1. Is a taxpayer eligible for the I.R.C. § 475 Industry Director Directive related to Mark-to-Market Valuation (IDD) if: i) the taxpayer uses the same mark-to-market values reported on its qualified financial statements for all securities and/or commodities that are subject to the tax valuation requirement of I.R.C. § 475, but ii) the taxpayer has made Schedule M adjusting entries or other book to tax adjusting entries, or has reported deferred tax assets, deferred tax liabilities, or valuation allowances (under FAS 109/ASC 740) with respect to such securities and/or commodities? A taxpayer is eligible for the IDD if: i) the taxpayer uses the same mark-to-market values reported on its qualified financial statements for all securities and/or commodities that are subject to the tax valuation requirement of I.R.C. § 475, and ii) the taxpayer has made Schedule M adjusting entries or other book to tax adjusting entries, or has reported deferred tax assets, deferred tax liabilities, or valuation allowances (under FAS 109/ASC 740), with respect to such securities and/or commodities that are not related to any inconsistencies in value between the mark-to-market values reported on its qualified financial statements and the I.R.C. § 475 mark-to-market values reported for Federal income tax purposes. 2. Is a taxpayer eligible for the IDD if the taxpayer does not have mark-to-market values reported on its qualified financial statements for some of its securities and/or commodities? Yes. The taxpayer is eligible for the IDD for all other securities and/or commodities that are subject to the tax valuation requirement of I.R.C. § 475 and for which mark-to-market values are reported on its qualified financial statements, as long as the mark-to-market values of those other securities and/or commodities reported on the taxpayer’s qualified financial statements are used for securities and/or commodities that are subject to the tax valuation requirement of I.R.C. § 475. For those securities and/or commodities that the taxpayer does not have mark-to-market values reported on the qualified financial statements, traditional valuation audit procedures will apply. 3. Is a taxpayer required to use the same mark-to-market values reported on its qualified financial statements for all of its securities and/or commodities that are subject to the tax valuation requirement of I.R.C. § 475 to be eligible for the IDD? Yes. If the taxpayer has mark-to-market values for securities and/or commodities reported on its qualified financial statements and does not use those values for some of its securities and/or commodities that are subject to the tax valuation requirement of I.R.C. § 475, then the taxpayer is ineligible for the IDD for all of its securities and/or commodities and traditional valuation audit procedures will apply. 4. For a taxpayer who is under the Directive (IDD), does a subsequent change in taxpayer’s method of valuation for determining its mark-to-market values for its securities and /or commodities for financial statement purposes require that a Form 3115 be filed to obtain consent to use that subsequent valuation method for tax purposes. Under the IDD, for tax purposes, a taxpayer must use the same mark-to-market values reported on its qualified financial statements for all securities and/or commodities that are subject to I.R.C. § 475. Because the valuation requirements for marking to market to arrive at fair value are substantially similar to the valuation requirements under section 475 of marking to market to arrive at fair market value, under the IDD, the Service accepts taxpayer’s values for its securities reported on its financial statement as its values for tax purposes. The purpose of the IDD is to balance current resources and workload priorities and to provide an administrable solution for difficult and resource-intensive issues. That same principle should also apply in handling changes made to valuation methodologies for financial statement purposes by a taxpayer subject to the IDD. It is anticipated that the Office of Chief Counsel will issue guidance regarding the issue above. Pending the issuance of that guidance, agents should not challenge the valuations based upon the lack of a Form 3115, provided those valuations comply with the IDD provisions.
