Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, October 19, 1993 TAG: 9310190047
SECTION: BUSINESS PAGE: B7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
The decision, likely to affect the smallest family farm to the largest corporation, reverses the IRS position on the tax treatment of hedges - transactions used by companies to protect themselves from fluctuations in interest rates, foreign currencies and commodity prices.
Faced with an unfavorable and unanimous U.S. Tax Court ruling in June, the IRS said it is abandoning a five-year-old position that prevented businesses from fully writing off the losses of many hedging transactions.
"This is an issue that cuts from the smallest business to family farms, all the way up to the largest corporation in America," said a senior Treasury Department official who spoke on the condition of anonymity.
Effective immediately, losses from most common business hedges will be deducted from ordinary income, rather than considered a capital loss.
Following a 1988 Supreme Court ruling, known as the Arkansas Best decision, the IRS allowed taxpayers to use losses from hedges only as an offset to capital gains. If a business had no capital gains, then it could not deduct the loss on its hedges.
Many businesses use hedges, such as futures contracts, to protect themselves from market fluctuations. A bank with loans abroad may use a hedge against swings in foreign currency exchange rates. A farmer can use a hedge to lock in the price of wheat three months before harvest.
By their nature, hedges have both a winning side and a losing side, which offset each other. The farmer, for instance, could lose money if the price of wheat declines but would have an offsetting gain on a futures contract. The new policy ensures that both the gain and loss get the same tax treatment.
The Treasury Department said it had no exact estimate of how the policy reversal would affect tax collections, but stressed its broad-based nature and large number of pending cases.
The decision was based in part on the history of the tax treatment of hedges back to the 1920s and in part on the belief it would be difficult to win a reversal of a 16-0 ruling in June by the U.S. Tax Court. That case alone, brought by the Federal National Mortgage Association, was worth more than $100 million.
The rule covers all open tax years, which means businesses can file amended returns if they had filled out their returns in conformance with the old policy.
by CNB