[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