SECTION 2. BACKGROUND

.01 Section 475(a) of the Internal Revenue Code requires dealers in securities to value their securities at fair market value as of the last business day of the year. Section 475(e) allows dealers in commodities to elect this same mark-to-market treatment for their commodities. Section 475(f) allows traders in securities (and traders in commodities) to elect mark-to-market treatment for positions held in connection with the taxpayer’s securities trading business (or commodities trading business, as the case may be).

.02 Section 475(c)(2) defines security as any—

(A) share of stock in a corporation; (B) partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust;

(C) note, bond, debenture, or other evidence of indebtedness;

(D) interest rate, currency, or equity notional principal contract;

(E) evidence of interest in, or a derivative financial instrument in, any security described in subparagraph (A), (B), (C), or (D) [of section 475(c)(2)], or any currency, including any option, forward contract, short position, and any similar financial instrument in such a security or currency; and

(F) position which –

(i) is not a security described in subparagraph (A), (B), (C), (D), or (E) [of section 475(c)(2)];

(ii) is a hedge with respect to such a security, and;

(iii) is clearly identified in the dealer’s records as being described in

[subparagraph (F) of section 475(c)(2)] before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).

Subparagraph (E) [of section 475(c)(2)] shall not include any contract to which section 1256(a) applies.

.03 Section 475(e)(2) defines commodity as:

(A) any commodity which is actively traded (within the meaning of section 1092(d)(1)); (B) any notional principal contract with respect to any commodity described in subparagraph (A) [of section 475(e)(2)];

(C) any evidence of an interest in, or a derivative instrument in, any commodity described in subparagraph (A) or (B) [of section 475(e)(2)], including any option, forward contract, futures contract, short position, and any similar instrument in such a commodity; and

(D) any position which —

(i) is not a commodity described in subparagraph (A), (B), or (C) [of section 475(e)(2)],

(ii) is a hedge with respect to such a commodity, and

(iii) is clearly identified in the taxpayer’s records as being described in [subparagraph (D) of section 475(2)(2)] before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).

.04 Section 475(g) provides that the Secretary shall prescribe regulations as may be necessary or appropriate to carry out the purposes of § 475. The legislative history of § 475 indicates that, under this regulatory authority, the Secretary may issue regulations to permit the use of valuation methodologies that reduce the administrative burden of compliance on taxpayers but that nevertheless clearly reflect income for federal income tax purposes. H.R. Rep. No. 213, 103d Cong., 1 ^st Sess. 616 (1993), 1993–3 C.B. 494. .05 On June 12, 2007, the Internal Revenue Service and the Treasury Department published the safe harbor valuation regulations in the Federal Register (T.D. 9328). These regulations provide an elective safe harbor method for valuation under § 475 for dealers in securities and dealers in commodities. Under the safe harbor in § 1.475(a)–4, an eligible taxpayer (as defined in § 1.475(a)–4) may elect that, if certain conditions and limitations are met, the values reported for certain eligible positions for financial reporting purposes are treated as those positions’ fair market values for purposes of § 475.

.06 Section 1.475(a)–4(c) defines an eligible taxpayer as “(1) a dealer in securities, as defined in section 475(c)(1) and the regulations thereunder; or (2) a dealer in commodities, as defined in section 475(e) and any regulations thereunder, that is subject to an election under section 475(e).”

.07 Section 1.475(a)–4(g) states, “For any taxpayer, an eligible position is any security or commodity that the Commis

sioner in a revenue procedure or other published guidance designates with respect to that taxpayer as an eligible position for purposes of this safe harbor.”