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through 2001, and MMC filed consolidated corporate Federal income
tax returns with these entities for 1997, 1998, and 1999.
Petitioners are accrual basis taxpayers.
1997 Change in Accounting Method
Petitioners elected on the return for 1997 to change the
method of accounting for customer paper. Petitioners had
previously used the original cost basis method to account for
customer paper and elected to change to the mark-to-market method
on the return for 1997. MMC reported a deduction of $5,349,372
related to this change in accounting method (the 1997 deduction).
Change in Law and 1998 Change in Accounting Method
Congress amended the law governing the mark-to-market
accounting method in the Internal Revenue Service Restructuring
and Reform Act of 1998 (the RRA), Pub. L. 105-206, sec. 7003(a),
112 Stat. 832. The RRA added to the Code section 475(c)(4),
which provides that nonfinancial customer paper is ineligible for
mark-to-market treatment. This new provision of the Code applies
to petitioners’ customer paper, and thus petitioners could not
use the mark-to-market method any longer. One year after their
change to the mark-to-market method, they had to revert to their
original accounting method.
After petitioners reverted to the original method, the
effective date provisions of the RRA required petitioners to
offset the 1997 deduction, which they had taken when they
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