the security on the

date the dealer acquired it and its basis to the dealer on that date)

is taken into account at the time, and has the character, provided by

the sections of the Internal Revenue Code that would apply to the

built-in gain or loss if section 475(a) did not apply to the security.

Sec. 1.475(b)-1 Scope of exemptions from mark-to-market requirement.

(a) Securities held for investment or not held for sale. Except as

otherwise provided by this section and subject to the identification

requirements of section 475(b)(2), a security is held for investment

(within the meaning of section 475(b)(1)(A)) or not held for sale

(within the meaning of section 475(b)(1)(B)) if it is not held by the

taxpayer primarily for sale to customers in the ordinary course of the

taxpayer's trade or business.

(b) Securities deemed identified as held for investment--(1) In

general. The following items held by a dealer in securities are per se

held for investment within the meaning of section 475(b)(1)(A) and are

deemed to be properly identified as such for purposes of section

475(b)(2)--

(i) Except as provided in paragraph (b)(3) of this section, stock

in a corporation, or a partnership or beneficial ownership interest in

a widely held or publicly traded partnership or trust, to which the

taxpayer has a relationship specified in paragraph (b)(2) of this

section; or

(ii) A contract that is treated for federal income tax purposes as

an annuity, endowment, or life insurance contract (see sections 72,

817, and 7702).

(2) Relationships--(i) General rule. The relationships specified in

this paragraph (b)(2) are--

(A) Those described in section 267(b) (2), (3), (10), (11), or

(12); or

(B) Those described in section 707(b)(1)(A) or (B).

(ii) Attribution. The relationships described in paragraph

(b)(2)(i) of this

[[Page 67721]]

section are determined taking into account sections 267(c) and

707(b)(3), as appropriate.

(iii) Trusts treated as partnerships. For purposes of this

paragraph (b)(2), the phrase partnership or trust is substituted for

the word partnership in sections 707(b) (1) and (3), and a reference to

beneficial ownership interest is added to each reference to capital

interest or profits interest in those sections.

(3) Securities traded on certain established financial markets.

Paragraph (b)(1)(i) of this section does not apply to a security if--

(i) The security is actively traded within the meaning of

Sec. 1.1092(d)-1(a) taking into account only established financial

markets identified in Sec. 1.1092(d)-1(b)(1) (i) or (ii) (describing

national securities exchanges and interdealer quotation systems);

(ii) Less than 15 percent of all of the outstanding shares or

interests in the same class are held by the taxpayer and all persons

having a relationship to the taxpayer that is specified in paragraph

(b)(2) of this section; and

(iii) If the security was acquired (e.g., on original issue) from a

person having a relationship to the taxpayer that is specified in

paragraph (b)(2) of this section, then, after the time the security was

acquired--

(A) At least one full business day has passed; and

(B) There has been significant trading involving persons not having

a relationship to the taxpayer that is specified in paragraph (b)(2) of

this section.

(4) Changes in status--(i) Onset of prohibition against marking--

(A) Once paragraph (b)(1) of this section begins to apply to the

security and for so long as it continues to apply, section 475(a) does

not apply to the security in the hands of the taxpayer.

(B) If a security has not been timely identified under section

475(b)(2) and, after the last day on which such an identification would

have been timely, paragraph (b)(1) of this section begins to apply to

the security, then the dealer must recognize gain or loss on the

security as if it were sold for its fair market value as of the close

of business of the last day before paragraph (b)(1) of this section

begins to apply to the security, and gain or loss is taken into account

at that time.

(ii) Termination of prohibition against marking. If a taxpayer did

not timely identify a security under section 475(b)(2), and paragraph

(b)(1) of this section applies to the security on the last day on which

such an identification would have been timely but thereafter ceases to

apply--

(A) An identification of the security under section 475(b)(2) is

timely if made on or before the close of the day paragraph (b)(1) of

this section ceases to apply; and

(B) Unless the taxpayer timely identifies the security under

section 475(b)(2) (taking into account the additional time for

identification that is provided by paragraph (b)(4)(ii)(A) of this

section), section 475(a) applies to changes in value of the security

after the cessation in the same manner as under section 475(b)(3).

(iii) Examples. These examples illustrate this paragraph (b)(4):

Example 1. Onset of prohibition against marking--(A) Facts.

Corporation H owns 75 percent of the stock of corporation D, a

dealer in securities within the meaning of section 475(c)(1). On

December 1, 1995, D acquired less than half of the stock in

corporation X. D did not identify the stock for purposes of section

475(b)(2). On July 17, 1996, H acquired from other persons 70

percent of the stock of X. As a result, D and X became related

within the meaning of paragraph (b)(2)(i) of this section. The stock

of X is not described in paragraph (b)(3) of this section

(concerning some securities traded on certain established financial

markets).

(B) Holding. Under paragraph (b)(4)(i) of this section, D

recognizes gain or loss on its X stock as if the stock were sold for

its fair market value at the close of business on July 16, 1996, and

the gain or loss is taken into account at that time. As with any

application of section 475(a), proper adjustment is made in the

amount of any gain or loss subsequently realized. After July 16,

1996, section 475(a) does not apply to D's X stock while paragraph

(b)(1)(i) of this section (concerning the relationship between X and

D) continues to apply.

Example 2. Termination of prohibition against marking; retained

securities identified as held for investment--(A) Facts. On July 1,

1996, corporation H owned 60 percent of the stock of corporation Y

and all of the stock of corporation D, a dealer in securities within

the meaning of section 475(c)(1). Thus, D and Y are related within

the meaning of paragraph (b)(2)(i) of this section. Also on July 1,

1996, D acquired, as an investment, 10 percent of the stock of Y.

The stock of Y is not described in paragraph (b)(3) of this section

(concerning some securities traded on certain established financial

markets). When D acquired its shares of Y stock, it did not identify

them for purposes of section 475(b)(2). On December 24, 1996, D

identified its shares of Y stock as held for investment under

section 475(b)(2). On December 30, 1996, H sold all of its shares of

stock in Y to an unrelated party. As a result, D and Y ceased to be

related within the meaning of paragraph (b)(2)(i) of this section.

(B) Holding. Under paragraph (b)(4)(ii)(A) of this section,

identification of the Y shares is timely if done on or before the

close of December 30, 1996. Because D timely identified its Y shares

under section 475(b)(2), it continues after December 30, 1996, to

refrain from marking to market its Y stock.

Example 3. Termination of prohibition against marking; retained

securities not identified as held for investment-- (A) Facts. The

facts are the same as in Example 2 above, except that D did not

identify its stock in Y for purposes of section 475(b)(2) on or

before December 30, 1996. Thus, D did not timely identify these

securities under section 475(b)(2) (taking into account the

additional time for identification provided in paragraph

(b)(4)(ii)(A) of this section).

(B) Holding. Under paragraph (b)(4)(ii)(B) of this section,

section 475(a) applies to changes in value of D's Y stock after

December 30, 1996, in the same manner as under section 475(b)(3).

Thus, any appreciation or depreciation that occurred while the

securities were prohibited from being marked to market is suspended.

Further, section 475(a) applies only to those changes occurring

after December 30, 1996.

Example 4. Acquisition of actively traded stock from related

party--(A) Facts. Corporation P is the parent of a consolidated

group whose taxable year is the calendar year, and corporation M, a

member of that group, is a dealer in securities within the meaning

of section 475(c)(1). Corporation M regularly acts as a market maker

with respect to common and preferred stock of corporation P.

Corporation P has outstanding 2,000,000 shares of series X preferred

stock, which are traded on a national securities exchange. During

the business day on December 29, 1997, corporation P sold 100,000

shares of series X preferred stock to corporation M for $100 per

share. Subsequently, also on December 29, 1997, persons not related

to corporation M engaged in significant trading of the series X

preferred stock. At the close of business on December 30, 1997, the

fair market value of series X stock was $99 per share. At the close

of business on December 31, 1997, the fair market value of series X

stock was $98.50 per share. Corporation M sold the series X stock on

the exchange on January 2, 1998. At all relevant times, corporation

M and all persons related to M owned less than 15% of the

outstanding series X preferred stock.

(B) Holding. The 100,000 shares of series X preferred stock held

by corporation M are not subject to mark-to-market treatment under

section 475(a) on December 29, 1997, because at that time the stock

was held for less than one full business day and is therefore

treated as properly identified as held for investment. At the close

of business on December 30, 1997, that prohibition on marking ceases

to apply, and section 475(b)(3) begins to apply. The built-in loss

is suspended, and subsequent appreciation and depreciation are

subject to section 475(a). Accordingly, when corporation M marks the

series X stock to market at the close of business on December 31,

1997, under section 475(a) it recognizes and takes into account a

loss of $.50 per share. Under section 475(b)(3), when corporation M

sells the series X stock on January 2, 1998, it takes into account

the suspended loss, that is, the difference between the $100 per

share it paid

[[Page 67722]]

corporation P for that stock and the $99-per-share fair market value

when section 475(b)(1) ceased to be applied to the stock. No

deduction, however, is allowed for that loss. (See Sec. 1.1502-

13(f)(6), under which no deduction is allowed to a member of a

consolidated group for a loss with respect to a share of stock of

the parent of that consolidated group, if the member does not take

the gain or loss into account pursuant to section 475(a).)

(c) Securities deemed not held for investment; dealers in notional

principal contracts and derivatives--(1) Except as otherwise determined

by the Commissioner in a revenue ruling, revenue procedure, or letter

ruling, section 475(b)(1)(A) (exempting from mark-to-market accounting

certain securities that are held for investment) does not apply to a

security if--

(i) The security is described in section 475(c)(2) (D) or (E)

(describing certain notional principal contracts and derivative

securities); and

(ii) The taxpayer is a dealer in such securities.

(2) See Sec. 1.475(d)-1(b) for a rule concerning the character of

gain or loss on securities described in this paragraph (c).

(d) Special rule for hedges of another member's risk. A taxpayer

may identify under section 475(b)(1)(C) (exempting certain hedges from

mark-to-market accounting) a security that hedges a position of another

member of the taxpayer's consolidated group if the security meets the

following requirements--

(1) The security is a hedging transaction within the meaning of

Sec. 1.1221-2(b);

(2) The security is timely identified as a hedging transaction

under Sec. 1.1221-2(e) (including identification of the hedged item);

and

(3) The security hedges a position that is not marked to market

under section 475(a).

(e) Transitional rules--(1) Stock, partnership, and beneficial

ownership interests in certain controlled corporations, partnerships,

and trusts before January 23, 1997--

(i) In general. The following items held by a dealer in securities

are per se held for investment within the meaning of section

475(b)(1)(A) and are deemed to be properly identified as such for

purposes of section 475(b)(2)--

(A) Stock in a corporation that the taxpayer controls (within the

meaning of paragraph (e)(1)(ii) of this section); or

(B) A partnership or beneficial ownership interest in a widely held

or publicly traded partnership or trust that the taxpayer controls

(within the meaning of paragraph (e)(1)(ii) of this section).

(ii) Control defined. Control means the ownership, directly or

indirectly through persons described in section 267(b) (taking into

account section 267(c)), of--

(A) 50 percent or more of the total combined voting power of all

classes of stock entitled to vote; or

(B) 50 percent or more of the capital interest, the profits

interest, or the beneficial ownership interest in the widely held or

publicly traded partnership or trust.

(iii) Applicability. The rules of this paragraph (e)(1) apply only

before January 23, 1997.

(2) Dealers in notional principal contracts and derivatives

acquired before January 23, 1997--

(i) General rule. Section 475(b)(1)(A) (exempting certain

securities from mark-to-market accounting) does not apply to a security

if--

(A) The security is described in section 475(c)(2) (D) or (E)

(describing certain notional principal contracts and derivative

securities); and

(B) The taxpayer is a dealer in such securities.

(ii) Exception for securities not acquired in dealer capacity. This

paragraph (e)(2) does not apply if the taxpayer establishes

unambiguously that the security was not acquired in the taxpayer's

capacity as a dealer in such securities.

(iii) Applicability. The rules of paragraph (e)(2) apply only to

securities acquired before January 23, 1997.

Sec. 1.475(b)-2 Exemptions--identification requirements.

(a) Identification of the basis for exemption. An identification of

a security as exempt from mark to market does not satisfy section

475(b)(2) if it fails to state whether the security is described in--

(1) Either of the first two subparagraphs of section 475(b)(1)

(identifying a security as held for investment or not held for sale);

or

(2) The third subparagraph thereof (identifying a security as a

hedge).

(b) Time for identifying a security with a substituted basis. For

purposes of determining the timeliness of an identification under

section 475(b)(2), the date that a dealer acquires a security is not

affected by whether the dealer's basis in the security is determined,

in whole or in part, either by reference to the basis of the security

in the hands of the person from whom the security was acquired or by

reference to other property held at any time by the dealer. See

Sec. 1.475(a)-3 for rules governing how the dealer accounts for such a

security if this identification is not made.

(c) Integrated transactions under Sec. 1.1275-6--(1) Definitions.

The following terms are used in this paragraph (c) with the meanings

that are given to them by Sec. 1.1275-6: integrated transaction,

legging into, legging out, qualifying debt instrument, Sec. 1.1275-6

hedge, and synthetic debt instrument.

(2) Synthetic debt held by a taxpayer as a result of legging in. If

a taxpayer is treated as the holder of a synthetic debt instrument as

the result of legging into an integrated transaction, then, for

purposes of the timeliness of an identification under section

475(b)(2), the synthetic debt instrument is treated as having the same

acquisition date as the qualifying debt instrument. A pre-leg-in

identification of the qualifying debt instrument under section

475(b)(2) applies to the integrated transaction as well.

(3) Securities held after legging out. If a taxpayer legs out of an

integrated transaction, then, for purposes of the timeliness of an

identification under section 475(b)(2), the qualifying debt instrument,

or the Sec. 1.1275-6 hedge, that remains in the taxpayer's hands is

generally treated as having been acquired, originated, or entered into,

as the case may be, immediately after the leg-out. If any loss or

deduction determined under Sec. 1.1275-6(d)(2)(ii)(B) is disallowed by

Sec. 1.1275-6(d)(2)(ii)(D) (which disallows deductions when a taxpayer

legs out of an integrated transaction within 30 days of legging in),

then, for purposes of this section and section 475(b)(2), the

qualifying debt instrument that remains in the taxpayer's hands is

treated as having been acquired on the same date that the synthetic

debt instrument was treated as having been acquired.

Sec. 1.475(b)-4 Exemptions--transitional issues.

(a) Transitional identification--(1) Certain securities previously

identified under section 1236. If, as of the close of the last taxable

year ending before December 31, 1993, a security was identified under

section 1236 as a security held for investment, the security is treated

as being identified as held for investment for purposes of section

475(b).

(2) Consistency requirement for other securities. In the case of a

security (including a security described in section 475(c)(2)(F)) that

is not described in paragraph (a)(1) of this section and that was held

by the taxpayer as of the close of the last taxable year ending before

December 31, 1993, the security is treated as having been properly

identified under section 475(b)(2) or 475(c)(2)(F)(iii) if the

[[Page 67723]]

information contained in the dealer's books and records as of the close

of that year supports the identification. If there is any ambiguity in

those records, the taxpayer must, no later than January 31, 1994, place

in its records a statement resolving this ambiguity and indicating

unambiguously which securities are to be treated as properly

identified. Any information that supports treating a security as having

been properly identified under section 475(b)(2) or (c)(2)(F)(iii) must

be applied consistently from one security to another.

(b) Corrections on or before January 31, 1994--(1) Purpose. This

paragraph (b) allows a taxpayer to add or remove certain

identifications covered by Sec. 1.475(b)-1.

(2) To conform to Sec. 1.475(b)-1(a)--(i) Added identifications. To

the extent permitted by paragraph (b)(2)(ii) of this section, a

taxpayer may identify as being described in section 475(b)(1) (A) or

(B)--

(A) A security that was held for immediate sale but was not held

primarily for sale to customers in the ordinary course of the

taxpayer's trade or business (for example, a trading security); or

(B) An evidence of indebtedness that was not held for sale to

customers in the ordinary course of the taxpayer's trade or business

and that the taxpayer intended to hold for less than one year.

(ii) Limitations. An identification described in paragraph

(b)(2)(i) of this section is permitted only if--

(A) Prior to December 28, 1993, the taxpayer did not identify as

being described in section 475(b)(1) (A) or (B) any of the securities

described in paragraph (b)(2)(i) of this section;

(B) The taxpayer identifies every security described in paragraph

(b)(2)(i) of this section for which a timely identification of the

security under section 475(b)(2) cannot be made after the date on which

the taxpayer makes these added identifications; and

(C) The identification is made on or before January 31, 1994.

(3) To conform to Sec. 1.475(b)-1(c). On or before January 31,

1994, a taxpayer described in Sec. 1.475(b)-1(e)(2)(i)(B) may remove an

identification under section 475(b)(1)(A) of a security described in

Sec. 1.475(b)-1(e)(2)(i)(A).

(c) Effect of corrections. An identification added under paragraph

(a)(2) or (b)(2) of this section is timely for purposes of section

475(b)(2) or (c)(2)(F)(iii). An identification removed under paragraph

(a)(2) or (b)(3) of this section does not subject the taxpayer to the

provisions of section 475(d)(2).

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

(a) Dealer-customer relationship. Whether a taxpayer is transacting

business with customers is determined on the basis of all of the facts

and circumstances.

(1) [Reserved].

(2) Transactions described in section 475(c)(1)(B)--(i) In general.

For purposes of section 475(c)(1)(B), the term dealer in securities

includes, but is not limited to, a taxpayer that, in the ordinary

course of the taxpayer's trade or business, regularly holds itself out

as being willing and able to enter into either side of a transaction

enumerated in section 475(c)(1)(B).

(ii) Examples. The following examples illustrate the rules of this

paragraph (a)(2). In the following examples, B is a bank and is not a

member of a consolidated group:

Example 1. B regularly offers to enter into interest rate swaps

with other persons in the ordinary course of its trade or business.

B is willing to enter into interest rate swaps under which it either

pays a fixed interest rate and receives a floating rate or pays a

floating rate and receives a fixed rate. B is a dealer in securities

under section 475(c)(1)(B), and the counterparties are its

customers.

Example 2. B, in the ordinary course of its trade or business,

regularly holds itself out as being willing and able to enter into

either side of positions in a foreign currency with other banks in

the interbank market. B's activities in the foreign currency make it

a dealer in securities under section 475(c)(1)(B), and the other

banks in the interbank market are its customers.

Example 3. B engages in frequent transactions in a foreign

currency in the interbank market. Unlike the facts in Example 2,

however, B does not regularly hold itself out as being willing and

able to enter into either side of positions in the foreign currency,

and all of B's transactions are driven by its internal need to

adjust its position in the currency. No other circumstances are

present to suggest that B is a dealer in securities for purposes of

section 475(c)(1)(B). B's activity in the foreign currency does not

qualify it as a dealer in securities for purposes of section

475(c)(1)(B), and its transactions in the interbank market are not

transactions with customers.

(3) Related parties--(i) General rule. Except as provided in

paragraph (a)(3)(ii) of this section (concerning transactions between

members of a consolidated group, as defined in Sec. 1.1502-1(h)), a

taxpayer's transactions with related persons may be transactions with

customers for purposes of section 475. For example, if a taxpayer, in

the ordinary course of the taxpayer's trade or business, regularly

holds itself out to its foreign subsidiaries or other related persons

as being willing and able to enter into either side of transactions

enumerated in section 475(c)(1)(B), the taxpayer is a dealer in

securities within the meaning of section 475(c)(1), even if it engages

in no other transactions with customers.

(ii) Special rule for members of a consolidated group. Solely for

purposes of paragraph (c)(1) of section 475 (concerning the definition

of dealer in securities) and except as provided in paragraph

(a)(3)(iii) of this section, a taxpayer's transactions with other

members of its consolidated group are not with customers. Accordingly,

notwithstanding paragraph (a)(2) of this section, the fact that a

taxpayer regularly holds itself out to other members of its

consolidated group as being willing and able to enter into either side

of a transaction enumerated in section 475(c)(1)(B) does not cause the

taxpayer to be a dealer in securities within the meaning of section

475(c)(1)(B).

(iii) The intragroup-customer election--(A) Effect of election. If

a consolidated group makes the intragroup-customer election, paragraph

(a)(3)(ii) of this section (special rule for members of a consolidated

group) does not apply to the members of the group. Thus, a member of a

group that has made this election may be a dealer in securities within

the meaning of section 475(c)(1) even if its only customer transactions

are with other members of its consolidated group.

(B) Making and revoking the election. Unless the Commissioner

otherwise prescribes, the intragroup-customer election is made by

filing a statement that says, ``[Insert name and employer

identification number of common parent] hereby makes the Intragroup-

Customer Election (as described in Sec. 1.475(c)-1(a)(3)(iii) of the

income tax regulations) for the taxable year ending [describe the last

day of the year] and for subsequent taxable years.'' The statement must

be signed by the common parent and attached to the timely filed federal

income tax return for the consolidated group for that taxable year. The

election applies for that year and continues in effect for subsequent

years until revoked. The election may be revoked only with the consent

of the Commissioner.

(iv) Examples. The following examples illustrate this paragraph

(a)(3):

General Facts. HC, a hedging center, provides interest rate

hedges to all of the members of its affiliated group (as defined in

section 1504(a)(1)). Because of the efficiencies created by having a

centralized risk manager, group policy prohibits members other than

HC from entering into derivative interest rate positions with

outside parties. HC regularly holds itself out as being

[[Page 67724]]

willing and able to, and in fact does, enter into either side of

interest rate swaps with its fellow members. HC periodically

computes its aggregate position and hedges the net risk with an

unrelated party. HC does not otherwise enter into interest rate

positions with persons that are not members of the affiliated group.

HC attempts to operate at cost, and the terms of its swaps do not

factor in any risk of default by the affiliate. Thus, HC's

affiliates receive somewhat more favorable terms then they would

receive from an unrelated swaps dealer (a fact that may subject HC

and its fellow members to reallocation of income under section 482).

No other circumstances are present to suggest that HC is a dealer in

securities for purposes of section 475(c)(1)(B).

Example 1. General rule for related persons. In addition to the

General Facts stated above, assume that HC's affiliated group has

not elected under section 1501 to file a consolidated return. Under

paragraph (a)(3)(i) of this section, HC's transactions with its

affiliates can be transactions with customers for purposes of

section 475(c)(1). Thus, under paragraph (a)(2)(i) of this section,

HC is a dealer in securities within the meaning of section

475(c)(1)(B), and the members of the group with which it does

business are its customers.

Example 2. Special rule for members of a consolidated group. In

addition to the General Facts stated above, assume that HC's

affiliated group has elected to file consolidated returns and has

not made the intragroup-customer election. Under paragraph

(a)(3)(ii) of this section, HC's interest rate swap transactions

with the members of its consolidated group are not transactions with

customers for purposes of determining whether HC is a dealer in

securities within the meaning of section 475(c)(1). Further, the

fact that HC regularly holds itself out to members of its

consolidated group as being willing and able to enter into either

side of a transaction enumerated in section 475(c)(1)(B) does not

cause HC to be a dealer in securities within the meaning of section

475(c)(1)(B). Because no other circumstances are present to suggest

that HC is a dealer in securities for purposes of section

475(c)(1)(B), HC is not a dealer in securities.

Example 3. Intragroup-customer election. In addition to the

General Facts stated above, assume that HC's affiliated group has

elected to file a consolidated return but has also made the

intragroup-customer election under paragraph (a)(3)(iii) of this

section. Thus, the analysis and result are the same as in Example 1.

(b) Sellers of nonfinancial goods and services--(1) Purchases and

sales of customer paper. Except as provided in paragraph (b)(3) of this

section, if a taxpayer would not be a dealer in securities within the

meaning of section 475(c)(1) but for 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 (as defined in Sec. 1.1502-1(h)) as the

taxpayer, then for purposes of section 475 the taxpayer is not a dealer

in securities.

(2) Definition of customer paper. A debt instrument is customer

paper with respect to a person at a point in time if--

(i) The person's principal activity is selling nonfinancial goods

or providing nonfinancial services;

(ii) The debt instrument was issued by a purchaser of the goods or

services at the time of the purchase of those goods or services in

order to finance the purchase; and

(iii) 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.

(3) Exceptions. Paragraph (b)(1) of this section does not apply

if--

(i) For purposes of section 471, the taxpayer accounts for any

security (as defined in section 475(c)(2)) as inventory;

(ii) The taxpayer is subject to an election under paragraph (b)(4)

of this section; or

(iii) The taxpayer is not described in paragraph (b)(2)(i) of this

section and one or more debt instruments that are customer paper with

respect to a corporation that is a member of the same consolidated

group as the taxpayer are accounted for by the taxpayer, or by a

corporation that is a member of the same consolidated group as the

taxpayer, in a manner that allows recognition of unrealized gains or

losses or deductions for additions to a reserve for bad debts.

(4) Election not to be governed by the exception for sellers of

nonfinancial goods or services--(i) Method of making the election.

Unless the Commissioner otherwise prescribes, an election under this

paragraph (b)(4) must be made in the manner, and at the time,

prescribed in this paragraph (b)(4)(i). The taxpayer must file with the

Internal Revenue Service a statement that says, ``[Insert name and

taxpayer identification number of the taxpayer] hereby elects not to be

governed by Sec. 1.475(c)-1(b)(1) of the income tax regulations for the

taxable year ending [describe the last day of the year] and for

subsequent taxable years.''

(A) Taxable years ending after December 24, 1996. If the first

taxable year subject to an election under this paragraph (b)(4) ends

after December 24, 1996, the statement must be attached to a timely

filed federal income tax return for that taxable year.

(B) Taxable years ending on or before December 24, 1996. If the

first taxable year subject to an election under this paragraph (b)(4)

ends on or before December 24, 1996 and the election changes the

taxpayer's taxable income for any taxable year the federal income tax

return for which was filed before February 24, 1997, the statement must

be attached to an amended return for the earliest such year that is so

affected, and that amended return (and an amended return for any other

such year that is so affected) must be filed not later than June 23,

1997. If the first taxable year subject to an election under this

paragraph (b)(4) ends on or before December 24, 1996 but the taxpayer

is not described in the preceding sentence, the statement must be

attached to the first federal income tax return that is for a taxable

year subject to the election and that is filed on or after February 24,

1997.

(ii) Continued applicability of an election. 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.

(c) Taxpayers that purchase securities from customers but engage in

no more than negligible sales of the securities--(1) Exemption from

dealer status--(i) General rule. A taxpayer that regularly purchases

securities from customers in the ordinary course of a trade or business

(including regularly making loans to customers in the ordinary course

of a trade or business of making loans) but engages in no more than

negligible sales of the securities so acquired is not a dealer in

securities within the meaning of section 475(c)(1) unless the taxpayer

elects to be so treated or, for purposes of section 471, the taxpayer

accounts for any security (as defined in section 475(c)(2)) as

inventory.

(ii) Election to be treated as a dealer. A taxpayer described in

paragraph (c)(1)(i) of this section elects to be treated as a dealer in

securities by filing a federal income tax return reflecting the

application of section 475(a) in computing its taxable income.

(2) Negligible sales. Solely for purposes of paragraph (c)(1) of

this section, a taxpayer engages in negligible sales of debt

instruments that it regularly purchases from customers in the ordinary

course of its business if, and only if, during the taxable year,

either--

(i) The taxpayer sells all or part of fewer than 60 debt

instruments, regardless how acquired; or

(ii) The total adjusted basis of the debt instruments (or parts of

debt instruments), regardless how acquired, that the taxpayer sells is

less than 5 percent of the total basis, immediately

[[Page 67725]]

after acquisition, of the debt instruments that it acquires in that

year.

(3) Special rules for members of a consolidated group--(i)

Intragroup-customer election in effect. If a taxpayer is a member of a

consolidated group that has made the intragroup-customer election

(described in paragraph (a)(3)(iii) of this section), the negligible

sales test in paragraph (c)(2) of this section takes into account all

of the taxpayer's sales of debt instruments to other group members.

(ii) Intragroup-customer election not in effect. If a taxpayer is a

member of a consolidated group that has not made the intragroup-

customer election (described in paragraph (a)(3)(iii) of this section),

the taxpayer satisfies the negligible sales test in paragraph (c)(2) of

this section if either--

(A) The test is satisfied by the taxpayer, taking into account

sales of debt instruments to other group members (as in paragraph

(c)(3)(i) of this section); or

(B) The test is satisfied by the group, treating the members of the

group as if they were divisions of a single corporation.

(4) Special rules. Whether sales of securities are negligible is

determined without regard to--

(i) Sales of securities that are necessitated by exceptional

circumstances and that are not undertaken as recurring business

activities;

(ii) Sales of debt instruments that decline in quality while in the

taxpayer's hands and that are sold pursuant to an established policy of

the taxpayer to dispose of debt instruments below a certain quality; or

(iii) Acquisitions and sales of debt instruments that are

qualitatively different from all debt instruments that the taxpayer

purchases from customers in the ordinary course of its business.

(5) Example. The following example illustrates paragraph

(c)(4)(iii) of this section:

Example. I, an insurance company, regularly makes policy loans

to its customers but does not sell them. I, however, actively trades

Treasury securities. No other circumstances are present to suggest

that I is a dealer in securities for purposes of section 475(c)(1).

Since the Treasuries are qualitatively different from the policy

loans that I originates, under paragraph (c)(4)(iii) of this

section, I disregards the purchases and sales of Treasuries in

applying the negligible sales test in paragraph (c)(2) of this

section.

(d) Issuance of life insurance products. A life insurance company

that is not otherwise a dealer in securities within the meaning of

section 475(c)(1) does not become a dealer in securities solely because

it regularly issues life insurance products to its customers in the

ordinary course of a trade or business. For purposes of the preceding

sentence, the term life insurance product means a contract that is

treated for federal income tax purposes as an annuity, endowment, or

life insurance contract. See sections 72, 817, and 7702.

Sec. 1.475(c)-2 Definitions--security.

(a) Items that are not securities. The following items are not

securities within the meaning of section 475(c)(2) with respect to a

taxpayer and, therefore, are not subject to section 475--

(1) A security (determined without regard to this paragraph (a)) if

section 1032 prevents the taxpayer from recognizing gain or loss with

respect to that security;

(2) A debt instrument issued by the taxpayer (including a synthetic

debt instrument, within the meaning of Sec. 1.1275-6(b)(4), that

Sec. 1.1275-6(b) treats the taxpayer as having issued); or

(3) A REMIC residual interest, or an interest or arrangement that

is determined by the Commissioner to have substantially the same

economic effect, if the residual interest or the interest or

arrangement is acquired on or after January 4, 1995.

(b) Synthetic debt that Sec. 1.1275-6(b) treats the taxpayer as

holding. If Sec. 1.1275-6 treats a taxpayer as the holder of a

synthetic debt instrument (within the meaning of Sec. 1.1275-6(b)(4)),

the synthetic debt instrument is a security held by the taxpayer within

the meaning of section 475(c)(2)(C).

(c) Negative value REMIC residuals acquired before January 4, 1995.

A REMIC residual interest that is described in paragraph (c)(1) of this

section or an interest or arrangement that is determined by the

Commissioner to have substantially the same economic effect is not a

security within the meaning of section 475(c)(2).

(1) Description. A residual interest in a REMIC is described in

this paragraph (c)(1) if, on the date the taxpayer acquires the

residual interest, the present value of the anticipated tax liabilities

associated with holding the interest exceeds the sum of--

(i) The present value of the expected future distributions on the

interest; and

(ii) The present value of the anticipated tax savings associated

with holding the interest as the REMIC generates losses.

(2) Special rules applicable to negative value REMIC residuals

acquired before January 4, 1995. Solely for purposes of this paragraph

(c)--

(i) If a transferee taxpayer acquires a residual interest with a

basis determined by reference to the transferor's basis, then the

transferee is deemed to acquire the interest on the date the transferor

acquired it (or is deemed to acquire it under this paragraph

(c)(2)(i)).

(ii) Anticipated tax liabilities, expected future distributions,

and anticipated tax savings are determined under the rules in

Sec. 1.860E-2(a)(3) and without regard to the operation of section 475.

(iii) Present values are determined under the rules in Sec. 1.860E-

2(a)(4).

Sec. 1.475(d)-1 Character of gain or loss.

(a) Securities never held in connection with the taxpayer's

activities as a dealer in securities. If a security is never held in

connection with the taxpayer's activities as a dealer in securities,

section 475(d)(3)(A) does not affect the character of gain or loss from

the security, even if the taxpayer fails to identify the security under

section 475(b)(2).

(b) Ordinary treatment for notional principal contracts and

derivatives held by dealers in notional principal contracts and

derivatives. Section 475(d)(3)(B)(ii) (concerning the character of gain

or loss with respect to a security held by a person other than in

connection with its activities as a dealer in securities) does not

apply to a security if Sec. 1.475(b)-1(c) and the absence of a

determination by the Commissioner prevent section 475(b)(1)(A) from

applying to the security.

Sec. 1.475(e)-1 Effective dates.

(a) and (b) [Reserved].

(c) Section 1.475(a)-3 (concerning acquisition by a dealer of a

security with a substituted basis) applies to securities acquired,

originated, or entered into on or after January 4, 1995.

(d) Except as provided elsewhere in this paragraph (d),

Sec. 1.475(b)-1 (concerning the scope of exemptions from the mark-to-

market requirement) applies to taxable years ending on or after

December 31, 1993.

(1) Section 1.475(b)-1(b) applies as follows:

(i) Section 1.475(b)-1(b)(1)(i) (concerning equity interests issued

by a related person) applies beginning June 19, 1996. If, on June 18,

1996, a security is subject to mark-to-market accounting and, on June

19, 1996, Sec. 1.475(b)-1(b)(1) begins to apply to the security solely

because of the effective dates in this paragraph (d) (rather than

because of a change in facts), then the rules of Sec. 1.475(b)-

1(b)(4)(i)(A) (concerning the prohibition against marking) apply, but

Sec. 1.475(b)-1(b)(4)(i)(B) (imposing a

[[Page 67726]]

mark-to-market on the day before the onset of the prohibition) does not

apply.

(ii) Section 1.475(b)-1(b)(2) (concerning relevant relationships

for purposes of determining whether equity interests in related persons

are prohibited from being marked to market) applies beginning June 19,

1996.

(iii) Section 1.475(b)-1(b)(3) (concerning certain actively traded

securities) applies beginning June 19, 1996, to securities held on or

after that date, except for securities described in Sec. 1.475(b)-

1(e)(1)(i) (concerning equity interests issued by controlled entities).

If a security is described in Sec. 1.475(b)-1(e)(1)(i), Sec. 1.475(b)-

1(b)(3) applies only on or after January 23, 1997 if the security is

held on or after that date. If Sec. 1.475(b)-1(b)(1) ceases to apply to

a security by virtue of the operation of this paragraph (d)(1)(iii),

the rules of Sec. 1.475(b)-1(b)(4)(ii) apply to the cessation.

(iv) Except to the extent provided in paragraph (d)(1) of this

section, Sec. 1.475(b)-1(b)(4) (concerning changes in status) applies

beginning June 19, 1996.

(2) Section 1.475(b)-1(c) (concerning securities deemed not held

for investment by dealers in notional principal contracts and

derivatives) applies to securities acquired on or after January 23,

1997.

(3) Section 1.475(b)-1(d) (concerning the special rule for hedges

of another member's risk) is effective for securities acquired,

originated, or entered into on or after January 23, 1997.

(e) Section 1.475(b)-2 (concerning identification of securities

that are exempt from mark-to-market treatment) applies as follows:

(1) Section 1.475(b)-2(a) (concerning the general rules for

identification of basis for exemption from mark to market treatment)

applies to identifications made on or after July 1, 1997.

(2) Section 1.475(b)-2(b) (concerning time for identifying a

security with a substituted basis) applies to securities acquired,

originated, or entered into on or after January 4, 1995.

(3) Section 1.475(b)-2(c) (concerning identification in the context

of integrated transactions under Sec. 1.1275-6) applies on and after

August 13, 1996 (the effective date of Sec. 1.1275-6).

(f) [Reserved].

(g) Section 1.475(b)-4 (concerning transitional issues relating to

exemptions) applies to taxable years ending on or after December 31,

1993.

(h) Section 1.475(c)-1 applies as follows:

(1) Except as otherwise provided in this paragraph (h)(1),

Sec. 1.475(c)-1(a) (concerning the dealer-customer relationship)

applies to taxable years beginning on or after January 1, 1995.

(i) [Reserved].

(ii) Section 1.475(c)-1(a)(2)(ii) (illustrating rules concerning

the dealer-customer relationship) applies to taxable years beginning on

or after June 20, 1996.

(iii) (A) Section 1.475(c)-1(a)(3) applies to taxable years

beginning on or after June 20, 1996, except for transactions between

members of the same consolidated group.

(B) For transactions between members of the same consolidated

group, paragraph Sec. 1.475(c)-1(a)(3) applies to taxable years

beginning on or after December 24, 1996.

(2) Section 1.475(c)-1(b) (concerning sellers of nonfinancial goods

and services) applies to taxable years ending on or after December 31,

1993.

(3) Except as otherwise provided in this paragraph (h)(3), section

1.475(c)-1(c) (concerning taxpayers that purchase securities but engage

in no more than negligible sales of the securities) applies to taxable

years ending on or after December 31, 1993.

(i) Section 1.475(c)-1(c)(3) (special rules for members of a

consolidated group) is effective for taxable years beginning on or

after December 24, 1996.

(ii) A taxpayer may rely on the rules set out in Sec. 1.475(c)-

1T(b) (as contained in 26 CFR part 1 revised April 1, 1996) for taxable

years beginning before January 23, 1997, provided the taxpayer applies

that paragraph reasonably and consistently.

(4) Section 1.475(c)-1(d) (concerning the issuance of life

insurance products) applies to taxable years beginning on or after

January 1, 1995.

(i) Section 1.475(c)-2 (concerning the definition of security)

applies to taxable years ending on or after December 31, 1993. By its

terms, however, Sec. 1.475(c)-2(a)(3) applies only to residual

interests or to interests or arrangements that are acquired on or after

January 4, 1995; and the integrated transactions that are referred to

in Secs. 1.475(c)-2(a)(2) and 1.475(c)-2(b) exist only after August 13,

1996 (the effective date of Sec. 1.1275-6).

(j) Section 1.475(d)-1 (concerning the character of gain or loss)

applies to taxable years ending on or after December 31, 1993.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 5. In Sec. 602.101 paragraph (c) is amended by:

1. Removing the following entry from the table:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control No.

------------------------------------------------------------------------

* * * * *

1.475(b)-2T................................................ 1545-1422

* * * * *

------------------------------------------------------------------------

2. Adding an entry in numerical order to the table to read as

follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control No.

------------------------------------------------------------------------

* * * * *

1.475(b)-4................................................. 1545-1496

* * * * *

------------------------------------------------------------------------

Approved: December 6, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 96-32248 Filed 12-23-96; 8:45 am]

BILLING CODE 4830-01-P