Td 8985

Federal Register / Vol. 67, No. 54 / Wednesday, March 20, 2002 / Rules and Regulations
Paperwork Reduction Act
This proposal contains no new
collection of information requirements
for purposes of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3501–
3520.

DEPARTMENT OF THE TREASURY

Regulation Identification Number
A regulation identification number
(RIN) is assigned to each regulatory
action listed in the Unified Agenda of
Federal Regulations. The Regulatory
Information Service Center publishes
the Unified Agenda in April and
October of each year. The RIN contained
in the heading of this document can be
used to cross-reference this action with
the Unified Agenda.

RIN 1545–AY02

List of Subjects in 23 CFR Part 710
Grant programs-transportation,
Highways and roads, Real property
acquisition, Rights-of-way.
Issued on: March 13, 2002.
Mary E. Peters,
Federal Highway Administrator.

In consideration of the foregoing, the
FHWA amends title 23, Code of Federal
Regulations, Chapter 1, by revising Part
710 as set forth below:
PART 710—[AMENDED]
1. The authority citation for part 710
continues to read as follows:
Authority: 23 U.S.C. 101(a), 107, 108, 111,
114, 133, 142(f), 145, 156, 204, 210, 308, 315,
317, and 323; 42 U.S.C. 2000d et seq., 4633,
4651–4655; 49 CFR 1.48(b) and (cc), 18.31,
and parts 21 and 24; 23 CFR 1.32.

2. Revise § 710.203(b)(2) to read as
follows:
§ 710.203

Funding and reimbursement.

*

*
*
*
*
(b) * * *
(2) Relocation assistance and
payments. Usual costs and
disbursements associated with the
following:
(i) Relocation assistance and
payments required under 49 CFR part
24, and
(ii) Relocation assistance and
payments provided under the laws of
the State that may exceed the
requirements of 49 CFR part 24, except
for relocation assistance and payments
provided to aliens not lawfully present
in the United States.
*
*
*
*
*
§ 710.409

[Amended]

3. Amend § 710.409(a) by revising the
reference ‘‘§ 710.403(c)’’ to read
‘‘§ 710.403(d)’’.
[FR Doc. 02–6760 Filed 3–19–02; 8:45 am]
BILLING CODE 4910–22–P

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Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8985]

Hedging Transactions
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to the character of
gain or loss from hedging transactions.
The regulations reflect changes to the
law made by the Ticket to Work and
Work Incentives Improvement Act of
1999. The regulations affect businesses
entering into hedging transactions.
DATES: Effective Date: These regulations
are effective March 20, 2002.
Applicability Dates: For dates of
applicability of these regulations, see
the discussion in the Dates of
Applicability paragraph in the
Supplementary Information portion of
the preamble.
FOR FURTHER INFORMATION CONTACT:
Elizabeth Handler, (202) 622–3930 or
Viva Hammer at (202) 622–0869 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collections of information
contained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1480. Some responses to these
collections of information are
mandatory, and others are required to
obtain the benefit of the separate-entity
election.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
The estimated annual burden per
respondent or recordkeeper varies from
.1 to 40 hours, depending on individual
circumstances, with an estimated
average of 5.9 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
W:CAR:MP:FP:S, Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the

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12863

Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any Internal Revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document contains amendments
to 26 CFR Part 1 under section 1221 of
the Internal Revenue Code (Code). Prior
to amendment in 1999, section 1221
generally defined a capital asset as
property held by the taxpayer other
than: (1) Stock in trade or other types of
assets includible in inventory; (2)
property used in a trade or business that
is real property or property subject to
depreciation; (3) certain copyrights (or
similar property); (4) accounts or notes
receivable acquired in the ordinary
course of a trade or business; and (5)
U.S. government publications.
In 1994, the IRS published in the
Federal Register (59 FR 36360) final
Treasury regulations under section 1221
providing for ordinary character
treatment for certain business hedges.
The regulations generally apply to
transactions that reduce risk with
respect to ordinary property, ordinary
obligations, and borrowings of the
taxpayer and that meet certain
identification requirements. (§ 1.1221–
2). In 1996, the IRS published in the
Federal Register (61 FR 517) final
regulations on the character and timing
of gain or loss from hedging transactions
entered into by members of a
consolidated group. In this preamble,
the final regulations published in 1994
and 1996 are referred to collectively as
the Treasury regulations.
On December 17, 1999, section 1221
was amended by section 532 of the
Ticket to Work and Work Incentives
Improvement Act of 1999 (113 Stat
1860) to provide ordinary gain or loss
treatment for hedging transactions and
consumable supplies. Section 1221(a)(7)
provides ordinary treatment for hedging
transactions that are clearly identified as
such before the close of the day on
which they were acquired, originated, or
entered into.
The statute defines a hedging
transaction as a transaction entered into
by the taxpayer in the normal course of
business primarily to manage risk of
interest rate, price changes, or currency
fluctuations with respect to ordinary
property, ordinary obligations, or
borrowings of the taxpayer. Sections
1221(b)(2)(A)(i) and (ii). The statutory

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Federal Register / Vol. 67, No. 54 / Wednesday, March 20, 2002 / Rules and Regulations

definition of hedging transaction also
includes transactions to manage such
other risks as the Secretary may
prescribe in regulations. Section
1221(b)(2)(A)(iii). Further, the statute
grants the Secretary the authority to
provide regulations to address the
treatment of nonidentified or
improperly identified hedging
transactions, and hedging transactions
involving related parties (sections
1221(b)(2)(B) and (b)(3), respectively).
The statutory hedging provisions are
effective for transactions entered into on
or after December 17, 1999. Congress
intended that the hedging rules be the
exclusive means through which the
gains and losses from hedging
transactions are treated as ordinary. S.
Rep. No. 201, 106th Cong., 1st Sess. 25
(1999).
Section 1221(a)(8) provides that
supplies of a type regularly consumed
by the taxpayer in the ordinary course
of a taxpayer’s trade or business are not
capital assets. That provision is effective
for supplies held or acquired on or after
December 17, 1999.
A notice of proposed rulemaking
(REG–107047–00, 2001–14 I.R.B. 1002)
was published in the Federal Register
(66 FR 4738) on January 18, 2001. On
May 16, 2001, the IRS held a public
hearing on the proposed regulations.
Written comments responding to the
notice of proposed rulemaking were also
received. In response to these
comments, the proposed regulations
were modified and as so modified are
adopted as final regulations. The
principal changes to the proposed
regulations are discussed below.
Explanation of Provisions
Coordination With International
Provisions of the Code
The provisions of these regulations
generally apply to determine the
character of gain or loss from
transactions that are also subject to
various international provisions of the
Code. Paragraph (a)(4) of the
regulations, however, provides that the
character of gain or loss on section 988
transactions is not determined under
these regulations because gain or loss on
those transactions is ordinary under
section 988(a)(1). In addition, no
implication is intended as to what
constitutes ‘‘risk management’’ or
‘‘managing risk’’ for purposes of
proposed or final regulations under
section 482.
Paragraph (a)(4) of the proposed
regulations provided that the definition
of a hedging transaction under § 1.1221–
2(b) of the proposed regulations would
apply for purposes of certain other

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international provisions of the Code
only to the extent provided in
regulations issued under those
provisions. Technical changes have
been made in the final regulations to
eliminate references to proposed
regulations as well as Code sections for
which the relevant regulations have not
been issued in final form. Subsequent
regulations will specify the extent to
which the rules relating to hedging
transactions that are contained in
§ 1.1221–2 will be applicable for
purposes of those other regulations and
related Code sections.
Risk Management Standard
Several commentators noted that the
proposed regulations used risk
reduction as the operating standard to
implement the risk management
definition of hedging introduced by
section 1221(b)(2)(A). These
commentators found that risk reduction
is too narrow a standard to encompass
the intent of Congress which defined
hedges to include transactions that
manage risk of interest rate, price
changes or currency fluctuations. They
urged the IRS and Treasury to adopt a
broader definition of hedging to reflect
Congress’ intent. With one exception,
the commentators did not suggest a
definition of risk management.
In response to these comments, the
final regulations have been restructured
to implement the risk management
standard. No definition of risk
management is provided, but instead,
the rules characterize a variety of classes
of transactions as hedging transactions
because they manage risk. Risk reducing
transactions still qualify as one class of
hedging transactions, but there are also
others. In addition, specific provision is
made for the recognition of additional
types of qualifying risk management
transactions through published
guidance or private letter rulings. Under
the final regulations, as under the
proposed regulations, transactions
entered into for speculative purposes
will not qualify as hedging transactions.
See S. Rep. No. 201, 106th Cong., 1st
Sess. 24 (1999).
Application on the Basis of Separate
Business Units
The proposed regulations provided
that a taxpayer has risk of a particular
type only if it is at risk when all of its
operations are considered. That is, risk
must exist on a ‘‘macro’’ basis. For this
purpose, under the proposed
regulations, a taxpayer has to show that
hedges of particular assets or liabilities,
or groups of assets or liabilities, are
reasonably expected to reduce the
overall risk of the taxpayer’s operations.

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Commentators pointed out that this
entity-based approach to hedging is no
longer uniform business practice.
Instead, businesses often conduct risk
management on a business unit by
business unit basis. In response to these
comments, the final regulations permit
the determination of whether a
transaction manages risk to be made on
a business unit basis provided that the
business unit is within a single entity or
consolidated return group that adopts
the single-entity approach. An example
was added to the final regulations in
which for one taxpayer, the
determination of whether hedging
activities reduce risk is made at the
business unit level. In the example, the
conduct of risk management activities
within separate business units is
undertaken as part of a program to
reduce the overall risk of the taxpayer’s
operations.
Fixed-to-Floating Interest Rate Hedges
Paragraph (c)(1) of the proposed
regulations recognized that a transaction
that economically converts an interest
rate or price from a fixed rate or price
to a floating rate or price may manage
risk. Commentators suggested that the
rule in the proposed regulations
provides insufficient guidance in that it
states only that fixed-to-floating interest
rate or price hedges may be hedging
transactions. In response to these
comments, the regulations have been
restructured to separately address
interest rate hedges and price hedges.
Commentators suggested that in the
case of interest rate conversions, a
taxpayer may choose to convert from a
floating to a fixed rate to fix the amount
payable on the obligation. However, a
taxpayer could also elect to convert
from a fixed to a floating rate to insure
that the value of the liability remained
relatively constant. In response to these
comments, the final regulations provide
that a transaction that converts an
interest rate from a fixed rate to a
floating rate or from a floating rate to a
fixed rate manages risk. With respect to
fixed-to-floating price hedges, the final
regulations adopt the proposed rules
without change.
Transactions Not Entered Into Primarily
To Manage Risk
Paragraph (c)(3) of the proposed
regulations provided that the purchase
or sale of certain assets will not qualify
as a hedging transaction if the assets are
not acquired primarily to manage risk.
This rule was illustrated by the example
of a taxpayer that has an interest rate
risk from a floating rate borrowing and
that acquires debt instruments bearing a
comparable floating interest rate.

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Although the taxpayer’s interest rate
risk from the floating rate borrowing
may be reduced by the purchase of the
floating rate debt instruments, the
proposed regulations provided that the
acquisition of the debt instruments is
not made primarily to reduce risk and,
therefore, is not a hedging transaction.
The IRS and Treasury understand that
some employers may invest in assets
(such as shares of a mutual fund) that
are used as a reference investment for
purposes of computing their liability to
employees under a nonqualified
deferred compensation plan. A question
may arise whether such an investment
may constitute a hedging transaction
and, if so, whether income from the
investment may be deferred by the
employer until payments of deferred
compensation are made to employees.
See § 1.446–4(b); but compare
Albertson’s, Inc. v. Commissioner, 42
F.3d 537 (9th Cir. 1994).
The rule in the proposed regulations
is based on § 1.1221–2(c)(1)(vii). The
rule has been restated in the final
regulations to refer specifically to
investments in debt instruments, equity
securities, and annuity contracts so as to
provide greater certainty in its
application. For this purpose certain
transactions in instruments that are not
themselves debt instruments may
include a debt investment. See, e.g.,
§ 1.446–3(g)(4). Further, the final
regulations provide that the IRS may
identify by future published guidance
specified transactions that are
determined not to be entered into
primarily to manage risk. An example
has been added to the final regulations
to illustrate that an investment in
mutual fund shares in the case
described in the preceding paragraph
does not qualify as a hedging
transaction. A similar example is added
with respect to an investment in an
annuity contract.
Hedging Risks Other Than Interest Rate
or Price Changes, or Currency
Fluctuations
Paragraph (c)(8) of the proposed
regulations provided that the
Commissioner may, by published
guidance, provide that hedging
transactions include transactions
entered into to manage risks other than
interest rate or price changes, or
currency fluctuations.
The notice of proposed rulemaking
solicited comments regarding the
expansion of the definition of hedging
transactions to include transactions that
manage risks other than interest rate or
price changes, or currency fluctuations
with respect to ordinary property,
ordinary obligations or borrowings of

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the taxpayer. Some comments were
received in response to that request.
Because the comments described
hedging transactions that related to the
general operating results of a business
(such as gross sales) rather than specific
ordinary property, ordinary obligations
or borrowings of the taxpayer, the
implementation of rules respecting such
hedges would present a number of
issues not easily dealt with by the rules
contained in the final regulations. Thus,
the expansion of the scope of operation
of the hedging rules is not being
proposed at this time, so as not to delay
the publication of guidance on the
matters that are covered by the final
regulations. However, the IRS is
continuing to consider whether to
expand the definition of hedging
transactions to cover hedges of such
other risks. The IRS and Treasury invite
comments on the types of risks that
should be covered, including specific
examples of derivative transactions that
may be incorporated into future
guidance, as well as the appropriate
timing of inclusion of gains and losses
with respect to such transactions. Send
submissions to: CC:ITA:RU (REG–
107047–00), room 5226, Internal
Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC
20044.

2001, or the provisions of this final
regulation.

‘‘Gap’’ Hedges

The principal author of these
regulations is Elizabeth Handler, Office
of the Associate Chief Counsel
(Financial Institutions and Products).
However, other personnel from the IRS
and Treasury Department participated
in their development.

The status of so-called gap hedges was
not separately addressed in the
proposed regulations and is not covered
in the final regulations. Insurance
companies, for example, sometimes
hedge the gap between their liabilities
and the assets that fund them. Under the
final regulations, a hedge of those assets
would not qualify as a hedging
transaction if the assets are capital
assets. Whether a gap hedge qualifies as
a liability hedge is a question of fact and
depends on whether it is more closely
associated with the liabilities than with
the assets.
Identification Requirement
A rule has been added specifying
additional information that must be
provided for a transaction that
counteracts a hedging transaction.
Dates of Applicability
The regulations generally apply to all
transactions entered into on or after
March 20, 2002. However, the IRS will
not challenge any transaction entered
into on or after December 17, 1999, and
before March 20, 2002, that satisfies the
provisions of either § 1.1221–2 of REG–
107047–00, published in the Federal
Register (66 FR 4738) on January 18,

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Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
is hereby certified that the collection of
information in these regulations will not
have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that very few small businesses enter into
hedging transactions due to their cost
and complexity. Further, those small
businesses that hedge enter into very
few hedging transactions because
hedging transactions are costly,
complex, and require constant
monitoring and a sophisticated
understanding of the capital markets.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Drafting Information

List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by revising the
entry for § 1.1221–2 to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1221–2 also issued under 26
U.S.C. 1221(b)(2)(A)(iii), (b)(2)(B), and (b)(3);
1502 and 6001. * * *

Par. 2. In the list below, for each
location indicated in the left column,

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remove the language in the middle

column from that section, and add the
language in the right column.
Affected section

Remove

1.446–4(d)(2), first sentence ...................................................................................................................
1.446–4(d)(2), last sentence ...................................................................................................................
1.446–4(d)(3), first sentence ...................................................................................................................
1.446–4(d)(3), first sentence ...................................................................................................................
1.446–4(e)(7), first sentence ...................................................................................................................
1.446–4(e)(9)(ii), first sentence ...............................................................................................................
1.446–4(e)(9)(ii), last sentence ...............................................................................................................
1.475(b)–1(d)(2) ......................................................................................................................................
1.954–2(a)(4)(ii)(A), first sentence ..........................................................................................................

1.1221–2(e) ...........
1.1221–2(e)(2) .......
1.1221–2(e) ...........
1.1221–2(a)(4)(i) ....
1.1221–2(c)(2) .......
1.1221–2(d)(2) .......
1.1221–2(d)(2)(ii) ...
1.1221–2(e) ...........
1.1221–2(a)
through (c).
1.1221–2(e) ...........
1.1221–2(c)(7) .......
1.1221–2(c)(7) .......
1.1221–2(e)(1) .......
1.1221–2(e)(1) .......
paragraph (f)(1)(ii)
of § 1.1221–2.

1.954–2(a)(4)(ii)(B), first sentence ..........................................................................................................
1.954–2(g)(2)(ii)(B)(2), last sentence ......................................................................................................
1.954–2(g)(3)(i)(B), last sentence ...........................................................................................................
1.1256(e)–1(b), first and last sentences .................................................................................................
1.1256(e)–1(c), first sentence .................................................................................................................
1.1256(e)–1(c), last sentence .................................................................................................................

Par. 3. Section 1.1221–2 is revised to
read as follows:
§ 1.1221–2

Hedging 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

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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

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Add
1.1221–2(f).
1.1221–2(f)(2).
1.1221–2(f).
1.1221–2(a)(4).
1.1221–2(d)(4).
1.1221–2(e)(2).
1.1221–2(e)(2)(ii).
1.1221–2(f).
1.1221–2(a)
through (d).
1.1221–2(f).
1.1221–2(c)(3).
1.1221–2(c)(3).
1.1221–2(f)(1).
1.1221–2(f)(1).
1.1221–2(g)(1)(ii).

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

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Federal Register / Vol. 67, No. 54 / Wednesday, March 20, 2002 / Rules and Regulations
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:
Example. Corporation X manages its
business operations by treating particular
groups of activities, including the assets and
liabilities attributable to those assets, as
separate business units. A separate set of
books and records is maintained with respect
to the activities, assets and liabilities of
separate business unit y. As part of a risk
management program that Corporation X
reasonably expects to reduce the overall risks
of its business operations, Corporation X
enters into hedges to reduce the risks of
separate business unit y. Corporation X may
demonstrate that the hedges reduce risk by
taking into account only the activities, assets
and liabilities of business unit y.

(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

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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:
Example 1. Taxpayer borrows money and
agrees to pay a floating rate of interest.
Taxpayer purchases debt instruments that
bear a comparable floating rate. Although
taxpayer’s interest rate risk from the floating
rate borrowing may be reduced by the
purchase of the debt instruments, the
acquisition of the debt instruments is not a
hedging transaction, because the transaction
is not entered into primarily to manage the
taxpayer’s risk.
Example 2. Taxpayer undertakes
obligations to pay compensation in the
future. The amount of the future
compensation payments is adjusted as if
amounts were invested in a specified mutual
fund and were increased or decreased by the
earnings, gains and losses that would result
from such an investment. Taxpayer invests
funds in the shares of the mutual fund.
Although the investment in shares of the
mutual fund reduces the taxpayer’s risk of
fluctuation in the amount of its obligation to
employees, the investment was not made
primarily to manage the taxpayer’s risk.
Accordingly, the transaction is not a hedging
transaction.
Example 3. Taxpayer provides a
nonqualified retirement plan for employees
that is structured like a defined contribution
plan. Based on a schedule that takes into
account an employee’s monthly salary and
years of service with the taxpayer, the
taxpayer makes monthly credits to an
account for each employee. Each employee
may designate that the account will be
treated as if it were used to pay premiums
on a variable annuity contract issued by the
M insurance company with a value that
reflects a specified investment option. M
offers a number of investment options for its
variable annuity contracts. Taxpayer invests
funds in M company variable annuity
contracts that parallel the investment options

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selected by the employees. The investment is
not made primarily to manage the taxpayer’s
risk and is not a hedging transaction.

(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 separateentity 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

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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 this
paragraph (e)(2) must be made in a
separate statement saying ‘‘[Insert Name
and Employer Identification Number of
Common Parent] HEREBY ELECTS THE
APPLICATION OF SECTION 1.1221–

(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):
Example 1. Single-entity treatment—(i)
General rule. Under paragraph (e)(1) of this
section, O’s risk A is treated as H’s risk, and
therefore D is a hedging transaction with

respect to risk A. Thus, the character of D is
determined under the rules of this section,
and the income, deduction, gain, or loss from
D must be accounted for under a method of
accounting that satisfies § 1.446–4. The
intercompany transaction B–C is not a
hedging transaction and is taken into account
under § 1.1502–13.
(ii) Identification. D must be identified as
a hedging transaction under paragraph (f)(1)
of this section, and A must be identified as
the hedged item under paragraph (f)(2) of this
section. Under paragraph (f)(5) of this
section, the identification of A as the hedged
item can be accomplished by identifying the
positions in the intercompany transaction as
hedges or hedged items, as appropriate.
Thus, substantially contemporaneous with
entering into D, H may identify C as the
hedged item and O may identify B as a hedge
and A as the hedged item.
Example 2. Separate-entity election;
counterparty that does not mark to market.
In addition to the General Facts stated above,
assume that the group makes a separateentity election under paragraph (e)(2) of this
section. If H does not mark C to market under
its method of accounting, then B is not a
hedging transaction, and the B–C
intercompany transaction is taken into
account under the rules of section 1502. D is
not a hedging transaction with respect to A,
but D may be a hedging transaction with
respect to C if C is ordinary property or an
ordinary obligation and if the other
requirements of paragraph (b) of this section
are met. If D is not part of a hedging
transaction, then D may be part of a straddle
for purposes of section 1092.

Example 3. Separate-entity election;
counterparty that marks to market. The facts
are the same as in Example 2 above, except
that H marks C to market under its method
of accounting. Also assume that B would be
a hedging transaction with respect to risk A
if O had entered into that transaction with an
unrelated party. Thus, for O, the B–C
transaction is an intercompany hedging
transaction with respect to O’s risk A, the
character and timing rules of § 1.1502–13 do
not apply to the B–C transaction, and H’s
income, deduction, gain, or loss from C is
ordinary. However, other attributes of the
items from the B–C transaction are
determined under § 1.1502–13. D is a
hedging transaction with respect to C if it
meets the requirements of paragraph (b) of
this section.

(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

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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 signed by the common parent
and filed with the group’s Federal
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 be revoked only 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.

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(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.

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(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

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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

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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 separateentity 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 nonidentification—(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);

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(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.

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(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.
Par. 4. Section 1.1256(e)–1 is revised
to read as follows:
§ 1.1256(e)–1 Identification of hedging
transactions.

(a) Identification and recordkeeping
requirements. Under section 1256(e)(2),
a taxpayer that enters into a hedging
transaction must identify the transaction
as a hedging transaction before the close
of the day on which the taxpayer enters
into the transaction.
(b) Requirements for identification.
The identification of a hedging
transaction for purposes of section
1256(e)(2) must satisfy the requirements
of § 1.1221–2(f)(1). Solely for purposes
of section 1256(f)(1), however, an
identification that does not satisfy all of
the requirements of § 1.1221–2(f)(1) is
nevertheless treated as an identification
under section 1256(e)(2).
(c) Consistency with § 1.1221–2. Any
identification for purposes of § 1.1221–
2(f)(1) is also an identification for
purposes of this section. If a taxpayer
satisfies the requirements of § 1.1221–
2(f)(1)(ii), the transaction is treated as if
it were not identified as a hedging
transaction for purposes of section
1256(e)(2).
(d) Effective date. The rules of this
section apply to transactions entered
into on or after March 20, 2002.

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Federal Register / Vol. 67, No. 54 / Wednesday, March 20, 2002 / Rules and Regulations
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 6. In § 602.101, paragraph (b) is
amended by removing the entries for
‘‘1.1221–2,’’ ‘‘1.1221–2(d)(2)(iv),’’
‘‘1.1221–2(e)(5),’’ ‘‘1.1221–2(g)(5)(ii),’’
‘‘1.1221–2(g)(6)(ii),’’ ‘‘1.1221–
2(g)(6)(iii),’’ and ‘‘1.1221–2T(c)’’ and
adding an entry in numerical order to
the table to read as follows:

docket, are part of docket CGD05–02–
003 and are available for inspection or
copying at Commander (Aoax), Fifth
Coast Guard District, 431 Crawford
Street, Portsmouth, Virginia 23704–
5004, between 9 a.m. and 2 p.m.,
Monday through Friday, except Federal
holidays.
FOR FURTHER INFORMATION CONTACT: S. L.
Phillips, Project Manager, Auxiliary and
Recreational Boating Safety Section, at
(757) 398–6204.
SUPPLEMENTARY INFORMATION:

Regulatory Information
We did not publish a notice of
proposed rulemaking (NPRM) for this
§ 602.101 OMB Control numbers.
regulation. In keeping with 5 U.S.C.
*
*
*
*
*
553(b)(B) and 553(d)(3), the Coast Guard
(b) * * *
finds that good cause exists for not
publishing a NPRM and for making this
CFR part or section where
Current OMB
identified and described
control No.
rule effective less than 30 days after
publication in the Federal Register. The
event will occur on April 13, 2002, and
*
*
*
*
*
numerous spectator craft are
1.1221–2 ...............................
1545–1480
anticipated. Because of the danger
posed to spectators and participants by
*
*
*
*
*
other vessels transiting through the
event area, it is in the public interest to
Robert E. Wenzel,
have these regulations in effect during
Deputy Commissioner of Internal Revenue.
the event. In addition, advance
Approved: March 14, 2002.
notifications will be made via the Local
Mark Weinberger,
Notice to Mariners, marine information
broadcasts, and area newspapers.
Assistant Secretary of the Treasury.
[FR Doc. 02–6622 Filed 3–15–02; 8:54 am]
BILLING CODE 4830–01–P

DEPARTMENT OF TRANSPORTATION
Coast Guard
33 CFR Part 100
[CGD05–02–003]
RIN 2115–AE46

Special Local Regulations for Marine
Events; St. Mary’s River, St. Mary’s
City, MD
Coast Guard, DOT.
Temporary final rule.

AGENCY:
ACTION:

SUMMARY: The Coast Guard is adopting
temporary special local regulations
during the St. Mary’s Seahawk Sprint, a
marine event to be held on the waters
of the St. Mary’s River, St. Mary’s City,
Maryland. This action is necessary to
provide for the safety of life on
navigable waters during the event. This
action is intended to restrict vessel
traffic in portions of the St. Mary’s River
during the event.
DATES: This rule is effective from 7 a.m.
to 4 p.m. eastern time on April 13, 2002.
ADDRESSES: Documents indicated in this
preamble as being available in the

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16:46 Mar 19, 2002

Jkt 197001

Background and Purpose
St. Mary’s College of Maryland will
sponsor the St. Mary’s Seahawk Sprint
on April 13, 2002. The St. Mary’s
Seahawk Sprint consists of
intercollegiate crew rowing teams racing
along a 2000-meter course on the waters
of the St. Mary’s River. A fleet of
spectator vessels is expected to gather
near the event site to view the
competition. To provide for the safety of
event participants, spectators and
transiting vessels, the Coast Guard will
temporarily restrict vessel movement in
the event area during the crew races.
Discussion of Rule
The Coast Guard is establishing
temporary special local regulations on
specified waters of the St. Mary’s River.
The temporary special local regulations
will be in effect from 7 a.m. to 4 p.m.
eastern time on April 13, 2002. The
effect will be to restrict general
navigation in the regulated area during
the event. Except for persons or vessels
authorized by the Coast Guard Patrol
Commander, no person or vessel will be
allowed to enter or remain in the
regulated area. The Patrol Commander
will allow non-participating vessels to
transit the regulated area between races,
when it is safe to do so. These
regulations are needed to control vessel

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traffic during the event to enhance the
safety of participants, spectators and
transiting vessels.
Regulatory Evaluation
This rule is not a ‘‘significant
regulatory action’’ under section 3(f) of
Executive Order 12866 and does not
require an assessment of potential costs
and benefits under section 6(a)(3) of that
Order. The Office of Management and
Budget has not reviewed it under that
Order. It is not significant under the
regulatory policies and procedures of
the Department of Transportation (DOT)
(44 FR 11040; February 26, 1979).
Although this regulation prevents
traffic from transiting a portion of the St.
Mary’s River during the event, the effect
of this regulation will not be significant
due to the limited duration that the
regulated area will be in effect and the
extensive advance notifications that will
be made to the maritime community via
the Local Notice to Mariners, marine
information broadcasts, and area
newspapers, so mariners can adjust
their plans accordingly. Additionally,
the regulated area has been narrowly
tailored to impose the least impact on
general navigation yet provide the level
of safety deemed necessary.
Small Entities
Under the Regulatory Flexibility Act
(5 U.S.C. 601—612), we considered
whether this rule would have a
significant economic impact on a
substantial number of small entities.
The term ‘‘small entities’’ comprises
small businesses, not-for-profit
organizations that are independently
owned and operated and are not
dominant in their fields, and
governmental jurisdictions with
populations of less than 50,000.
The Coast Guard certifies under 5
U.S.C. 605(b) that this rule will not have
a significant economic impact on a
substantial number of small entities.
This rule will affect the following
entities, some of which may be small
entities: the owners or operators of
vessels intending to transit this section
of St. Mary’s River during the event.
Although this regulation prevents
traffic from transiting a portion of the St.
Mary’s River during the event, the effect
of this regulation will not be significant
because of the limited duration that the
regulated area will be in effect and the
extensive advance notifications that will
be made to the maritime community via
the Local Notice to Mariners, marine
information broadcasts, and area
newspapers, so mariners can adjust
their plans accordingly.

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