[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16868]
[[Page Unknown]]
[Federal Register: July 18, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8554]
RIN 1545-AS96
Clear Reflection of Income in the Case of Hedging Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to
accounting for business hedging transactions. Elsewhere in the Rules
and Regulations portion of this issue of the Federal Register, the
Internal Revenue Service is issuing final regulations to clarify the
character of gain or loss recognized from the sale or exchange of
property that is part of a business hedge. The final regulations in
this document are needed to provide guidance to taxpayers regarding
when gain or loss from common business hedging transactions is taken
into account for tax purposes.
DATES: These regulations are effective July 18, 1994.
For dates of applicability of these regulations, see Sec. 1.446-
4(g).
FOR FURTHER INFORMATION CONTACT: Jo Lynn Ricks of the Office of the
Assistant Chief Counsel (Financial Institutions and Products), Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 20224
(attn: CC:DOM:FI&P). Telephone (202) 622-3920 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))
under control number 1545-1412. The estimated annual burden per
respondent or recordkeeper varies from .1 to 10 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, PC: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.
Background
On October 20, 1993, the Service published in the Federal Register
(58 FR 54077) a notice of proposed rulemaking (FI-54-93) relating to
accounting for business hedging transactions. The notice also contained
proposed amendments to regulations under sections 446 (relating to
accounting for notional principal contracts) and 461 (relating to
general rules on the taxable year of deduction).
On January 19, 1994, the Service held a public hearing on the
proposed regulations. In addition, the Service received a number of
written comments on the proposed regulations. The proposed regulations,
with certain modifications and changes, are adopted as final
regulations. The changes, and several of the suggestions that were not
adopted, are discussed below.
Explanation of Provisions
Under the final regulations, a hedging transaction defined in
Sec. 1.1221-2(b) must be accounted for under the rules of Sec. 1.446-4.
This requirement applies regardless of whether the character of the
gain or loss on the hedging transaction is determined under
Sec. 1.1221-2. Thus, for example, certain section 988 transactions that
are described in Sec. 1.1221-2(b) are accounted for under the rules of
this section.
The regulations require taxpayers to clearly reflect income by
reasonably matching the timing of the income, deduction, gain, or loss
from a hedging transaction with the timing of income, deduction, gain,
or loss from the hedged item or items. The regulations generally
provide significant flexibility to taxpayers in determining the
appropriate method of accounting for their different hedging
transactions.
Some commentators suggested that any hedge accounting method
employed by a taxpayer for financial statement purposes should be
treated as satisfying the matching requirement. Because the financial
accounting standards for hedges are in a state of development, however,
the final regulations do not expressly sanction the use of financial
accounting methods. Nevertheless, the Service and Treasury expect that
the hedge accounting methods employed by most taxpayers for financial
accounting purposes will satisfy the clear reflection standard in the
final regulations.
The final regulations require taxpayers to maintain books and
records containing a description of the accounting method used for each
type of hedging transaction in sufficient detail to demonstrate how the
clear reflection standard is met. For each hedging transaction, in
addition to the identification required by the regulations under
section 1221, the final regulations require whatever more specific
identification is necessary to verify the application of the method of
accounting used by the taxpayer for that transaction.
Various commentators requested that the regulations provide
specific examples or other guidance on the type of additional
information the Service expects taxpayers to provide. Because the
identification that is needed depends upon the method of accounting
being used and the types of items or risk being hedged, however,
specific rules cannot be provided. For example, taxpayers using a mark-
and-spread method of accounting for aggregate hedges will identify the
spread period in their books and records, but taxpayers using other
methods will not.
The proposed regulations provided no specific guidance on the
appropriate method of accounting for global hedges and other hedges of
aggregate risk. The preamble, however, solicited comments on this
issue. Many commentators suggested that the regulations should provide
for an aggregate hedge account, in which both the hedging transactions
and the hedged items would be accounted for under a particular method.
Methods suggested included a periodic mark-to-market method modeled on
the mixed straddle accounts of section 1092(b) and realization-based
methods with loss-deferral or loss-limitation provisions.
Because these regulations concern only accounting for hedging
transactions, the Service and Treasury are concerned about expanding
the regulations to allow mark-to-market accounting for hedged items in
an aggregate hedge account. Many taxpayers are not currently using
mark-to-market accounting, and general changes to their methods of
accounting for hedged items would create issues that are beyond the
scope of the regulations. Realization-based methods of accounting for
aggregate hedge accounts would only be appropriate if coupled with
loss-deferral or loss-limitation provisions, and the Service and
Treasury are concerned about their authority to impose these
restrictions. Accordingly, the regulations do not adopt the suggestion
that an aggregate hedge account should be permitted.
The final regulations restate the general matching rule for hedges
of aggregate risk and require taxpayers to match the timing of income,
deduction, gain, or loss from the hedging transaction to the timing of
the aggregate income, deduction, gain, or loss from the items being
hedged. The regulations further provide that the ``mark-and-spread''
method currently employed by many taxpayers to account for hedges of
aggregate risk for financial accounting purposes may provide an
appropriate and reasonable match. Under the mark-and-spread method
described in the regulations, the taxpayer periodically marks the
hedging transactions to market and takes the gain or loss into account
over the period for which the hedge is intended to reduce exposure to
risk. Similar spreading applies to realized income, deduction, gain,
and loss. Under this method, the period over which the hedging
transaction is intended to reduce risk (and thus the period over which
the gains and losses are taken into account) may change over time,
depending upon a taxpayer's particular hedging strategies. The period
used, however, must be reasonable and consistent with those strategies.
It is anticipated that the identification and recordkeeping required by
Secs. 1.446-4(d) and 1.1221-2(e) will support the reasonableness of a
taxpayer's spread period.
The mark-and-spread method is not the only method that clearly
reflects income for hedges of aggregate risk. The final regulations
also state that, if a taxpayer hedges its aggregate risk with a
notional principal contract, taking into account gains and losses in
accordance with Sec. 1.446-3 of the regulations may clearly reflect
income. Other methods of accounting also may be appropriate. Like the
proposed regulations, the final regulations allow flexibility in
attaining the reasonable matching required by the general rule.
The proposed regulations contained several provisions applicable to
inventory hedging transactions. The general rule in the proposed
regulations was that gains and losses on hedges of inventory purchases
may be taken into account at the same time they would be taken into
account if they were elements of inventory cost. Similarly, gains and
losses on hedges of sales of inventory may be taken into account at the
same time they would be if they were elements of gross sales proceeds.
In response to comments, the final regulations clarify the general
rule for inventory hedges and extend it to hedges of aggregate
inventory risk. A hedge of an aggregate risk cannot be associated with
particular purchase or sales transactions. Accordingly, the final
regulations provide that taxpayers may account for hedges of purchases
under the mark-and-spread method, with the modification that the gain
or loss spread to particular periods is taken into account in the same
period it would have been if it had been an increase or decrease to
inventory cost incurred in the particular period. Similarly, a taxpayer
may account for hedges of sales of inventory under a mark-and-spread
approach, with the gain or loss that is spread to a particular period
taken into account in the same period it would have been if it had been
an increase or decrease to gross sales proceeds.
The final regulations clarify certain simplified methods of
accounting for inventory hedges that were provided in the proposed
regulations. First, the proposed regulations provided a special rule
allowing taxpayers to take hedging gains and losses into account when
realized, if the hedging transactions are closed when the hedged
inventory items are sold and units are included in inventory at cost.
Because the general rule has been clarified to encompass this approach,
this provision is not separately stated in the final regulations.
Second, the final regulations continue the simplified method of
taking into account gains and losses on hedges of both purchases and
sales as though those gains and losses were elements of inventory cost.
The regulations make it clear that it is realized gains and losses that
are so taken into account. The regulations also continue to prohibit
the use of this method by LIFO taxpayers. The Service and Treasury
believe that significant distortions of income might result if gains
and losses on sales hedges became buried in inventory cost layers.
Finally, the simplified method of marking to market inventory
hedging transactions is clarified to allow the mark-to-market gain or
loss to be taken into account immediately, instead of being treated as
an element of cost or gross proceeds. The final regulations continue
the proposed prohibition on the use of this method by LIFO taxpayers
and by taxpayers employing a lower-of-cost-or-market method of
accounting for inventory. Moreover, this method may be used only if
items are held in inventory for short periods of time.
The final regulations clarify when the built-in gain or loss on the
hedging transaction is taken into account where a taxpayer disposes of
the hedged item but does not dispose of the hedging transaction. In
this situation, the taxpayer must appropriately match the built-in gain
or loss on the hedging transaction to the gain or loss on the disposed
item. This matching may be met by marking to market the hedge on the
date of disposition of the hedged item. If the taxpayer intends to
dispose of the hedging transaction within a reasonable period, the
taxpayer may match the realized gain or loss on the hedging transaction
with the gain or loss on the disposed item. However, if the taxpayer
intends to dispose of the hedging transaction within a reasonable
period and the hedging transaction is still in place after that period,
the taxpayer must match the gain or loss on the hedge at the end of the
reasonable period with the gain or loss on the disposed item. For these
purposes, a reasonable period is generally seven days.
The final regulations provide rules of accounting for recycled
hedges (positions that previously hedged one item but that the taxpayer
has re-identified as hedging another). The new rules are similar to
those of the proposed regulations for treatment of hedges after
disposition of the hedged asset or liability. A taxpayer recycling a
hedge of a particular hedged item to serve as a hedge of another item
must match the built-in gain or loss on the hedge at the time of the
recycling to the income, deduction, gain, or loss on the original
hedged item. Income, deduction, gain, or loss on the hedge after the
recycling must be matched to the income, deduction, gain, or loss on
the new hedged item, items, or aggregate risk. This matching may be
accomplished by marking the hedge to market at the time of the
recycling.
The preamble to the proposed regulations invited comments on the
appropriate accounting for anticipatory hedges where the anticipated
transaction is not consummated. Most commentators suggested that gains
or losses be taken into account when realized. Others suggested that
any gain or loss realized on the hedging transaction be taken into
account at the same time it would have been taken into account if the
anticipated transaction had been consummated and the timing of the gain
or loss on the hedge had been matched with the timing of the gain or
loss on the hedged item. Still others suggested an arbitrary spread
period.
The first suggestion was adopted. The regulations provide that, if
an anticipated transaction is not consummated, any income, deduction,
gain, or loss on the hedging transaction is taken into account when
realized. The regulations provide that a transaction is consummated
upon the occurrence, within a reasonable time period, of either the
anticipated transaction or a different but similar transaction for
which the hedge serves to reasonably reduce risk. The Service will view
the ``similar transaction'' parameters broadly to prevent taxpayers
from realizing hedging gains and losses selectively by abandoning a
planned transaction and substituting a similar transaction.
Finally, the regulations grant consent for taxpayers to change
their methods of accounting for hedging transactions. The change must
be made for transactions entered into on or after October 1, 1994, and
must be made for the taxable year containing that date. The change is
made on a cut-off basis. Therefore, no items of income or deduction are
omitted or duplicated, and no adjustment under section 481 is allowed
or permitted. Because the consent does not extend to changes for a
subsequent tax year, consent for such a change must be requested
according to the procedures established under Sec. 1.446-1(e).
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 also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis 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).
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 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.446-3 is amended as follows:
1. The first sentence of paragraph (h)(2) is revised.
2. The second sentence of the introductory language of paragraph
(h)(5) is revised.
3. The revisions read as follows:
Sec. 1.446-3 Notional principal contracts.
* * * * *
(h) * * *
(2) Taxable year of inclusion and deduction by original parties.
Except as otherwise provided (for example, in section 453, section
1092, or Sec. 1.446-4), a party to a notional principal contract
recognizes a termination payment in the year the contract is
extinguished, assigned, or exchanged. * * *
* * * * *
(5) * * * The contracts in the examples are not hedging
transactions as defined in Sec. 1.1221-2(b), and all of the examples
assume that no loss-deferral rules apply.
* * * * *
Par. 3. Section 1.446-4 is added to read as follows:
Sec. 1.446-4 Hedging transactions.
(a) In general. Except as provided in this paragraph (a), a hedging
transaction as defined in Sec. 1.1221-2(b) (whether or not the
character of gain or loss from the transaction is determined under
Sec. 1.1221-2) must be accounted for under the rules of this section.
To the extent that provisions of any other regulations governing the
timing of income, deductions, gain, or loss are inconsistent with the
rules of this section, the rules of this section control.
(1) Trades or businesses excepted. A taxpayer is not required to
account for hedging transactions under the rules of this section for
any trade or business in which the cash receipts and disbursements
method of accounting is used or in which Sec. 1.471-6 is used for
inventory valuations if, for all prior taxable years ending on or after
September 30, 1993, the taxpayer met the $5,000,000 gross receipts test
of section 448(c) (or would have met that test if the taxpayer were a
corporation or partnership). A taxpayer not required to use the rules
of this section may nonetheless use a method of accounting that is
consistent with these rules.
(2) Coordination with other sections. This section does not apply
to--
(i) Any position to which section 475(a) applies;
(ii) Any section 988 hedging transaction if the transaction is
integrated under Sec. 1.988-5 or if other regulations issued under
section 988(d) (or an advance ruling described in 1.988-5(e)) govern
when gain or loss from the transaction is taken into account; or
(iii) The determination of the issuer's yield on an issue of tax-
exempt bonds for purposes of the arbitrage restrictions to which
Sec. 1.148-4(h) applies.
(b) Clear reflection of income. The method of accounting used by a
taxpayer for a hedging transaction must clearly reflect income. To
clearly reflect income, the method used must reasonably match the
timing of income, deduction, gain, or loss from the hedging transaction
with the timing of income, deduction, gain, or loss from the item or
items being hedged. Taking gains and losses into account in the period
in which they are realized may clearly reflect income in the case of
certain hedging transactions. For example, where a hedge and the item
being hedged are disposed of in the same taxable year, taking realized
gain or loss into account on both items in that taxable year may
clearly reflect income. In the case of many hedging transactions,
however, taking gains and losses into account as they are realized does
not result in the matching required by this section.
(c) Choice of method and consistency. For any given type of hedging
transaction, there may be more than one method of accounting that
satisfies the clear reflection requirement of paragraph (b) of this
section. A taxpayer is generally permitted to adopt a method of
accounting for a particular type of hedging transaction that clearly
reflects the taxpayer's income from that type of transaction. See
paragraph (e) of this section for requirements and limitations on the
taxpayer's choice of method. Different methods of accounting may be
used for different types of hedging transactions and for transactions
that hedge different types of items. Once a taxpayer adopts a method of
accounting, however, that method must be applied consistently and can
only be changed with the consent of the Commissioner, as provided by
section 446(e) and the regulations and procedures thereunder.
(d) Recordkeeping requirements--(1) In general. The books and
records maintained by a taxpayer must contain a description of the
accounting method used for each type of hedging transaction. The
description of the method or methods used must be sufficient to show
how the clear reflection requirement of paragraph (b) of this section
is satisfied.
(2) Additional identification. In addition to the identification
required by Sec. 1.1221-2(e), the books and records maintained by a
taxpayer must contain whatever more specific identification with
respect to a transaction is necessary to verify the application of the
method of accounting used by the taxpayer for the transaction. This
additional identification may relate to the hedging transaction or to
the item, items, or aggregate risk being hedged. The additional
identification must be made at the time specified in Sec. 1.1221-
2(e)(2) and must be made on, and retained as part of, the taxpayer's
books and records.
(3) Transactions in which character of gain or loss is not
determined under Sec. 1.1221-2. A section 988 transaction, as defined
in section 988(c)(1), or a qualified fund, as defined in section
988(c)(1)(E)(iii), is subject to the identification and recordkeeping
requirements of Sec. 1.1221-2(e). See Sec. 1.1221-2(a)(4)(i).
(e) Requirements and limitations with respect to hedges of certain
assets and liabilities. In the case of certain hedging transactions,
this paragraph (e) provides guidance in determining whether a
taxpayer's method of accounting satisfies the clear reflection
requirement of paragraph (b) of this section. Even if these rules are
satisfied, however, the taxpayer's method, as actually applied to the
taxpayer's hedging transactions, must clearly reflect income by meeting
the matching requirement of paragraph (b) of this section.
(1) Hedges of aggregate risk--(i) In general. The method of
accounting used for hedges of aggregate risk must comply with the
matching requirements of paragraph (b) of this section. Even though a
taxpayer may not be able to associate the hedging transaction with any
particular item being hedged, the timing of income, deduction, gain, or
loss from the hedging transaction must be matched with the timing of
the aggregate income, deduction, gain, or loss from the items being
hedged. For example, if a notional principal contract hedges a
taxpayer's aggregate risk, taking into account income, deduction, gain,
or loss under the provisions of Sec. 1.446-3 may clearly reflect
income. See paragraph (e)(5) of this section.
(ii) Mark-and-spread method. The following method may be
appropriate for taking into account income, deduction, gain, or loss
from hedges of aggregate risk:
(A) The hedging transactions are marked to market at regular
intervals for which the taxpayer has the necessary data, but no less
frequently than quarterly; and
(B) The income, deduction, gain, or loss attributable to the
realization or periodic marking to market of hedging transactions is
taken into account over the period for which the hedging transactions
are intended to reduce risk. Although the period over which the hedging
transactions are intended to reduce risk may change, the period must be
reasonable and consistent with the taxpayer's hedging policies and
strategies.
(2) Hedges of items marked to market. In the case of a transaction
that hedges an item that is marked to market under the taxpayer's
method of accounting, marking the hedge to market clearly reflects
income.
(3) Hedges of inventory--(i) In general. If a hedging transaction
hedges purchases of inventory, gain or loss on the hedging transaction
may be taken into account in the same period that it would be taken
into account if the gain or loss were treated as an element of the cost
of inventory. Similarly, if a hedging transaction hedges sales of
inventory, gain or loss on the hedging transaction may be taken into
account in the same period that it would be taken into account if the
gain or loss were treated as an element of sales proceeds. If a hedge
is associated with a particular purchase or sales transaction, the gain
or loss on the hedge may be taken into account when it would be taken
into account if it were an element of cost incurred in, or sales
proceeds from, that transaction. As with hedges of aggregate risk,
however, a taxpayer may not be able to associate hedges of inventory
purchases or sales with particular purchase or sales transactions. In
order to match the timing of income, deduction, gain, or loss from the
hedge with the timing of aggregate income, deduction, gain, or loss
from the hedged purchases or sales, it may be appropriate for a
taxpayer to account for its hedging transactions in the manner
described in paragraph (e)(1)(ii) of this section, except that the gain
or loss that is spread to each period is taken into account when it
would be if it were an element of cost incurred (purchase hedges), or
an element of proceeds from sales made (sales hedges), during that
period.
(ii) Alternative methods for certain inventory hedges. In lieu of
the method described in paragraph (e)(3)(i) of this section, other
simpler, less precise methods may be used in appropriate cases where
the clear reflection requirement of paragraph (b) of this section is
satisfied. For example:
(A) Taking into account realized gains and losses on both hedges of
inventory purchases and hedges of inventory sales when they would be
taken into account if the gains and losses were elements of inventory
cost in the period realized may clearly reflect income in some
situations, but does not clearly reflect income for a taxpayer that
uses the last-in, first-out method of accounting for the inventory; and
(B) Marking hedging transactions to market with resulting gain or
loss taken into account immediately may clearly reflect income even
though the inventory that is being hedged is not marked to market, but
only if the inventory is not accounted for under either the last-in,
first-out method or the lower-of-cost-or-market method and only if
items are held in inventory for short periods of time.
(4) Hedges of debt instruments. Gain or loss from a transaction
that hedges a debt instrument issued or to be issued by a taxpayer, or
a debt instrument held or to be held by a taxpayer, must be accounted
for by reference to the terms of the debt instrument and the period or
periods to which the hedge relates. A hedge of an instrument that
provides for interest to be paid at a fixed rate or a qualified
floating rate, for example, generally is accounted for using constant
yield principles. Thus, assuming that a fixed rate or qualified
floating rate instrument remains outstanding, hedging gain or loss is
taken into account in the same periods in which it would be taken into
account if it adjusted the yield of the instrument over the term to
which the hedge relates. For example, gain or loss realized on a
transaction that hedged an anticipated fixed rate borrowing for its
entire term is accounted for, solely for purposes of this section, as
if it decreased or increased the issue price of the debt instrument.
(5) Notional principal contracts. The rules of Sec. 1.446-3 govern
the timing of income and deductions with respect to a notional
principal contract unless, because the notional principal contract is
part of a hedging transaction, the application of those rules would not
result in the matching that is needed to satisfy the clear reflection
requirement of paragraph (b) and, as applicable, (e)(4) of this
section. For example, if a notional principal contract hedges a debt
instrument, the method of accounting for periodic payments described in
Sec. 1.446-3(e) and the methods of accounting for nonperiodic payments
described in Sec. 1.446-3(f)(2)(iii) and (v) generally clearly reflect
the taxpayer's income. The methods described in Sec. 1.446-3(f)(2)(ii)
and (iv), however, generally do not clearly reflect the taxpayer's
income in that situation.
(6) Disposition of hedged asset or liability. If a taxpayer hedges
an item and disposes of, or terminates its interest in, the item but
does not dispose of or terminate the hedging transaction, the taxpayer
must appropriately match the built-in gain or loss on the hedging
transaction to the gain or loss on the disposed item. To meet this
requirement, the taxpayer may mark the hedge to market on the date it
disposes of the hedged item. If the taxpayer intends to dispose of the
hedging transaction within a reasonable period, however, it may be
appropriate to match the realized gain or loss on the hedging
transaction with the gain or loss on the disposed item. If the taxpayer
intends to dispose of the hedging transaction within a reasonable
period and the hedging transaction is not actually disposed of within
that period, the taxpayer must match the gain or loss on the hedge at
the end of the reasonable period with the gain or loss on the disposed
item. For purposes of this paragraph (e)(6), a reasonable period is
generally 7 days.
(7) Recycled hedges. If a taxpayer enters into a hedging
transaction by recycling a hedge of a particular hedged item to serve
as a hedge of a different item, as described in Sec. 1.1221-2(c)(2),
the taxpayer must match the built-in gain or loss at the time of the
recycling to the gain or loss on the original hedged item, items, or
aggregate risk. Income, deduction, gain, or loss attributable to the
period after the recycling must be matched to the new hedged item,
items, or aggregate risk under the principles of paragraph (b) of this
section.
(8) Unfulfilled anticipatory transactions--(i) In general. If a
taxpayer enters into a hedging transaction to reduce risk with respect
to an anticipated asset acquisition, debt issuance, or obligation, and
the anticipated transaction is not consummated, any income, deduction,
gain, or loss from the hedging transaction is taken into account when
realized.
(ii) Consummation of anticipated transaction. A taxpayer
consummates a transaction for purposes of paragraph (e)(8)(i) of this
section upon the occurrence (within a reasonable interval around the
expected time of the anticipated transaction) of either the anticipated
transaction or a different but similar transaction for which the hedge
serves to reasonably reduce risk.
(9) Hedging by members of a consolidated group. [Reserved.]
(f) Type or character of income and deduction. The rules of this
section govern the timing of income, deduction, gain, or loss on
hedging transactions but do not affect the type or character of income,
deduction, gain, or loss produced by the transaction. Thus, for
example, the rules of paragraph (e)(3) of this section do not affect
the computation of cost of goods sold or sales proceeds for a taxpayer
that hedges inventory purchases or sales. Similarly, the rules of
paragraph (e)(4) of this section do not increase or decrease the
interest income or expense of a taxpayer that hedges a debt instrument
or a liability.
(g) Effective date. This section applies to hedging transactions
entered into on or after October 1, 1994.
(h) Consent to change methods of accounting. The Commissioner
grants consent for a taxpayer to change its methods of accounting for
transactions that are entered into on or after October 1, 1994, and
that are described in paragraph (a) of this section. This consent is
granted only for changes for the taxable year containing October 1,
1994. The taxpayer must describe its new methods of accounting in a
statement that is included in its Federal income tax return for that
taxable year.
Par. 4. In Sec. 1.461-1, paragraph (a)(2)(iii)(B) is revised to
read as follows:
Sec. 1.461-1 General rules for taxable year of deduction.
(a) * * *
(2) * * *
(iii) * * *
(B) If the liability of a taxpayer is subject to section 170
(charitable contributions), section 192 (black lung benefit trusts),
section 194A (employer liability trusts), section 468 (mining and solid
waste disposal reclamation and closing costs), or section 468A (certain
nuclear decommissioning costs), the liability is taken into account as
determined under that section and not under section 461 or the
regulations thereunder. For special rules relating to certain loss
deductions, see sections 165(e), 165(i), and 165(l), relating to theft
losses, disaster losses, and losses from certain deposits in qualified
financial institutions.
* * * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 5. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 6. Section 602.101(c) is amended by adding an entry 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 No.
------------------------------------------------------------------------
*****
1.446-4(d)................................................. 1545-1412
*****
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved:
Samuel Y. Sessions,
Acting Assistant Secretary of Treasury.
[FR Doc. 94-16868 Filed 7-13-94; 9:10 am]
BILLING CODE 4830-01-U
