[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
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
                                                                        
                                 *****                                  
------------------------------------------------------------------------

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