Joint Committee on Taxation
March 27, 1998
ERRATA FOR JCX-17-98
DESCRIPTION OF SENATE FINANCE COMMITTEE
CHAIRMAN'S MARK RELATING TO
REFORM AND RESTRUCTURING OF THE
INTERNAL REVENUE SERVICE
Effective date of Item V.B. Modify Foreign Tax Credit Carryover Rules should
be revised to read as follows:
The proposal would apply to foreign tax credits arising in taxable years ending after the
date of enactment.
Insert at the end of the document the following new item (and add heading to the
Contents):
E. Make Certain Trade Receivables Ineligible for Mark-to-Market Treatment
Present Law
In general, dealers in securities are required to use a mark-to-market method of accounting
for securities (sec. 475). Exceptions to the mark-to-market rule are provided for securities held for
investment, certain debt instruments and obligations to acquire debt instruments and certain
securities that hedge securities. A dealer in securities is a taxpayer who regularly purchases
securities from or sells securities to customers in the ordinary course of a trade or business, or who
regularly offers to enter into, assume, offset, assign, or otherwise terminate positions in certain
types of securities with customers in the ordinary course of a trade or business. A security
includes (1) a share of stock, (2) an interest in a widely held or publicly traded partnership or trust,
(3) an evidence of indebtedness, (4) an interest rate, currency, or equity notional principal contract,
(5) an evidence of an interest in, or derivative financial instrument in, any of the foregoing
securities, or any currency, including any option, forward contract, short position, or similar
financial instrument in such a security or currency, or (6) a position that is an identified hedge with
respect to any of the foregoing securities.
Treasury regulations provide that if a taxpayer would be a dealer in securities only because
of 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, the taxpayer will not normally be treated as a dealer in securities. However, the regulations
allow such a taxpayer to elect out of this exception to dealer status. For this purpose, a debt
instrument is customer paper with respect to a person if: (1) the person's principal activity is selling
nonfinancial goods or providing nonfinancial services; (2) the debt instrument was issued by the
purchaser of the goods or services at the time of the purchase of those goods and services in order
to finance the purchase; and (3) 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.
Description of Proposal
The proposal would provide that certain trade receivables would not be eligible for mark-to
market treatment, whether the taxpayer is a securities dealer required to use mark-to-market
treatment or elects such treatment under the Treasury regulation. The trade receivables that would
be excluded would include non-interest bearing receivables, and account, note and trade
receivables unrelated to an active business of a securities dealer. The proposal would grant the
Treasury regulatory authority to carry out the purposes of the proposal. The proposal would not
affect the non-accrual experience method of accounting for service providers.
Effective Date
The proposal generally would be effective for taxable years ending after the date of
enactment. Adjustments required under section 481 as a result of the change in method of
accounting would be required to be taken into account ratably over the four-year period beginning
in the first taxable year for which the proposal is in effect.