Proposed hedging regulations under Sections 446 and 1221.

• Position: Tax Executives Institute

On November 1, 1994, Tax Executives Institute submitted the following comments to IRS Commissioner Margaret M. Richardson on the proposed regulations relating to hedging of property by a consolidated group. The comments, in the form of a letter from TEI President Linda B. Burke, was prepared under the aegis of TEI's Federal Tax Committee, whose chair is Michael A. DeLuca of Household International, Inc.

On behalf of Tax Executives Institute, I am pleased to submit these comments on the proposed regulations under sections 446 and 1221, relating to the treatment of hedging transactions entered into by members of consolidated groups.

Background

Tax Executives Institute is the principal association of business tax executives in North America. The Institute's approximately 5,000 members represent more than 2,800 of the largest companies in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations relating to the income tax treatment to be accorded to hedging transactions effected on a consolidated, and generally, "net" basis.

Overview

On July 13, 1994, the Internal Revenue Service issued Treasury Decisions 8554 and 8555,(1) promulgating final regulations under sections 446, 461, and 1221, of the Internal Revenue Code. The regulations, which relate to business hedging transactions are generally consistent with the temporary and proposed regulations issued on October 18, 1993. Thus, assuming certain administrative requirements are met, the regulations treat gain or loss arising from defined business "hedging transactions" as ordinary in character under section 1221 and prescribe timing rules for recognition of gain or loss for the hedge transaction. The temporary and...