rp-07-41.pdf

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Part III

Administrative, Procedural, and Miscellaneous

[26 CFR 1.601.204]: Changes in accounting periods and in methods of accounting.
(Also Part 1:§§ 446, 475; 1.475(a)-4)

Rev. Proc. 2007-41

SECTION 1. PURPOSE
Section 1.475(a)-4 of the Income Tax Regulations (the safe harbor valuation
regulations) permits dealers in securities and dealers in commodities to elect to use the
values of eligible positions reported on certain financial statements as the fair market
values of those positions for purposes of section 475 of the Internal Revenue Code
(Code). This revenue procedure designates the securities and commodities that are
eligible positions for purposes of the safe harbor valuation regulations. This revenue
procedure also illustrates the application of the safe harbor to taxpayers who are both
dealers and traders.

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
(TD 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 Commissioner in a revenue procedure or other published
guidance designates with respect to that taxpayer as an eligible position for purposes of
this safe harbor.”
SECTION 3. SCOPE
This revenue procedure designates eligible positions under § 1.475(a)–4(g) for
electing eligible taxpayers under § 1.475(a)–4(c).

SECTION 4. ELIGIBLE POSITIONS FOR SAFE HARBOR
Pursuant to § 1.475(a)–4(g), the following are designated as eligible positions for
purposes of the safe harbor valuation regulations:
.01 With respect to an eligible taxpayer described in § 1.475(a)–4(c)(1), any
security within the meaning of § 475(c)(2) and the regulations thereunder.
.02 With respect to an eligible taxpayer described in § 1.475(a)–4(c)(2), any
commodity within the meaning of § 475(e)(2) and any regulations thereunder
SECTION 5. EXAMPLES
The following examples illustrate the application of this revenue procedure:
.01 Example 1
.
X
is both a dealer in securities and a dealer in physical commodities. In a
business unrelated to its commodities dealing business, X is a trader in commodity
derivatives. With respect to the commodity trading business, X
has made a mark-to-
market election under § 475(f)(2) but has not made the commodity dealer election under
§ 475(e). X
makes the valuation safe harbor election under § 1.475(a)–4.
Because X is a dealer in securities, X is an eligible taxpayer within the meaning
of § 1.475(a)–4(c)(1). Accordingly, X
’s securities are eligible positions with respect to X,
and, if all other requirements are met, may be covered by the valuation safe harbor.
Because X has not made the election under § 475(e), however, X is not described in
§ 1.475(a)–4(c)(2). For that reason, X’s commodity positions are not eligible positions

with respect to X, and the positions in the commodity trading business (which are
marked to market pursuant to § 475(f)) are not covered by the valuation safe harbor.
.02 Example 2.
Y is a dealer in commodities and is a trader in securities but is not a dealer in
securities. Y
makes the elections under § 475(e) (the commodity dealer election),
under § 475(f) (the election to apply § 475 to its securities trading business), and under
§ 1.475(a)–4 (the valuation safe harbor election).
Because Y is an eligible taxpayer described in § 1.475(a)–4(c)(2), Y’s commodity
positions are eligible positions with respect to Y
. Although Y also marks to market the
securities held in connection with Y’s securities trading business, those securities are
not eligible positions with respect to Y because Y is not an eligible taxpayer described in
§ 1.475(a)–4(c)(1).
SECTION 6. EFFECTIVE DATES
This revenue procedure is effective on June 12, 2007.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Marsha Ann Sabin or John W.
Rogers III of the Office of Associate Chief Counsel (Financial Institutions & Products).
For further information regarding this revenue procedure contact Marsha Ann Sabin or
John W. Rogers III at (202) 622-3950 (not a toll free call).