31474 Federal Register / Vol. 61, No. 120 / Thursday, June 20, 1996 / Proposed Rules

Par. 2. Section 1.280B–1 is added to

read as follows:

§ 1.280B–1 Demolition of structures.

(a) In general. Section 280B provides

that, in the case of the demolition of any

structure, no deduction otherwise

allowable under chapter 1 of subtitle A

shall be allowed to the owner or lessee

of such structure for any amount

expended for the demolition or any loss

sustained on account of the demolition,

and that the expenditure or loss shall be

treated as properly chargeable to the

capital account with respect to the land

on which the demolished structure was

located.

(b) Definition of structure. For

purposes of section 280B, the term

structure means a building, as defined

in § 1.48–1(e)(1), and the structural

components of that building, as defined

in § 1.48–1(e)(2).

(c) Effective date. This section applies

with respect to demolitions occurring

on or after the date that the final

regulations are filed with the Federal

Register.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96–15665 Filed 6–19–96; 8:45 am]

BILLING CODE 4830–01–P

26 CFR Part 1

[FI–32–95]

RIN 1545–AT94

Mark to Market for Dealers in

Securities; Equity Interests in Related

Parties and the Dealer-Customer

Relationship

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations that make mark-tomarket accounting inapplicable to most

equity interests in related entities. The

regulations also relate to the definition

of a dealer in securities for certain

federal income tax purposes. To qualify

as a dealer in securities, a taxpayer must

engage in transactions with customers.

The proposed regulations concern the

existence of dealer-customer

relationships. The Revenue

Reconciliation Act of 1993 amended the

applicable tax law. These regulations

provide guidance for taxpayers that

engage in securities transactions. This

document also provides notice of a

public hearing on these proposed

regulations.

DATES: Written comments and outlines

of oral comments to be presented at a

public hearing scheduled for October

15, 1996, at 10 a.m., must be received

by September 18, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (FI–32–95), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:R (FI–32–95),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC 20224. The public

hearing will be held in the

Commissioner’s Conference Room, room

3313, Internal Revenue Building, 1111

Constitution Avenue NW., Washington,

DC 20224.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Jo Lynn L.

Ricks, (202) 622–3920, or Robert B.

Williams, (202) 622–3960; concerning

submissions and the hearing, Michael

Slaughter, (202) 622–7190 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collection of

information should be sent 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, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received by

August 19, 1996.

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 collection of information is

described in the Explanation of

Provisions section of the Preamble

(rather than being included in the text

of the proposed regulations). The

Preamble requests comments on

whether the final regulations should

permit taxpayers to elect to disregard

certain inter-company transactions in

determining status as a dealer in

securities. The preamble also indicates

that, if the election is allowed to be

made, it is expected that taxpayers

would make it by attaching a statement

to a tax return. If the final regulations

allow taxpayers to make this election in

this manner, the information will be

required by the IRS to determine

whether the election has been made,

and will be used for that purpose. The

likely respondents will be businesses

that file consolidated tax returns. If

taxpayers are allowed to make the

election, responses to this collection of

information will be required to obtain

the benefit of having status as a dealer

in securities determined without regard

to certain inter-company transactions.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103. Estimated total annual

reporting burden: 6,000 hours. The

estimated annual burden per respondent

varies from .25 hour to 1 hour,

depending on individual circumstances,

with an estimated average of .5 hours.

Estimated number of respondents:

12,000. Estimated annual frequency of

responses: once in the existence of each

respondent.

Background

This document contains proposed

regulations under section 475 of the

Internal Revenue Code, which requires

mark-to- market accounting for certain

dealers in securities. Section 475 was

added by section 13223 of the Revenue

Reconciliation Act of 1993, Pubic Law

103–66, 107 Stat. 481, and is effective

for all taxable years ending on or after

December 31, 1993.

Temporary and proposed regulations

published on December 29, 1993, (58 FR

68798) 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 IRS is

reproposing this rule with two changes.

First, the IRS has concluded 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

determined 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 are requested as
Federal Register / Vol. 61, No. 120 / Thursday, June 20, 1996 / Proposed Rules 31475

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. The provisions in this

document concerning these issues are

referred to below in this preamble as the

reproposed regulations.

When commenting on the temporary

and proposed regulations, taxpayers

asked the IRS to provide guidance on

whether certain transactions are entered

into with customers for purposes of

section 475. Whether transactions are

entered into with customers can affect

both whether a taxpayer is a dealer in

securities subject to mark-to-market

accounting (see section 475(c)(1)) and

whether a dealer may exempt a security

from mark- to-market treatment (see

section 475(b)(1) (A) and (B) and

§ 1.475(b)–1T(a)).

In response to these comments, on

January 4, 1995, the IRS published

proposed regulations [(FI–42–94) (60 FR

397)] stating that whether a taxpayer is

transacting business with customers is

determined based on all of the facts and

circumstances (see proposed § 1.475(c)–

1(c), reproposed as § 1.475(c)–1(a)).

These proposed regulations also provide

that 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) (see

proposed § 1.475(c)–1(c)(2), reproposed

as § 1.475(c)–1(a)(2)).

On March 4, 1996, the IRS published

Notice 96–12 (1996–10 I.R.B. 29), stating

that the IRS intended to publish

additional proposed regulations

concerning when transactions with

related parties may be transactions with

customers for purposes of section 475.

Notice 96–12 also described the

substance of rules that the proposed

regulations were expected to contain.

The rules were expected to be proposed

to be effective for taxable years

beginning on or after February 20, 1996.

The proposed regulations in this

document generally reflect the

substance that was described in Notice

96–12.

Explanation of Provisions

Prohibition Against Marking Equity

Interests in Related Persons

The reproposed regulations identify

certain assets that are inherently

investments and, thus, may not be

marked to market under section 475.

The new rules retain the provision in

the temporary regulations that prevents

marking certain insurance products to

market, but they differ from the

temporary regulations in the provisions

that prevent the marking of certain

equity interests. Under the temporary

regulations, the prohibition against

marking applies only if the dealer in

securities controls the issuer of an

equity interest (whether it is stock in a

corporation or an interest in a widely

held or publicly traded partnership or

trust). The reproposed regulations

expand the scope of this treatment so

that mark-to-market accounting cannot

be used for equity interests in many

related issuers. (For these purposes, the

reproposed regulations incorporate by

reference the relevant relations

described in sections 267(b) and

707(b)(1).) The reproposed regulations

also narrow the scope of this prohibition

against marking so that mark-to-market

accounting can be used for certain

actively-traded securities, regardless of

the dealer’s relation to the issuer of the

security, if the dealer owns less than

five percent of the securities. The IRS is

particularly interested in receiving

comments on the scope of the

reproposed rules’ exception to the

general prohibition on marking to

market equity interests in a related

person.

These reproposed regulations also

contain rules to cover situations where

a security begins, or ceases, to be subject

to this deemed-identification rule. First,

if a security is being marked to market

and then, as a result of a change in facts,

the regulations prohibit the security

from continuing to be marked to market,

the regulations require that the security

be marked as of the close of business on

the last day before the day when the

prohibition on marking first applies.

Second, the reproposed regulations

also cover situations in which the

regulations have prohibited a security

from being marked to market and then

the prohibition on marking ceases to

apply. In these cases, the deadline for

the taxpayer to identify the security

under section 475(b)(2) as exempt from

mark-to-market treatment is generally

extended until the date the prohibition

on marking ceases to apply. (If the

taxpayer had identified the security by

the original deadline, the extension, of

course, is irrelevant.) If the

identification is not made on or before

the deadline (as so extended), new

changes in value are taken into account

under the mark-to-market method, but

recognition of appreciation and

depreciation that occurred while the

security was not being marked is

suspended. This is the approach

adopted by section 475(b)(3) for

securities that lose their exemption from

mark-to-market treatment. The

reproposed rule is to apply both when

the prohibition on marking ceases

because of a change in facts and when

the prohibition on marking ceases

because the rule covering certain

actively-traded securities becomes

effective.

In sum, under the reproposed

regulations, the following assets held by

a dealer in securities are deemed to be

properly identified as held for

investment: (1) 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 is related (other than

certain actively-traded stock or

interests); and (2) an annuity,

endowment, or life insurance contract.

The provision concerning the second

category of assets continues to be

proposed to apply to all taxable years

ending on or after December 31, 1993.

The rules concerning the first category

of assets, however, are proposed to

prohibit only those marks to market that

would have occurred on or after June

19, 1996. If the prohibition against

marking begins to apply to a security

solely because of this effective date rule,

then (unlike the situation when the

onset of the prohibition is caused by a

change in facts) the security is not

marked to market immediately before

the prohibition begins.

In general, the provision allowing

certain actively-traded securities to be

marked to market even when the issuer

of the security is related is proposed to

be effective for marks to market on or

after June 19, 1996. Thus, this effective

date is the same as the effective date in

the reproposed regulations for the

general prohibition on marking to

market securities issued by a related

person. Until the reproposed regulations

are finalized, however, all equity

interests issued by controlled entities

continue to be subject to the temporary

regulations’ prohibition against being

marked to market, even if the dealer

owns less than 5 percent of interests of

that class and even if the interests are

actively traded.

Some commenters suggested there

should be no per se rule treating certain

securities as held for investment, but

instead there should be a rebuttable

presumption to this effect for these

items. Other commenters proposed to

add, or delete, a variety of items to or

from those deemed to be per se held for

investment. The reproposed regulations

do not adopt these suggestions.

Consolidated Returns

Under both the temporary and the

reproposed regulations, there are

situations in which the mark-to-market

method may apply to a consolidated
31476 Federal Register / Vol. 61, No. 120 / Thursday, June 20, 1996 / Proposed Rules

group member’s stock held by another

member of the group. This may result in

the recognition of duplicate gain or loss.

For instance, if a common parent marks

to market stock in a subsidiary to reflect

increases in the value of the subsidiary

stock owned by the parent resulting

from appreciation in the value of the

subsidiary’s assets, the parent will

recognize gain on that stock under the

mark-to-market method. The

subsidiary’s subsequent sale of the

assets will replicate that gain at the

subsidiary level. The gains will generate

duplicate stock basis increases under

section 475 and § 1.1502–32(b), creating

the potential for an offsetting loss when

the stock is subsequently marked down

to fair market value under section 475.

Section 1.1502–20, however, may

disallow any such offsetting loss.

Comments are invited regarding how to

address the anomalies these rules may

produce.

The Dealer-Customer Relationship

These proposed regulations clarify

that a taxpayer’s transactions with

members of its consolidated group or

other related persons may be

transactions with customers for

purposes of section 475. Thus, a

taxpayer may be a dealer in securities

for purposes of section 475 even if its

only customer transactions are

transactions with members of its

consolidated group. In enacting section

475, Congress adopted a taxpayer-bytaxpayer approach to determining dealer

status, rather than the single-entity

approach embodied in § 1.1502–13.

An example in the proposed

regulations clarifies that, for purposes of

section 475, transactions do not fail to

be transactions with customers solely

because the parties enter into them with

other than arms-length pricing terms.

Under section 482 and the regulations

thereunder, however, the district

director may make allocations between

or among the members of the group if

he or she determines that a member has

not reported its true taxable income.

These proposed regulations generally

reflect the substance of the rules set

forth in Notice 96–12 (1996–10 I.R.B.

29). In response to taxpayer comments,

however, certain language in Notice 96–

12 has been clarified. Because of these

changes, although the rules described in

Notice 96–12 were expected to be

proposed to be effective for taxable

years beginning on or after February 20,

1996, these proposed regulations are to

be effective for taxable years beginning

on or after June 20, 1996. If there are any

situations in which the proposed rules

lead to a different result from that which

would be reached under the rules

described in the notice, a taxpayer may

reasonably and consistently apply the

rules described in the notice for any

taxable year beginning on or after

February 20, 1996, and before June 20,

1996.

Under these regulations, a taxpayer

may be a dealer in securities based

solely on transactions with other

members of its consolidated group. The

IRS requests comments on whether

certain consolidated groups should be

allowed to disregard inter-member

transactions in determining a member’s

status as a dealer in securities. For

instance, a group might be allowed to

disregard inter-member transactions if

the group, considered as a single

corporation, would not be a dealer in

securities for purposes of section 475. It

is likely that the election, if permitted

by the final regulations, would be made

by attaching an appropriate statement to

the taxpayer’s return. (See the

Paperwork Reduction Act section of this

preamble, which requests comments on

the burden that might be imposed by

this requirement.) The IRS hereby

requests comments on the desirability

and potential terms and conditions of

any such election. Comments could also

address whether such an election

should apply in determining whether a

taxpayer had made more than negligible

sales for purposes of reproposed

§ 1.475(c)-1(c). Further, the IRS requests

comments on whether the election

should be available only to groups that

have not made a separate-entity election

under § 1.1221–2(d)(2).

Miscellaneous

Some of the 1993 and 1995 proposed

regulations are reordered.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) that are submitted

timely to the IRS. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for October 15, 1996, at 10 a.m. in the

Commissioner’s Conference Room, room

3313, Internal Revenue Building, 1111

Constitution Avenue NW., Washington,

DC 20224. Because of access

restrictions, visitors will not be

admitted beyond the Internal Revenue

Building lobby more than 15 minutes

before the hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments and submit an

outline of the topics to be discussed and

the time to be devoted to each topic

(signed original and eight (8) copies) by

September 18, 1996.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal authors of these

regulations are Jo Lynn L. Ricks and

Robert B. Williams, Office of Assistant

Chief Counsel (Financial Institutions &

Products). However, other personnel

from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1, as proposed on January 4,

1995, at 60 FR 401, is further amended

by revising the entries for ‘‘Section

1.475(b)–1’’, ‘‘Section 1.475(b)–2’’, and

‘‘Section 1.475(b)–4’’ to read as follows:

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

Section 1.475(b)–1 also issued under 26

U.S.C. 475(a) 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. * * *

Par. 2. Section 1.475–0, as proposed

on January 4, 1995 (60 FR 401), is

amended by:
Federal Register / Vol. 61, No. 120 / Thursday, June 20, 1996 / Proposed Rules 31477

1. Revising the heading and entries for

§§ 1.475(b)–1, 1.475(b)–2, and 1.475(b)–

4.

2. Revising the entries under

§§ 1.475(c)–1 and 1.475(c)–2.

3. Removing the entries under

§ 1.475(e)–1.

The revisions read as follows:

§ 1.475–0 Table of contents.

* * * * *

§ 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.

(1) General rule for dealers in notional

principal contracts and derivatives.

(2) Exception for securities not acquired in

dealer capacity.

(d) Special rules.

(1) Stock, partnership, and beneficial

ownership interests in certain controlled

corporations, partnerships, and trusts.

(i) In general.

(ii) Control defined.

(iii) Applicability.

(2) [Reserved].

§ 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) Securities involved in integrated

transactions under § 1.1275–6.

(1) Definitions.

(2) Synthetic debt held by a taxpayer as a

result of legging in.

(3) Securities held after legging out.

* * * * *

§ 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 § 1.475(b)–1(a).

(i) Added identifications.

(ii) Limitations.

(3) To conform to § 1.475(b)–1(c).

(c) Effect of corrections.

§ 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) In general.

(ii) Example.

(b) Sellers of nonfinancial goods and

services.

(c) Taxpayers that purchase securities but

do not sell more than a negligible portion of

the securities.

(1) Exemption from dealer status.

(2) Negligible portion.

(3) Special rules.

(d) Issuance of life insurance products.

§ 1.475(c)–2 Definitions—Security.

(a) In general.

(b) Synthetic debt held by a taxpayer as a

result of an integrated transaction under

§ 1.1275–6.

(c) Negative value REMIC residuals.

(d) Special rules.

* * * * *

§ 1.475(e)–1 Effective dates.

Par. 3. Section 1.475(b)–1 as proposed

on December 29, 1993 (58 FR 68798), is

amended by revising paragraph (b) and

adding paragraph (d) to read as follows:

§ 1.475(b)–1 Scope of exemptions from

mark-to-market requirement.

* * * * *

(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 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

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 707(b)(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 § 1.1092(d)–1(a)

taking into account only established

financial markets identified in

§ 1.1092(d)–1(b)(1) (i) or (ii) (describing

national securities exchanges and

interdealer quotation systems), and

(ii) The taxpayer owns less than 5

percent of all of the shares or interests

in the same class.

(4) Changes in status—(i) Onset of

prohibition against marking—(A) Once

a security begins to be described in

paragraph (b)(1) of this section and for

so long as it continues to be so

described, 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,

the security begins to be described in

paragraph (b)(1) of this section, 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 the security begins

to be described in paragraph (b)(1) of

this section, 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 it 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):
31478 Federal Register / Vol. 61, No. 120 / Thursday, June 20, 1996 / Proposed Rules

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 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 D and X continue to be related to each

other.

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 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 27, 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 cease 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 to refrain from

marking to market its Y stock after December

30, 1996.

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.

* * * * *

(d) Special rules—(1) Stock,

partnership, and beneficial ownership

interests in certain controlled

corporations, partnerships, and trusts—

(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 (d)(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 (d)(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 (d)(1) apply only before the

date 30 days after final regulations on

this subject are published in the Federal

Register.

(2) [Reserved].

§ 1.475 [Amended]

Par. 4. Section 1.475(b)–2, as

proposed on December 29, 1993 (58 FR

68798), is redesignated as § 1.475(b)–4.

Par. 5. Section 1.475(b)–4, as

proposed on January 4, 1995 (60 FR

404), is redesignated as § 1.475(b)–2.

Par. 6. Section 1.475(c)–1, as

proposed on December 29, 1993 (58 FR

68798), and amended on January 4,

1995 (60 FR 405), is amended as

follows:

1. Paragraph (c) is removed.

2. Paragraphs (a) and (b) are

redesignated as paragraphs (b) and (c),

respectively.

2. New paragraph (a) is added to read

as follows:

§ 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:

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) In general. A

taxpayer’s transactions with members of

its consolidated group or with other

related persons may be transactions

with customers for purposes of section

475. For example, transactions

enumerated in section 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. 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.

(ii) Example. The following example

illustrates this paragraph (a)(3):

Example. Risk management transactions—

(1) Facts. HC, a hedging center, provides
Federal Register / Vol. 61, No. 120 / Thursday, June 20, 1996 / Proposed Rules 31479

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 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. Because HC attempts to

operate at cost and the terms of its swaps do

not factor in any risk of default by the

affiliate, HC’s affiliates receive somewhat

more favorable terms then they would

receive from an unrelated swaps dealer.

(2) Holding. Because HC regularly holds

itself out as being willing and able to enter

into transactions enumerated in section

475(c)(1)(B), HC is a dealer in securities for

purposes of section 475(c)(1)(B) and the other

members are its customers.

* * * * *

§ 1.475 [Amended]

Par. 7. Section 1.475(c)-2, as proposed

on December 29, 1993 (58 FR 68798),

and amended on January 4, 1995 (60 FR

405), is amended as follows:

1. Paragraphs (b), (c), and (d) are

redesignated as paragraphs (c), (d), and

(b), respectively.

2. Paragraph (a) and newly designated

paragraph (c) are revised by removing

the phrase ‘‘paragraph (b)’’ each place it

appears and replacing it with

‘‘paragraph (c)’’ each place it appeared.

3. Newly designated paragraph (d) is

revised by removing the phrase

‘‘paragraphs (a)(3) and (b)’’ and

replacing it with ‘‘paragraphs (a)(3) and

(c)’’. Newly designated paragraph (d) is

further revised by removing the phrase

‘‘this paragraph (c)(1)).’’ and replacing it

with the phrase ‘‘this paragraph

(d)(1)).’’.

4. Newly designated paragraph (b) is

revised by removing the words ‘‘See

§ 1.475(b)–4(c)’’ and replacing them

with the words ‘‘See § 1.475(b)-2(c)’’.

Par. 8. Section 1.475(e)–1, as

proposed on December 29, 1993 (58 FR

68798), and amended on January 4,

1995 (60 FR 405), is revised to read as

follows:

§ 1.475(e)–1 Effective dates.

(a) Section 1.475(a)–1 (concerning

mark-to-market for debt instruments)

applies to taxable years beginning on or

after January 1, 1995.

(b) Section 1.475(a)–2 (concerning

marking a security to market upon

disposition) applies to dispositions or

terminations of ownership occurring on

or after January 4, 1995.

(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) Section 1.475(b)–1 (concerning the

scope of exemptions from the mark-tomarket requirement) applies as follows:

(1) Section 1.475(b)–1(a) (concerning

securities held for investment or not

held for sale) applies to taxable years

ending on or after December 31, 1993.

(2) Except as provided elsewhere in

this paragraph (d)(2), § 1.475(b)–1(b)(1)

(concerning securities deemed

identified as held for investment)

applies to taxable years ending on or

after December 31, 1993.

(i) Section 1.475(b)–1(b)(1)(i)

(concerning equity interests issued by a

related person) applies on or after June

19, 1996. If, on June 18, 1996, a security

is subject to mark-to-market accounting

and, on June 19, 1996, § 1.475(b)–1(b)(1)

begins to apply to the security solely

because of the effective dates in this

paragraph (d)(2) (rather than because of

a change in facts), then the rules of

§ 1.475(b)–1(b)(4)(i)(A) (concerning the

prohibition against marking) apply, but

§ 1.475(b)–1(b)(4)(i)(B) (imposing a 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 on or after June 19,

1996.

(iii) Section 1.475(b)–1(b)(3)

(concerning certain activelytraded

securities) generally applies on or after

June 19, 1996 to securities held on or

after that date. In the case, however, of

securities described in § 1.475(b)–

1(d)(1)(i) (concerning equity interests

issued by controlled entities),

§ 1.475(b)–1(b)(3) applies on or after the

date thirty days after final regulations

on this subject are published in the

Federal Register to securities held on or

after that date. If § 1.475(b)–1(b)(1)

ceases to apply to a security by virtue

of the operation of this paragraph

(d)(2)(ii), the rules of § 1.475(b)–

1(b)(4)(ii) apply to the cessation.

(iv) Except to the extent provided in

paragraph (d)(2)(i) of this section,

§ 1.475(b)–1(b)(4) (concerning changes

in status) applies on or after June 19,

1996.

(e) Section 1.475(b)–2 (concerning the

identification requirements for

obtaining an exemption from mark-tomarket treatment) applies to

identifications made on or after January

4, 1995.

(f) Section 1.475(b)–3 (concerning

exemption of securities in certain

securitization transactions) applies to

securities acquired, originated, or

entered into on or after January 4, 1995.

(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(a) (concerning

the dealer-customer relationship),

except for § 1.475(c)–1(a)(1), (a)(2)(ii),

and (a)(3), applies to taxable years

beginning on or after January 1, 1995.

Section 1.475(c)–1(a)(2)(ii) and (a)(3)

(concerning certain aspects of the

dealer-customer relationship) apply to

taxable years beginning on or after June

20, 1996.

(i) Section 1.475(c)–1(b) (concerning

sellers of nonfinancial goods and

services) and (c) (concerning taxpayers

that purchase securities but do not sell

more than a negligible portion of the

securities) applies to taxable years

ending on or after December 31, 1993.

(j) Section 1.475(c)–1(d) (concerning

the issuance of life insurance products)

applies to taxable years beginning on or

after January 1, 1995.

(k) Section 1.475(c)–2 (concerning the

definition of security) applies to taxable

years ending on or after December 31,

1993. Note, however, that, by its terms,

§ 1.475(c)–2(a)(3) applies only to

interests or arrangements that are

acquired on or after January 4, 1995, and

that the integrated transactions to which

§ 1.475(c)–2(b) applies will exist only

after the effective date of § 1.1275–6.

(l) Section 1.475(d)–1 (concerning the

character of gain or loss) applies to

taxable years ending on or after

December 31, 1993.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96–15666 Filed 6–19–96; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF VETERANS

AFFAIRS

38 CFR Part 1

RIN 2900–AI21

Disinterments in National Cemeteries

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

SUMMARY: The Department of Veterans

Affairs (VA) proposes to amend

regulations concerning disinterments

from national cemeteries. Current

regulations permit disinterment of

persons buried in a national cemetery

with the consent of immediate family

members. The definition of immediate

family members includes a surviving

spouse only if unmarried. It is proposed