II

106TH CONGRESS

1ST SESSION S. 1000

To amend the Internal Revenue Code of 1986 to treat certain dealer derivative

financial instruments, hedging transactions, and supplies as ordinary assets.

IN THE SENATE OF THE UNITED STATES

MAY 11, 1999

Mr. BREAUX (for himself and Mr. NICKLES) introduced the following bill;

which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to treat certain dealer derivative financial instruments, hedging

transactions, and supplies as ordinary assets.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. TREATMENT OF CERTAIN DEALER DERIVATIVE

4 FINANCIAL INSTRUMENTS, HEDGING TRANS5 ACTIONS, AND SUPPLIES AS ORDINARY AS6 SETS.

7 (a) IN GENERAL.—Section 1221 of the Internal Rev8 enue Code of 1986 (defining capital assets) is amended—

9 (1) by striking ‘‘For purposes’’ and inserting

10 the following:
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1 ‘‘(a) IN GENERAL.—For purposes’’,

2 (2) by striking the period at the end of para3 graph (5) and inserting a semicolon, and

4 (3) by adding at the end the following:

5 ‘‘(6) any derivative financial instrument held by

6 a derivatives dealer, unless held for investment and

7 clearly identified in the dealer’s records as held for

8 investment before the close of the day on which it

9 was acquired, originated, or entered into (or such

10 other time as the Secretary may by regulations pre11 scribe);

12 ‘‘(7) any hedging transaction (as defined in sec13 tion 1256(e)(2)); or

14 ‘‘(8) supplies of a type regularly used by the

15 taxpayer in the provision of services or the produc16 tion of property otherwise described in paragraphs

17 (1) through (7).

18 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—

19 ‘‘(1) DERIVATIVE FINANCIAL INSTRUMENTS.—

20 For purposes of subsection (a)(6)—

21 ‘‘(A) DERIVATIVES DEALER.—The term

22 ‘derivatives dealer’ means a person (other than

23 an options and commodities dealer (within the

24 meaning of section 1402(i)) which regularly of25 fers to enter into, assume, offset, assign, or ter-
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1 minate positions in derivative financial instru2 ments with customers in the ordinary course of

3 a trade or business.

4 ‘‘(B) DERIVATIVE FINANCIAL INSTRU5 MENT.—

6 ‘‘(i) IN GENERAL.—The term ‘deriva7 tive financial instrument’ means any con8 tract or financial instrument (other than a

9 share of stock in a corporation, a beneficial

10 interest in a partnership or trust, or a

11 note, bond, debenture, or other evidence of

12 indebtedness) the value or settlement price

13 of which is calculated by or determined by

14 reference to a specified index, including

15 any swap, cap, collar, floor, option, futures

16 contract, forward contract, or similar con17 tract or financial instrument.

18 ‘‘(ii) SPECIFIED INDEX.—The term

19 ‘specified index’ means any one or more or

20 any combination of—

21 ‘‘(I) a fixed rate, price, or

22 amount, or

23 ‘‘(II) a variable rate, price, or

24 amount,
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1 which is based on any current, objectively

2 determinable financial or economic infor3 mation which is not within the control of

4 any of the parties to the contract or in5 strument and is not unique to any of the

6 parties’ circumstances.

7 ‘‘(2) TREATMENT OF LOSSES IN CASE OF NON

8 IDENTIFICATION OR IMPROPER IDENTIFICATION OF

9 HEDGING TRANSACTIONS.—Notwithstanding sub10 section (a)(7) the Secretary shall prescribe regula11 tions for the proper treatment of the character of

12 any gain or loss arising from a transaction—

13 ‘‘(A) which is a hedging transaction under

14 section 1256(e)(2) except for the fact it was not

15 identified as such under section 1256(e)(2)(C),

16 or

17 ‘‘(B) which was so identified but is not

18 such a hedging transaction.’’

19 (b) MANAGEMENT OF RISK.—

20 (1) Section 475(c)(3) of the Internal Revenue

21 Code of 1986 is amended by striking ‘‘reduces’’ and

22 inserting ‘‘manages’’.

23 (2) Section 871(h)(4)(C)(iv) of such Code is

24 amended by striking ‘‘to reduce’’ and inserting ‘‘to

25 manage’’.
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1 (3) Clauses (i) and (ii) of section 988(d)(2)(A)

2 of such Code are each amended by striking ‘‘to re3 duce’’ and inserting ‘‘to manage’’.

4 (4) Section 1202(j)(2)(C) of such Code is

5 amended by striking ‘‘reduces’’ and inserting ‘‘man6 ages’’.

7 (5) Clauses (i) and (ii) of section 1256(e)(2)(A)

8 of such Code are each amended by striking ‘‘to re9 duce’’ and inserting ‘‘to manage’’.

10 (c) EFFECTIVE DATE.—The amendments made by

11 this section shall apply to any instrument held, acquired,

12 or entered into, any transaction entered into, and supplies

13 held or acquired on or after the date of enactment of this

14 Act.

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