Td 8554

.. ...
~

59. No, 136 I Monday. July 18. '1994 I Rules and Regulations

NT:

REASURY

, Reports Clearance Oflicer, PC:FP.
: Washington, DC 20224, and to the· .
· qffice of Management and Budget, Attn:
• Desk Officer for the Department of th.e,
; Treasury. Office of Infonnation lind ,.. '
Regulatory Affairs, Washington, DC. ".'
". 20503.·
.. "
.

t~¥M~~~::!:~O~.~.~T;.· .'. >.. ' .r- ... Backg~und

.< ..:._.

~t~Jt~~k~~:~n~~--,~~rvi~~,

_.

..

. •..

purposes will satisfy the clear rcncction
standard in the !inal regulations. -.
The final regulations require
taxpayers to maintain books and records
cC;lntnining 8 description of the . .
accounting method used for each type of .
hedging transaction in sufficient detail .. -

~~(l~~~~nf:~:t~~:;~~lh:d~~~;·ction

On October 20, i993;the Service' .' '. transaction. in addition to the

;~ 6:.CFR Parts·1 and 602,-· .. · •.... ·.published in the Federal Register (58 -:' " identi~catioQ require~ by the

_'.'

l~m~~~;~f";XC:•. '.• •. :. gE;ITtifltE~!u4.~gii~i~<·.· • ~i-~~§fi2!Tig~~:Xl...
':i:'<':;-Clear~Reflection .~, Income In the Case'
:,;-;~.: of HEidg·irigT.ransactiC!ns·~, :.•;':. .... :,....

j

proposed amendments to regulations .: ;' .·account!ng use.d by the taxpe " - '.' '.
On January 19. 1994, the. Service held' of addltlonalmformatlOn ,the SerYlce .~'
. - '~cliON:Firiit! regulations:-

a public hearing on the proposed::'
cxp~cts t~pa~ers to .p.,:ovlde. Beca~se ..
SuMMARY: This document contains finnl' regulations. In addition. the. Service .
the Identlficatlon that IS needed
.
.' regulation~ rel,ating to acc~unting for'
received a number of written comments d.epe,nds up?n !he..method o~ account~ng
.',. business hedgmg transactIOns...... ,
on the p'fopolied regulations..The . '_'. . . be~ngused and the. typ_es ~~'I~ems Or rISk
.Elsewhere in the Rules and Regulations'
being hedged ho\\eve specific rules
'v'
F"
I
· proposed regulations, with certain -- .
..
modi fications and changes. are adopted _ cannot be prp.. }ded. ~r examp e. ;'
.portiori of this issue of the Federal
. Rci!ister, the Internal Revenue Sen'ice is as .final regulations. The.c.hanges, and. :: ta"unt over the period for which tbe
. The final regulations clarify certain ': .. reasonable period is generally seven
hedge is inlended to reduce exposure to simpli lied methods of accounting for
deys.
.
riSK. Similar spreading applies to
inventory bedges that were provided in· , The final regulations prov'iderules of
'., realized income, deduction, gain; and.
the proposed regulations. First, the' . . occQunting for reCycled 'hedges . .
. : loss. Under this method, the period over proposed regulations providedoo special (positions that previously hedged one
, which the hedging transaction is
rule allowing taxpayers to take hedging . item but' that the taxpayer has re­
identified as,hedging ano',':ler). The new
intended to reduce risk. {a'nd thus the ­ gains and losses into account when
.period over which the gams and losses " realized. if the hedging transactions are , rules are similar to those t.: the' ,

.are taken into account) may change over closed when the hedged inventory items proposed regulations fo'r treatment of

,,~: time, depending upon a taxpayer's'
.
are sold and units are included in. . .. ,hedges after disposition of the hedged
asset or liability. A taxpayeTrer.ycling il
. :~~:.:.particular hedging strategies. The period
inventory at cost. Because the general
'~
used, however, must be reasonable and
rule has been clarified to encompass'
hedge of a particular hedged item to
serve as a hedge of another item must
- .. ':. consistent with those strategies. It is
this approach. this provision is not'
. .~ ~ti~ipated that the identification and , separately stated in the final regulations. match the built-in gain or loss on the
. : .recordkeeping required by §§ 1.446-4(d)
Second. the final regulations continue hedge at the time of the recycling to the
the sim plified method of taking into
income, deduction, gain, or loss on the
~. and 1.1221-2(e) will support the
account gains and losses on hedges of
:' 'reasonableness of a taxpayer's spread
o:-iginal hedged item: Income.
period. ' :
both purchases and sales as thc:.;.gh .
. .
deduction. gain,'or losS on the hedge
The mark-and-spread method is not
those gains and losses were elements of after the recyc1ingmust be matched to
the only method that clearly reflects
inventory cost. The regulations make it
the income, deduction. gain. or loss on
income for hedges of aggregate risk. The clear that it is realized gains and losses
the new hedged item. items. or aggref;3te
final regulations also state that, if a
that are so taken into account. The
risk. This matching may be
taxpayer hedges its aggregate risk ,...i th
regulations also continue to prohibit tne accomplished by marking the hedge to
a notional prindpal contract. taking into use of this method by LIFO taxpayers.
market at the tiIlJe of the recycling,
account gains and losses in accordance
The Service and Treasury believe that
The preamble to the proposed
regulations invited comments on the
with § 1.446-3 of the regulations may
significant distortions of income might
clearly reflect income. Other methods of result if gains aod losses on sales hedges appropriate accounting for anticipatory
accounting also may be appropriate.
became buried in inventory cost lavers.
hedges where the anticipated
Like the proposed regulations. the final
Finally. the simplified method of
transaction is not consummated. Mos!
n:gulations allow flexibility in attaining marking to market inve;\tory hedgi:lg
commentators suggested that gains 0:­
the reasonable matching required by the transactions is clarified to allow the
losses be taken into account when
general r u l e . .
mark-to-merket gain or Joss to be talen
realized. Others suggested that any g?in
The proposed regulations contained
into account immediately. instead of
or loss realized on the hedging
being treated as an eJemer.t of COsi or
s~veral provisions applicable to
transaction be taken into account at the
gross proc~ds. The final regu lations
inventory hedging tre.nsaetions. The
sane time it would have been taken into
general rule in the proposed regulations continue the proposed prohibition on
acvlUnt if L~e anticipated transaction
was that gains and losses on bedges of
the use of this method by UFO
had been consummated and the timing
taxpayers and by taxpayers employing a of the gain or Joss on the hedge had
. inventory purchases may be taken into
': a::count at the same time they would be lower-of-cost-or·market method of
been matched with the timing of the
taken into account if they were elements accounting for invento;-y. Moreover. this goin or loss on the hedged item. StilJ
of inventory cost. Similarl y. gains and
method may be used on ly if item~ ure
others suggested an arbitrary spread
period,
losses on hedges of sales of inventory
held in inventory for short periods of
The first suggestion was adOpii:O, The
may be taken into account at the same
time.
The final regulations clarify when the regulations provide that, if an
time they would be if they were.
clements of gross sales proceeds..
built-in gain or loss on the hedging
anticipated transaction is not
transaction is taken into account whe~e
L, response to comments, the final'
consummated. any inco:ne. dedudion.
regulations clarify the general rule for -, a taxpayer disposes of the hedged item
~,1in. or lo~s on the hedging transof this section is satisfied.
. .'
quarterly;. and ,
" ,,'
',_. (2) Ac:fditionaJ i~entjfication. In.
,
(B) The income, deduction, gain; or .
.'. lirldition to the identification required' loss attributable to the realization or' .
· .'·bY§l.i z21 - Z(e). the bo~ks and reco,,?s periodic marking to market of hedging
transactions is taken into account over
. maintained by a taxpayer must contam
~,:whaiever mOTe specific identification'. the period for whiCh the hedging ..
·Witb.:respeet'to' a trailsaction is' '. " .
trapsactions are intended to reduce risk.
'necesSary to verify the application of the Although the period over which the
hedging transactions are intended to'
· 'method'of accounting used by the"
taxpayer f~r, theY'an~ction~ Tbis.. '.
redu~e risk may change, the period must
additional identification may relate to. . be reasonable and consistent with the
the h~dgirig~.~!~oii~~ to ~e Item,:,. taxpayer's hedging policiesilnd
.
=. used for·.each type ofbedgmg..

"~~~~~~~ti~~i~:n~~~~~~ ~e:~e~,:~;.. st7irn:d~~~ofjie;n~ ma;fed·;o~~~ket.

.

---

---~_._--

36360

------ ._----_ _----..

--------, ...

-.'

- ..­

Federal Register / Vol. 59. No. 136 / Monday. July 18. 1994 / Rules and Regulations

pa"ments described in § 1.44&­
3(D(2)(iii) and (v) genemB)· clearly
reflect the taxpayer's income. The
methods described in § 1.446-3(O(2)(ii)
and (iv). however. generally do nol.'·
clearly reflect the taxpayer's income in

similar transaction for which the hedge
serves to reasonably reduce risk.
(9) Hedging by members of a
.
'consolidated group. IRescrved.\
(0 Type or charocterof income and
deduction. The rules of this section

Authoril}': 26 U.S.c. 1605.
Par. 6. Section 602.10l(c) is amended
by adding an entry in nurneri~l order
to the table to read as follows:"
,.'
, ; : " .•':,.•..
§ 602.101 OMS Control nurnbe!'s.·.... ' ..'" '

:~lffFr:7~~;:te~~;,e;:i::l~in+", · ;~~~~:~~~E:1E:Ei~iFi" CF'. ~~.~'.
;i~:;~?f:~~}};~i~i~K>
.

".'. .':.:' .::.':""..:..,:.::_;

, and dis~oses o~. or terminates its -<,:"_c:" inCQme. de~ucti.oo. gCl;in. ~r lo·~,:·.::.·>. : .~~.
~':~-:'::-s7 cUrrent :,' ....
i~terest In, the Ite~ but does not.. : >;/. prOduce~ b,:.thl!.~ction_:·.:rhus>for~·.:,:._.. :~.~~~
~ ~~~~_.OM8 ~,:_.- ..
dispose of or temunate the hedgwg ;" example. the nues of paragrap~ (e)(3) ofj ':''''':'-:''~~~':':'::''';;':=''-!'"'y''i7~~;.",.~.-,,;troI No.
transaction. the taxpayer must
. '. ' . this section do nOt afJec:. th9'i'~~~~:":-'-'~ ~.~~..~ .:.' ::'·i:.r".:i-i'~);..... 'i'='~-·;$"'~·:' :'.. .
.
appropriately match the built-in gain or . computatioii of cOst of gOodS
·or~~"':'~·i:.~ ~~~~~:{f-:'~+;-',;r:" .. ': •
lo~s on the hedging ~ransacti~:>n to the ' ~Ies proceeds for. illaxp.aYet: that'hed~'~..;~~~~:::.'ji;··~:"·~::---" ..... 1 ~5-1412
gain or loss on the disposed Item. To
Inventory pUrchases or sales. Si.milarly.'i'.'!':i~~~{.:.~~b.~7. •.~-""';~.· ,,'.' _ .:
•
.
meet this requirement. the taxpayer m.ay the ~les orpangniph (e)(4) o(~hi.s.~~~~;':~: ~~~of::'\'.~~:~:' .~'" '.
~ark the hedge to mark~t on the date It
~echon ~o not inc:rease or ~ea:e#.~.~~i't~;---MiJ~ircbird,~D.
disposes of the hedged Item. If the
Interest Income or expense ora taxpa~.~.. -.:.~~ .....",.. ~rInt . 1/l--enue
d'
fth e
th. at..e
h d ges a debt instrwneilt ora.~-€~i.j\t:;:"::
.I"'~COmzrussronero"
.
.
d
taxp~yer lnten s. to l~p~se 0
"'
' :.'::r::...•erna~.
­
heaglDg transaction Within a reasonable habl\ll)'.
. - .-'" "'.: ·..;;·.•(,:,."~';I~,n~:-~~-~.~~ ,'.' .
.
(g) Ef(ecti\·e date: This section appties·;~_r·.~~.
~

period. however,. it mlly.be appropriate
to match the reahzed gain or loss on the to hedging transactions entered into 00 : ~~r;tfiI~.A~lstont secr:t0rJ.. of Treosu :'. ,

hedging transaction with the gain or loss or after October!. 1994.
.'. _.;.. ;.l.~.•;;lf:R ~,94-16~66 Filed 1-13-94: !J;10 ami

on the disposed item. If the taxpayer
(h) Co~sent to chan8~ methods ofr::~~-~CODE .a.JO-Ot-4J
,.",

intends to dispose of the hedging
accountmg. The Commissioner grants :~"".:e.p;;¥;tr -.'"
'
. - C;;;l!'~~:«l":~~'15~~

transaction within a reasonable period
consent for 8 ta.x:pa~er to change its . ' ,
and the hedging transaction is not
methods of acco~ntmg for transactions:
actually disposed of within that period. that are entered IOta on or .arter.Octobe
des~nbed I?
the taxpayer must match the gain or loss 1.1994, and that
paragrap.h (a) of this sectIOn. ThiS
on the hedge at the end of the
.
reasonable period with the gain or loss
consent 1S granted only ~or changes for
on the disposed. item. For purposes of
the taxable year contam 109 Oc~obe.r 1.
, this paragraph (e)(6). a reasonable

1994. The taxpayer must. de~cnbe lis
.new methods ~f ~ccounlJn~ I~ a
, ."~ is generally, 7. days.,: ;; "

_-;~i::e.:'(7) Recycled hedges. lfil taxpayer .' '~tatement that IS !Dcluded III Its Federa
Income tax return for that taxable year.
~,?'~ferS'intoa hedging transaction by .
-:~~1ijc:~g.~ ~ge ora parti~ hedged
Par...~.ln ~ 1.46~-1, parcgraph
(a)(2)(Ill)(B) IS reVIsed to read as follow
:~)tem to serve as a hedge of a different··
::.::~it'em.-"as·described in § 1.1221-2(c)(2).
§ 1.461-1 General rules for taxable year o(
'}Cthe ~ayer must match the built-in
detotbe gain or loss on the original
(2)' • •
.:': hedged item. items. or aggregate risk.
(iii)' • •
,':" InCome'; deduction. gain. or loss '
(B) If the liability of a taxpayer is
, ~;,~ attributable to the period after the
subject to section 170 (charitable
- recycling must be matched to the new
contributions!. section 192 (black lung
" hedged item. items. or aggregate risk
benefit trusts). section 194A (employer
under the principles of pll1'agraph (b) of liability trusts). section 468 (mining en
this section. .
solid weste disposal reclamation and
(8) Unfulfilled anticipatory
closing costs). or section 4681\ (certain
transoctjons-{i) In general. 1£ a
nuclear decommissioning costs). L~e
taxpayer enters into a hedging
liability is taken into account as
transaction to reduce risk with respect
deteor.ined under that section and not
to an anticipated asset acquisition. debt
under section 461 or the regulations
issuance. or obligation, and the
thereunder. For special rules relating to
anticipated transaction is not
certain loss deductions. see sections
consummated. any income, dedlJction.
165(e). 16S(i). and 165(1). relating to
gain. or loss from the hedging
theft losses, disaster losses, D.'1d losses
transaction is taken into account when
from ~rtain deposits in qU<:llified
realized.
fimmcial institutions.
(ii) Consummation of anticipated
I
tronsoction. A taxpayer consummates a
transaction for purposes of paragraph
PART 602-0MB CONTROL NUMBER
(e)[8)(i) of this section upon the
occurrence (within a reasonable interval UNDER THE PAPERWORK
REDUCTION ACT
around the expected time of the
anticipated transaction) of either Ll,e
Par. 5. The authority citation for p<:ll"1
anticipated transaction or a different but' 602 continues to read as follows:

sold

a:e

at