I
106TH CONGRESS
1ST SESSION
H. R. 1713
To amend the Internal Revenue Code of 1986 to treat certain dealer derivative
financial instruments, hedging transactions, and supplies as ordinary assets.
IN THE HOUSE OF REPRESENTATIVES
MAY 5, 1999
Mr. THOMAS introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to treat cer-
tain dealer derivative financial instruments, hedging
transactions, and supplies as ordinary assets.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. TREATMENT OF CERTAIN DEALER DERIVATIVE
FINANCIAL INSTRUMENTS, HEDGING TRANS-
ACTIONS, AND SUPPLIES AS ORDINARY AS-
SETS.
(a) IN GENERAL.—Section 1221 of the Internal Rev-
enue Code of 1986 (defining capital assets) is amended—
(1) by striking ‘‘For purposes’’ and inserting
the following:
‘‘(a) IN GENERAL.—For purposes’’,
(2) by striking the period at the end of para-
graph (5) and inserting a semicolon, and
(3) by adding at the end the following:
‘‘(6) any derivative financial instrument held by
a derivatives dealer, unless held for investment and
clearly identified in the dealer’s records as held for
investment 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 pre-
scribe);
‘‘(7) any hedging transaction (as defined in sec-
tion 1256(e)(2)); or
‘‘(8) supplies of a type regularly used by the
taxpayer in the provision of services or the produc-
tion of property otherwise described in paragraphs
(1) through (7).
‘‘(b) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) DERIVATIVE FINANCIAL INSTRUMENTS.—
For purposes of subsection (a)(6)—
‘‘(A) DERIVATIVES
DEALER.—The term
‘derivatives dealer’ means a person (other than
an options and commodities dealer (within the
meaning of section 1402(i)) which regularly of-
fers to enter into, assume, offset, assign, or ter-
minate positions in derivative financial instru-
ments with customers in the ordinary course of
a trade or business.
‘‘(B) DERIVATIVE
FINANCIAL
INSTRU-
MENT.—
‘‘(i) IN GENERAL.—The term ‘deriva-
tive financial instrument’ means any con-
tract or financial instrument (other than a
share of stock in a corporation, a beneficial
interest in a partnership or trust, or a
note, bond, debenture, or other evidence of
indebtedness) the value or settlement price
of which is calculated by or determined by
reference to a specified index, including
any swap, cap, collar, floor, option, futures
contract, forward contract, or similar con-
tract or financial instrument.
‘‘(ii) SPECIFIED
INDEX.—The term
‘specified index’ means any one or more or
any combination of—
‘‘(I) a fixed rate, price, or
amount, or
‘‘(II) a variable rate, price, or
amount,
which is based on any current, objectively
determinable financial or economic infor-
mation which is not within the control of
any of the parties to the contract or in-
strument and is not unique to any of the
parties’ circumstances.
‘‘(2) TREATMENT OF LOSSES IN CASE OF NON
IDENTIFICATION OR IMPROPER IDENTIFICATION OF
HEDGING
TRANSACTIONS.—Notwithstanding 
sub-
section (a)(7) the Secretary shall prescribe regula-
tions for the proper treatment of the character of
any gain or loss arising from a transaction—
‘‘(A) which is a hedging transaction under
section 1256(e)(2) except for the fact it was not
identified as such under section 1256(e)(2)(C),
or
‘‘(B) which was so identified but is not
such a hedging transaction.’’
(b) MANAGEMENT OF RISK.—
(1) Section 475(c)(3) of the Internal Revenue
Code of 1986 is amended by striking ‘‘reduces’’ and
inserting ‘‘manages’’.
(2) Section 871(h)(4)(C)(iv) of such Code is
amended by striking ‘‘to reduce’’ and inserting ‘‘to
manage’’.
(3) Clauses (i) and (ii) of section 988(d)(2)(A)
of such Code are each amended by striking ‘‘to re-
duce’’ and inserting ‘‘to manage’’.
(4) Section 1202(j)(2)(C) of such Code is
amended by striking ‘‘reduces’’ and inserting ‘‘man-
ages’’.
(5) Clauses (i) and (ii) of section 1256(e)(2)(A)
of such Code are each amended by striking ‘‘to re-
duce’’ and inserting ‘‘to manage’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to any instrument held, acquired,
or entered into, any transaction entered into, and supplies
held or acquired on or after the date of enactment of this
Act.
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