Energy Group Seeks Changes for Some Sales Under FDII, GILTI Regs

Draft Language — Prop. Reg. §1.250(b)-4(f)

Current Rule

(f) Special rule for certain financial instruments. — The sale of a security (as defined in section 475(c)(2)) or a commodity (as defined in section 475(e)(2)(B) through (D)) is not a FDDEI sale.

Proposed Change to Prop. Reg. §1.250(b)-4(f)

(f) Special rules for certain financial instruments.

(1) In general. The sale of a security (as defined in section 475(c)(2)) or a commodity (as defined in section 475(e)(2)(B) through (D)) is not a FDDEI sale.

(2) Exceptions. Notwithstanding paragraph (f)(1) of this section, the following transactions are FDDEI sales:

(i) Contracts for physical settlement. The sale of a physical commodity (as defined in section 475(e)(2)(A)) in satisfaction of a commodity derivative contract (as defined in section 475(e)(2)(C)) is a FDDEI sale if the sale of the physical commodity itself would have otherwise satisfied the requirements of paragraph (b) of this section if not made pursuant to a commodity derivative contract.

(ii) Hedging transactions. Gain or loss with respect to a commodity (as defined in section 475(e)(2)(B) through (D)) that is properly treated as a hedging transaction (as defined in Treas. Reg. sec. 1.1221-2 or section 475(e)(2)(D)(iii), as applicable) is treated as an FDDEI sale if the hedging transaction manages risk with respect to general property the sale of which represents a FDDEI sale under paragraph (b) of this section.

(A) Identification requirement. In determining whether a hedging transaction manages risk with respect to particular general property, the transaction must be properly identified as a hedging transaction under the rules of Treas. Reg. sec. 1.1221-2(f) or section 475(e)(2)(D)(iii), as applicable, with respect to the general property (or, in the case of aggregate hedges, multiple general properties).

(B) Special rule for aggregate hedges. In the case of an aggregate hedge, the taxpayer must reasonably match its hedging gain or loss to the portion of its sales of general property representing FDDEI sales. Methods representing reasonable matching under this paragraph (f)(2)(ii)(B) include, but are not limited to:

(I) Pro rata allocation across all general property sales occurring during the same tax period (to which gains or losses are matched under Treas. Reg. sec. 1.446-4(e)(1) or under section 475(e), as applicable);

(II) in the case of property customarily sold by weight or by volume, the allocation methodology is determined using the custom of the industry (for example, barrels of oil); or

(III) any other method supported by contemporaneous documentation (executed on or before the date the hedging transaction is entered into) maintained in the taxpayer's books and records.