Clear Reflection of Income in the Case of Hedging Transactions

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) * * *

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Current OMB

CFR part or section where identified and described control No.

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*****

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