[Federal Register Volume 66, Number 45 (Wednesday, March 7, 2001)]
[Notices]
[Pages 13836-13838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5453]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

[BPG-132413-00]


Dealers in Securities Futures Contracts; Request for Comments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of solicitation of comments.

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SUMMARY: The IRS and Treasury Department are soliciting comments on the 
criteria that should be used to determine whether a taxpayer is a 
dealer in securities futures contracts (or options on such contracts) 
for purposes of section 1256 of the Internal Revenue Code.

DATES: Written and electronic comments are requested on or before May 
7, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (BPG-132413-00), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered between the hours of 8 a.m. 
and 5 p.m. to: CC:M&SP:RU (BPG-132413-00), Courier's Desk, Internal 
Revenue Service, 1111 Constitution Avenue NW., Washington, DC. 
Alternatively, taxpayers may submit comments electronically via the 
Internet by submitting comments directly to the IRS Internet site at 
http://www.irs.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the notice, Patrick E. 
White

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(202) 622-3920; concerning submission and delivery of comments, Treena 
Garrett, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    The Commodities Futures Modernization Act of 2000, enacted as part 
of the Consolidated Appropriations Act, 2001 (Public Law 106-554, 114 
Stat. 2763), authorizes the trading of securities futures contracts, a 
new type of derivative financial product. Another portion of the same 
enactment--the Community Renewal Tax Relief Act of 2000 (the Act)--
prescribes the tax treatment of these financial products. In general, 
gain or loss is recognized on securities futures contracts upon 
disposition, and the character of such gain or loss is determined by 
newly enacted section 1234B.
    The timing and character of gains and losses on dealer securities 
futures contracts, however, is determined by section 1256. Thus, dealer 
securities futures contracts are subject to mark-to-market treatment, 
and capital gains or losses are treated as 60 percent long-term capital 
gain or loss and 40 percent short-term capital gain or loss. Section 
1256(g)(9) defines dealer securities futures contracts as securities 
futures contracts (and options on such contracts) that are traded on a 
qualified board or exchange and are entered into by a dealer in the 
normal course of the dealer's business of dealing in such contracts or 
options. For this purpose, a person is a dealer in securities futures 
contracts or options on such contracts if the Secretary of the Treasury 
determines that the person performs functions with respect to such 
contracts or options similar to the functions performed with respect to 
stock options by persons registered with a national securities exchange 
as a market maker or specialist in listed options. The Act requires the 
Secretary of the Treasury or his delegate to make this determination no 
later than July 1, 2001.
    The legislative history of the Act states the following with 
respect to the determination process:

    The determination of who is a dealer in securities futures 
contracts is to be made in a manner that is appropriate to carry out 
the purposes of the provision, which generally is to provide 
comparable tax treatment between dealers in securities futures 
contracts, on the one hand, and dealers in equity options, on the 
other. Although traders in securities futures contracts (and options 
on such contracts) may not have the same market-making obligations 
as market makers or specialists in equity options, many traders are 
expected to perform analogous functions to such market makers or 
specialists by providing market liquidity for securities futures 
contracts (and options) even in the absence of a legal obligation to 
do so. Accordingly, the absence of market-making obligations is not 
inconsistent with a determination that a class of traders are 
dealers in securities futures contracts (and options), if the 
relevant factors, including providing market liquidity for such 
contracts (and options), indicate that the market functions of the 
traders is comparable to that of equity options dealers.

H.R. Conf. Rep. No. 106-1033, 106th Cong., 2d Sess. 1036 (2000).
    The IRS and Treasury Department, therefore, seek taxpayers' 
suggestions concerning both the substance of these determinations and 
the manner in which they should be made. As described in more detail 
below, of particular interest are comments that will aid in 
establishing objective criteria and processes for making the 
determinations. In addition, comments are solicited in certain specific 
areas.
    First, comments are requested about the activities and obligations 
of equity options dealers, especially those activities and obligations 
that contribute to the establishment and maintenance of an orderly 
market. For purposes of this notice, the term equity options dealer 
means a market maker or specialist described in section 1256(g)(8) with 
respect to options that are described in section 1256(g)(6) without 
regard to the requirement that indices be narrow based. Any relevant 
way in which the activities and obligations of market makers differ 
from those of specialists should be described; and the significance of 
this difference for any comment or other response to this notice should 
be explained when relevant.
    Among the questions on which information is sought are the 
following: What are the activities imposed on, or undertaken by, equity 
option dealers that are considered making a market? Do equity option 
dealers engage in activities that extend beyond making a market but 
that contribute to the establishment and maintenance of orderly 
markets? For example, equity options dealers trading for their own 
accounts (and not in response to orders placed by an off-exchange 
customer) may be a significant source of market volume. Is that the 
case? If so, to what extent does this added volume contribute to market 
liquidity? Are there other ways in which these dealers contribute to 
the markets in which they participate? What differences are there, in 
scale or kind, between the activities of equity options dealers and 
similar activities of other market participants?
    Although some relevant activities of equity options dealers may be 
ongoing, other critical activities may commence, or change 
significantly in nature or scope, during periods of market 
disequilibrium. Information with respect to equity options dealers' 
activities at these times will be particularly welcome.
    Second, information is requested regarding activities of traders 
\1\ on futures markets. Although traders on futures markets may not 
have specific market-making obligations, their trading activities may 
contribute to the establishment and maintenance of orderly markets. Is 
that typically the case? Descriptions of trading activities on futures 
markets generally will be helpful, and insights and supporting data on 
the nature and extent of trading by specific groups of futures traders 
will be particularly useful. Relevant groups for this purpose may be 
based on the type of contract traded, the extent of trading for one's 
own account (as opposed to trading in response to orders from off-
exchange customers), and the class of exchange membership.
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    \1\ The references here, and in the following paragraphs, to 
traders are not intended to exclude any taxpayers who are not 
treated as traders for tax purposes but who may perform functions 
similar to the functions performed by equity options dealers.
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    This discussion should be accompanied, if possible, by an 
explanation of the extent to which the activities of traders in 
securities futures contracts are expected to resemble the activities of 
the specific groups described. In general, expectations of how trading 
in securities futures contracts may or may not differ from trading in 
current products will also be helpful.
    Third, comments are solicited on administrable and economically 
meaningful criteria for identifying any traders that should be treated 
as dealers in securities futures contracts. Criteria for identifying 
these persons might include, among others, the nature and extent of 
trading activities (including the extent to which the person's trading 
is concentrated in certain products), class of exchange membership, 
capital, and share of net income derived from trading activities. 
Should it be possible for a person to be a dealer in securities futures 
contracts with respect to some such contracts but not with respect to 
others?
    If a taxpayer's satisfaction of the suggested criteria may vary 
over time, comments are also requested respecting rules for determining 
when a taxpayer becomes, or ceases to be, a dealer in securities 
futures contracts. For example, should it be possible for the

[[Page 13838]]

status as a dealer in securities futures contracts to change within a 
single taxable year or only between taxable years? Does a taxpayer need 
to know before it enters a transaction whether it is treated as a 
dealer for purposes of that transaction? Will special rules be required 
for taxpayers who have not previously traded in the contracts? 
(Initially, all taxpayers fall into this category.) Comments regarding 
both substantive criteria and the method of application will be useful.

Comments

    Written or electronic comments (a signed original and eight (8) 
copies, if written) should be timely submitted (in the manner described 
in the ADDRESSES portion of this notice) to the IRS. All comments will 
be available for public inspection and copying.

Drafting Information

    The principal authors of this notice are Patrick E. White, Office 
of Associate Chief Counsel (Financial Institutions and Products), and 
Matthew J. Eichner, Office of Tax Analysis, United States Department of 
the Treasury. However, other personnel from the IRS and Treasury 
Department participated in its development.

Lon B. Smith,
Acting Associate Chief Counsel (Financial Institutions & Products).
[FR Doc. 01-5453 Filed 3-6-01; 8:45 am]
BILLING CODE 4830-01-P