LB&I Control No: LB&I-4-1110-033 Impacted IRM 4.51.2.2 PLEASE NOTE: Contacts for this Directive has been updated. Questions concerning this Directive should be directed to the Financial Instruments Issue Practice Group. April 14, 2011 MEMORANDUM FOR INDUSTRY DIRECTORS DIRECTOR, FIELD SPECIALISTS DIRECTOR, PREFILING AND TECHNICAL GUIDANCE DIRECTOR, INTERNATIONAL BUSINESS COMPLIANCE FROM: Walter L. Harris /s/ Walter L. Harrism, Industry Director, Financial Services SUBJECT: I.R.C. §475: Field Directive related to Mark-to-Market Valuation This Industry Director Directive ("IDD") provides that Large Business & International (LB&I) examiners should not challenge mark-to-market values reported on a qualified financial statement for the tax valuation requirement of I.R.C. §475. This IDD applies to all taxpayers who are required to, or elect to, mark-to-market securities and/or commodities under I.R.C. §475 and are required to file a financial statement with the U.S. Securities and Exchange Commission ("SEC") under Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and/or under Rule 17a-5 or Rule 17a-12 promulgated thereunder.[1] The financial accounting valuation requirements for marking to market values that are reported on qualified financial statements are substantially similar to the valuation requirements under I.R.C. §475. In addition, independently valuing securities and commodities subject to I.R.C. §475 imposes a significant administrative burden on both taxpayers and LB&I. Therefore, in an effort to balance current resources and workload priorities, LB&I examiners are directed not to challenge mark-to-market values reported on a qualified financial statement for the tax valuation requirement of I.R.C. §475 if the requirements set forth in this IDD are satisfied. If a taxpayer has a tax valuation requirement under I.R.C. §475, but does not meet the requirements of this IDD, traditional audit procedures will apply. This IDD is not an official pronouncement of law, and cannot be used, cited, or relied upon as such. Background I.R.C. §475 requires dealers in securities to mark their securities to market. I.R.C. §475 allows traders in securities or commodities, as well as dealers in commodities, to elect to mark-to-market their securities or commodities to market annually. Traditionally, gains and losses are deferred until disposition, but the mark-to-market provisions of I.R.C. §475 require income recognition without realization. Thus, if a security or commodity subject to I.R.C. §475 is held at the end of the taxable year, it must be treated as if it were sold on the last business day of the taxable year for its fair market value and the appropriate gain or loss must be recognized. For many securities and/or commodities that are subject to I.R.C. §475, no readily available public valuation benchmarks, such as public price quotations, exist. Taxpayers value these instruments internally, using highly subjective and complex mathematical models. Generally, valuation audits are extremely burdensome for both taxpayers and LB&I because of the subjectivity of valuation and the need for significant resources to verify the taxpayer's determinations. Valuation audits of complex, non-publicly traded securities and/or commodities are additionally burdensome because of the complexity of valuation. Further, individual taxpayers may have a significant volume of such securities and/or commodities that are required by I.R.C. §475 to be valued annually. For example, a large financial services firm may have thousands of non-publicly traded securities that must be valued annually for purposes of computing I.R.C. §475 mark-to-market losses and gains. Currently, conducting an I.R.C. §475 mark-to-market valuation audit of such taxpayers requires a substantial commitment of limited LB&I audit resources. For financial accounting purposes, many taxpayers subject to I.R.C. §475 are required to value these same securities and/or commodities and report these values to the SEC. To improve the administrability of the valuation requirements of I.R.C. §475, LB&I should accept mark-to-market values reported on a qualified financial statement if the taxpayer follows the requirements outlined below. Issue tracking: Any cases having this issue should use the following ITAC tracking code: ITAC 4475: "Industry Directive on I.R.C. §475 Valuation" Examination guidance: For taxpayers who are required or elect to mark-to-market securities and/or commodities under the provisions of I.R.C. §475, LB&I examiners should accept mark-to-market values reported on a qualified financial statement for the tax valuation requirement of I.R.C. §475. Taxpayers must use the mark-to-market values reported on a qualified financial statement for all securities and/or commodities that are subject to the tax valuation requirement of I.R.C. §475. A taxpayer currently under examination may not have used their mark-to-market values reported on qualified financial statements for the tax valuation requirement of I.R.C. §475, but would like to change to that method under the provisions of this IDD. For such a taxpayer, LB&I examiners, in consultation with the taxpayer, will decide whether the most appropriate way to make the change is to (1) change the taxpayer's method of accounting for the taxable year under examination to one that is consistent with this IDD or (2) allow the taxpayer to request advance consent to change their method to one that is consistent with this IDD for the current taxable year. With respect to an advance consent, LB&I would grant the taxpayer consent under section 6.01(4) of Rev. Proc. 97-27 to request the voluntary change in method of accounting. In addition, for any taxpayer requesting an advance consent, attaching a completed Certification Statement (described below) to their Form 3115 will generally satisfy the documentation requirements of Lines 19-21 of Form 3115 Upon examination, if a taxpayer has used its mark-to-market values reported on a qualified financial statement for the tax valuation requirement of I.R.C. §475, the taxpayer must sign and complete the attached "Industry Directive on I.R.C. §475 Valuation Certification Statement" ("the Certification Statement"). A taxpayer must complete all sections of the Certification Statement, must have the Certification Statement signed by an authorized individual, and must provide the Certification Statement to the LB&I examiner within 30 days of a request for the Certification Statement. A separate Certification Statement may be requested for each tax year under audit. A LB&I examiner will consider any taxpayer not in compliance with these requirements ineligible for this IDD and subject to traditional audit procedures. The Certification Statement must be signed by an individual who is authorized to execute the taxpayer's federal income tax return for the taxable year under audit, and must certify, under penalty of perjury, that, for the tax year under audit, the taxpayer's mark-to-market values reported on its qualified financial statements are consistent with the I.R.C. §475 values for the same securities and/or commodities reported on the taxpayer's federal income tax return for the relevant taxable year. Taxpayers should retain the underlying financial accounting valuation documentation that would permit the LB&I examiner to reconcile the taxpayer's financial accounting mark-to-market values with the taxpayer's tax mark-to-market values. If a taxpayer fails to properly and timely submit a Certification Statement or if a taxpayer fails to timely submit requested valuation documentation that would permit the examiner to reconcile the taxpayer's financial accounting values with the taxpayer's tax mark-to-market values, then the Industry Director or his/her delegate may determine that this IDD does not apply to the taxpayer. Definitions: Qualified Financial Statements: A qualified financial statement is a financial statement that is required to be filed with the SEC under Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and/or under Rule 17a-5 or Rule 17a-12 promulgated thereunder. Certification Statement: To be eligible for this IDD, a taxpayer must certify that their mark-to-market values reported on a qualified financial statement are the same values being used for the tax valuation requirement of I.R.C. §475. Upon audit, this certification must be completed on the attached Certification Statement and must be provided to an LB&I examiner within 30 days of a request. For corporations, the certification must be signed by an individual authorized under I.R.C. § 6062. For partnerships, the certification must be signed by an individual authorized under I.R.C. § 6063. All Certification Statements must be signed under penalties of perjury. Contacts: If you have any questions, please contact I.R.C. §475 Technical Advisor Ann Schultz or Securities and Financial Services firms Industry Counsel Nicole Cammarota. Documents: Industry Directive on I.R.C. §475 Valuation Certification Statement [1] 15 U.S.C.S §§ 78m, 78o, 17 C.F.R. §§ 240.17a-12, 240.17a-5. INDUSTRY DIRECTIVE ON I.R.C. § 475 VALUATION CERTIFICATION STATEMENT Taxpayer Name: ______________________________________ Taxpayer EIN: ______________________________________ Tax Year: ______________________________________ Qualified Financial Statement: ______________________________________ Relevant Period of the Qualified Financial Statement: ______________________________________ Certification By signing this certification statement, the taxpayer agrees to readily provide (upon request of the IRS) all relevant data and records to establish to the satisfaction of the IRS that the statements made in this certification statement are true, correct and complete. I certify, under penalty of perjury, that for the tax year to which this certification statement applies, the taxpayer's mark-to-market values reported on its qualified financial statements are consistent with the I.R.C. §475 values for the same securities and/or commodities reported on the taxpayer's federal income tax return for the relevant tax year for all entities included in the consolidated tax return that use the I.R.C. §475 mark-to-market method of accounting. I certify, under penalty of perjury, that no tax return Schedule M adjusting entries or other book to tax adjusting entries were made regarding the I.R.C. §475 mark-to-market values. I certify, under penalty of perjury, that no deferred tax assets, deferred tax liabilities, or valuation allowances were reported for U.S. GAAP (FAS 109/ASC 740) purposes regarding any I.R.C. §475 mark-to-market values. I certify, under penalty of perjury, that I have examined this certification statement, and to the best of my knowledge and belief, it is true, correct, and complete. Signature: ______________________________________ Date: ______________________________________ Title: ______________________________________ For corporations, the certification must be signed by an individual authorized under I.R.C. § 6062. For partnerships, the certification must be signed by an individual authorized under I.R.C. § 6063. All certifications must be signed under penalties of perjury. Frequently Asked Questions (FAQ)
