Rev. Rul. 64-160

The purpose of this Revenue Ruling is to provide instructions amplifying the stock identification requirements of section 1.1236-1(d)(1)(ii) of the Income Tax Regulations.

Section 1.1236-1(d)(1) of the regulations provides as follows:

(d) Identification of security in dealer's records .-(1) A security is clearly identified in the dealer's records as a security held for investment when there is an accounting separation of the security from other securities, as by making appropriate entries in the dealer's books of account to distinguish the security from inventories and to designate it as an investment, and by (i) indicating with such entries, to the extent feasible, the individual serial number of, or other characteristic symbol imprinted upon, the individual security, or (ii) adopting any other method of identification satisfactory to the Commissioner.

Prior to its amendment by Treasury Decision 6726, page 305, this Bulletin, section 1.1236-1(d)(1) of the regulations provided that a security was clearly identified in a dealer's records as held for investment when there was an accounting separation of the security from other securities, as by making appropriate entries in the dealer's books of account to distingjish the security from inventories and to designate it as an investment, and indicating with such entires, to the extent feasible, the individual serial number of, or other characteristic symbol imprinted upon, the individual security.

Revenue Ruling 59-332, C.B. 1959-2, 190, holds that, where investment securities of a brokerage firm are deposited in accordance with a securities pilot operation with a bank as transfer agent, to be held in the name of a nominee partnership, together with similar securities of that firm and other participating firms held for sale to customers in the ordinary course of business, such securities do not qualify as clearly identifiable securities.

It came to the attention of the Internal Revenue Service that many securities' dealers were interested in participating in certain proposed methods of clearing stock transactions which required the deposit of all stocks of participating dealers in a single common depository account held in nominee name on behalf of each participating dealer. The purpose of such clearing methods was to eliminate, insofar as possible, physical delivery of stock certificates and to utilize automatic bookkeeping methods to maintain net deposit balances in each type of stock for each participating dealer. Such clearing methods did not, however, permit the identification of investment stocks by indicating individual certificate numbers in the dealer's records as required by section 1.1236-1(d)(1) of the regulations.

After a thorough analysis of the facts regarding the described methods of clearing stock transactions, the Service concluded that there was a sufficient showing of business need for such arrangements, and an apparent sufficiency of accounting records available to satisfactorily identify investment stock involved without the use of certificate number or symbol identification. This conclusion warranted a liberalization of the stock identification requirements with respect to securities' dealers participating in such clearing methods. Accordingly, subparagraph (ii) was added to section 1.1236-1(d)(1) of the regulations.

The following instructions are provided in amplification of the stock identification requirements of section 1.1236-1(d)(1)(ii) of the regulations:

1. Section 1.1236-1(d)(1)(ii) of the regulations is applicable only to those security dealers who, in the buying and selling of stocks, participate in certain approved methods of clearing stock transactions. In general, such clearing methods are those conducted by a clearing company which involve a deposit of stocks of participating dealers and brokers in depository accounts held in nominee name on behalf of each participating dealer and broker and which effect, between participating dealers and brokers, transfers of title to such stocks while eliminating, insofar as possible, physicial delivery of stock certificates and utilizing bookkeeping methods to maintain net deposit balances for each stock with respect to which a participating dealer or broker has an interest. Participating or nonparticipating dealers having possession at any time of stocks held for investment which are identified by certificate numbers imprinted on stock certificates may deposit such stock certificates in a depository arrangement conducted by a clearing company. For each date of purchase of each different stock, such dealers shall, as a means of identification, use the separate serial number imprinted on an instruction form furnished by the clearing company in place of the certificate numbers imprinted on the stock certificates that were deposited.

2. Each dealer must maintain in his records, for each stock owned by him in which he is a dealer, two separate accounts, one for shares held for investment purposes and the other for shares held for sale to customers. However, with respect to shares in a depository arrangement, the specific identification of stock by certificate number, as required in section 1.1236-1(d)(1)(i) of the regulations, will not be required.

3. The clearing company which performs the clearing function and which maintains the clearing facilities for participating dealers must, in addition to such other accounts as it may maintain for each participating dealer, maintain in its records separate investment identification accounts for each such dealer. Such amount is to reflect a dealer's position with respect to each stock held for investment. In addition, the clearing company shall render periodic statements to the dealer. Such statements shall indicate the dealer's position with respect to each stock held for investment purposes at the beginning of each day, on which changes in such position take place, and the dealer's position with respect to each stock held for investment at the end of such day. Such statements shall be reconciled by the dealer with his accounts and the statements, plus any adjusting entries, shall be retained by the dealer.

4. Each investment account, maintained by a dealer, must disclose the name or identifying symbol of the stock, the date of purchase and the purchase price of each lot of stock and in addition the serial number as imprinted on the instruction form furnished by the clearing company. Such instruction form shall request the clearing company to make an entry in its bookkeeping records to cover the delivery of shares out of the dealer's general account, maintained by the clearing company with respect to such dealer, and the receipt of such shares in the dealer's investment identification account. Such entry on the records of the clearing company must disclose the name or identifying symbol of the stock, the date of purchase and the serial number imprinted on the instruction form. With respect to sales, each investment account maintained by a dealer must disclose the name or identifying symbol of the stock, the date of sale, and the sales price and must refer to the serial number of the instruction form previously used to enter such stock in the dealer's investment identification account on the books of the clearing company. In connection with such sale the dealer, on an instruction form furnished by the clearing company, shall request the clearing company to make an entry in its records to cover a decrease of shares in the investment account and an increase of shares in the general account. This procedure is required solely because of the operation of the clearance system. The entry must disclose the name or identifying symbol of the stock, the date of the previous purchase and the serial number imprinted on the instruction form previously used to enter such stock on the records of the clearing company.

5. Separate investment accounts shall be maintained by each participating dealer to reflect purchases and sales of stocks made on behalf of any partner or officer-shareholder of such participating dealer. In connection with such transactions, the dealer shall use similar serially numbered instruction forms to request the clearing company to make entries of the same data as that required by paragraph 4 above. The clearing company may make such entries in the investment identification account maintained by it for such dealer provided an appropriate designation, such as `PO,' is used in the records of the clearing company to indicate that such entries relate to partner's or officer-shareholder's investments. Such designation shall be so maintained in the records of the clearing company until the entry is eliminated as a result of appropriate instructions from the dealer to the clearing company.

6. Each instruction relating to an investment identification account from a dealer to the clearing company must reflect any information necessary for the maintenance of accounts required herein of the clearing company. Copies of such instructions shall be retained by the dealer and the clearing company. All change resulting from the dealer's instructions must be reflected in each participating dealer's investment identification account maintained in the records of the clearing company.

7. Each participating dealer, which acts as a clearing agent for other dealers not participating in the clearing operation, must maintain in its books a separate omnibus investment account for each such nonparticipating dealer, including its partners or officer-shareholders. In addition, each such nonparticipating dealer shall maintain in its books the same type of accounts required of participating dealers. The clearing company shall maintain for each participating dealer, acting as clearing agent for other dealers not participating in the clearing operation, a separate omnibus investment identification account to reflect the entries resulting from instructions with respect to each nonparticipating dealer, including its partners or officer-shareholders, for which each participating dealer acts. An appropriate numerical designation shall be used to indicate that an account relates to a particular nonparticipating dealer's investment account similarly identified on the books of the participating dealer acting as clearing agent. A separate serially numbered instruction form is to be used by the participating dealer for each nonparticipating dealer investment account entity (nonparticipating dealer's own investment account or investment accounts of its partners or officer-shareholders) on the books of the nonparticipating dealer whenever more than one such entity has transactions in the same security on the same day. The allocation of serial numbers on such instruction forms among the nonparticipating dealer's investment account entities shall be required, however, only on the latter's records.

8. Participating dealers that have investment stocks on deposit in the depository arrangement, in either their investment identification account or an omnibus investment identification account, may make a withdrawal thereof by instructing the clearing company to deliver stock certificates. The certificate numbers imprinted on such stock certificates shall be used as a means of identification in place of the serial number that appears on the instruction form which resulted in the original entry in such investment identification account or omnibus investment identification account maintained by the clearing company.

9. For purposes of this Revenue Ruling the term `stock' includes only stock listed or traded on a national security exchange registered with the Securities and Exchange Commission and stock rights and warrants so listed and traded thereon.

Nothing contained in this ruling shall be construed as a determination that stocks accounted for in an investment account are capital assets. In addition, in the case of securities dealers who are specialists in specific stocks on a national securities exchange, nothing in this ruling shall be construed as a determination that stocks in which they specialize are capital assets, although accounted for in an investment account.

Revenue Ruling 59-332, C.B. 1959-2, 190, is hereby modified to indicate that securities dealers participating in approved methods of clearing stock transactions may meet the requirements of section 1.1236-1(d) of the regulations, with respect to identification of securities in their records, without indicating the individual certificate number of each security in their records, provided they comply with the instructions contained in the instant ruling.

¹ Also released as Technical Information Release 591, dated Apr. 30, 1964.