[Federal Register Volume 61, Number 5 (Monday, January 8, 1996)]
[Rules and Regulations]
[Pages 517-522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-178]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602
[TD 8653]
RIN 1545-AS75
Hedging Transactions by Members of a Consolidated Group
AGENCY: Internal Revenue Service, Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to the
character and timing of gain or loss from certain hedging transactions
entered into by members of a consolidated group. These regulations
apply when one member of the group hedges its own risk, hedges the risk
of another member, or enters into a risk-shifting transaction with
another member. The regulations are needed to provide appropriate rules
for these transactions. The regulations provide guidance for
corporations that are members of consolidated groups.
DATES: These regulations are effective February 7, 1996.
For dates of applicability of these regulations, see Sec. 1.446-
4(e)(9)(iv) and Sec. 1.1221-2(g) (4), (5), and (6).
FOR FURTHER INFORMATION CONTACT: Jo Lynn Ricks of the Office of the
Assistant Chief Counsel (Financial Institutions and Products),
telephone (202) 622-3920 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1480. Some responses to these collections of
information are mandatory, and others are required to obtain the
benefit of the separate-entity election or of applying single-entity
treatment in taxable years prior to the general effective date of the
regulations.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated annual burden per respondent or recordkeeper varies
from 1.0 to 40.0 hours, depending on individual circumstances, with an
estimated average of 5 hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On July 18, 1994, the IRS published in the Federal Register (59 FR
36394) a notice of proposed rulemaking (FI-34-94) relating to the
character and timing of gain or loss from certain risk-shifting
transactions entered into by members of a consolidated group. Comments
were received on the proposed regulations, and a public hearing was
held on October 18, 1994. Most commentators believe that the proposed
regulations provide a sensible and flexible set of rules to deal with
hedging operations by the members of a consolidated group of
corporations.
The most significant comment on the regulations relates to their
effective date. Almost all of the commentators requested a transition
rule permitting consolidated groups to elect to apply the proposed
character rules retroactively. The final regulations adopt this
suggestion, generally allowing consolidated groups to elect to apply
the single-entity approach of the proposed regulations to all open
years. Section 1.1221-2, concerning the character of hedging
transactions, was made retroactive for all open years to permit the IRS
to resolve fairly and consistently controversies involving transactions
that were entered into prior to the publication date of those
regulations. It is appropriate that these regulations, as an integral
part of Sec. 1.1221-2, also apply retroactively. To prevent any adverse
consequences, however, retroactivity is elective.
The proposed regulations, with new effective date provisions, are
adopted as final regulations. The new provisions, and several comments
that were not adopted, are discussed below.
Explanation of Provisions
Character Regulations
The final regulations retain the single-entity approach of the
proposed regulations. That is, they treat the risk of one member of the
group as the risk of the other members, as if all the members were
divisions of a single corporation. Thus, a member of a consolidated
group that hedges the risk of another member by entering into a
transaction with a third party may receive ordinary gain or loss
treatment on that transaction if the transaction otherwise qualifies as
a hedging transaction.
Under this single-entity approach, intercompany transactions are
neither hedging transactions nor hedged items. Because they are treated
as transactions between divisions of a single corporation, intercompany
transactions do not reduce the risk of that single corporation and,
therefore, fail to qualify as hedging transactions.
Some commentators requested that the IRS extend the single-entity
approach to apply the hedging rules to a taxpayer's transactions that
hedge the
[[Page 518]]
risk of a related party that is not a member of the taxpayer's
consolidated group. The IRS and Treasury, however, do not believe that
this approach is appropriate where the parties file different tax
returns. Accordingly, the final regulations do not adopt this
suggestion.
The final regulations also retain the separate-entity election of
the proposed regulations, permitting a consolidated group to treat its
members as separate entities when applying the hedging rules. The
election is made by attaching a statement to the group's federal income
tax return.
For a group that elects separate-entity treatment, an intercompany
transaction is treated as a hedging transaction if and only if: (1) it
would qualify as a hedging transaction if entered into with an
unrelated party; and (2) it is entered into with a member that, under
its method of accounting, marks its position in the intercompany
transaction to market. If these requirements are satisfied, the member
with respect to which it is an intercompany hedging transaction must
account for its position in the transaction under Sec. 1.446-4, and, if
that member properly identifies the transaction as a hedging
transaction, each member treats the gain or loss from its position in
the transaction as ordinary.
In response to comments, the final regulations clarify that, even
when these two requirements are met, these regulations supplant only
the character and timing rules of Sec. 1.1502-13. Other aspects of the
transaction, such as the source of the gain or loss, are unaffected by
these regulations and thus may be governed by Sec. 1.1502-13.
As noted above, commentators pointed out that taxpayers frequently
enter into transactions to transfer their business risk to related
parties that do not qualify as members of a consolidated group. Some
commentators argued that, even if risk reduction in these circumstances
is not analyzed using a single-entity perspective, the relationship
between the parties to the risk transfer justifies a rule under which
the party receiving the risk has ordinary gain or loss on its position
in the transaction. That is, they wanted to apply one part of the
separate-entity rules to taxpayers that are not part of the same
consolidated group.
The IRS and Treasury, however, do not believe that additional,
special character rules are appropriate for risk- shifting transactions
outside the context of a consolidated group. Accordingly, the final
regulations do not adopt these comments.
The final regulations expand upon the effective date provision of
the proposed regulations. The final regulations generally apply to
transactions entered into on or after March 8, 1996.
In response to comments, the final regulations permit a
consolidated group to apply the single-entity approach of the
regulations retroactively. The group may elect to begin to apply the
single-entity approach for all transactions entered into in any taxable
year (the election year) beginning prior to March 8, 1996. The election
may be made, however, only if the election year and each subsequent
taxable year are still open for assessment under section 6501 on July
1, 1996, or such earlier date as the Commissioner may allow. Once made,
the single-entity election applies to all transactions entered into in
the election year and in all subsequent consolidated return years until
the date as of which the group makes a separate-entity election. The
Service will publish guidance on the manner, and the time, for making
the single-entity election.
Further, the regulations also permit a consolidated group to apply
the separate-entity approach to all transactions entered into in
taxable years subject to the election. The taxpayer may choose, as the
first year under the election, any taxable year beginning on or after
July 12, 1995. This ability to apply the election to taxable years
beginning before March 8, 1996 allows a consolidated group to apply the
separate-entity approach to all intercompany transactions that are
subject to new Sec. 1.1502-13 (which is effective for taxable years
beginning on or after July 12, 1995). Thus, by electing separate-entity
treatment for all transactions entered into in a taxable year beginning
on or after July 12, 1995, a consolidated group can determine the
character and timing of its intercompany hedging transactions under
Sec. 1.446-4 and Sec. 1.1221-2, rather than under Sec. 1.1502-13.
If the group makes the single-entity election or elects to apply
the separate-entity approach retroactively, special identification
rules apply.
First, the members of the group are required to identify
transactions that were entered into prior to March 8, 1996, that are
still in existence on that date, and that become hedging transactions
as a result of one of these elections. The members are also required to
identify the hedged item for these transactions.
Second, the final regulations extend the time period for making the
additional identifications that are referred to in the preceding
paragraph.
Third, if the taxpayer's consolidated group has elected the single-
entity approach, the regulations nullify all hedge identifications
under Sec. 1.1221-2(e)(i) that had been made for intercompany
transactions. In this situation, the regulations determine the
character of each intercompany transaction as if it had never been
identified as a hedging transaction. Thus, the character and timing of
the intercompany transaction are determined under the otherwise
applicable regulations, and the transaction is not subject to the
ordinary-gain, capital-loss rule that generally applies to transactions
that are incorrectly identified as hedging transactions. The
identification may, however, serve to identify the hedged item.
In order to ensure that consolidated groups do not improperly use
hindsight in making these identifications, the regulations provide a
consistency requirement. Under this requirement, the group members must
treat similar or identical transactions consistently within the same
year and from year to year. If a member of the consolidated group fails
to identify a hedging transaction as a hedging transaction, but has
identified similar or identical hedging transactions in the same or a
subsequent year, then, for purposes of Sec. 1.1221-2(f)(2)(iii), the
member entering into the transaction is treated as having no reasonable
grounds for treating the transaction as other than a hedging
transaction. Thus, the member is generally subject to the ordinary-
gain, capital-loss rules for taxpayers who fail to identify
transactions as hedging transactions.
Timing regulations
The final regulations clarify the general rule that was provided in
the proposed regulations for the timing of the gain or loss from
hedging transactions that are entered into by members of a consolidated
group. Under the final regulations, a member of a consolidated group
must account for its hedging transactions as if all the members were
separate divisions of a single corporation (the single-entity
approach). Thus, the timing of the income, deduction, gain, or loss on
the hedging transaction must match the timing of the income, deduction,
gain, or loss from the item, items, or aggregate risk being hedged.
These regulations make clear that a member must account for all of its
hedging transactions, not just those that hedge the risk of another
member, under the single-entity approach.
[[Page 519]]
Since all of the members are treated as divisions of a single
corporation, intercompany transactions are neither hedging transactions
nor hedged items. Thus, under the single-entity approach, the timing of
the gain or loss from intercompany transactions is not determined under
the rules of Sec. 1.446-4.
The final regulations also clarify the rule in the proposed
regulations on accounting for the gain or loss on hedging transactions
by members of a group that has made a separate-entity election. If a
group makes the separate-entity election, the members do not account
for their hedging transactions (including their intercompany hedging
transactions) as if they were divisions of a single corporation.
Rather, each member accounts for its hedging transactions on a member-
by-member basis. For example, if an intercompany transaction is treated
as a hedging transaction, the gain or loss on the transaction is
accounted for under the rules of Sec. 1.446-4 rather than under the
timing rules of the intercompany transaction regulations, Sec. 1.1503-
13. As was stated above, even when a separate-entity election is in
place, Secs. 1.1221-2 and 1.446-4 affect only the timing and character
of intercompany hedging transactions. Other aspects of the intercompany
hedging transaction remain subject to the rules of Sec. 1.1502-13.
These final timing regulations are effective for transactions
entered into on or after March 8, 1996.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It is hereby certified that
these regulations do not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that these regulations will primarily affect affiliated groups
of corporations that have elected to file consolidated returns, which
tend to be larger businesses. The regulations do not significantly
alter the reporting or recordkeeping duties of small entities.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Jo Lynn Ricks, Office
of Assistant Chief Counsel (Financial Institutions and Products), IRS.
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for Sec. 1.1221-2 and by adding entries in numerical
order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.446-4 also issued under 26 U.S.C. 1502. * * *
Section 1.1221-2 also issued under 26 U.S.C. 1502 and 6001. * *
*
Par. 2. Section 1.446-4 is amended by adding the text of paragraph
(e)(9) to read as follows:
Sec. 1.446-4 Hedging transactions.
* * * * *
(e) * * *
(9) Hedging by members of a consolidated group--(i) General rule:
single-entity approach. In general, a member of a consolidated group
must account for its hedging transactions as if all of the members were
separate divisions of a single corporation. Thus, the timing of the
income, deduction, gain, or loss on a hedging transaction must match
the timing of income, deduction, gain, or loss from the item or items
being hedged. Because all of the members are treated as if they were
divisions of a single corporation, intercompany transactions are
neither hedging transactions nor hedged items for these purposes.
(ii) Separate-entity election. If a consolidated group makes an
election under Sec. 1.1221-2(d)(2), then paragraph (e)(9)(i) of this
section does not apply. Thus, in that case, each member of the
consolidated group must account for its hedging transactions in a
manner that meets the requirements of paragraph (b) of this section.
For example, the income, deduction, gain, or loss from intercompany
hedging transactions (as defined in Sec. 1.1221-2(d)(2)(ii)) is taken
into account under the timing rules of Sec. 1.446-4 rather than under
the timing rules of Sec. 1.1502-13.
(iii) Definitions. For definitions of consolidated group, divisions
of a single corporation, intercompany transaction, and member, see
section 1502 and the regulations thereunder.
(iv) Effective date. This paragraph (e)(9) applies to transactions
entered into on or after March 8, 1996.
Par. 3. Section 1.1221-2 is amended by adding the text of
paragraphs (d), (e)(5), (f)(3), and (g)(4), and by adding the text and
headings of paragraphs (g) (5) and (6) to read as follows:
Sec. 1.1221-2 Hedging transactions.
* * * * *
(d) Hedging by members of a consolidated group--(1) General rule:
single-entity approach. For purposes of this section, the risk of one
member of a consolidated group is treated as the risk of the other
members as if all of the members of the group were divisions of a
single corporation. For example, if any member of a consolidated group
hedges the risk of another member of the group by entering into a
transaction with a third party, that transaction may potentially
qualify as a hedging transaction. Conversely, intercompany transactions
are not hedging transactions because, when considered as transactions
between divisions of a single corporation, they do not reduce the risk
of that single corporation.
(2) Separate-entity election. In lieu of the single-entity approach
specified in paragraph (d)(1) of this section, a consolidated group may
elect separate-entity treatment of its hedging transactions. If a group
makes this separate-entity election, the following rules apply.
(i) Risk of one member not risk of other members. Notwithstanding
paragraph (d)(1) of this section, the risk of one member is not treated
as the risk of other members.
(ii) Intercompany transactions. An intercompany transaction is a
hedging transaction (an intercompany hedging transaction) with respect
to a member of a consolidated group if and only if it meets the
following requirements--
(A) The position of the member in the intercompany transaction
would qualify as a hedging transaction with respect to the member
(taking into account paragraph (d)(2)(i) of this section) if the member
had entered into the transaction with an unrelated party; and
(B) The position of the other member (the marking member) in the
transaction
[[Page 520]]
is marked to market under the marking member's method of accounting.
(iii) Treatment of intercompany hedging transactions. An
intercompany hedging transaction (that is, a transaction that meets the
requirements of paragraphs (d)(2)(ii) (A) and (B) of this section) is
subject to the following rules--
(A) The character and timing rules of Sec. 1.1502-13 do not apply
to the income, deduction, gain, or loss from the intercompany hedging
transaction; and
(B) Except as provided in paragraph (f)(3) of this section, the
character of the marking member's gain or loss from the transaction is
ordinary.
(iv) Making and revoking the election. Unless the Commissioner
otherwise prescribes, the election described in this paragraph (d)(2)
must be made in a separate statement saying ``[Insert Name and Employer
Identification Number of Common Parent] HEREBY ELECTS THE APPLICATION
OF SECTION 1.1221-2(d)(2) (THE SEPARATE-ENTITY APPROACH).'' The
statement must also indicate the date as of which the election is to be
effective. The election must be signed by the common parent and filed
with the group's federal income tax return for the taxable year that
includes the first date for which the election is to apply. The
election applies to all transactions entered into on or after the date
so indicated.
(3) Definitions. For definitions of consolidated group, divisions
of a single corporation, group, intercompany transactions, and member,
see section 1502 and the regulations thereunder.
(4) Examples. The following examples illustrate this paragraph (d):
General Facts. In these examples, O and H are members of the
same consolidated group. O's business operations give rise to
interest rate risk ``A,'' which O wishes to hedge. O enters into an
intercompany transaction with H that transfers the risk to H. O's
position in the intercompany transaction is ``B,'' and H's position
in the transaction is ``C.'' H enters into position ``D'' with a
third party to reduce the interest rate risk it has with respect to
its position C. D would be a hedging transaction with respect to
risk A if O's risk A were H's risk.
BILLING CODE 4830-01-U
[GRAPHIC][TIFF OMITTED]TR08JA96.000
BILLING CODE 4830-01-C
Example 1. Single-entity treatment--(i) General rule. Under
paragraph (d)(1) of this section, O's risk A is treated as H's risk,
and therefore D is a hedging transaction with respect to risk A.
Thus, the character of D is determined under the rules of this
section, and the income, deduction, gain, or loss from D must be
accounted for under a method of accounting that satisfies
Sec. 1.446-4. The intercompany transaction B-C is not a hedging
transaction and is taken into account under Sec. 1.1502-13.
(ii) Identification. D must be identified as a hedging transaction
under paragraph (e)(1) of this section, and A must be identified as the
hedged item under paragraph (e)(2) of this section. Under paragraph
(e)(5) of this section, the identification of A as the hedged item can
be accomplished by identifying the positions in the intercompany
transaction as hedges or hedged items, as appropriate. Thus,
substantially contemporaneous with entering into D, H may identify C as
the hedged item and O may identify B as a hedge and A as the hedged
item.
Example 2. Separate-entity election; counterparty that does not
mark to market. In addition to the General Facts stated above,
assume that the group makes a separate-entity election under
paragraph (d)(2) of this section. If H does not mark C to market
under its method of accounting, then B is not a hedging transaction,
and the B-C intercompany transaction is taken into account under the
rules of section 1502. D is not a hedging transaction with respect
to A, but D may be a hedging transaction with respect to C if C is
ordinary property or an ordinary obligation and if the other
requirements of paragraph (b) of this section are met. If D is not
part of a hedging transaction, then D may be part of a straddle for
purposes of section 1092.
Example 3. Separate-entity election; counterparty that marks to
market. The facts are the same as in Example 2 above, except that H
marks C to market under its method of accounting. Also assume that B
would be a hedging transaction with respect to risk A if O had
entered into that transaction with an unrelated party. Thus, for O,
the B-C transaction is an intercompany hedging transaction with
respect to O's risk A, the character and timing rules of
Sec. 1.1502-13 do not apply to the B-C transaction, and H's income,
deduction, gain, or loss from C is ordinary. However, other
attributes of the items from the B-C transaction are determined
under Sec. 1.1502-13. D is a hedging transaction with respect to C
if it meets the requirements of paragraph (b) of this section.
(e) * * *
(5) Identification of hedges involving members of a consolidated
group--(i) General rule: single-entity approach. A member of a
consolidated group must satisfy the requirements of this paragraph (e)
as if all of the members of the group were divisions of a single
corporation. Thus, the member entering into the hedging transaction
with a third party must identify the hedging transaction under
paragraph (e)(1) of this section. Under paragraph (e)(2) of this
section, that member must also identify the item, items, or aggregate
risk that is being hedged, even if the item, items, or aggregate risk
relates primarily or entirely to other members of the group. If the
members of a group use intercompany transactions to transfer risk
within the group, the requirements of paragraph (e)(2) of this section
may be met by identifying the intercompany transactions, and the risks
hedged by the intercompany transactions, as hedges or hedged items, as
appropriate. Because identification of the intercompany transaction as
a hedge serves solely to identify the hedged item, the identification
is timely if made within the period required by paragraph (e)(2) of
this section. For example, if a member transfers risk in an
intercompany transaction, it may identify under the rules of this
paragraph (e) both its position in that transaction and the item,
items, or aggregate risk being hedged. The member that hedges the risk
outside the group may identify under the rules of this paragraph (e)
both its position with the third party and its position in the
intercompany transaction. Paragraph (d)(4) Example 1 of this section
illustrates this identification.
[[Page 521]]
(ii) Rule for consolidated groups making the separate-entity
election. If a consolidated group makes the separate-entity election
under paragraph (d)(2) of this section, each member of the group must
satisfy the requirements of this paragraph (e) as though it were not a
member of a consolidated group.
* * * * *
(f) * * *
(3) Transactions by members of a consolidated group--(i) Single-
entity approach. If a consolidated group is under the general rule of
paragraph (d)(1) of this section (the single-entity approach), the
rules of this paragraph (f) apply only to transactions that are not
intercompany transactions.
(ii) Separate-entity election. If a consolidated group has made the
election under paragraph (d)(2) of this section, then, in addition to
the rules of paragraphs (f) (1) and (2) of this section, the following
rules apply.
(A) If an intercompany transaction is identified as a hedging
transaction but does not meet the requirements of paragraphs (d)(2)(ii)
(A) and (B) of this section, then, notwithstanding any contrary
provision in Sec. 1.1502-13, each party to the transaction is subject
to the rules of paragraph (f)(1) of this section with respect to the
transaction as though it had incorrectly identified its position in the
transaction as a hedging transaction.
(B) If a transaction meets the requirements of paragraphs
(d)(2)(ii) (A) and (B) of this section but the transaction is not
identified as a hedging transaction, each party to the transaction is
subject to the rules of paragraph (f)(2) of this section. (Because the
transaction is an intercompany hedging transaction, the character and
timing rules of Sec. 1.1502-13 do not apply. See paragraph
(d)(2)(iii)(A) of this section.)
(g) * * *
(4) Effective date and transition rules for hedges by members of a
consolidated group. Paragraphs (d), (e)(5), and (f)(3) of this section
apply to transactions entered into on or after March 8, 1996.
(5) Elections to accelerate the effective date of the regulations--
(i) Election to apply the single-entity approach retroactively. A
consolidated group may elect to begin to apply paragraphs (d)(1) and
(3), (e)(5)(i), and (f)(3)(i) of this section to all transactions
entered into in any taxable year (the election year) beginning prior to
March 8, 1996. This election must be made in the manner, and at the
time, prescribed by the Commissioner. A group may make the election
only if the election year, and each subsequent taxable year, are still
open for assessment under section 6501 on July 1, 1996 (or such earlier
date as the Commissioner may allow). The election applies to all
transactions entered into in the election year and in all subsequent
consolidated return years until the date, if any, as of which the group
makes a separate-entity election under paragraph (d)(2) of this
section. The rules of paragraph (g)(6) of this section apply to all
transactions that were entered into before March 8, 1996 in taxable
years subject to an election under this paragraph (g)(5)(i). The
election may be revoked only with the consent of the Commissioner.
(ii) Ability to apply the separate-entity approach retroactively.
Notwithstanding paragraph (g)(4) of this section, the separate-entity
election described in paragraph (d)(2) of this section may be made for
any taxable year beginning on or after July 12, 1995. If that election
is made for a taxable year beginning before March 8, 1996, then
paragraphs (d)(2) and (3), (e)(5)(ii), and (f)(3)(ii) of this section
apply to all transactions entered into on or after the beginning of
that taxable year and while the election is in effect, and the rules of
paragraph (g)(6) of this section (other than paragraph (g)(6)(i)) apply
to all transactions that were entered into on or after the first day of
the first year for which the election is made and before March 8, 1996.
(6) Transitional identification rules. To allow a consolidated
group to conform to paragraphs (g)(5)(i) and (ii) of this section, this
paragraph (g)(6) nullifies certain hedge identifications and permits a
member of a consolidated group to add certain hedge identifications.
This paragraph (g)(6) applies only to the extent provided in paragraph
(g)(5) of this section.
(i) Intercompany transactions previously identified.
Notwithstanding paragraph (f)(1)(i) of this section, if, for purposes
of paragraph (e)(1) of this section, a member identified as a hedging
transaction an intercompany transaction (or a transaction that would
qualify as an intercompany transaction under Sec. 1.1502-13(b)(1) if
the taxable year in which the transaction was entered into were
described in Sec. 1.1502-13(l)), the character of the gain on the
intercompany transaction is determined as if it had not been identified
as a hedging transaction. The identification may, however, serve to
identify the hedged item under paragraph (e)(5)(i) of this section.
(ii) Additional identifications of hedging transactions. A member
of a consolidated group must identify under paragraph (e)(5) of this
section a transaction that--
(A) Was entered into before March 8, 1996,
(B) When entered into was not a hedging transaction (as defined in
paragraph (b) of this section),
(C) Solely as a result of the group's election under paragraph
(g)(5)(i) or (ii) of this section, is a hedging transaction (as defined
in paragraph (b) of this section), and
(D) Remains in existence on March 8, 1996.
(iii) Additional identification of hedged items. In the case of
transactions described in paragraph (g)(6)(ii) of this section, the
hedging member must identify under paragraph (e)(5) of this section the
item, items, or aggregate risk being hedged.
(iv) Consistency requirement for hedge identifications. In
identifying transactions as hedging transactions under paragraph
(g)(6)(ii) of this section, all of the members of the group must treat
similar or identical transactions consistently within the same year and
from year to year. If paragraph (g)(6)(ii) of this section requires a
member to identify a transaction, and the member fails to identify a
transaction as a hedging transaction, but it or another member of the
group identifies similar or identical hedging transactions in the same
or a subsequent year, then for purposes of paragraphs (f)(2)(iii) and
(3) of this section, the member entering into the transaction is
treated as having no reasonable grounds for treating the transaction as
other than a hedging transaction.
(v) Extension of time for making additional identifications. If an
identification of a hedging transaction would not be required but for
the rules of paragraph (g)(6)(ii) of this section, the identification
is timely for purposes of paragraph (e)(1) of this section if made
before the close of business on May 7, 1996. If an identification of a
hedged item would not be required but for the rules of paragraph
(g)(6)(iii) of this section, it is timely for purposes of paragraph
(e)(2) of this section if made before the close of business on the
later of May 7, 1996 or the last day of the period specified in
paragraph (e)(2)(ii) of this section.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
[[Page 522]]
Par. 5. In Sec. 602.101, paragraph (c) is amended by adding entries
in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control number
------------------------------------------------------------------------
* * * * *
1.1221-2(d)(2)(iv)...................................... 1545-1480
1.1221-2(e)(5).......................................... 1545-1480
1.1221-2(g)(5)(ii)...................................... 1545-1480
1.1221-2(g)(6)(ii)...................................... 1545-1480
1.1221-2(g)(6)(iii)..................................... 1545-1480
* * * * *
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 20, 1995.
Cynthia G. Beerbower,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 96-178 Filed 1-5-96; 8:45 am]
BILLING CODE 4830-01-U
