Mark-to-market should not apply to small banks.

• Author: Wheeler, Charles W.
• Position: Brief Article

The Revenue Reconciliation Act of 1993 (RRA) enacted Sec. 475 effective for tax years ending on or after Dec. 31, 1993. Taxpayers who are dealers in any security must adjust the tax basis of dealer securities to fair market value as of year-end and include any gains or losses in income for the year, unless an exception to the general rule applies. In IR-93-78, the Service explained that these provisions may apply to many financial institutions not traditionally considered securities dealers. Thus, taxpayers that make and regularly sell loans are affected, unless the loans are not held for sale and any other securities are held for investment. These exceptions are not necessarily controlled by financial accounting provisions.

Some observers have noted a paradox in the mark-to-market requirement. When originally proposed by the Bush Administration, this provision was perceived as possible retaliation for the securities industry's opposition to granting authority for banks to enter the securities business (as proposed at one time by the Administration). Even so, the legislative history for the RRA indicates that banks indeed might be covered.

In a somewhat related area, small independent banks with gross receipts under $5 million were thought to be exempt from the accrual method of accounting mandated in Sec. 448, added...