Part III. — Internal Revenue Bulletin 1996-10

interest rate positions with outside parties. HC regularly holds itself out as being 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 consolidated group. The terms of the transactions between HC and its fellow members are consistent with the terms the members would obtain if they entered into the transactions with an unrelated swaps dealer.

Holding : Because the relationship between HC and its fellow members is consistent with that of a dealer in securities transacting business with unrelated customers ( see § 1.475(c)–1(c)(2) of the proposed Income Tax Regulations), HC is a dealer in securities for purposes of section 475(c)(1)(B), and the other members are its customers.

The preceding rules are expected to be proposed to be effective for taxable years beginning on or after February 20, 1996.

DRAFTING INFORMATION

The principal author of this notice is Jo Lynn Ricks of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this notice contact Ms. Ricks on (202) 622-3920 (not a toll-free call).

Certain Payments from the Presidential Election Campaign Fund

Notice 96–13

This notice announces a change that will be made to the Presidential Election Campaign Fund Regulations for certain payments made to Presidential primary candidates from that Fund.

Section 9006(a) of the Internal Revenue Code established the Presidential Election Campaign Fund (Fund) on the books of the U.S. Treasury. Section 9006(a) requires the Secretary of the Treasury (Secretary) to transfer to the Fund from time to time an amount equal to the individual taxpayer desig

Mark to Market for Securities Dealers: The Dealer-Customer Relationship

Notice 96–12

This notice provides immediate guidance, pending the issuance of proposed regulations, concerning whether a taxpayer’s transactions with related persons, including members of the taxpayer’s consolidated group, may be transactions with customers for purposes of § 475 of the Internal Revenue Code. This guidance will assist consolidated groups in deciding whether or not to make a separate-entity election under § 1.1221–2(d)(2) of the Income Tax Regulations. One result of making this election is that a group takes a separate-entity perspective in determining whether a transaction reduces risk for purposes of the definition of hedging transaction in § 1.1221–2(b).

Even when a group makes the separate-entity election, however, an intercompany transaction can be a hedging transaction only if it is entered into with a member that accounts for its position in the intercompany transaction by marking the position to market. See § 1.1221–2(d)(2)(ii)(B). Section 475 of the Code requires dealers in securities generally to use mark-tomarket accounting for the securities that they hold. Thus, whether a member of a consolidated group is a dealer in securities under section 475 can affect whether intercompany risk-shifting transactions may be hedging transactions.

Whether a taxpayer is a dealer in securities depends on whether certain of its transactions are entered into with customers. Section 475(c)(1) defines a dealer in securities as a taxpayer who: (1) regularly purchases securities from, or sells securities to, customers in the ordinary course of a trade or business (§ 475(c)(1)(A)); or (2) regularly offers to enter into, assume, offset, assign, or otherwise terminate positions in securities with customers in the ordinary course of a trade or business (§ 475(c)(1)(B)).

Under existing proposed regulations, whether a taxpayer is transacting business with customers is based on all of the facts and circumstances. See § 1.475(c)–1(c) of the proposed Income

Tax Regulations, published in the Federal Register on January 4, 1995 (60 Fed. Reg. 397). Under § 1.475(c)–1(c)(2) of the proposed regulations, 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 § 475(c)(1)(B).

EXPECTED ADDITIONAL PROPOSED REGULATIONS

The Service expects to publish additional proposed regulations that address the issue of whether a taxpayer is transacting business with customers. The proposed regulations are expected to contain, in substance, the following rules.

Transactions with related parties

A taxpayer’s transactions with members of its consolidated group or with other related persons may be transactions with customers for purposes of § 475. Thus, a sale of a security to another member of a consolidated group is a sale to a customer if the relationship between the parties is consistent with that of a dealer in securities transacting business with an unrelated customer. Similarly, transactions enumerated in § 475(c)(1)(B) between members of a consolidated group are transactions with customers if, in the ordinary course of its business, the taxpayer holds itself out as being willing and able to engage in these transactions on a regular basis and the relationship between the parties is consistent with that of a dealer in securities transacting business with an unrelated customer. A taxpayer may be a dealer in securities within the meaning of section 475(c)(1) even if its only customer transactions are transactions with other members of its consolidated group.

The following example illustrates the foregoing.

Facts : HC, a hedging center, provides interest rate hedges to all of the members of its consolidated group. Because of the efficiencies created by having a centralized risk manager, group policy prohibits members other than HC from entering into derivative

nations for the Fund under section 6096. Section 701.9006–1(a) of the Presidential Election Campaign Fund Regulations requires the Secretary to determine the amounts designated by individuals for the Fund at least once a month.

Section 9037(a) requires the Secretary to maintain within the Fund a separate account known as the Presidential Primary Matching Payment Account (Account). The Secretary is required to deposit into the Account amounts from the Fund after determining that certain other amounts are available and set aside for certain other payments. The amounts in the Account are for Presidential primary candidates who are certified for payments by the Federal Election Commission (Commission).

Section 702.9037–2(a) provides that, except as provided in section 702.9037–2(c), promptly after the end of each calendar month, but not before the beginning of the calendar year of a Presidential election, the Secretary shall pay the amounts certified by the Commission in the preceding calendar

month from the Account to the primary candidates.

Section 702.9037–2(c) provides that if the amount certified by the Commission for primary candidates in a calendar month exceeds the balance in the Account on the last day of the calendar month, the amount paid to a candidate for that month from the Account is determined by multiplying the amount certified by the Commission for the candidate during that month by the ratio of the balance in the Account on the last day of the calendar month over the total amount certified by the Commission for all the candidates during that month. Any amount certified by the Commission, but not paid to a candidate because of the operation of this shortfall rule, is treated as an amount certified by the Commission for that candidate during the succeeding calendar month. Section 702.9037– 2(d) provides an example illustrating the shortfall rule of section 702.9037– 2(c). To provide additional payments from the Account to certified primary candidates in a more timely manner when

the Account is in a shortfall position, Part 702 of the regulations will be amplified. The revised regulations will require the Secretary to make an additional payment between regular payment dates promptly after funds are available. Such payment will be determined by multiplying the amount certified by the Commission for the candidate in month 1 by the ratio of the balance in the Account (but not to exceed the shortfall) on the 15th day of month 2 (or the first business day thereafter if the 15th is not a business day) over the total amount certified by the Commission for all the candidates in month 1.

The effective date of these amendments to the regulations will be February 2, 1996.

DRAFTING INFORMATION

The principal author of this notice is Joel Rutstein of the Office of the Associate Chief Counsel (Domestic). For further information regarding this notice contact Mr. Rutstein on (202) 622-4530 (not a toll-free call).