"Dealer in commodities" for the section 965 transition tax means the ordinary dictionary sense, a buyer-reseller who does not convert the commodity

Plain-English summary

A field attorney in Large Business & International asked Chief Counsel to pin down what "dealer in commodities" means for the section 965 transition tax. The 2017 transition tax taxed U.S. shareholders on the untaxed offshore earnings of their foreign corporations, at a higher effective rate (about 15.5%) on the portion backed by cash and liquid assets and a lower rate (about 8%) on the rest. Actively traded commodities normally count as liquid "cash-position" assets, but a "specified commodity exception" carves out commodities a foreign corporation holds as inventory or supplies, EXCEPT commodities held "in its capacity as a dealer or trader in commodities." The regulations never define that phrase. The memo surveys the definitions used elsewhere in the Code (sections 864(b), 954(c), 199A, and 475(c)) plus the case law and rejects each: a definition too narrow would widen the exception, and one too broad would gut it, both contrary to Congress's intent and Treasury's stated aim to keep the exception narrow. Chief Counsel concludes the best reading is the ordinary dictionary meaning: a dealer in commodities is a business that buys and sells commodities in a market without converting them into a different form of property. Applied to the three fact patterns: a foreign corporation that buys and resells the same commodity is a dealer (its commodities stay in the cash position); one that processes commodities into other commodities (oil into gasoline, cotton into t-shirts) is not a dealer as to the processed goods; a mixed operator is a dealer only for the portion it resells unprocessed. The practical stakes: dealer commodities remain in the higher-taxed cash position, while genuine inventory or supplies are excluded.

Ruling snapshot

• Question: What does "dealer in commodities" mean for purposes of the specified commodity exception in Treas. Reg. § 1.965-1(f)(13)?
• Outcome: advice given (adopt the common-parlance dictionary definition)
• Key authorities: IRC § 965(c) and Treas. Reg. § 1.965-1(f)(13); compared with IRC §§ 864(b)(2), 954(c), 199A(d), 475(c); Kemon v. Commissioner, 16 T.C. 1026 (1951)

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service

memorandum

Number: 202439014
Release Date: 9/27/2024

CC:INTL:B02
POSTS-114031-24

UILC: 965.00-00

date: August 23, 2024

to: Danielle R. Dold
Area Counsel (Area 3)
(Large Business & International)

from: Peter H. Blessing
Associate Chief Counsel
(International)

subject: Dealer in Commodities in Treas. Reg. §1.965-1(f)(13)

This Chief Counsel Advice responds to your request for assistance under section 965 of
the Internal Revenue Code ("Code"). This memorandum provides non-taxpayer-specific
legal advice regarding when a specified foreign corporation will be considered a dealer
in commodities for purposes of the specified commodity exception of Treas.
Reg. §1.965–1(f)(13). This advice may not be used or cited as precedent.

I. ISSUE

What does the term "dealer in commodities" mean for purposes of Treas. Reg. §1.965–
1(f)(13)?

II. CONCLUSION

Given the absence of a definition for the term "dealer in commodities" in Treas.
Reg. §1.965–1(f)(13), the best definition consistent with the purpose of section 965(c) is
the common and ordinary dictionary definition (common parlance). Based on common
parlance, dealers are persons that conduct a business of buying and selling property in
a relevant market without converting it into another form of property. A "dealer in
commodities" is therefore a person that conducts a business of buying and selling
commodities in a relevant market without converting the commodities into another form
of property.

III. BACKGROUND

For purposes of this memo, assume that USP is a United States shareholder (as that
term is defined in section 951(b)) ("U.S. shareholder") of various specified foreign
corporations ("SFCs") (as that term is defined in section 965(e)). The SFCs that
regularly buy and sell commodities may fall within one of three categories:

1. SFCs that purchase commodities from related or unrelated parties/SFCs and sell
   the same commodities to related or unrelated parties/SFCs ("Category 1 SFCs").

2. SFCs that purchase commodities from related or unrelated parties/SFCs,
   process the commodities into other commodities, and sell the processed
   commodities to related or unrelated parties/SFCs ("Category 2 SFCs").

3. SFCs that would be Category 2 SFCs but that also sell unprocessed
   commodities to related or unrelated parties/SFCs ("Category 3 SFCs").

Whether the SFCs may benefit from the "specified commodity exception" under Treas.
Reg. §1.965–1(f)(13) (discussed below) will depend upon whether the SFCs hold the
commodities in their "capacity as a dealer or trader in commodities." This memorandum
focuses solely on the issue of whether the SFCs are considered to hold commodities in
their capacity as a dealer for purposes of the specified commodity exception.

IV. SECTION 965(c)'S LEGAL FRAMEWORK

In general, the effective rate of tax on a U.S. shareholder's section 965 inclusion
amount varies based on the "cash position" of the U.S. shareholder's SFCs. [1] Under
section 965(c)(1), a U.S. shareholder of a deferred foreign income corporation [2] is
generally allowed a deduction, from its section 965 inclusion amount, that generally
results in a 15.5% rate of tax on the U.S. shareholder's aggregate foreign cash position
and an 8% rate of tax otherwise. Section 965(c)(3)(A) defines the aggregate cash
position of a U.S. shareholder based on the cash positions of the U.S. shareholder's
SFCs measured on certain cash measurement dates.[3]

[1] See generally section 965(c) (providing for a deduction, the amount of which varies based on a U.S. shareholder's pro rata share of the cash position of each of its SFCs).
[2] Section 965(d)(1) defines a deferred foreign income corporation as any specified foreign corporation ("SFC") of a U.S. shareholder which has accumulated post-1986 deferred foreign income greater than zero.
[3] See Treas. Reg. §1.965-1(f)(15) (it defines the cash measurement dates to consist of the first cash measurement date, the second cash measurement date, and the final cash measurement date). The first cash measurement date of an SFC is the close of the last taxable year of the SFC that ends after November 1, 2015, and before November 2, 2016, if any. (Treas. Reg. §1.965-1(f)(25)). The second cash measurement date of an SFC is the close of the last taxable year of the SFC that ends after November 1, 2016, and before November 2, 2017, if any. (Treas. Reg. §1.965-1(f)(31)). The final cash measurement date of an SFC is the close of the last taxable year of the SFC that begins before January 1, 2018, and ends on or after November 2, 2017, if any. (Treas. Reg. §1.965-1(f)(24)).

Section 965(c)(3)(B) defines a SFC's cash position as the sum of:

  (i) cash held by such foreign corporation,
  (ii) the net accounts receivable of such foreign corporation, plus
  (iii) the fair market value of the following assets held by such corporation:
           (I) Personal property which is of a type that is actively traded and for
           which there is an established financial market.[4]
           (II) Commercial paper, certificates of deposit, the securities of the
           Federal government and of any State or foreign government.
           (III) Any foreign currency.
           (IV) Any obligation with a term of less than one year.
           (V) Any asset which the Secretary identifies as being economically
           equivalent to any asset described in this subparagraph.

Commodities generally fall under the category described in section 965(c)(3)(B)(iii)(I).

In section 965(c)(3)(B), Congress provided an enumerated list of items that make up the
cash position and express Secretarial authority to expand, but not to narrow, the list.
The legislative history further highlights the items that are specifically included in an
SFC's cash position, without suggesting any exceptions or possible narrowing of the
categories:

  The cash position of an entity consists of all cash, net accounts receivable,
  and the fair market value of similarly liquid assets, specifically including
  personal property that is actively traded on an established financial market,
  government securities, certificates of deposit, commercial paper, foreign
  currency, and short-term obligations. In addition, the Secretary may identify
  other assets that are economically equivalent to the enumerated assets that
  are included.[5]

As a general matter, then, Congress expressed an intention that "all" property falling
within the enumerated listed items be included in the cash position, with that property
"specifically including" personal property that is actively traded on an established
financial market. In light of this general Congressional intent that all items described in
the enumerated list be included in the cash position, and in the absence of a specific
grant of authority to the Secretary to narrow the list, any regulatory exceptions to the list
should be interpreted narrowly so as to best harmonize with the statutory text.[6] [7]

[4] Emphasis added.
[5] H.R. Rep. No. 115–446, 609–10 (2017) (emphasis added); cite also to House Bill, and the Senate Amendment. See also H.R. Rep. 115-409, 379 (2017); S. Print. No 115-20, 365 (2017).
[6] See e.g., Time Warner Entertainment Co., L.P. v. Everest Midwest Licensee, L.L.C., 381 F.3d 1039, 1050 (10th Cir. 2004) (providing that "a regulation must be interpreted in such a way as to not conflict with the objective of its organic statute"), citing Joy Technologies, Inc. v. Sec. of Labor, 99 F.3d 991, 996 (10th Cir. 1996) ("[A] regulation must be interpreted so as to harmonize with and further and not to conflict with the objective of the statute it implements.").
[7] Although Congress did not provide the Secretary specific authority to narrow the enumerated list of cash position items, section 965(o) authorizes the Secretary to prescribe regulations as may be necessary or appropriate to carry out the provisions of section 965. Accordingly, while any regulatory exceptions to the enumerated list should be interpreted narrowly to best harmonize with Congressional intent, it was nonetheless within the Secretary's regulatory discretion to provide limited exceptions that were necessary or appropriate.

The proposed regulations under section 965 did not contain any exceptions to section
965(c)(3)(B)(iii)(I).[8] Prop. Treas. Reg. §1.965–1(f)(13) read as follows: "(13) Cash-
equivalent asset. The term cash-equivalent asset means any of the following assets –
(i) Personal property which if of a type that is actively traded and for which there is an
established financial market. In addition, the Secretary may identify other assets that
are economically equivalent to the enumerated assets that are treated as cash."[9] The
preamble to the proposed regulations, however, noted that "comments requested
exceptions for commodities representing inventory or supplies."[10]

The Department of the Treasury ("Treasury Department") and the Internal Revenue
Service ("IRS"), in response to taxpayers' comments, included in the final regulations an
exception to section 965(c)(3)(B)(iii)(I) for certain commodities that qualify as inventory
or supplies (the "specified commodity exception").[11] The preamble to the final
regulations described the comments asking for an exception for certain commodities as
follows:

  Comments requested that certain products or raw materials held as
  inventory that are a type of property that may be actively traded on, for
  example, commodities markets, and forward contracts with respect to those
  items be excluded from a specified foreign corporation's cash position if the
  items are part of the corporation's ongoing operations or are disposed of in
  the normal course of business.[12]

The preamble to the final regulations explicitly stated, twice, that the specified commodity
exception is a narrow exception:

  The Treasury Department and the IRS have determined that a narrow
  exemption from the definition of "cash position" is appropriate for certain
  assets held by a specified foreign corporation in the ordinary course of its
  trade or business as well as certain privately negotiated contracts to buy or
  sell such assets. Therefore, in response to comments, the final regulations
  provide that a commodity that is described in section 1221(a)(1) or
  1221(a)(8) in the hands of the specified foreign corporation is excluded from
  the category of personal property which is of a type that is actively traded
  and for which there is an established market, except with respect to dealers
  or traders in commodities.[13]
  …
  These well-settled delineations of what constitute inventory or supplies are
  consistent with the statutory definition of and legislative history explaining
  cash-equivalent assets in section 965(c)(3)(B)(iii). Moreover, the contours
  of this category have been carefully defined through common law and are
  generally well-understood by taxpayers. As a result, an exception from
  cash-equivalent assets for this type of property is well-defined and
  understood, consistent with statutory intent, and appropriately narrow.[14]

Thus, as published in the final regulations, Treas. Reg. §1.965–1(f)(13) reads as
follows:

  (13) Cash-equivalent asset—

  (i) In general. The term cash-equivalent asset means any of the following
  assets— (A) Personal property which is of a type that is actively traded and for
  which there is an established financial market, other than a specified commodity;
  ...
  (ii) Specified commodity. The term specified commodity means a commodity held
  by a specified foreign corporation that, in the hands of the specified foreign
  corporation, is property described in section 1221(a)(1) or 1221(a)(8). This
  paragraph (f)(13)(ii) does not apply with respect to a specified foreign
  corporation that is a dealer or trader in commodities.[15]

Two months after the publication of the final regulations, in response to taxpayer's
comments, the Treasury Department and the IRS clarified the specified commodity
exception through a technical correction.[16] The technical correction revised the specified
commodity exception to read as follows:

[8] Guidance Regarding the Transition Tax Under Section 965 and Related Provisions ("Proposed Regulations"), 83 Fed. Reg. 39514, 39546 (August 2018).
[9] Proposed Regulations, 83 Fed. Reg. 39514, 39346 (August 2018)
[10] Preamble to the Proposed Regulations, 83 Fed. Reg. 39514, 39538 (August 2018).
[11] Regulations Regarding the Transition Tax under Section 965 and Related Provisions ("Final Regulations"), 84 Fed. Reg. 1838, 1840 (February 2019).
[12] Preamble to the Final Regulations, 84 Fed. Reg. 1838, 1840 (February 2019).
[13] Id. (emphasis added).
[14] Id., at 1970 (emphasis added).
[15] Final Regulations, 84 Fed. Reg. 1838, 1880 (February 2019) (emphasis added).
[16] Regulations Regarding the Transition Tax Under Section 965 and Related Provisions; Correction ("Technical Correction"), 83 Fed. Reg. 14260 (April 2019).

  The term specified commodity means a commodity held, or, for purposes
  of paragraph (f)(18) of this section, to be held, by a specified foreign
  corporation that, in the hands of the specified foreign corporation, is
  property described in section 1221(a)(1) or 1221(a)(8). This paragraph
  (f)(13)(ii) does not apply with respect to commodities held by a
  specified foreign corporation in its capacity as a dealer or trader in
  commodities.[17]

By adding the words "in its capacity as a dealer or trader in commodities," the technical
correction clarified that merely being a dealer or trader in commodities does not result in
the commodities held by a dealer/trader being included in the SFC's cash position, as
there are dealers/traders that also engage in production and manufacturing by
processing a commodity into another commodity or property (for example, processing
oil into gasoline, or cotton into t-shirts), and, therefore, do not hold the commodity in
their capacity as a dealer or trader.

Thus, under Treas. Reg. §1.965–1(f)(13)(ii), which incorporates the technical correction,
the specified commodity exception does not apply to the commodities that are held by
an SFC in its capacity as a dealer or trader in commodities (the "specified commodity's
dealer/trader carve out"). In other words, the specified commodity exception of Treas.
Reg. §1.965-1(f)(13) excludes from an SFC's cash position the FMV of commodities
only if they are both inventory in the hands of the SFC and not held by the SFC in its
capacity as a dealer or trader in commodities. The regulations do not define a "dealer or
trader in commodities" or what it means to hold commodities in a capacity as a dealer or
trader. Nor do they provide any cross reference to other regulations or code sections for
a definition.

V. ANALYSIS

In the absence of a definition or cross reference for a term, a reasonable approach is to
look to the relevant definitions within the Code, the case law, and common and ordinary
dictionary definitions (common parlance).[18] In considering the term "dealer," this
memorandum analyzes a variety of these definitions and addresses whether using
these definitions would be reasonable for purposes of section 965(c) and which is best.

  A. Definition of a Dealer in Section 864(b) and Regulations Thereunder

[17] Id. (emphasis added).
[18] See Sutherland Statutory Construction § 47:27 (7th ed.) ("Usually the words of a statute must be construed in accordance with their ordinary and common meaning unless they have acquired a technical meaning or unless a definite meaning is apparent or indicated by the context of the words."), citing United States v. Hansen, 599 U.S. 762, 775 (2023); National R.R. Passenger Corp. v. Morgan, 536 U.S. 101, 122 S. Ct. 2061, 153 L. Ed. 2d 106 (2002); Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 115 S. Ct. 788, 130 L. Ed. 2d 682 (1995); Smith v. U.S., 508 U.S. 223, 113 S. Ct. 2050, 124 L. Ed. 2d 138 (1993).

The regulations under section 864 provide one of the oldest definitions in the
international tax context of a type of dealer. Section 864(b)(2)(A)(ii) and (B)(ii) generally
provide that if a foreign person who is not a dealer trades in U.S. stocks, securities, or
commodities, for their own account, whether through its own employees or through a
U.S. agent, the trading activity does not create a U.S. trade or business (this rule is
generally known as a trading safe harbor). Section 864(b)(2)'s trading safe harbor and
its exclusion for dealers was enacted by the Congress in 1966 to expand the scope of
the prior trading safe harbor.

The 1966 expansion was intended to widen the circumstances in which a foreign person
could trade in U.S. stocks and commodities without establishing a U.S. trade or
business, while limiting those benefits to non-dealers.[19] Thus, the trading safe harbor,
similar to the specified commodity exception, has a carve out for dealers. As a result of
this carve out, if a foreign non-dealer trades in U.S. stocks, securities, or commodities
for its own account, it would benefit from the trading safe harbor and would not be
viewed as having a U.S. trade or business. But if a foreign dealer engaged in the same
activity, it would have a U.S. trade or business.

Section 864 does not define a dealer. Treas. Reg. §1.864-2(c)(2)(iv)(a), which was
published in 1967 and has remained substantially the same since, defines a dealer in
stocks or securities as a merchant of stocks or securities, with an established place of
business, regularly engaged as a merchant in purchasing stocks or securities, and
selling them to customers with a view to the gains and profits that may be derived
therefrom.[20] In other words, to be a dealer in stocks or securities for purposes of section
864(b)(2)'s trading safe harbor, there are two key elements (1) being a merchant of
stocks or securities with an established place of business with a view to the gains and
profits derived from buying and selling securities, and (2) regularly engaging as a
merchant in purchasing stocks or securities and selling them to customers
The final regulations under section 864, however, do not provide a definition for a
"dealer in commodities" or of a "dealer" generally. Treas. Reg. §1.864-2(c)(2)(iv)(a),
which limits its definition to that of a "dealer in stock or securities," therefore has limited
informative ability when determining what a "dealer in commodities" means for purposes
of the specified commodity exception.

[19] H.R. Rep. No. 89-1450, 55-57 (1966).
[20] This definition has been in the regulations since the Notice of the Proposed Rule Making, 32 Fed. Reg. 14848, 14850 (October 1967). ("(iv) Definition of dealer in stocks or securities—(a) in general. For purposes of this subparagraph, a dealer in stocks or securities is a merchant of stocks or securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged as a merchant in purchasing stocks or securities and selling them to customers with a view to the gains and profits that may be derived therefrom. Persons who buy and sell, or hold, stocks or securities for investment or speculation, irrespective of whether such buying or selling constitutes the carrying on of a trade or business, and officers of corporations and members of partnerships who in their individual capacities buy and sell, or hold, stocks or securities for investment or speculation are not dealers in stocks or securities within the meaning of this subparagraph. In determining under this subdivision whether a person is a dealer in stocks or securities such person's transactions in stocks or securities effected both in and outside the United States shall be taken into account.")

  B. Definition of a Regular Dealer under Treas. Reg. §1.954-2(a)(4)(iv)

Section 954(c) provides a definition for a "regular dealer" in the context of foreign
personal holding company income ("FPHCI"). Congress enacted section 954(c) as part
of the 1986 tax reform that significantly expanded the scope of FPHCI. Section
954(c)(1) defines FPHCI to include the excess of gains over losses from the sale or
exchange of certain property. Section 954(c)(2)(C) provides an exception from FPHCI
from this category of income for "regular dealers."

As a result of section 954(c)'s regular dealer exception, FPHCI does not include income
derived by regular dealers from sale of exchange of certain property entered into in the
ordinary course of the regular dealer's trade or business. In other words, if a foreign
person who is a regular dealer derives certain types of income, that income is not
FPHCI. On the other hand, if a person who is not a regular dealer derives the same
income, that income is FPHCI. Thus, unlike section 864(b)(2)'s dealer carve-out from
the trading safe harbor and Treas. Reg. §1.965–1(f)(13)(ii)'s specified commodities
dealer carve out, this exception from FPHCI provides a tax benefit to regular dealers.

Treas. Reg. §1.954-2(a)(4)(iv) defines a "regular dealer," for purposes of FPHCI, as a
CFC that "(A) regularly and actively offers to, and in fact does, purchase property from
and sell property to customers who are not related persons (as defined in section
954(d)(3)) with respect to the controlled foreign corporation in the ordinary course of a
trade or business; or (B) regularly and actively offers to, and in fact does, enter into,
assume, offset, assign or otherwise terminate positions in property with customers who
are not related persons (as defined in section 954(d)(3)) with respect to the controlled
foreign corporation in the ordinary course of a trade or business."[21]

In other words, in relevant part,[22] to be a regular dealer for purposes of section
954(c)(2)(C)'s exception from FPHCI, there are three key elements (1) purchasing and
selling property to customers (2) that are unrelated (3) regularly and actively in the
ordinary course of business.

Given that (a) Treas. Reg. §1.954-2(a)(4)(iv) defines a "regular" dealer as opposed to a
dealer, and (b) the regulation is drafted to reflect the policies of subpart F that an
exception from subpart F income be narrow (namely, by providing a definition of
"regular dealer" that does not involve related party transactions), using the definition of a
regular dealer found in the section 954 regulations for purposes of section 965 is not
reasonable. Using a narrow definition of a dealer for purposes of the specified
commodity exception would broaden the scope of the exception, which would be
contrary to the general legislative intent behind section 965(c) to include in the cash
position all property covered by section 965(c)(3)(B)'s enumerated list of items and the
language in the preamble to the final regulations under section 965 to have a "narrow"
exception.

[21] Emphasis added.
[22] The second part of the regular dealer definition that addresses derivatives is not relevant to the fact pattern at hand and hence is not discussed here.

C. Definition of a Dealer under Section 199A

Section 199A(a), which was enacted by Congress in 2017, in the same bill that enacted
section 965, provides a deduction for certain non-corporate taxpayers, the amount of
which depends on having a "qualified trade or business." Section 199A(d)(1) defines a
"qualified trade or business" as any trade or business other than a "specified service
trade or business." Section 199A(d)(2) defines a "specified service trade or business"
as, among others, performance of services that consists of trading or dealing in
securities or commodities.

Treas. Reg. §1.199A-5(b)(2)(xiii)(B) defines "dealing in commodities," for purposes of
section 199A(d)(2), as "regularly purchasing commodities from and selling commodities
to customers in the ordinary course of a trade or business or regularly offering to enter
into, assume, offset, assign, or otherwise terminate positions in commodities with
customers in the ordinary course of a trade or business." An exception, however, is
provided with respect to gains and losses from "qualified active sales." Treas. Reg.
§1.199A-5(b)(2)(xiii)(1) defines qualified active sales to mean "the sale of commodities
in the active conduct of a business as a producer, processor, merchant, or handler of
commodities if the trade or business is as an active producer, processor, merchant or
handler of commodities." The section 199A regulations, borrowing from the "qualified
active sale" definition of Treas. Reg. 1.954-2(f)(2)(iii),[23] provide a relatively low bar for
the types of activities required to give rise to a commodities trade or business, including
merely blending and drying agricultural commodities, concentrating, refining, mixing,
crushing, aerating or milling commodities, or owning and operating facilities for storage
or warehousing of commodities.[24]

Stated simply, in relevant part,[25] there are three key elements for being a "dealer" in
commodities for purposes of section 199A(d)(2)'s deduction for qualified trade or
businesses: (1) purchasing and selling commodities to customers, (2) regularly in the
ordinary course of a trade or business, (3) but excluding qualified active sales.

The qualified active sales exception, and therefore Treas. Reg. §1.199A-
5(b)(2)(xiii)(B)'s definition of "dealing in commodities" as a whole, is inappropriate for
purposes of the specified commodity exception. The minimal level of activity necessary
to give rise to a qualified active sale substantially narrows the definition of a dealer,
which, in the context of section 965(c), would substantially broaden the specified
commodities exception. As discussed, a broad specified commodities exception would
be contrary to the general legislative intent behind section 965 and the language in the
preamble to the final regulations to have a "narrow" exception. Further, the qualified
active sales definition found in Treas. Reg. §1.954-2(f)(2)(iii) predates both section
199A and section 965. The final regulations under section 965(c) could have easily
incorporated the qualified active sales rules in defining a dealer in commodities for
purposes of the specified commodity exception but did not do so. The qualified active
sale exception was therefore implicitly rejected by the final regulations.

[23] Treas. Reg. § 1.954-2(f) generally includes gains from commodities transactions in foreign personal holding company income, with an exception for gains arising from qualified active sales.
[24] Treasury Regulations Section 1.199A-5(b)(2)(xiii)(4), (5).
[25] The part of the "dealing in commodities" definition that addresses derivatives is not relevant to the fact pattern at hand and hence is not discussed here.

  D. Definition of a Dealer in Securities under Section 475(c)

Under section 475(a), which was enacted by the Congress in 1993, dealers in securities
must, in the case of any security that is inventory in their hands, include the security in
inventory at its fair market value, and in the case of any security which is not inventory
in their hands and that is held at the close of any taxable year, recognize gain or loss as
if such security were sold for its fair market value on the last business day of such
taxable year, taking into account such gain or loss for such taxable year (this is
generally known as the mark to market rule). Section 475(c)(1) defines a "dealer in
securities" for purposes of section 475 as "a taxpayer who-- (A) regularly purchases
securities from or sells securities to customers in the ordinary course of a trade or
business; or (B) regularly offers to enter into, assume, offset, assign or otherwise
terminate positions in securities with customers in the ordinary course of a trade or
business."[26]

In other words, in relevant part,[27] to be a "dealer" in securities for purposes of section
475's mark to market rules, there are two key elements (1) in the ordinary course of
business regularly, (2) purchasing or selling securities to customers (disjunctive test).

Given its disjunctive test, the definition of a dealer under section 475(c) is very broad.
Using such a broad definition of a dealer for purposes of the specified commodity
exception (i.e., a broad carve out) narrows the scope of the specified commodity
exception to a point where the specified commodity exception would have little or no
function. It is therefore not reasonable to use this definition for purposes of Treas.
Reg. §1.965–1(f)(13) as having such a broad definition for a dealer would effectively
write the specified commodity exception out of the regulations.

E. Definition of a Dealer in Case Law

There is ample case law on the definition of a dealer, mainly focused on distinguishing a
dealer from a trader or an investor for purposes of qualification of gain as capital gain.

[26] Section 475(e) provides that a dealer in commodities may elect to apply section 475 to commodities held by such dealer in the same manner as section 475 applies to securities held by a dealer in securities. A "dealer in commodities" is not specifically defined in section 475.
[27] The second part of the dealer definition that addresses derivatives is not relevant to the fact pattern at hand and hence is not discussed here.

One of the seminal cases in this regard is Kemon v. Commissioner.[28] In this case, the
Tax Court described dealers as follows:

  Those who sell 'to customers' are comparable to a merchant in that they
  purchase their stock in trade, in this case securities, with the expectation of
  reselling at a profit, not because of a rise in value during the interval of time
  between purchase and resale, but merely because they have or hope to
  find a market of buyers who will purchase from them at a price in excess of
  their cost. This excess or mark-up represents remuneration for their labors
  as a middle man bringing together buyer and seller, and performing the
  usual services of retailer or wholesaler of goods. ... Such sellers are known
  as 'dealers.'[29]

This definition of a dealer in Kemon has been cited as the key definition of a dealer by
other courts in different circuits.[30]

Thus, to be a "dealer" under case law, there are two key elements (1) purchase and
sale of the same property to customers, (2) with the expectation of reselling at a profit
that represents remuneration for their labors as a middleman bringing together buyer
and seller. Similar to certain statutory definitions discussed above, the case law
definition of a dealer requires a dealer to buy and sell (conjunctive test).

In defining a "dealer," the case law emphasizes the characteristics that distinguish a
dealer from a trader. In the context of the specified commodity exception, these
distinctions are of less immediate relevance because bother dealers in commodities and
traders in commodities are excluded from the exception. Nonetheless, the case law's
emphasis that a dealer derives its profits from acting as a middleman is informative of
the nature of a dealer and ultimately consistent with the common parlance
understanding of a dealer discussed below.

F. Definition of a Dealer in the Common Parlance

When a term is not defined in a statute, as is the case here, courts turn to its ordinary
and contemporary dictionary meaning.[31] "Usually the words of a statute must be
construed in accordance with their ordinary and common meaning unless they have
acquired a technical meaning or unless a definite meaning is apparent or indicated by
the context of the words."[32] As shown above, the definitions of "dealer" in the Code and
regulations exist in their own distinct contexts and, for varyious reasons, do not provide
an appropriate meaning of "dealer in commodities" for purposes of the specified
commodity exception. Hence, it is appropriate to turn to the ordinary dictionary
definitions of the term "dealer" to determine its meaning in common parlance. Here, the
meaning of a term in a regulation is at issue, but the same inquiry into the ordinary and
common meaning is appropriate given the lack of definition in the regulations.[33]

Webster's Third New International Dictionary defines a dealer as "a person who makes
a business of buying and selling goods especially without altering their condition,"[34] and
that is typical of other dictionary definitions.[35]
The ordinary dictionary definition therefore supports a common parlance understanding
of "dealers" as referring to persons that conduct a business of buying and selling
property (conjunctive test) in a relevant market without adding value by converting the
purchased property into different property.[36] A dealer in commodities is therefore a
person that conducts a business of buying and selling a given commodity in a relevant
market without adding value by converting the commodity into different property.

This understanding is consistent with the case law understanding of a dealer discussed
above.

[28] Kemon v. Commissioner, 16 T.C. 1026 (T.C. 1951).
[29] Kemon, 16 T.C. at 1032-33. (internal citations omitted).
[30] See e.g., Martin v. Commissioner, 147 F.3d 147, 151 (2d Cir. 1998); United States v. Diamond, 788 F.2d 1025, 1027 (4th Cir.1986); Mirro–Dynamics Corp. v. U.S., 374 F.2d 14, 16 (9th Cir.1967); U.S. v. Wood, 943 F.2d 1048, 1051 (9th Cir.1991); Frank v. Commissioner, 321 F.2d 143, 150-151 (8th Cir. 1963); Bielfeldt v. Commissioner, T.C. Memo. 1998-394 (T.C. 1998); MacAdam v. Commissioner, T.C. Memo. 1991-410 (T.C. 1991); King v. Commissioner, 89 T.C. 445, 458 (1987).
[31] Garland v. Cargill, 602 U.S. 402, 415-416 (2024); Sutherland Statutory Construction § 66:3 (8th ed.), citing Wisconsin Central Ltd. v. U.S., 138 S. Ct. 2067 (2018).
[32] Sutherland Statutory Construction § 47:27 (7th ed.), citing United States v. Hansen, 599 U.S. 762, 775 (2023); National R.R. Passenger Corp. v. Morgan, 536 U.S. 101, 122 S. Ct. 2061, 153 L. Ed. 2d 106 (2002); Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 115 S. Ct. 788, 130 L. Ed. 2d 682 (1995); Smith v. U.S., 508 U.S. 223, 113 S. Ct. 2050, 124 L. Ed. 2d 138 (1993).
[33] See e.g., Mitchell v. Commissioner, 775 F.3d 1243, 1249 (10th Cir. 2015) (providing that in interpreting regulations, "we apply the same rules we use to interpret statutes" and "[w]e begin by examining the plain language of the text, giving each word its ordinary and customary meaning.").
[34] Dealer, WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY (3d. ed. 1986).
[35] Black's Law Dictionary defines a dealer as "someone who purchases goods or property for sale to others; a retailer;" or "a person or firm that buys and sells securities for its own account as a principal, and then sells to a customer." Dealer, Black's Law Dictionary (11th ed. 2019). The Concise Oxford English Dictionary defines a dealer as "a person who buys and sells goods" or "a person who buys and sells shares or other financial assets as a principal (rather than as a broker or agent)." Dealer, CONCISE OXFORD ENGLISH DICTIONARY (12th ed. 2011).
[36] While the Webster's definition expressly emphasizes the absence of converting or altering the property that is bought and sold (Webster's Third New International Dictionary), the Black's Law Dictionary and Concise Oxford English Dictionary definitions listed in n. 35 imply as much by referring to the purchasing and selling of "goods" or "property," without any suggestion that the "goods" or "property" sold are different than the "goods" or "property" purchased.

VI. CONCLUSION

As discussed above, the common parlance meaning of a dealer in commodities refers
to a person that conducts a business of buying and selling a given commodity in a
relevant market without converting it into another property. In the absence of a definition
in the final section 965(c) regulations or any cross-reference to other definitions of a
"dealer" provided by the Code, the specified commodity exception should be understood
as adopting this common parlance understanding.

Further, in contrast with definitions of "dealer" provided elsewhere in the Code or
regulations, this common parlance meaning is consistent with both the legislative intent
behind section 965(c) and the Treasury Department's objective to create a narrow
exception from including the value of commodities in an SFC's cash position. The
common parlance meaning is also consistent with the case law's understanding of a
dealer.

Thus, under the common parlance understanding of a dealer and for purposes of the
specified commodity exception:

1. Category 1 SFCs that purchase commodities from related or unrelated parties
   and sell the same commodities to related or unrelated parties are dealers.

2. Category 2 SFCs that purchase commodities from related or unrelated parties,
   process the commodities into other commodities, and sell the processed[37]
   commodities to related or unrelated parties are not dealers.

3. Category 3 SFCs that purchase commodities from related or unrelated parties,
   process a portion of the commodities into other commodities, and sell the
   processed commodities and unprocessed commodities to related or unrelated
   parties are dealers with respect to the portion of the commodities that are sold
   without processing but are not dealers with respect to the portion of the
   commodities that are sold after processing.

VII. DISCLOSURE

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

[37] Processing in this context means manufacturing, producing, or constructing. Storing, handling, shipping, or transporting do not constitute processing. As discussed above, the common parlance understanding of a dealer is of a person that buys and resells the same product in a relevant market. Thus, by definition, a dealer engages in manufacturing, production, or construction, by changing the form of the underling property, is not holding that product in its capacity as a dealer. Section 965 and its regulations do not define the term dealer. Nor do they define the term production, which is indirectly related to the definition of the term dealer. However, Treas. Reg. 1.954-3(a)(1)(ii)(a) specifically provides that "the term 'processing' shall be deemed not to include handling, packing, packaging, grading, storing, transporting, slaughtering, and harvesting." See also, Garnac Grain v. Commissioner, 95 T.C. 7 (T.C. 1990) (wherein the Tax Court disagreed with the taxpayer, a global grain merchant, that its use of grain elevators that stored grain (the storage included drying, cleaning, aerating, blending, and fumigating grains) rose to the level of manufacturing or productions for purposes of section 993 (the regulations under section 993 offer a similar definition of production as in section 954) and found for the IRS that the grain storage activities provided by the grain elevators did not rise to the level of production.).

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