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Abstract: 

The guidance in the tax law on when taxpayers should take into account gains and losses on hedging transactions is extremely vague. Reg. 1.446-4(b) says only that the method a taxpayer uses to account for a hedging transaction must “clearly reflect income,” and further requires that the hedge tax accounting “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.” Reg. 1.446-4(c) acknowledges, “there may be more than one method of accounting that satisfies the clear reflection requirement.” For hedges of debt instruments, Reg. 1.446-4(e)(4) provides the further but equally vague rule: “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.”

Keywords: Rev. Rul. 2002-71

Affiliations:  1: Ernst & Young LLP; 2: Ernst & Young LLP.