Hedging Transactions by Members of a Consolidated Group

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.

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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.

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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