§1221 — Capital asset defined
345 citing cases
Statute Text — 26 U.S.C. §1221
For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—
stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;
a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—
a taxpayer whose personal efforts created such property,
in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or
a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);
accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);
a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—
a taxpayer who so received such publication, or
a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);
any commodities derivative financial instrument held by a commodities derivatives dealer, unless—
it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and
such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);
any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or
supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.
For purposes of subsection (a)(6)—
The term “commodities derivatives dealer” means a person which 11 So in original. Probably should be “who”. regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.
The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.
The term “specified index” means any one or more or any combination of—
a fixed rate, price, or amount, or
a variable rate, price, or amount,
which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances.
For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—
to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,
to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or
to manage such other risks as the Secretary may prescribe in regulations.
Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—
which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or
which was so identified but is not a hedging transaction.
At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).
The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.
Treasury Regulations
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Treas. Reg. §1.1221-1Meaning of terms
(a) The term capital assets includes all classes of property not specifically excluded by section 1221. In determining whether property is a capital asset, the period for which held is immaterial.
(b) Property used in the trade or business of a taxpayer of a character which is subject to the allowance for depreciation provided in section 167 and real property used in the trade or business of a taxpayer is excluded from the term capital assets. Gains and losses from the sale or exchange of such property are not treated as gains and losses from the sale or exchange of capital assets, except to the extent provided in section 1231. See § 1.1231-1. Property held for the production of income, but not used in a trade or business of the taxpayer, is not excluded from the term capital assets even though depreciation may have been allowed with respect to such property under section 23(l) of the Internal Revenue Code of 1939 before its amendment by section 121(c) of the Revenue Act of 1942 (56 Stat. 819). However, gain or loss upon the sale or exchange of land held by a taxpayer primarily for sale to customers in the ordinary course of his business, as in the case of a dealer in real estate, is not subject to the provisions of subchapter P (section 1201 and following), chapter 1 of the Code.
(c)(1) A copyright, a literary, musical, or artistic composition, and similar property are excluded from the term capital assets if held by a taxpayer whose personal efforts created such property, or if held by a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of a taxpayer whose personal efforts created such property. For purposes of this subparagraph, the phrase similar property includes for example, such property as a theatrical production, a radio program, a newspaper cartoon strip, or any other property eligible for copyright protection (whether under statute or common law), but does not include a patent or an invention, or a design which may be protected only under the patent law and not under the copyright law.
(2) In the case of sales and other dispositions occurring after July 25, 1969, a letter, a memorandum, or similar property is excluded from the term capital asset if held by (i) a taxpayer whose personal efforts created such property, (ii) a taxpayer for whom such property was prepared or produced, or (iii) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of a taxpayer described in subdivision (i) or (ii) of this subparagraph. In the case of a collection of letters, memorandums, or similar property held by a person who is a taxpayer described in subdivision (i), (ii), or (iii) of this subparagraph as to some of such letters, memorandums, or similar property but not as to others, this subparagraph shall apply only to those letters, memorandums, or similar property as to which such person is a taxpayer described in such subdivision. For purposes of this subparagraph, the phrase similar property includes, for example, such property as a draft of a speech, a manuscript, a research paper, an oral recording of any type, a transcript of an oral recording, a transcript of an oral interview or of dictation, a personal or business diary, a log or journal, a corporate archive, including a corporate charter, office correspondence, a financial record, a drawing, a photograph, or a dispatch. A letter, memorandum, or property similar to a letter or memorandum, addressed to a taxpayer shall be considered as prepared or produced for him. This subparagraph does not apply to property, such as a corporate archive, office correspondence, or a financial record, sold or disposed of as part of a going business if such property has no significant value separate and apart from its relation to and use in such business; it also does not apply to any property to which subparagraph (1) of this paragraph applies (i.e., property to which section 1221(3) applied before its amendment by section 514(a) of the Tax Reform Act of 1969 (83 Stat. 643)).
(3) For purposes of this paragraph, in general, property is created in whole or in part by the personal efforts of a taxpayer if such taxpayer performs literary, theatrical, musical, artistic, or other creative or productive work which affirmatively contributes to the creation of the property, or if such taxpayer directs and guides others in the performance of such work. A taxpayer, such as corporate executive, who merely has administrative control of writers, actors, artists, or personnel and who does not substantially engage in the direction and guidance of such persons in the performance of their work, does not create property by his personal efforts. However, for purposes of subparagraph (2) of this paragraph, a letter or memorandum, or property similar to a letter or memorandum, which is prepared by personnel who are under the administrative control of a taxpayer, such as a corporate executive, shall be deemed to have been prepared or produced for him whether or not such letter, memorandum, or similar property is reviewed by him.
(4) For the application of section 1231 to the sale or exchange of property to which this paragraph applies, see § 1.1231-1. For the application of section 170 to the charitable contribution of property to which this paragraph applies, see section 170(e) and the regulations thereunder.
(d) Section 1221(4) excludes from the definition of capital asset accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of stock in trade or inventory or property held for sale to customers in the ordinary course of trade or business. Thus, if a taxpayer acquires a note receivable for services rendered, reports the fair market value of the note as income, and later sells the note for less than the amount previously reported, the loss is an ordinary loss. On the other hand, if the taxpayer later sells the note for more than the amount originally reported, the excess is treated as ordinary income.
(e) Obligations of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, are excluded from the term capital assets. An obligation may be issued on a discount basis even though the price paid exceeds the face amount. Thus, although the Second Liberty Bond Act (31 U.S.C. 754) provides that United States Treasury bills shall be issued on a discount basis, the issuing price paid for a particular bill may, by reason of competitive bidding, actually exceed the face amount of the bill. Since the obligations of the type described in this paragraph are excluded from the term capital assets, gains or losses from the sale or exchange of such obligations are not subject to the limitations provided in such subchapter P. It is, therefore, not necessary for a taxpayer (other than a life insurance company taxable under part I (section 801 and following), subchapter L, chapter 1 of the Code, as amended by the Life Insurance Company Tax Act of 1955 (70 Stat. 36), and, in the case of taxable years beginning before January 1, 1955, subject to taxation only on interest, dividends, and rents) to segregate the original discount accrued and the gain or loss realized upon the sale or other disposition of any such obligation. See section 454(b) with respect to the original discount accrued. The provisions of this paragraph may be illustrated by the following examples:
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Treas. Reg. §1.1221-1(a)The term capital assets includes all classes of property not specifically excluded by section 1221.
The term capital assets includes all classes of property not specifically excluded by section 1221. In determining whether property is a capital asset, the period for which held is immaterial.
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Treas. Reg. §1.1221-1(b)Property used in the trade or business of a taxpayer of a character which is subject to the allowance for depreciation provided in section 167 and real property used in the trade or business of a taxpayer is excluded from the term capital assets.
Property used in the trade or business of a taxpayer of a character which is subject to the allowance for depreciation provided in section 167 and real property used in the trade or business of a taxpayer is excluded from the term capital assets. Gains and losses from the sale or exchange of such property are not treated as gains and losses from the sale or exchange of capital assets, except to the extent provided in section 1231. See § 1.1231-1. Property held for the production of income, but not used in a trade or business of the taxpayer, is not excluded from the term capital assets even though depreciation may have been allowed with respect to such property under section 23(l) of the Internal Revenue Code of 1939 before its amendment by section 121(c) of the Revenue Act of 1942 (56 Stat. 819). However, gain or loss upon the sale or exchange of land held by a taxpayer primarily for sale to customers in the ordinary course of his business, as in the case of a dealer in real estate, is not subject to the provisions of subchapter P (section 1201 and following), chapter 1 of the Code.
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Treas. Reg. §1.1221-1(c)§1.1221-1(c)
(1) A copyright, a literary, musical, or artistic composition, and similar property are excluded from the term capital assets if held by a taxpayer whose personal efforts created such property, or if held by a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of a taxpayer whose personal efforts created such property. For purposes of this subparagraph, the phrase similar property includes for example, such property as a theatrical production, a radio program, a newspaper cartoon strip, or any other property eligible for copyright protection (whether under statute or common law), but does not include a patent or an invention, or a design which may be protected only under the patent law and not under the copyright law.
(2) In the case of sales and other dispositions occurring after July 25, 1969, a letter, a memorandum, or similar property is excluded from the term capital asset if held by (i) a taxpayer whose personal efforts created such property, (ii) a taxpayer for whom such property was prepared or produced, or (iii) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of a taxpayer described in subdivision (i) or (ii) of this subparagraph. In the case of a collection of letters, memorandums, or similar property held by a person who is a taxpayer described in subdivision (i), (ii), or (iii) of this subparagraph as to some of such letters, memorandums, or similar property but not as to others, this subparagraph shall apply only to those letters, memorandums, or similar property as to which such person is a taxpayer described in such subdivision. For purposes of this subparagraph, the phrase similar property includes, for example, such property as a draft of a speech, a manuscript, a research paper, an oral recording of any type, a transcript of an oral recording, a transcript of an oral interview or of dictation, a personal or business diary, a log or journal, a corporate archive, including a corporate charter, office correspondence, a financial record, a drawing, a photograph, or a dispatch. A letter, memorandum, or property similar to a letter or memorandum, addressed to a taxpayer shall be considered as prepared or produced for him. This subparagraph does not apply to property, such as a corporate archive, office correspondence, or a financial record, sold or disposed of as part of a going business if such property has no significant value separate and apart from its relation to and use in such business; it also does not apply to any property to which subparagraph (1) of this paragraph applies (i.e., property to which section 1221(3) applied before its amendment by section 514(a) of the Tax Reform Act of 1969 (83 Stat. 643)).
(3) For purposes of this paragraph, in general, property is created in whole or in part by the personal efforts of a taxpayer if such taxpayer performs literary, theatrical, musical, artistic, or other creative or productive work which affirmatively contributes to the creation of the property, or if such taxpayer directs and guides others in the performance of such work. A taxpayer, such as corporate executive, who merely has administrative control of writers, actors, artists, or personnel and who does not substantially engage in the direction and guidance of such persons in the performance of their work, does not create property by his personal efforts. However, for purposes of subparagraph (2) of this paragraph, a letter or memorandum, or property similar to a letter or memorandum, which is prepared by personnel who are under the administrative control of a taxpayer, such as a corporate executive, shall be deemed to have been prepared or produced for him whether or not such letter, memorandum, or similar property is reviewed by him.
(4) For the application of section 1231 to the sale or exchange of property to which this paragraph applies, see § 1.1231-1. For the application of section 170 to the charitable contribution of property to which this paragraph applies, see section 170(e) and the regulations thereunder.
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Treas. Reg. §1.1221-1(d)Section 1221(4) excludes from the definition of capital asset accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of stock in trade or inventory or property held for sale to customers in the ordinary course of trade or business.
Section 1221(4) excludes from the definition of capital asset accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of stock in trade or inventory or property held for sale to customers in the ordinary course of trade or business. Thus, if a taxpayer acquires a note receivable for services rendered, reports the fair market value of the note as income, and later sells the note for less than the amount previously reported, the loss is an ordinary loss. On the other hand, if the taxpayer later sells the note for more than the amount originally reported, the excess is treated as ordinary income.
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Treas. Reg. §1.1221-1(e)Obligations of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, are excluded from the term capital assets.
Obligations of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, are excluded from the term capital assets. An obligation may be issued on a discount basis even though the price paid exceeds the face amount. Thus, although the Second Liberty Bond Act (31 U.S.C. 754) provides that United States Treasury bills shall be issued on a discount basis, the issuing price paid for a particular bill may, by reason of competitive bidding, actually exceed the face amount of the bill. Since the obligations of the type described in this paragraph are excluded from the term capital assets, gains or losses from the sale or exchange of such obligations are not subject to the limitations provided in such subchapter P. It is, therefore, not necessary for a taxpayer (other than a life insurance company taxable under part I (section 801 and following), subchapter L, chapter 1 of the Code, as amended by the Life Insurance Company Tax Act of 1955 (70 Stat. 36), and, in the case of taxable years beginning before January 1, 1955, subject to taxation only on interest, dividends, and rents) to segregate the original discount accrued and the gain or loss realized upon the sale or other disposition of any such obligation. See section 454(b) with respect to the original discount accrued. The provisions of this paragraph may be illustrated by the following examples:
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Treas. Reg. §1.1221-2Hedging transactions
(a) Treatment of hedging transactions—(1) In general. This section governs the treatment of hedging transactions under section 1221(a)(7). Except as provided in paragraph (g)(2) of this section, the term capital asset does not include property that is part of a hedging transaction (as defined in paragraph (b) of this section).
(2) Short sales and options. This section also governs the character of gain or loss from a short sale or option that is part of a hedging transaction. Except as provided in paragraph (g)(2) of this section, gain or loss on a short sale or option that is part of a hedging transaction (as defined in paragraph (b) of this section) is ordinary income or loss.
(3) Exclusivity. If a transaction is not a hedging transaction as defined in paragraph (b) of this section, gain or loss from the transaction is not made ordinary on the grounds that property involved in the transaction is a surrogate for a noncapital asset, that the transaction serves as insurance against a business risk, that the transaction serves a hedging function, or that the transaction serves a similar function or purpose.
(4) Coordination with section 988. This section does not apply to determine the character of gain or loss realized on a section 988 transaction as defined in section 988(c)(1) or realized with respect to any qualified fund as defined in section 988(c)(1)(E)(iii).
(b) Hedging transaction defined. Section 1221(b)(2)(A) provides that a hedging transaction is any transaction that a taxpayer enters into in the normal course of the taxpayer's trade or business primarily—
(1) To manage risk of price changes or currency fluctuations with respect to ordinary property (as defined in paragraph (c)(2) of this section) that is held or to be held by the taxpayer;
(2) To manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer; or
(3) To manage such other risks as the Secretary may prescribe in regulations (see paragraph (d)(6) of this section).
(c) General rules—(1) Normal course. Solely for purposes of paragraph (b) of this section, if a transaction is entered into in furtherance of a taxpayer's trade or business, the transaction is entered into in the normal course of the taxpayer's trade or business. This rule includes managing risks relating to the expansion of an existing business or the acquisition of a new trade or business.
(2) Ordinary property and obligations. Property is ordinary property to a taxpayer only if a sale or exchange of the property by the taxpayer could not produce capital gain or loss under any circumstances. Thus, for example, property used in a trade or business within the meaning of section 1231(b) (determined without regard to the holding period specified in that section) is not ordinary property. An obligation is an ordinary obligation if performance or termination of the obligation by the taxpayer could not produce capital gain or loss. For purposes of this paragraph (c)(2), the term termination has the same meaning as it does in section 1234A.
(3) Hedging an aggregate risk. The term hedging transaction includes a transaction that manages an aggregate risk of interest rate changes, price changes, and/or currency fluctuations only if all of the risk, or all but a de minimis amount of the risk, is with respect to ordinary property, ordinary obligations, or borrowings.
(4) Managing risk—(i) In general. Whether a transaction manages a taxpayer's risk is determined based on all of the facts and circumstances surrounding the taxpayer's business and the transaction. Whether a transaction manages a taxpayer's risk may be determined on a business unit by business unit basis (for example by treating particular groups of activities, including the assets and liabilities attributable to those activities, as separate business units), provided that the business unit is within a single entity or consolidated return group that adopts the single-entity approach. A taxpayer's hedging strategies and policies as reflected in the taxpayer's minutes or other records are evidence of whether particular transactions were entered into primarily to manage the taxpayer's risk.
(ii) Limitation of risk management transactions to those specifically described. Except as otherwise determined by published guidance or by private letter ruling, a transaction that is not treated as a hedging transaction under paragraph (d) does not manage risk. Moreover, a transaction undertaken for speculative purposes will not be treated as a hedging transaction.
(d) Transactions that manage risk—(1) Risk reduction transactions—(i) In general. A transaction that is entered into to reduce a taxpayer's risk, manages a taxpayer's risk.
(ii) Micro and macro hedges—(A) In general. A taxpayer generally has risk of a particular type only if it is at risk when all of its operations are considered. Nonetheless, a hedge of a particular asset or liability generally will be respected as reducing risk if it reduces the risk attributable to the asset or liability and if it is reasonably expected to reduce the overall risk of the taxpayer's operations. If a taxpayer hedges particular assets or liabilities, or groups of assets or liabilities, and the hedges are undertaken as part of a program that, as a whole, is reasonably expected to reduce the overall risk of the taxpayer's operations, the taxpayer generally does not have to demonstrate that each hedge that was entered into pursuant to the program reduces its overall risk.
(B) Example. The following example illustrates the rules stated in paragraph (d)(1)(ii)(A) of this section:
(iii) Written options. A written option may reduce risk. For example, in appropriate circumstances, a written call option with respect to assets held by a taxpayer or a written put option with respect to assets to be acquired by a taxpayer may be a hedging transaction. See also paragraph (d)(3) of this section.
(iv) Fixed-to-floating price hedges. Under the principles of paragraph (d)(1)(ii)(A) of this section, a transaction that economically converts a price from a fixed price to a floating price may reduce risk. For example, a taxpayer with a fixed cost for its inventory may be at risk if the price at which the inventory can be sold varies with a particular factor. Thus, for such a taxpayer a transaction that converts its fixed price to a floating price may be a hedging transaction.
(2) Interest rate conversions. A transaction that economically converts an interest rate from a fixed rate to a floating rate or that converts an interest rate from a floating rate to a fixed rate manages risk.
(3) Transactions that counteract hedging transactions. If a transaction is entered into primarily to offset all or any part of the risk management effected by one or more hedging transactions, the transaction is a hedging transaction. For example, if a written option is used to reduce or eliminate the risk reduction obtained from another position such as a purchased option, then it may be a hedging transaction.
(4) Recycling. A taxpayer may enter into a hedging transaction by using a position that was a hedge of one asset or liability as a hedge of another asset or liability (recycling).
(5) Transactions not entered into primarily to manage risk—(i) Rule. Except as otherwise determined in published guidance or private letter ruling, the purchase or sale of a debt instrument, an equity security, or an annuity contract is not a hedging transaction even if the transaction limits or reduces the taxpayer's risk with respect to ordinary property, borrowings, or ordinary obligations. In addition, the Commissioner may determine in published guidance that other transactions are not hedging transactions.
(ii) Examples. The following examples illustrate the rule stated in paragraph (d)(5)(i) of this section:
(6) Hedges of other risks. The Commissioner may, by published guidance, determine that hedging transactions include transactions entered into to manage risks other than interest rate or price changes, or currency fluctuations.
(7) Miscellaneous provision—(i) Extent of risk management. A taxpayer may hedge all or any portion of its risk for all or any part of the period during which it is exposed to the risk.
(ii) Number of transactions. The fact that a taxpayer frequently enters into and terminates positions (even if done on a daily or more frequent basis) is not relevant to whether these transactions are hedging transactions. Thus, for example, a taxpayer hedging the risk associated with an asset or liability may frequently establish and terminate positions that hedge that risk, depending on the extent the taxpayer wishes to be hedged. Similarly, if a taxpayer maintains its level of risk exposure by entering into and terminating a large number of transactions in a single day, its transactions may nonetheless qualify as hedging transactions.
(e) 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 manage the risk of that single corporation.
(2) Separate-entity election. In lieu of the single-entity approach specified in paragraph (e)(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 (e)(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 (e)(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 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 (e)(2)(ii)(A) and (B) of this section) is subject to the following rules—
(A) The character and timing rules of § 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 (g)(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 paragraph (e)(2) of this section must be made in a separate statement that provides, “[INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF COMMON PARENT] HEREBY ELECTS THE APPLICATION OF § 1.1221-2(e)(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 filed by including the statement on or with the consolidated group's 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. The election may only be revoked with the consent of the Commissioner.
(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. 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. The following examples illustrate this paragraph (e):
(f) Identification and recordkeeping—(1) Same-day identification of hedging transactions. Under section 1221(a)(7), a taxpayer that enters into a hedging transaction (including recycling an existing hedging transaction) must clearly identify it as a hedging transaction before the close of the day on which the taxpayer acquired, originated, or entered into the transaction (or recycled the existing hedging transaction).
(2) Substantially contemporaneous identification of hedged item—(i) Content of the identification. A taxpayer that enters into a hedging transaction must identify the item, items, or aggregate risk being hedged. Identification of an item being hedged generally involves identifying a transaction that creates risk, and the type of risk that the transaction creates. For example, if a taxpayer is hedging the price risk with respect to its June purchases of corn inventory, the transaction being hedged is the June purchase of corn and the risk is price movements in the market where the taxpayer buys its corn. For additional rules concerning the content of this identification, see paragraph (f)(3) of this section.
(ii) Timing of the identification. The identification required by this paragraph (f)(2) must be made substantially contemporaneously with entering into the hedging transaction. An identification is not substantially contemporaneous if it is made more than 35 days after entering into the hedging transaction.
(3) Identification requirements for certain hedging transactions. In the case of the hedging transactions described in this paragraph (f)(3), the identification under paragraph (f)(2) of this section must include the information specified.
(i) Anticipatory asset hedges. If the hedging transaction relates to the anticipated acquisition of assets by the taxpayer, the identification must include the expected date or dates of acquisition and the amounts expected to be acquired.
(ii) Inventory hedges. If the hedging transaction relates to the purchase or sale of inventory by the taxpayer, the identification is made by specifying the type or class of inventory to which the transaction relates. If the hedging transaction relates to specific purchases or sales, the identification must also include the expected dates of the purchases or sales and the amounts to be purchased or sold.
(iii) Hedges of debt of the taxpayer—(A) Existing debt. If the hedging transaction relates to accruals or payments under an issue of existing debt of the taxpayer, the identification must specify the issue and, if the hedge is for less than the full issue price or the full term of the debt, the amount of the issue price and the term covered by the hedge.
(B) Debt to be issued. If the hedging transaction relates to the expected issuance of debt by the taxpayer or to accruals or payments under debt that is expected to be issued by the taxpayer, the identification must specify the following information: the expected date of issuance of the debt; the expected maturity or maturities; the total expected issue price; and the expected interest provisions. If the hedge is for less than the entire expected issue price of the debt or the full expected term of the debt, the identification must also include the amount or the term being hedged. The identification may indicate a range of dates, terms, and amounts, rather than specific dates, terms, or amounts. For example, a taxpayer might identify a transaction as hedging the yield on an anticipated issuance of fixed rate debt during the second half of its fiscal year, with the anticipated amount of the debt between $75 million and $125 million, and an anticipated term of approximately 20 to 30 years.
(iv) Hedges of aggregate risk—(A) Required identification. If a transaction hedges aggregate risk as described in paragraph (c)(3) of this section, the identification under paragraph (f)(2) of this section must include a description of the risk being hedged and of the hedging program under which the hedging transaction was entered. This requirement may be met by placing in the taxpayer's records a description of the hedging program and by establishing a system under which individual transactions can be identified as being entered into pursuant to the program.
(B) Description of hedging program. A description of a hedging program must include an identification of the type of risk being hedged, a description of the type of items giving rise to the risk being aggregated, and sufficient additional information to demonstrate that the program is designed to reduce aggregate risk of the type identified. If the program contains controls on speculation (for example, position limits), the description of the hedging program must also explain how the controls are established, communicated, and implemented.
(v) Transactions that counteract hedging transactions. If the hedging transaction is described in paragraph (d)(3) of this section, the description of the hedging transaction must include an identification of the risk management transaction that is being offset and the original underlying hedged item.
(4) Manner of identification and records to be retained—(i) Inclusion of identification in tax records. The identification required by this paragraph (f) must be made on, and retained as part of, the taxpayer's books and records.
(ii) Presence of identification must be unambiguous. The presence of an identification for purposes of this paragraph (f) must be unambiguous. The identification of a hedging transaction for financial accounting or regulatory purposes does not satisfy this requirement unless the taxpayer's books and records indicate that the identification is also being made for tax purposes. The taxpayer may indicate that individual hedging transactions, or a class or classes of hedging transactions, that are identified for financial accounting or regulatory purposes are also being identified as hedging transactions for purposes of this section.
(iii) Manner of identification. The taxpayer may separately and explicitly make each identification, or, so long as paragraph (f)(4)(ii) of this section is satisfied, the taxpayer may establish a system pursuant to which the identification is indicated by the type of transaction or by the manner in which the transaction is consummated or recorded. An identification under this system is made at the later of the time that the system is established or the time that the transaction satisfies the terms of the system by being entered, or by being consummated or recorded, in the designated fashion.
(iv) Principles of paragraph (f)(4)(iii) of this section illustrated. Paragraphs (f)(4)(iv)(A) through (C) of this section illustrate the principles of paragraph (f)(4)(iii) of this section and assume that the other requirements of this paragraph (f) are satisfied.
(A) A taxpayer can make an identification by designating a hedging transaction for (or placing it in) an account that has been identified as containing only hedges of a specified item (or of specified items or specified aggregate risk).
(B) A taxpayer can make an identification by including and retaining in its books and records a statement that designates all future transactions in a specified derivative product as hedges of a specified item, items, or aggregate risk.
(C) A taxpayer can make an identification by designating a certain mark, a certain form, or a certain legend as meaning that a transaction is a hedge of a specified item (or of specified items or a specified aggregate risk). Identification can be made by placing the designated mark on a record of the transaction (for example, trading ticket, purchase order, or trade confirmation) or by using the designated form or a record that contains the designated legend.
(5) Identification of hedges involving members of the same consolidated group—(i) General rule: single-entity approach. A member of a consolidated group must satisfy the requirements of this paragraph (f) 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 (f)(1) of this section. Under paragraph (f)(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 (f)(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 (f)(2) of this section. For example, if a member transfers risk in an intercompany transaction, it may identify under the rules of this paragraph (f) 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 (f) both its position with the third party and its position in the intercompany transaction. Paragraph (e)(4) Example 1 of this section illustrates this identification.
(ii) Rule for consolidated groups making the separate-entity election. If a consolidated group makes the separate-entity election under paragraph (e)(2) of this section, each member of the group must satisfy the requirements of this paragraph (f) as though it were not a member of a consolidated group.
(6) Consistency with section 1256(e)(2). Any identification for purposes of section 1256(e)(2) is also an identification for purposes of paragraph (f)(1) of this section.
(g) Effect of identification and non-identification—(1) Transactions identified—(i) In general. If a taxpayer identifies a transaction as a hedging transaction for purposes of paragraph (f)(1) of this section, the identification is binding with respect to gain, whether or not all of the requirements of paragraph (f) of this section are satisfied. Thus, gain from that transaction is ordinary income. If the transaction is not in fact a hedging transaction described in paragraph (b) of this section, however, paragraphs (a)(1) and (2) of this section do not apply and the character of loss is determined without reference to whether the transaction is a surrogate for a noncapital asset, serves as insurance against a business risk, serves a hedging function, or serves a similar function or purpose. Thus, the taxpayer's identification of the transaction as a hedging transaction does not itself make loss from the transaction ordinary.
(ii) Inadvertent identification. Notwithstanding paragraph (g)(1)(i) of this section, if the taxpayer identifies a transaction as a hedging transaction for purposes of paragraph (f) of this section, the character of the gain is determined as if the transaction had not been identified as a hedging transaction if—
(A) The transaction is not a hedging transaction (as defined in paragraph (b) of this section);
(B) The identification of the transaction as a hedging transaction was due to inadvertent error; and
(C) All of the taxpayer's transactions in all open years are being treated on either original or, if necessary, amended returns in a manner consistent with the principles of this section.
(2) Transactions not identified—(i) In general. Except as provided in paragraphs (g)(2)(ii) and (iii) of this section, the absence of an identification that satisfies the requirements of paragraph (f)(1) of this section is binding and establishes that a transaction is not a hedging transaction. Thus, subject to the exceptions, the rules of paragraphs (a)(1) and (2) of this section do not apply, and the character of gain or loss is determined without reference to whether the transaction is a surrogate for a noncapital asset, serves as insurance against a business risk, serves a hedging function, or serves a similar function or purpose.
(ii) Inadvertent error. If a taxpayer does not make an identification that satisfies the requirements of paragraph (f) of this section, the taxpayer may treat gain or loss from the transaction as ordinary income or loss under paragraph (a)(1) or (2) of this section if—
(A) The transaction is a hedging transaction (as defined in paragraph (b) of this section);
(B) The failure to identify the transaction was due to inadvertent error; and
(C) All of the taxpayer's hedging transactions in all open years are being treated on either original or, if necessary, amended returns as provided in paragraphs (a)(1) and (2) of this section.
(iii) Anti-abuse rule. If a taxpayer does not make an identification that satisfies all the requirements of paragraph (f) of this section but the taxpayer has no reasonable grounds for treating the transaction as other than a hedging transaction, then gain from the transaction is ordinary. The reasonableness of the taxpayer's failure to identify a transaction is determined by taking into consideration not only the requirements of paragraph (b) of this section but also the taxpayer's treatment of the transaction for financial accounting or other purposes and the taxpayer's identification of similar transactions as hedging transactions.
(3) Transactions by members of a consolidated group—(i) Single-entity approach. If a consolidated group is under the general rule of paragraph (e)(1) of this section (the single-entity approach), the rules of this paragraph (g) apply only to transactions that are not intercompany transactions.
(ii) Separate-entity election. If a consolidated group has made the election under paragraph (e)(2) of this section, then, in addition to the rules of paragraphs (g)(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 (e)(2)(ii)(A) and (B) of this section, then, notwithstanding any contrary provision in § 1.1502-13, each party to the transaction is subject to the rules of paragraph (g)(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 (e)(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 (g)(2) of this section. (Because the transaction is an intercompany hedging transaction, the character and timing rules of § 1.1502-13 do not apply. See paragraph (e)(2)(iii)(A) of this section.)
(h) Effective date. The rules of this section apply to transactions entered into on or after March 20, 2002.
(i) [Reserved]. For further guidance, see § 1.1221-2T(i) through (j)(1).
(j) Effective/applicability date. Paragraph (e)(2)(iv) of this section applies to any original consolidated Federal income tax return due (without extensions) after June 14, 2007. For original consolidated Federal income tax returns due (without extensions) after May 30, 2006, and on or before June 14, 2007, see § 1.1221-2T as contained in 26 CFR part 1 in effect on April 1, 2007. For original consolidated Federal income tax returns due (without extensions) on or before May 30, 2006, see § 1.1221-2 as contained in 26 CFR part 1 in effect on April 1, 2006.
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Treas. Reg. §1.1221-2(a)Treatment of hedging transactions—(1) In general.
Treatment of hedging transactions—(1) In general. This section governs the treatment of hedging transactions under section 1221(a)(7). Except as provided in paragraph (g)(2) of this section, the term capital asset does not include property that is part of a hedging transaction (as defined in paragraph (b) of this section).
(2) Short sales and options. This section also governs the character of gain or loss from a short sale or option that is part of a hedging transaction. Except as provided in paragraph (g)(2) of this section, gain or loss on a short sale or option that is part of a hedging transaction (as defined in paragraph (b) of this section) is ordinary income or loss.
(3) Exclusivity. If a transaction is not a hedging transaction as defined in paragraph (b) of this section, gain or loss from the transaction is not made ordinary on the grounds that property involved in the transaction is a surrogate for a noncapital asset, that the transaction serves as insurance against a business risk, that the transaction serves a hedging function, or that the transaction serves a similar function or purpose.
(4) Coordination with section 988. This section does not apply to determine the character of gain or loss realized on a section 988 transaction as defined in section 988(c)(1) or realized with respect to any qualified fund as defined in section 988(c)(1)(E)(iii).
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Treas. Reg. §1.1221-2(b)Hedging transaction defined.
Hedging transaction defined. Section 1221(b)(2)(A) provides that a hedging transaction is any transaction that a taxpayer enters into in the normal course of the taxpayer's trade or business primarily—
(1) To manage risk of price changes or currency fluctuations with respect to ordinary property (as defined in paragraph (c)(2) of this section) that is held or to be held by the taxpayer;
(2) To manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer; or
(3) To manage such other risks as the Secretary may prescribe in regulations (see paragraph (d)(6) of this section).
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Treas. Reg. §1.1221-2(c)General rules—(1) Normal course.
General rules—(1) Normal course. Solely for purposes of paragraph (b) of this section, if a transaction is entered into in furtherance of a taxpayer's trade or business, the transaction is entered into in the normal course of the taxpayer's trade or business. This rule includes managing risks relating to the expansion of an existing business or the acquisition of a new trade or business.
(2) Ordinary property and obligations. Property is ordinary property to a taxpayer only if a sale or exchange of the property by the taxpayer could not produce capital gain or loss under any circumstances. Thus, for example, property used in a trade or business within the meaning of section 1231(b) (determined without regard to the holding period specified in that section) is not ordinary property. An obligation is an ordinary obligation if performance or termination of the obligation by the taxpayer could not produce capital gain or loss. For purposes of this paragraph (c)(2), the term termination has the same meaning as it does in section 1234A.
(3) Hedging an aggregate risk. The term hedging transaction includes a transaction that manages an aggregate risk of interest rate changes, price changes, and/or currency fluctuations only if all of the risk, or all but a de minimis amount of the risk, is with respect to ordinary property, ordinary obligations, or borrowings.
(4) Managing risk—(i) In general. Whether a transaction manages a taxpayer's risk is determined based on all of the facts and circumstances surrounding the taxpayer's business and the transaction. Whether a transaction manages a taxpayer's risk may be determined on a business unit by business unit basis (for example by treating particular groups of activities, including the assets and liabilities attributable to those activities, as separate business units), provided that the business unit is within a single entity or consolidated return group that adopts the single-entity approach. A taxpayer's hedging strategies and policies as reflected in the taxpayer's minutes or other records are evidence of whether particular transactions were entered into primarily to manage the taxpayer's risk.
(ii) Limitation of risk management transactions to those specifically described. Except as otherwise determined by published guidance or by private letter ruling, a transaction that is not treated as a hedging transaction under paragraph (d) does not manage risk. Moreover, a transaction undertaken for speculative purposes will not be treated as a hedging transaction.
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Treas. Reg. §1.1221-2(d)Transactions that manage risk—(1) Risk reduction transactions—(i) In general.
Transactions that manage risk—(1) Risk reduction transactions—(i) In general. A transaction that is entered into to reduce a taxpayer's risk, manages a taxpayer's risk.
(ii) Micro and macro hedges—(A) In general. A taxpayer generally has risk of a particular type only if it is at risk when all of its operations are considered. Nonetheless, a hedge of a particular asset or liability generally will be respected as reducing risk if it reduces the risk attributable to the asset or liability and if it is reasonably expected to reduce the overall risk of the taxpayer's operations. If a taxpayer hedges particular assets or liabilities, or groups of assets or liabilities, and the hedges are undertaken as part of a program that, as a whole, is reasonably expected to reduce the overall risk of the taxpayer's operations, the taxpayer generally does not have to demonstrate that each hedge that was entered into pursuant to the program reduces its overall risk.
(B) Example. The following example illustrates the rules stated in paragraph (d)(1)(ii)(A) of this section:
(iii) Written options. A written option may reduce risk. For example, in appropriate circumstances, a written call option with respect to assets held by a taxpayer or a written put option with respect to assets to be acquired by a taxpayer may be a hedging transaction. See also paragraph (d)(3) of this section.
(iv) Fixed-to-floating price hedges. Under the principles of paragraph (d)(1)(ii)(A) of this section, a transaction that economically converts a price from a fixed price to a floating price may reduce risk. For example, a taxpayer with a fixed cost for its inventory may be at risk if the price at which the inventory can be sold varies with a particular factor. Thus, for such a taxpayer a transaction that converts its fixed price to a floating price may be a hedging transaction.
(2) Interest rate conversions. A transaction that economically converts an interest rate from a fixed rate to a floating rate or that converts an interest rate from a floating rate to a fixed rate manages risk.
(3) Transactions that counteract hedging transactions. If a transaction is entered into primarily to offset all or any part of the risk management effected by one or more hedging transactions, the transaction is a hedging transaction. For example, if a written option is used to reduce or eliminate the risk reduction obtained from another position such as a purchased option, then it may be a hedging transaction.
(4) Recycling. A taxpayer may enter into a hedging transaction by using a position that was a hedge of one asset or liability as a hedge of another asset or liability (recycling).
(5) Transactions not entered into primarily to manage risk—(i) Rule. Except as otherwise determined in published guidance or private letter ruling, the purchase or sale of a debt instrument, an equity security, or an annuity contract is not a hedging transaction even if the transaction limits or reduces the taxpayer's risk with respect to ordinary property, borrowings, or ordinary obligations. In addition, the Commissioner may determine in published guidance that other transactions are not hedging transactions.
(ii) Examples. The following examples illustrate the rule stated in paragraph (d)(5)(i) of this section:
(6) Hedges of other risks. The Commissioner may, by published guidance, determine that hedging transactions include transactions entered into to manage risks other than interest rate or price changes, or currency fluctuations.
(7) Miscellaneous provision—(i) Extent of risk management. A taxpayer may hedge all or any portion of its risk for all or any part of the period during which it is exposed to the risk.
(ii) Number of transactions. The fact that a taxpayer frequently enters into and terminates positions (even if done on a daily or more frequent basis) is not relevant to whether these transactions are hedging transactions. Thus, for example, a taxpayer hedging the risk associated with an asset or liability may frequently establish and terminate positions that hedge that risk, depending on the extent the taxpayer wishes to be hedged. Similarly, if a taxpayer maintains its level of risk exposure by entering into and terminating a large number of transactions in a single day, its transactions may nonetheless qualify as hedging transactions.
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Treas. Reg. §1.1221-2(e)Hedging by members of a consolidated group—(1) General rule: single-entity approach.
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 manage the risk of that single corporation.
(2) Separate-entity election. In lieu of the single-entity approach specified in paragraph (e)(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:
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Treas. Reg. §1.1221-2(f)Identification and recordkeeping—(1) Same-day identification of hedging transactions.
Identification and recordkeeping—(1) Same-day identification of hedging transactions. Under section 1221(a)(7), a taxpayer that enters into a hedging transaction (including recycling an existing hedging transaction) must clearly identify it as a hedging transaction before the close of the day on which the taxpayer acquired, originated, or entered into the transaction (or recycled the existing hedging transaction).
(2) Substantially contemporaneous identification of hedged item—(i) Content of the identification. A taxpayer that enters into a hedging transaction must identify the item, items, or aggregate risk being hedged. Identification of an item being hedged generally involves identifying a transaction that creates risk, and the type of risk that the transaction creates. For example, if a taxpayer is hedging the price risk with respect to its June purchases of corn inventory, the transaction being hedged is the June purchase of corn and the risk is price movements in the market where the taxpayer buys its corn. For additional rules concerning the content of this identification, see paragraph (f)(3) of this section.
(ii) Timing of the identification. The identification required by this paragraph (f)(2) must be made substantially contemporaneously with entering into the hedging transaction. An identification is not substantially contemporaneous if it is made more than 35 days after entering into the hedging transaction.
(3) Identification requirements for certain hedging transactions. In the case of the hedging transactions described in this paragraph (f)(3), the identification under paragraph (f)(2) of this section must include the information specified.
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Treas. Reg. §1.1221-2(g)Effect of identification and non-identification—(1) Transactions identified—(i) In general.
Effect of identification and non-identification—(1) Transactions identified—(i) In general. If a taxpayer identifies a transaction as a hedging transaction for purposes of paragraph (f)(1) of this section, the identification is binding with respect to gain, whether or not all of the requirements of paragraph (f) of this section are satisfied. Thus, gain from that transaction is ordinary income. If the transaction is not in fact a hedging transaction described in paragraph (b) of this section, however, paragraphs (a)(1) and (2) of this section do not apply and the character of loss is determined without reference to whether the transaction is a surrogate for a noncapital asset, serves as insurance against a business risk, serves a hedging function, or serves a similar function or purpose. Thus, the taxpayer's identification of the transaction as a hedging transaction does not itself make loss from the transaction ordinary.
(ii) Inadvertent identification. Notwithstanding paragraph (g)(1)(i) of this section, if the taxpayer identifies a transaction as a hedging transaction for purposes of paragraph (f) of this section, the character of the gain is determined as if the transaction had not been identified as a hedging transaction if—
(A) The transaction is not a hedging transaction (as defined in paragraph (b) of this section);
(B) The identification of the transaction as a hedging transaction was due to inadvertent error; and
(C) All of the taxpayer's transactions in all open years are being treated on either original or, if necessary, amended returns in a manner consistent with the principles of this section.
(2) Transactions not identified—(i) In general. Except as provided in paragraphs (g)(2)(ii) and (iii) of this section, the absence of an identification that satisfies the requirements of paragraph (f)(1) of this section is binding and establishes that a transaction is not a hedging transaction. Thus, subject to the exceptions, the rules of paragraphs (a)(1) and (2) of this section do not apply, and the character of gain or loss is determined without reference to whether the transaction is a surrogate for a noncapital asset, serves as insurance against a business risk, serves a hedging function, or serves a similar function or purpose.
(ii) Inadvertent error. If a taxpayer does not make an identification that satisfies the requirements of paragraph (f) of this section, the taxpayer may treat gain or loss from the transaction as ordinary income or loss under paragraph (a)(1) or (2) of this section if—
(A) The transaction is a hedging transaction (as defined in paragraph (b) of this section);
(B) The failure to identify the transaction was due to inadvertent error; and
(C) All of the taxpayer's hedging transactions in all open years are being treated on either original or, if necessary, amended returns as provided in paragraphs (a)(1) and (2) of this section.
(iii) Anti-abuse rule. If a taxpayer does not make an identification that satisfies all the requirements of paragraph (f) of this section but the taxpayer has no reasonable grounds for treating the transaction as other than a hedging transaction, then gain from the transaction is ordinary. The reasonableness of the taxpayer's failure to identify a transaction is determined by taking into consideration not only the requirements of paragraph (b) of this section but also the taxpayer's treatment of the transaction for financial accounting or other purposes and the taxpayer's identification of similar transactions as hedging transactions.
(3) Transactions by members of a consolidated group—(i) Single-entity approach. If a consolidated group is under the general rule of paragraph (e)(1) of this section (the single-entity approach), the rules of this paragraph (g) apply only to transactions that are not intercompany transactions.
(ii) Separate-entity election. If a consolidated group has made the election under paragraph (e)(2) of this section, then, in addition to the rules of paragraphs (g)(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 (e)(2)(ii)(A) and (B) of this section, then, notwithstanding any contrary provision in § 1.1502-13, each party to the transaction is subject to the rules of paragraph (g)(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 (e)(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 (g)(2) of this section. (Because the transaction is an intercompany hedging transaction, the character and timing rules of § 1.1502-13 do not apply. See paragraph (e)(2)(iii)(A) of this section.)
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Treas. Reg. §1.1221-2(h)Effective date.
Effective date. The rules of this section apply to transactions entered into on or after March 20, 2002.
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Treas. Reg. §1.1221-2(i)§1.1221-2(i)
[Reserved]. For further guidance, see § 1.1221-2T(i) through (j)(1).
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Treas. Reg. §1.1221-2(j)Effective/applicability date.
Effective/applicability date. Paragraph (e)(2)(iv) of this section applies to any original consolidated Federal income tax return due (without extensions) after June 14, 2007. For original consolidated Federal income tax returns due (without extensions) after May 30, 2006, and on or before June 14, 2007, see § 1.1221-2T as contained in 26 CFR part 1 in effect on April 1, 2007. For original consolidated Federal income tax returns due (without extensions) on or before May 30, 2006, see § 1.1221-2 as contained in 26 CFR part 1 in effect on April 1, 2006.
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Treas. Reg. §1.1221-2(v)Transactions that counteract hedging transactions.
Transactions that counteract hedging transactions. If the hedging transaction is described in paragraph (d)(3) of this section, the description of the hedging transaction must include an identification of the risk management transaction that is being offset and the original underlying hedged item.
(4) Manner of identification and records to be retained—(i) Inclusion of identification in tax records. The identification required by this paragraph (f) must be made on, and retained as part of, the taxpayer's books and records.
(ii) Presence of identification must be unambiguous. The presence of an identification for purposes of this paragraph (f) must be unambiguous. The identification of a hedging transaction for financial accounting or regulatory purposes does not satisfy this requirement unless the taxpayer's books and records indicate that the identification is also being made for tax purposes. The taxpayer may indicate that individual hedging transactions, or a class or classes of hedging transactions, that are identified for financial accounting or regulatory purposes are also being identified as hedging transactions for purposes of this section.
(iii) Manner of identification. The taxpayer may separately and explicitly make each identification, or, so long as paragraph (f)(4)(ii) of this section is satisfied, the taxpayer may establish a system pursuant to which the identification is indicated by the type of transaction or by the manner in which the transaction is consummated or recorded. An identification under this system is made at the later of the time that the system is established or the time that the transaction satisfies the terms of the system by being entered, or by being consummated or recorded, in the designated fashion.
(iv) Principles of paragraph (f)(4)(iii) of this section illustrated. Paragraphs (f)(4)(iv)(A) through (C) of this section illustrate the principles of paragraph (f)(4)(iii) of this section and assume that the other requirements of this paragraph (f) are satisfied.
(A) A taxpayer can make an identification by designating a hedging transaction for (or placing it in) an account that has been identified as containing only hedges of a specified item (or of specified items or specified aggregate risk).
(B) A taxpayer can make an identification by including and retaining in its books and records a statement that designates all future transactions in a specified derivative product as hedges of a specified item, items, or aggregate risk.
(C) A taxpayer can make an identification by designating a certain mark, a certain form, or a certain legend as meaning that a transaction is a hedge of a specified item (or of specified items or a specified aggregate risk). Identification can be made by placing the designated mark on a record of the transaction (for example, trading ticket, purchase order, or trade confirmation) or by using the designated form or a record that contains the designated legend.
(5) Identification of hedges involving members of the same consolidated group—(i) General rule: single-entity approach. A member of a consolidated group must satisfy the requirements of this paragraph (f) 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 (f)(1) of this section. Under paragraph (f)(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 (f)(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 (f)(2) of this section. For example, if a member transfers risk in an intercompany transaction, it may identify under the rules of this paragraph (f) 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 (f) both its position with the third party and its position in the intercompany transaction. Paragraph (e)(4) Example 1 of this section illustrates this identification.
(ii) Rule for consolidated groups making the separate-entity election. If a consolidated group makes the separate-entity election under paragraph (e)(2) of this section, each member of the group must satisfy the requirements of this paragraph (f) as though it were not a member of a consolidated group.
(6) Consistency with section 1256(e)(2). Any identification for purposes of section 1256(e)(2) is also an identification for purposes of paragraph (f)(1) of this section.
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Treas. Reg. §1.1221-3Time and manner for electing capital asset treatment for certain self-created musical works
(a) Description. Section 1221(b)(3) allows an electing taxpayer to treat the sale or exchange of a musical composition or a copyright in a musical work created by the taxpayer's personal efforts (or having a basis determined by reference to the basis of such property in the hands of a taxpayer whose personal efforts created such property) as the sale or exchange of a capital asset. As a consequence, gain or loss from the sale or exchange is treated as capital gain or loss.
(b) Time and manner for making the election. An election described in this section is made separately for each musical composition (or copyright in a musical work) sold or exchanged during the taxable year. An election must be made on or before the due date (including extensions) of the income tax return for the taxable year of the sale or exchange. The election is made on Schedule D, “Capital Gains and Losses,” of the appropriate income tax form (for example, Form 1040, “U.S. Individual Income Tax Return;” Form 1065, “U.S. Return of Partnership Income;” Form 1120, “U.S. Corporation Income Tax Return”) by treating the sale or exchange as the sale or exchange of a capital asset, in accordance with the form and its instructions.
(c) Revocability of election. The election described in this section is revocable with the consent of the Commissioner. To seek consent to revoke the election, a taxpayer must submit a request for a letter ruling under the applicable administrative procedures. Alternatively, an automatic extension of 6 months from the due date of the taxpayer's income tax return (excluding extensions) is granted to revoke the election, provided the taxpayer timely filed the taxpayer's income tax return and, within this 6-month extension period, the taxpayer files an amended income tax return that treats the sale or exchange as the sale or exchange of property that is not a capital asset.
(d) Effective/applicability date. This section applies to elections under section 1221(b)(3) in taxable years beginning after May 17, 2006.
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Treas. Reg. §1.1221-3(a)Description.
Description. Section 1221(b)(3) allows an electing taxpayer to treat the sale or exchange of a musical composition or a copyright in a musical work created by the taxpayer's personal efforts (or having a basis determined by reference to the basis of such property in the hands of a taxpayer whose personal efforts created such property) as the sale or exchange of a capital asset. As a consequence, gain or loss from the sale or exchange is treated as capital gain or loss.
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Treas. Reg. §1.1221-3(b)Time and manner for making the election.
Time and manner for making the election. An election described in this section is made separately for each musical composition (or copyright in a musical work) sold or exchanged during the taxable year. An election must be made on or before the due date (including extensions) of the income tax return for the taxable year of the sale or exchange. The election is made on Schedule D, “Capital Gains and Losses,” of the appropriate income tax form (for example, Form 1040, “U.S. Individual Income Tax Return;” Form 1065, “U.S. Return of Partnership Income;” Form 1120, “U.S. Corporation Income Tax Return”) by treating the sale or exchange as the sale or exchange of a capital asset, in accordance with the form and its instructions.
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Treas. Reg. §1.1221-3(c)Revocability of election.
Revocability of election. The election described in this section is revocable with the consent of the Commissioner. To seek consent to revoke the election, a taxpayer must submit a request for a letter ruling under the applicable administrative procedures. Alternatively, an automatic extension of 6 months from the due date of the taxpayer's income tax return (excluding extensions) is granted to revoke the election, provided the taxpayer timely filed the taxpayer's income tax return and, within this 6-month extension period, the taxpayer files an amended income tax return that treats the sale or exchange as the sale or exchange of property that is not a capital asset.
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Treas. Reg. §1.1221-3(d)Effective/applicability date.
Effective/applicability date. This section applies to elections under section 1221(b)(3) in taxable years beginning after May 17, 2006.
345 Citing Cases
135 [*135] We hold that LHDC is permitted to deduct the entire $2,770,775 of salary-and-wage deductions reported on its 2010 return, the entire $2,326,407 of salary-and-wage deductions reported on its 2011 tax return, and the entire $1,818,542 of professional-fee deductions reported on its 2011 tax return.
A “written determination” of the IRS may not be used or cited as precedent, § 6110(k)(3), and written determinations are defined to include IRS private letter rulings, § 6110(b)(1)(A); see also Plano Holding LLC v.
Carbonara], and we have no knowledge to the contrary, that the Property does not constitute stock in trade or inventory and because the Property is not one of the other types of property listed in Code Section 1221 that do not qualify as “capital assets,” the Property is a capital asset.
1221, 1231, in transactions involving related parties. Respondent instead argues that the amounts Dr. Filler received are taxable as ordinary income because sec. 1235 does not apply and the incorporation agreement described Dr.
- 25 - [*25] Section 1221(a) provides that a capital asset is "propertyheld by the taxpayer (whether or not connected with his trade or business)".
Treatment ofCapital Assets Under Section 1221 Petitioners assert that (1) petitioner's 2008 real estate activities constituted a trade or business and (2) the Florida properties were held primarily for sale to customers in the ordinary course oftrade or business, and thus they are entitled to ordinary loss treatment for the dispositions ofthe Florida properties.
We held for the Commissioner and explained: [B]oth the legislative history ofsection 741 and its language indicate that Congress intended it to operate independently ofsection 1221 so as to be dispositive ofthe character ofpetitioner's loss.
The Commissioner says that since section 1253 doesn't apply, we have to decide whether the contracts were capital assets by looking at section 1221, the six-part multiprong test ofF_oy 8(...continued) when they filed their petitions, these cases are presumptively appealable to the Ninth Circuit.
The Commissioner says that since section 1253 doesn't apply, we have to decide whether the contracts were capital assets by looking at section 1221, the six-part multiprong test ofF_oy 8(...continued) when they filed their petitions, these cases are presumptively appealable to the Ninth Circuit.
The Commissioner says that since section 1253 doesn't apply, we have to decide whether the contracts were capital assets by looking at section 1221, the six-part multiprong test ofF_oy 8(...continued) when they filed their petitions, these cases are presumptively appealable to the Ninth Circuit.
members," as the statute requires. Sec. 513(a)(2) (emphasis added). In another tax context, the Supreme Court has interpreted the term "primarily' to mean "offirst importance" or "principally." Malat v. Riddell, 383 U.S. 569, 572 (1966) (construing section 1221(1)). As the Claims Court concluded in Am. College ofPhysicians, "[t]here seems to be no reason to depart from this common sense definition in interpreting section 513(a)(2)." 3 Cl. Ct. at 536. During 2004-2007 petitioner derived aggregat
According to respondent, section 1234A expressly references a "capital asset in the hands ofthe taxpayer." Since the Radisson Bay Harbor Hotel was section 1231 property, it by definition was not a capital asset as defined in section 1221 and thus cannot fall under section 1234A.
Although section 1221 doesn't define these terms either, there's caselaw under that section and we can look to it to help us solve the mystery - 8 - [*8] before us.
We disagree with the premise that Evans was in the rental business and that he held the Newport Beach property as part ofhis rental business.
Section 1221 provides that a capital asset is "propertyheld by the taxpayer (whether or not connected with his trade or business)".
Section 1221 provides that a capital asset is "propertyheld by the taxpayer (whether or not connected with his trade or business)".
Section 1221 provides that a capital asset is "propertyheld by the taxpayer (whether or not connected with his trade or business)".
Pursuant to section 32(i), petitioners' disqualified income for 2012 is $4,117, which exceeds the $3,200 threshold for entitlement to an EIC. Accordingly, petitioners are not entitled to an EIC for 2012. 3. American Opportunity Credit Respondent disallowed petitioners' claimed American Opportunity Credit for 2012. The American Opportunit
The FPAA stated that the $3,816,000 Route 231 received from Virginia Conservation for Virginia tax credits was income to Route 231 because (1) the - 21 - [*21] credits were income derived from business under section 61(a)(2); (2) they were property taxable under section 61(a)(3) as ordinary income and not capital assets under section 1221; or (3) alternatively, they were property under section 1221 but taxable only as short-term capital gain.
The term "primarily" forpurposes ofsection 1221 means "offirst importance" or "principally".
1235-1(b), Income Tax Regs. Instead, the tax consequences ofsuch transactions are determined under other provisions ofthe Code. R Petitioners do not contend that Mr. Cooper is entitled to capital gain treatment under any provisions ofthe Code (e.g., sec. 1221 or sec. 1231) other than sec. 1235. 3¹In determining whether a transfer ofall substantial rights to a patenthas occurred, the language ofthe transfer agreement is not controlling. Sec. 1.1235- 2(b)(1), Income Tax Regs. Instead, the entire a
However, section 165(f) provides that losses from sales or exchanges ofcapital assets are allowed only to the extent allowed under sections 1211 and 1212.
The definition ofcapital assetunder section 1221 is bound by the 5Eight categories ofproperty are excluded from this definition.
The term "primarily" forpurposes ofsection 1221 means "offirst importance" or "principally".
The definition of capital asset under section 1221 is bound by the ordinary income doctrine.
l(b), Income Tax Regs. Instead, the tax consequences of such transactions are determined under other provisions of the Code. Id. Petitioners do not contend that Mr. Cooper is entitled to capital gain treatment under any provisions of the Code (e.g., sec. 1221 or sec. 1231) other than sec. 1235. In determining whether a transfer of all substantial rights to a patent has occurred, the language of the transfer agreement is not controlling. Sec. 1.1235-2(b)(l), Income Tax Regs. Instead, the entire a
- 17 - (B) Interest, dividends, rents, royalties, or annuities, not derived in the ordinary course ofa trade or business; (C) Receipts from the sale or exchange ofcapital assets, as defined in section 1221; (D) Repayments ofloans or similar instruments * * *; (E) Receipts from a sale or exchange not in the ordinary course ofbusiness * * *, and (F) Receipts from any activity other than a trade or business or an activity engaged in for profit.
While we agree with Long that he intended to sell the land (ready for construction), we hold that the character ofthe income is ordinary.
However, section 165(f) provides that a loss from the sale or exchange ofa capital - 7 - asset is allowed only to the extent allowed under sections 1211 and 1212.6 Section 1221 defines a capital asset as any property held by the taxpayer, whether or not connected with his or her trade or business.
evant property to be allowed a loss deduction. See secs. 165(b), 1011(a), 1012(a), 1016; see also Barberv. Commissioner, 152 F.2d 930 (2d Cir. 1946) (affirming the Tax Court's finding that the taxpayerdid not 1°The term "capital asset" is defined in sec. 1221 as "propertyheld by the taxpayer (whether or not connected with his trade or business)", with four exceptions, none ofwhich is relevant here. "Ifan individual's capital losses exceed capital gains, sec. 1211(b) restricts deductions for capi
not include amounts representing— (A) Returns or allowances; (B) Interest, dividends, rents, royalties, or annuities, not derived in the ordinary course of a trade or business; (C) Receipts from the sale or exchange of capital assets, as defined in section 1221; (D) Repayments of loans or similar instruments * * *; (E) Receipts from a sale or exchange not in the ordinary course of business * * *, and (F) Receipts from any activity other than a trade or business or an activity engaged in for pro
Generally, no deduction is allowed for capital expenditures. Sec. 263(a). In any - 8 - event, debts arising from unpaid rents are not allowable as a bad debt deduction unless the rental income has been included on the return for the year or a prior taxable year. Sec. 1.166-1(e), Income Tax Regs. Petitioner has not shown that she include
While the context in which the word "primary" is used is important--Malatlooked at section 1221--there is nothing in the regulation or section 7701(a)(48) that suggests "primary" means anything else in this context.
Finally, respondent argues that under section 1221 the property was not held primarily for 3Sec.
2, 1998), also excluded certain items from the definition, including: (I) returns or allowances; (ii) receipts from the sale or exchange of capital assets, as defined in section 1221; (iii) repayments ofloans or similar instruments (e.g., a repayment ofthe principal amount ofa loan held by a commercial lender); (iv) receipts from a sale or exchange not in the ordinary course ofbusiness, such as the sale ofan entire trade or business or the sale ofproperty used in a
While the context in which the word “primary” is used is important — Malat looked at section 1221 — there is nothing in the regulation or section 7701(a)(48) that suggests “primary” means anything else in this context.
Gross receipts are not reduced by cost of goods sold or by the cost of property sold if such property is described in section 1221 (1), (3), (4) or (5).
However, section 165(f) provides that losses from sales or exchanges of capital assets are allowed only to the extent allowed under sections 1211 and 1212.
stributions from both MXF and MXE during that time. The record contains various 3(...con.tinued) 2000 as they were destroyed in a fire. 4Long-term capital gains are profits from a transaction in which a taxpayer sells a capital asset, as,defined by sec. 1221, for more than the taxpayer's basis in that property and has held that property for more than 1 year. sPetitioner contends that he deducted a $3,000 loss from the $12,000 loss and the $9,000 loss in the years he realized those losses. 'RICs,
Accordingly, we hold the State tax credits petitioners sold are capital assets.
Section 1221 defines “capital asset” as property held by a taxpayer, except for eight categories of property specifically excluded from the definition. None of the excluded categories is applicable to the State tax credits at issue. The purpose of capital gains treatment is to provide some relief to taxpayers from the excessive burdens of taxation
Section 1221 Petitioners assert they purchased real estate for the purpose of holding it for investment and with the intent of renting it. Respondent argues that petitioners' intent was to resell the property. A "capital asset" is broadly defined as property held by the taxpayer, whether or not connected with his or her trade or business, subject t
1964), we faced the question of whether a lender's mortgage loans made in the ordinary course of business were ordinary or capital assets under section 1221(4) .43 .
)(2), 1231(b)(1) , 1239 (a) and (e), 1245(a)(3), 1250(c), 7871(c) (3) (B) (i) . 30 - allowance" for depreciation in revenue legislation, see, e .g ., Revenue Act of 1938, ch . 289, sec. 117(a), 52 Stat . 500 (enacting the predecessor of the current section 1221) . When drafting section 1239, however, Congress did not merely reuse the already familiar phrase but clarified in the hands of which taxpayer the determination of the character of the property should be made . Because section 1239 discus
We hold that the excess lots were-held for investment purposes and the proceeds are capital gains and losses .
Under section 1221, the term "capital assets" includes all assets other than assets expressly excluded. Dealers in securities who sell-to customers may recognize ordinary income or ordinary loss on their securities trading activity . Dealers' securities are considered-to be inventory held for sale to customers . Sec . 1221(a)(1) . 'Apart from dealers, ho
575 (1970) . Litigating costs that are incurred in connection with the sale of a capital asset are capital expenditures . Sec . 1211(b)(1) . A capital asset is property held by the taxpayer and not specifically excluded from capital asset status by section 1221 . Sec . "The sec . 212 deduction is reported on Schedule A and is subject to the 2-percent floor . See supra note 1 . I - 17 - 1221 (a) . The regulations under section 1221 provide that "Property held for the production of income, but no
Section 1221 defines the term "capital asset" as follows : SEC . 1221(a) . In General.--For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with hi s trade or business), but does not include-- (1) stock in trade of the taxpayer or other property of a kind which would properly be incl
Capital Losses Under Regular Tax and Alternative Minimum Tax If securities which are capital assets (as defined by section 1221) become worthless during a taxable year, any losses resulting therefrom are treated as capital losses, as if a sale or exchange of the securities occurred on the last day of that taxable year.
pital losses for AMT purposes . See secs . 55-59 (and accompanying regulations) . Petitioners are not securities dealers, and they held thei r MGC shares strictly as investors . There is no dispute the MGC shares in question are capital assets under section 1221 . The record also shows petitioner sold MGC shares in 2001 and that he realized capital losses as a result ." However, the capital loss limitations of sections 1211(b) and 1212(b) restricted petitioners' ability to deduct these regular c
Respondent points out that the premise underlying petitioners’ contentions is that the right to receive future lottery payments is “considered ‘property’ under certain provisions of Federal and state law * * * [and that therefore] the right must be considered ‘property’ for purposes of * * * [section 1221)(a)]”; i.e., a capital asset.
Capital Losses Under Regular Tax and Alternative Minimum Tax If securities which are capital assets (as defined by section 1221) become worthless during a taxable year, any losses resulting therefrom are treated as capital losses, as if a sale or exchange of the securities occurred on the last day of that taxable year.
of capital losses for AMT purposes. See secs. 55-59 (and accompanying regulations). Petitioners are not securities dealers, and they held their MGC shares strictly as investors. There is no dispute the MGC shares in question are capital assets under section 1221. The record also shows petitioner sold MGC shares in 2001 and that he realized capital losses as a result. However, the capital loss limitations of sections 1211(b) and 1212(b) restricted petitioners’ ability to deduct these regular capi
A taxpayer must generally recognize the entire amount of the realized gain or loss. Sec. 1001(c). However, where there was an “installment sale”, a taxpayer can use the installment method to defer recognition of income.4 See sec. 453. An installment sale is a “disposition of property where at least 1 payment is to be received after the c
Section 1221 broadly defines a “capital asset” as “property held by the taxpayer (whether or not connected with his trade or business),” subject to enumerated exceptions for certain kinds of property. Specifically, with respect to stock in a corporation, unless the taxpayer is a securities dealer within the meaning of section 1221(1), the stock is
ry installment payments to Settlement Funding constitutes ordinary income or capital gain. Resolution of this issue depends on whether petitioner’s right to receive the remaining lottery installment payments was a capital asset within the meaning of section 1221. Petitioner’s argument that the assignment of the right to receive the remaining payments was the sale of a capital asset purports to apply the “parameters” but disputes the reasoning in United States v. Maginnis, 356 F.3d 1179 (9th Cir.
petitioner's old tools qualified as capital assets under section 1221 and some of the old tools were property used in petitioner's trade or business (of being an employee of IMC) of a character subject to the allowance for depreciation under section 167(a) (1).3 See Noyce v.
Section 1221 defines “capital asset” as follows: SEC. 1221. CAPITAL ASSET DEFINED. (a) In General. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include-– (1) stock in trade of the taxpayer or other property of a kind which would proper
installment payments constitutes ordinary income or capital gain during the year in issue. Resolution of this issue depends on whether petitioner's right to receive the remaining lottery installment payments was a capital asset within the meaning of section 1221. Petitioner's argument that the assignment was a sale of a capital asset relies on reasoning found in United States v. Maginnis, 356 F.3d 1179 (9th Cir. 2004). We note from the outset that we are not bound by the opinion of the Court of
ger is ordinary income or capital gain. Our resolution of the issue presented does not depend on who has the burden of proof in this case. Resolution of this issue depends on whether the sale to Singer involved a capital asset within the meaning of section 1221. Section 1221 provides the following definition of the term “capital asset”: SEC. 1221. Capital Asset Defined. (a) In general. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not con
nstallment payments constitutes ordinary income or capital gain during the years in issue. Resolution of this issue depends on whether Mr. Wolman's right to receive the remaining lottery installment payments was a capital asset within the meaning of section 1221. We find the facts in the instant case indistinguishable in substance from the facts in our opinion of Davis v. Commissioner, 119 T.C. 1 (2002), and cases relying on that opinion, in which a taxpayer assigned a right to future lottery in
In Davis, we held that the taxpayers’ right to receive certain future annual lottery payments did not constitute a capital asset within the meaning of section 1221 and that the lump-sum amount that the taxpayers received for their right to receive the future annual lottery payments was ordinary income and not capital gain.
er section 1.1221-2). Respondent contends, among other things, that Mr. Welter’s commodities trading activity is not described in former section 1.1221-2. B. Law The term “capital asset” includes all classes of property not specifically excluded by section 1221. Sec. 1.1221-1(a), Income Tax Regs. Section 1221, as in effect during the years at issue, did not contain a specific exclusion relating to hedging transactions. However, former section 1.1221-2(a)(1) provided that, notwithstanding section
olution of this issue depends on whether the right to receive future annual lottery 4Our resolution of the issue presented does not depend on who has the burden of proof in this case. - 5 - payments constitutes a capital asset within the meaning of section 1221. Section 1221 provides the following definition of the term “capital asset”: SEC. 1221. CAPITAL ASSET DEFINED. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his
ment of the 12 future lottery payments to Woodbridge is ordinary income or long-term capital gain. Resolution of that issue depends upon whether Mary’s right to receive the 12 future lottery payments constitutes a capital asset within the meaning of section 1221. The question of whether the right to receive future lottery payments, which represent a portion of the total anticipated payout, constitutes a capital asset does not present an issue of first impression. In Davis v. Commissioner, 119 T.
We hold, therefore, that the value-added payments are not excludable under section 1402(a)(3) in calculating petitioners’ net earnings from self-employment.
1221(c)(2) (which amended the definition of foreign base company shipping income under section 954(f) to include income from a space or ocean activity (as defined in section 863(d)(2)).
In Schelble v. Commissioner, T.C. Memo. 1996-269, affd. 130 F.3d 1388 (10th Cir. 1997), we considered whether the taxpayer received gain from the sale or exchange of a capital asset. Pursuant to the terms of the agreement with the insurance company for which he was an agent, the taxpayer was required to return all records, manuals, mater
effectively overruled that line of cases and requires the result in the instant case that they advocate.
tioners received in exchange for petitioners’ assignment is ordinary income or capital gain. Resolution of that dispute depends on whether petitioners’ right to receive future annual lottery payments constitutes a capital asset within the meaning of section 1221. Section 1221 defines the term “capital asset” as follows: SEC. 1221. CAPITAL ASSET DEFINED. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business
oblem was substantially lessened because space and ocean income is included in the separate foreign tax credit limitation for shipping income, secs. 904(d)(2)(D), 954(f), flush language, and is subject to U.S. tax under the subpart F rules, 1986 TRA sec. 1221(c)(2) (which amended the definition of foreign base company shipping income under section 954(f) to include income from a space or ocean activity (as defined in section 863(d)(2)). H. Conf. Rept. 99-841 (Vol. II), supra at 11-600, 1986-3 C.
Section 1221 defines capital asset broadly as “property held by the taxpayer (whether or not connected with his trade or business)” but excludes from that definition property described in section 1221(a)(1) through (5). The exclusions include stock in trade of the taxpayer, other property of a kind normally includable in inventory if on hand at the
In Schelble v. Commissioner, T.C. Memo. 1996-269, affd. 130 F.3d 1388 (10th Cir. 1997), we considered whether the taxpayer received gain from the sale or exchange of a capital asset. Pursuant to the terms of the agreement with the insurance company for which he was an agent, the taxpayer was required to return all records, manuals, mater
he same taxable year. When an outlay is connected to the acquisition of an asset with an extended life, it would understate current net income to deduct the outlay immediately. * * * 6We do not use the term “capital asset” in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year. Metrobank chose to acquire Community’s assets. One way to accomplish this was through a conversion transaction where a
The taxpayer argued in this Court that he could deduct $10,960 of the expenses because they were attributable to a hearing held by the Federal Communications Commission on this matter and which did not add any value to the acquired stock. We disagreed with the taxpayer that any of these amounts were currently deductible. On appeal, so did the Court of Appeals for the Ninth Circuit. According to 30 As mentioned above, we understand the term “capital asset” to be used in its accounting sense and n
Section 1221 provides: For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include-- (1) stock in trade of the taxpayer * * *; (2) property, used in his trade or business, of a character * * * subject to * * * dep
ses in general: an expenditure that would ordinarily be a deductible expense must nonetheless be capitalized if it is incurred in connection with the acquisition of a capital asset.6 6We do not use the term “capital asset” in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year. Accord American Stores Co. & Subs. v. Commissioner, 114 T.C. 458 (2000) (taxpayer required to capitalize legal fees in
ses in general: an expenditure that would ordinarily be a deductible expense must nonetheless be capitalized if it is incurred in connection with the acquisition of a capital asset.6 6We do not use the term “capital asset” in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year. Accord American Stores Co. & Subs. v. Commissioner, 114 T.C. 458 (2000) (taxpayer required to capitalize legal fees in
During the year in issue, none of the exceptions addressed futures contracts. Sec. 1221. (Section 1221 was amended by adding subsection 7 which excludes clearly identified hedging transactions from the definition of capital asset, effective for any transaction entered into on or after December 17, 1999. Ticket to Work and Work Incentives
CO, Inc. v. Commissioner, 503 U.S. 79, 87-88 (1992). See Commissioner v. Idaho Power Co., 418 U.S. 1, 13 (1974); American Stores Co. & Subs. v. Commissioner, 114 T.C. 458, 469 (2000). We do not use the term “capital asset” in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year. These objectives appeal- to be significant long-term benefits that support respondent’s argument. Petitioner states on
e same taxable year. When an outlay is connected to the acquisition of an asset with an extended life, it would understate current net income to deduct the outlay immediately. * * * 6We do not use the term “capital asset” in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year. Distinguishing between expenses that can be deducted under section 162 and those that must be capitalized under section
ily for his own benefit and because petitioner argues that the entire alleged loss should be allocated to him, we agree with respondent that the gain calculated with regard to the sale of the Longport (continued...) - 9 - gain is not subject to the section 1221 capital gain preference as a result of the application of section 1221(2), petitioner’s gain does receive preferential treatment under section 1231.
Section 1221 defines "capital asset" generally as any property held by a taxpayer, with certain exceptions, including property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, and real property used in the taxpayer's trade or business. See sec. 1221(1) and 22 On their respective Schedules D, Capi
Section 1221 generally defines “capital asset” as “property held by the taxpayer (whether or not connected with his trade or business)”, but specifically excludes five classes of assets. The cases cited and relied upon by petitioners were all decided under the doctrine of Corn Prods. Refining Co. v. Commissioner, 350 U.S. 46 (1955), in which the Su
Commissioner, supra, are present in this case, that in the hands of Lea, the patents were long-term capital assets as defined in section 1221, and that the Leas satisfy the requirements of the ruling.10 10We note that sec.
429, 433 (1970) (interpreting “his trade or business” under section 1221(1) to 9(...continued) references sec.
Commissioner, supra, are present in this case, that in the hands of Lea, the patents were long-term capital assets as defined in section 1221, and that the Leas satisfy the requirements of the ruling.10 10We note that sec.
ess otherwise indicated, section references are to the Internal Revenue Code applicable to the subject years, and Rule references are to the Tax Court Rules of Practice and Procedure. We do not use the term “capital asset” in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year. In Brown v. United States, 526 F.2d 135, 139 (6th Cir. 1975), legal expenses paid in settlement of a derivative action
1221 provides as follows: SEC.
Under section 1221(1), the term "capital asset" does not include property held by a taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business.1 There is no fixed formula or rule of thumb for making this determination, and each case must rest upon its own facts. See Kaltreider v. Commissioner, 255 F.2d 833, 838 (3
1221; Frederick Weisman Co. v. Commissioner, 97 T.C. 563, 572 (1991); Proskauer v. Commissioner, T.C. Memo. 1983-395. Because Lakeview incurred the legal fees in defending claims that arose from a transaction involving the acquisition of a capital asset, under the "origin-of-the-claim" test the cost of such fees must be capitalized.' 8 As note
This includes not only gains and losses realized from the sale or other disposition of capital assets, as defined by section 1221, but also gains and losses from the sale or other disposi- tion of “property used in the trade or business”, as defined by section 1231(b).
In order for contract rights to qualify as capital assets under section 1221, the contract rights must constitute “property” of the taxpayer and not constitute any of the five types of property excluded from capital gain treatment under section 1221(1) through (5) (namely, (1) inventory; (2) depre-ciable personal property or real property used in a trade or business; (3) certain intangible property; (4) account
There must be a "sale or exchange" of a capital asset in order for the transaction to be taxed as a capital gain or loss. Sec. 165(f). Our analysis, therefore, is not directed at whether petitioner was in a trade or business with respect to Saddle Mountain, but whether there was a "sale or exchange". As the Court stated in La Rue v. Comm
1973); see also NCNB Corp.
We do not agree with petitioner.
1221; Arkansas Best Corp. v. Commissioner, supra at 215. Section 1221(1), the only category that could apply here, provides that property is not a capital asset if it is: stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or p
1221; Arkansas Best Corp. v. Commissioner, supra at 215. Section 1221(1), the only category that could apply here, provides that property is not a capital asset if it is: stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or p
s include the direct costs of such property and such property's proper share of those indirect costs part or all of which are allocable to such property. Section 1.263A-1T, Temporary 5 Sec. 263A also applies to real or personal property described in sec. 1221(1) which is acquired by the taxpayer for resale except for taxpayers who have annual gross receipts of $10 million or less. Sec. 263A(b)(2). There is no exception provided for producers who have annual gross receipts of $10 million or less.
In the context of section 1221, the Supreme Court held that the term "primarily" means "of first importance" or "principally." Malat v.
Idaho Power Co., supra at 16, the Supreme Court considered the interrelationship between Part VI (which includes section 161 and following, relating to items deductible) 17"It is clear that an expenditure need not be for a capital asset, as described in Section 1221 * * * in order to be classified as a capital expenditure." Georator Corp.
Section 1221(2) provides that real property used in a trade or business is not a capital asset (and therefore a loss from the disposition of such property would be an ordinary loss). Accordingly, we must determine whether the two 1-acre lots and the airplane hangar were used in petitioner's trade or business. The Supreme Court has stated that "to b
Section 1221(2) provides that real property used in a trade or business is not a capital asset (and therefore a loss from the disposition of such property would be an ordinary loss). Accordingly, we must determine whether the two 1-acre lots and the airplane hangar were used in petitioner's trade or business. The Supreme Court has stated that "to b
contracts by which investors simply settle or close out their position in a straddle or in a leg of a straddle transaction. As stated, the parties agree that forward contracts in commodity markets held for investment constitute capital assets under section 1221. Commissioner v. Covington, 120 F.2d 768 (5th Cir. 1941), affg. in part and revg. in part 42 B.T.A. 601 (1940); Vickers v. Commissioner, 80 T.C. 394 (1983); Hoover Co. v. Commissioner, 72 T.C. 206 (1979). Although no delivery or physical
11 shareholders regardless of whether the various CFC's within the chain were engaged in similar or related business activity.¹ In 1986, section 952(d) was repealed, effective for any year ending after 1986. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1221(f), 100 Stat. 2554. The repeal was based generally on Congress' belief that the chain deficit rule in section 952(d) . allowed U.S. taxpayers to shelter through CFC's excessive amounts of tax haven income from current U.S. tax. See H. Conf.
- 15 - assets under section 1221 when resold by the employer.
ion of the disputed issue. Discussion Although not specifically addressed by either party, there appears to be agreement between them on the following points. First, the BCBI stock in the hands of petitioner constituted a capital asset as defined by section 1221. Except as provided by section 1244, because of the period that petitioner held the 3(...continued) purposes. In this regard it should also be noted that the parties stipulated that in the agreement petitioner "agreed to sell all of the
OPINION In her notice of deficiency, respondent determined that the securities and futures contracts purchased and sold by petitioner during the taxable years 1989 and 1990 were capital assets within - 8 - the meaning of section 1221, and not inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
The term "capital assets" is defined by section 1221 as follows: For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include-- (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of
However, section 1221(1) provides in part that property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business does not constitute a capital asset. The purpose of the section 1221(1) exclusion is to "differentiate between gain derived from the everyday operations of a business and gain derive
contracts by which investors simply settle or close out their position in a straddle or in a leg of a straddle transaction. As stated, the parties agree that forward contracts in commodity markets held for investment constitute capital assets under section 1221. Commissioner v. Covington, 120 F.2d 768 (5th Cir. 1941), affg. in part and revg. in part 42 B.T.A. 601 (1940); Vickers v. Commissioner, 80 T.C. 394 (1983); Hoover Co. v. Commissioner, 72 T.C. 206 (1979). Although no delivery or physical
The term "capital asset" is defined in section 1221 as "property held by the taxpayer (whether or not connected with his trade or business)," subject to five specified exceptions.
s in Section 1256 Contracts", provides in pertinent 12 Respondent also contends, in the alternative, that Mr. Gordon’s 1986 net trading loss is a capital loss because it resulted from the sale of options that are capital assets within the meaning of sec. 1221. In light of our holding that that loss constitutes a capital loss pursuant to sec. 1256(f)(3)(A), we shall not address respondent's contention under sec. 1221. - 30 - part: (A) In general.--For purposes of this title, gain or loss from tra
Section 1221(1), however, creates an exception to the definition of a capital asset for "stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary
Section 1221 defines the term "capital asset" to mean "property held by the taxpayer", except for the property that falls into five enumerated categories. The first category of property excluded from the definition of capital asset is the following: (1)stock in trade of the taxpayer or other property of a kind which would properly be included in th
Section 1221 defines capital assets as any property held by the taxpayer, - 6 - whether or not connected with his trade or business. Section 1221(1), however, creates an exception to the definition of a capital asset: Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on
t she means by a "dealer in securities", we assume that she is referring to an individual who holds securi- ties, other than the type of options that were held by Mr. Gordon during 1986, that are excluded from the definition of a capital asset under sec. 1221(1). Our use herein of the phrase "dealer in securities" shall have the same meaning as we assume Ms. Gordon intended by the use of that phrase. - 11 - you a dealer in securities? A No. Ms. Gordon also points to the following testimony elici
Respondent’s position thus follows the ruling position that relocating employees’ homes purchased by their employer to assist the employees in the sale of the residences are capital assets under section 1221 when resold by the employer.
1221; Commissioner v. McCue Bros. & Drummond, Inc., 210 F.2d 752, 753 (2d Cir. 1954), affg. 19 T.C. 667 (1953); Miller v. Commissioner, 48 T.C. 649, 651-652 (1967); sec. 1.1221-1(a), Income Tax Regs. Petitioner's sale to Seawall of his leasehold interest constitutes a sale or exchange. Sec. 1241. Petitioner paid Spyropoulos legal expenses for
1221(1); Philhall Corp. v. United States, 546 F.2d 210, 215 (6th Cir. 1976) (land option, ordinary income); McHugh v. Commissioner, T.C. Memo. 1957-4 (land contracts, ordinary income). They had a zero basis in the hands of Alice Berger to the extent they had not been properly taken into Woodbine income by Howard at the time of his transfer of
1221(1); Philhall Corp. v. United States, 546 F.2d 210, 215 (6th Cir. 1976) (land option, ordinary income); McHugh v. Commissioner, T.C. Memo. 1957-4 (land contracts, ordinary income). They had a zero basis in the hands of Alice Berger to the extent they had not been properly taken into Woodbine income by Howard at the time of his transfer of
were an incentive for the 17 Petitioners contend that respondent abandoned on brief the argument originally advanced in respondent’s trial memorandum that the warrants in issue were within the inventory exception to the definition of capital asset, sec. 1221(1), and suggest that respondent is raising a new theory on brief by arguing that the stock warrants constituted a trade discount. We consider respondent’s argument on brief, however, to be merely a development of the determination in the no
attributable to negligence or disregard of 3Respondent, in her brief, suggests that Daisy was not a capital asset in the hands of petitioner. No authority for this proposition was stated and it would appear to us that, given the express language of sec. 1221, which provides the definition of a capital asset, Daisy clearly fits within that definition. - 10 - rules or regulations. The term "negligence" includes any failure to make a reasonable attempt to comply with the statute, and the term "dis
n shall mean a charitable contribution of property described in paragraph (1) or (2) of section 1221, by a corporation (other than a corporation which is an S corporation) to an organization which is described in section 501(c)(3) and is exempt under section 501(a) (other than a private foundation, as defined in section 509(a), which is not an operating foundation, as defined in section 4942(j)(3)), but only if-- (i) the use of the property by the donee is related to the purpose or function cons
And the gain attributable to the sale of a capital asset results in capital gain income. Sec. 1222. Moreover, the gain from the sale of property is equal to the excess of the amount realized (i.e., the sum of any money received plus the fair market value of the property received; sec. 1001(b)) from the sale, over the taxpayer's adjust
Section 1221 defines a capital asset as "property held by the taxpayer (whether or not connected with his trade or business)," but excludes four categories of assets, only one of which is of relevance here, namely: (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on
— For purposes of this paragraph, a qualified contribution shall mean a charitable contribution of property described in paragraph (1) or (2) of section 1221, by a corporation (other than a corporation which is an S corporation) to an organization which is described in section 501(c)(3) and is exempt under section 501(a) (other than a private foundation, as defined in section 509(a), which is not an operating foundation, as defined in section 4942(j)(3)), but only if— (i) the use of the pro