508 
(F) Section 1503(e)(2)(C), as amended by the 
preceding provisions of this Act, is amended— 
(i) by striking ‘‘paragraph (6)’’ and insert-
ing ‘‘paragraph (5)’’, and 
(ii) by striking ‘‘SECTION 312(n)(6)’’ in 
the 
heading 
and 
inserting 
‘‘SECTION 
312(n)(5)’’. 
(3) Section 1363 is amended by striking sub-
section (d). 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
(d) CHANGE IN METHOD OF ACCOUNTING.— 
(1) IN GENERAL.—In the case of any taxpayer 
required by the amendments made by this section to 
change its method of accounting for its first taxable 
year beginning after December 31, 2014— 
(A) such change shall be treated as initi-
ated by the taxpayer, 
(B) such change shall be treated as made 
with the consent of the Secretary of the Treas-
ury, and 
(C) if the net amount of the adjustments 
required to be taken into account by the tax-
payer under section 481 of the Internal Rev-
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2014, and ending with the taxable year be-
fore the first taxable year referred to in 
clause (i) shall not fail to be taken into ac-
count as part of the period of the adjust-
ment merely because such amount is not 
otherwise taken into account under clause 
(i) during such period. 
(2) ELECTED TAXABLE YEAR.—For purposes of 
this subsection, the term ‘‘elected taxable year’’ 
means such taxable year as the taxpayer may elect 
(at such time and in such form and manner as the 
Secretary may provide) which begins after December 
31, 2014, and is before the taxpayer’s second tax-
able year beginning after December 31, 2018. 
(3) REDUCTION IN AMOUNT OF ADJUSTMENT 
FOR CLOSELY-HELD ENTITIES.— 
(A) IN
GENERAL.—In the case of any 
closely-held entity, paragraph (1)(C) shall be 
applied by treating any reference to ‘‘such 
amount’’ as a reference to 20 percent (28 per-
cent in the case of a C corporation) of such 
amount. 
(B) CLOSELY-HELD
ENTITY.—For pur-
poses of this paragraph— 
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(i) IN GENERAL.—The term ‘‘closely- 
held entity’’ means any domestic corpora-
tion or domestic partnership which— 
(I) is not an ineligible entity, 
(II) does not have more than 100 
shareholders or partners (as the case 
may be), and 
(III) does not have as a share-
holder or partner a person (other than 
an estate, a trust described in section 
1361(c)(2) of the Internal Revenue 
Code of 1986, or an organization de-
scribed section 1361(c)(6) of such 
Code) who is not an individual. 
(ii) CERTAIN SUBSIDIARIES.—An enti-
ty shall not fail to be treated as a closely- 
held entity by reason of clause (i)(III) if all 
of the interests in such entity are held by 
a single closely-held entity (determined 
without regard to this clause) and individ-
uals taken into account under clause (i)(II) 
with respect to such entity. In the case of 
tiered entities (other than the top tier enti-
ty), the preceding sentence shall be ap-
plied— 
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(I) by substituting ‘‘(determined 
after application of this clause)’’ for 
‘‘(determined without regard to this 
clause)’’, and 
(II) by substituting ‘‘with respect 
to the top tier entity’’ for ‘‘with re-
spect to such entity’’. 
(iii) INELIGIBLE ENTITY.—The term 
‘‘ineligible entity’’ means any entity de-
scribed in section 1361(b)(2) of the Inter-
nal Revenue Code of 1986 applied by sub-
stituting ‘‘corporation or partnership’’ for 
‘‘corporation’’ each place it appears. 
(iv) DATE OF DETERMINATION.—The 
status of any entity as a closely-held entity 
shall be determined as of February 26, 
2014. 
(v) SOLE
PROPRIETORS.—An indi-
vidual operating a trade or business shall 
be treated as a closely-held entity. 
(C) CERTAIN TRANSFERS DISREGARDED.— 
(i) IN GENERAL.—In the case of any 
specified inventory transfer, the adjust-
ments referred to in paragraph (1)(C) 
shall be determined— 
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(I) with respect to the transferor, 
as though the property transferred 
continued to be held at all times by 
such transferor, and 
(II) with respect to the trans-
feree, as though such property was 
never transferred to such transferee. 
(ii) SPECIFIED
INVENTORY
TRANS-
FER.—The 
term 
‘‘specified 
inventory 
transfer’’ means any transfer of property 
described in section 1221(a)(1) if— 
(I) such transfer is to a closely- 
held entity from any person who is 
not a closely-held entity, 
(II) such transfer is on or after 
February 26, 2014, and before the be-
ginning of the transferor’s first tax-
able year beginning after December 
31, 2014, and 
(III) the basis of such property 
in the hands of the transferee imme-
diately after such transfer is either 
determined by reference to the basis 
of such property in the hands of the 
transferor or is less than the fair mar-
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ket value of such property at the time 
of such transfer. 
SEC. 3311. REPEAL OF LOWER OF COST OR MARKET METH-
OD OF INVENTORY. 
(a) IN GENERAL.—Section 471, as amended by the 
preceding provisions of this Act, is amended by redesig-
nating subsection (d) as subsection (e) and by inserting 
after subsection (c) the following new subsection: 
‘‘(d) LOWER OF COST OR MARKET METHOD NOT 
PERMISSIBLE.—The lower of cost or market method of 
determining inventories shall in no event be treated as 
clearly reflecting income. For purposes of the preceding 
sentence, the lower of cost or market shall include the 
lower of cost or bona fide net selling price.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
(c) CHANGE IN METHOD OF ACCOUNTING.— 
(1) IN GENERAL.—In the case of any taxpayer 
required by the amendments made by this section to 
change its method of accounting for its first taxable 
year beginning after December 31, 2014— 
(A) such change shall be treated as initi-
ated by the taxpayer, 
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(B) such change shall be treated as made 
with the consent of the Secretary of the Treas-
ury, and 
(C) if the net amount of the adjustments 
required to be taken into account by the tax-
payer under section 481 of the Internal Rev-
enue Code of 1986 by reason of such change is 
positive— 
(i) such amount shall be taken into 
account during the 4-taxable year period 
beginning with the earlier of the taxpayer’s 
elected taxable year or the taxpayer’s first 
taxable year beginning after December 31, 
2018, as follows: 
(I) 10 percent of such amount in 
the first taxable year in such period, 
(II) 15 percent of such amount 
in the second taxable year in such pe-
riod, 
(III) 25 percent of such amount 
in the third taxable year in such pe-
riod, and 
(IV) 50 percent of such amount 
in the fourth taxable year in such pe-
riod, and 
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(ii) for purposes of applying the regu-
lations and other guidance issued under 
such section (including any provisions 
which require accelerated inclusion), the 
period beginning with the taxpayer’s first 
taxable year beginning after December 31 
2014, and ending with the taxable year be-
fore the first taxable year referred to in 
clause (i) shall not fail to be taken into ac-
count as part of the period of the adjust-
ment merely because such amount is not 
otherwise taken into account under clause 
(i) during such period. 
(2) ELECTED TAXABLE YEAR.—For purposes of 
this subsection, the term ‘‘elected taxable year’’ 
means such taxable year as the taxpayer may elect 
(at such time and in such form and manner as the 
Secretary may provide) which begins after December 
31, 2014, and is before the taxpayer’s second tax-
able year beginning after December 31, 2018. 
SEC. 3312. MODIFICATION OF RULES FOR CAPITALIZATION 
AND INCLUSION IN INVENTORY COSTS OF 
CERTAIN EXPENSES. 
(a) $10,000,000 GROSS RECEIPTS EXCEPTION TO 
APPLY TO PROPERTY PRODUCED BY THE TAXPAYER.— 
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Section 263A(b) is amended by striking all that follows 
paragraph (1) and inserting the following new paragraphs: 
‘‘(2) PROPERTY ACQUIRED FOR RESALE.—Real 
or personal property described in section 1221(a)(1) 
which is acquired by the taxpayer for resale. 
‘‘(3) EXCEPTION FOR TAXPAYER WITH GROSS 
RECEIPTS
OF
$10,000,000
OR
LESS.—This section 
shall not apply to any property produced or acquired 
by the taxpayer during any taxable year if the aver-
age annual gross receipts of the taxpayer (or any 
predecessor) for the 3-taxable year period ending 
with the taxable year preceding such taxable year do 
not exceed $10,000,000. For purposes of this para-
graph, rules similar to the rules of paragraphs (2) 
and (3) of section 448(b) shall apply. 
‘‘(4) FILMS, 
SOUND
RECORDINGS, 
BOOKS, 
ETC.—For purposes of this subsection, the term 
‘tangible personal property’ shall include a film, 
sound recording, video tape, book, or similar prop-
erty.’’. 
(b) REPEAL OF EXCEPTIONS FOR TIMBER AND CER-
TAIN ORNAMENTAL TREES.—Section 263A(c) is amended 
by striking paragraph (5). 
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(c) REPEAL OF EXCEPTION FOR QUALIFIED CRE-
ATIVE EXPENSES.—Section 263A is amended by striking 
subsection (h). 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2014. 
(2) CHANGE IN METHOD OF ACCOUNTING.—In 
the case of any taxpayer required by the amend-
ments made by this section to change its method of 
accounting for its first taxable year beginning after 
December 31, 2014— 
(A) such change shall be treated as initi-
ated by the taxpayer, and 
(B) such change shall be treated as made 
with the consent of the Secretary of the Treas-
ury. 
SEC. 3313. MODIFICATION OF INCOME FORECAST METHOD. 
(a) EXTENSION OF FORECAST PERIOD.— 
(1) IN
GENERAL.—Paragraph (1) of section 
167(g) is amended by striking ‘‘10th’’ each place it 
appears and inserting ‘‘20th’’. 
(2) 
MODIFICATION
OF
RECOMPUTATION 
YEARS.—Paragraph (4) of section 167(g) is amend-
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ed by striking ‘‘the 3d and the 10th’’ and inserting 
‘‘the 5th, 10th, 15th, and 20th’’. 
(b) MODIFICATION OF RULES FOR TREATMENT OF 
PARTICIPATIONS AND RESIDUALS.—Paragraph (7) of sec-
tion 167(g) is amended to read as follows: 
‘‘(7) TREATMENT OF PARTICIPATIONS AND RE-
SIDUALS.— 
‘‘(A) IN
GENERAL.—In the case of any 
participation or residual with respect to any 
property to which this subsection applies (in-
cluding any property to which section 168 ap-
plies by reason of paragraph (8)), the tax-
payer— 
‘‘(i) shall exclude such participation or 
residual from the adjusted basis of such 
property, and 
‘‘(ii) shall be allowed a deduction for 
such participation or residual in the tax-
able year in which such participation or re-
sidual is paid. 
‘‘(B) PARTICIPATIONS AND RESIDUALS.— 
For purposes of this paragraph, the term ‘par-
ticipation or residual’ means, with respect to 
any property, any cost the amount of which by 
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contract varies with the amount of income 
earned in connection with such property.’’. 
(c) ELECTION TO UTILIZE 20-YEAR STRAIGHT LINE 
RECOVERY.—Subsection (g) of section 167 is amended by 
redesignating (8) as paragraph (9) and by inserting after 
paragraph (7) the following new paragraph: 
‘‘(8) ELECTION TO UTILIZE 20-YEAR STRAIGHT 
LINE RECOVERY.—If the taxpayer elects the applica-
tion of this paragraph for any taxable year, the de-
preciation deduction allowable with respect to any 
property placed in service by the taxpayer during 
such taxable year which would otherwise be deter-
mined under paragraph (1) shall be determined 
under section 168— 
‘‘(A) by treating the straight line method 
as the applicable depreciation method, and 
‘‘(B) by treating 20 years as the applicable 
recovery period.’’. 
(d) REPEAL OF SPECIAL RULES FOR CERTAIN MUSI-
CAL WORKS AND COPYRIGHTS.—Subsection (g) of section 
167, as amended by subsection (c), is amended by striking 
paragraph (9). 
(e) SAFE HARBOR AMORTIZATION OF CERTAIN IN-
TANGIBLE ASSETS.—Effective for property placed in serv-
ice after December 31, 2014, the Secretary of the Treas-
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ury, or the Secretary’s designee, shall revise Treasury 
Regulation section 1.167(a)–3(b) (and such regulation 
shall be applied) such that the safe harbor amortization 
for certain intangible assets to which such regulation ap-
plies shall allow the taxpayer to treat such asset as having 
a useful life equal to 20 years (and not 15 years). 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
December 31, 2014. 
SEC. 3314. REPEAL OF AVERAGING OF FARM INCOME. 
(a) IN GENERAL.—Subchapter Q of chapter 1 is 
amended by striking part I (and by striking the item relat-
ing to such part in the table of parts for such subchapter). 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3315. TREATMENT OF PATENT OR TRADEMARK IN-
FRINGEMENT AWARDS. 
(a) IN GENERAL.—Part II of subchapter B of chap-
ter 1 is amended by adding at the end the following new 
section: 
‘‘SEC. 
91. 
PATENT 
OR 
TRADEMARK 
INFRINGEMENT 
AWARDS. 
‘‘(a) IN GENERAL.—Except as provided in subsection 
(b), any payment received for infringement of any patent 
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or trademark (whether by reason of judgment or settle-
ment) shall be included in gross income as ordinary in-
come. 
‘‘(b) IMPAIRMENT
OF CAPITAL.—If the taxpayer 
demonstrates to the satisfaction of the Secretary that a 
payment described in subsection (a) constitutes damages 
received by reason of the reduction in value of property 
of the taxpayer caused by the infringement referred to in 
subsection (a)— 
‘‘(1) the taxpayer’s basis in such property shall 
be reduced (but not below zero) by the amount of 
such payment, and 
‘‘(2) subsection (a) shall apply to so much of 
such payment as exceeds the amount of the reduc-
tion under paragraph (1).’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 1016(a) is amended by adding at 
the end the following new paragraph: 
‘‘(38) to the extent provided in section 
91(b)(1),’’. 
(2) The table of sections for part II of sub-
chapter B of chapter 1 is amended by adding at the 
end the following new item: 
‘‘Sec. 91. Patent or trademark infringement awards.’’. 
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to payments received pursuant to 
judgments and settlements after December 31, 2014. 
SEC. 3316. REPEAL OF REDUNDANT RULES WITH RESPECT 
TO CARRYING CHARGES. 
(a) IN GENERAL.—Part IX of subchapter B of chap-
ter 1 is amended by striking section 266 (and by striking 
the item relating to such section in the table of sections 
for such subpart). 
(b) CONFORMING AMENDMENTS.— 
(1) Section 163(n) is amended by striking para-
graph (3) and by redesignating paragraphs (4) and 
(5) as paragraphs (3) and (4), respectively. 
(2) Section 1016(a)(1)(A)(i), as amended by 
section 3514, is amended by striking ‘‘described in 
section 266’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts paid or incurred after 
December 31, 2014. 
SEC. 3317. REPEAL OF RECURRING ITEM EXCEPTION FOR 
SPUDDING OF OIL OR GAS WELLS. 
(a) IN GENERAL.—Section 461(i) is amended by 
striking paragraph (2) and by redesignating paragraphs 
(3), (4), and (5) as paragraphs (2), (3), and (4), respec-
tively. 
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
Subtitle E—Financial Instruments 
PART 1—DERIVATIVES AND HEDGES 
SEC. 3401. TREATMENT OF CERTAIN DERIVATIVES. 
(a) IN GENERAL.—Subchapter E of chapter 1 is 
amended by adding at the end the following new part: 
‘‘PART IV—DERIVATIVES 
‘‘Sec. 485. Treatment of certain derivatives. 
‘‘Sec. 486. Derivative defined. 
‘‘SEC. 485. TREATMENT OF CERTAIN DERIVATIVES. 
‘‘(a) IN GENERAL.—For purposes of this subtitle— 
‘‘(1) any derivative held by a taxpayer at the 
close of the taxable year shall be treated as sold for 
its fair market value on the last business day of 
such taxable year (and any gain or loss shall be 
taken into account for the taxable year), and 
‘‘(2) proper adjustment shall be made in the 
amount of any gain or loss subsequently realized for 
gain or loss taken into account by reason of para-
graph (1). 
‘‘(b) TREATMENT AS ORDINARY INCOME OR LOSS; 
ALLOWANCE AS NET OPERATING LOSS.—All items of in-
come, gain, loss, and deduction with respect to any deriva-
tive— 
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‘‘(1) shall be treated as ordinary income or loss, 
and 
‘‘(2) shall be treated for purposes of section 
172(d)(4) as attributable to a trade or business of 
the taxpayer. 
‘‘(c) MARK TO MARKET OF CERTAIN OFFSETTING 
POSITIONS.— 
‘‘(1) IN GENERAL.—In the case of any straddle 
which includes any derivative, subsections (a) and 
(b) shall apply to all positions comprising such 
straddle in the same manner as such subsections 
apply to such derivative. 
‘‘(2) APPLICATION
TO
BUILT-IN
GAIN
POSI-
TIONS.— 
‘‘(A) IN
GENERAL.—In the case of any 
built-in gain position to which subsection (a) 
applies by reason of paragraph (1)— 
‘‘(i) in addition to any other time at 
which such position is treated as sold 
under subsection (a)(1), such position shall 
be treated as sold for its fair market value 
at the time that the straddle is established 
with respect to such position, 
‘‘(ii) proper adjustment shall be made 
in the amount of any gain or loss subse-
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quently realized for gain taken into ac-
count by reason of clause (i), and 
‘‘(iii) subsection (b) shall not apply to 
any gain taken into account by reason of 
clause (i). 
‘‘(B) BUILT-IN GAIN POSITION.—For pur-
poses of this subsection, the term ‘built-in gain 
position’ means any position (other than a de-
rivative to which subsection (a) applies) with re-
spect to which a gain would be realized if such 
position were sold for its fair market value at 
the time that the straddle is established with 
respect to such position. 
‘‘(C) EXCEPTION FOR STRAIGHT DEBT.— 
Subparagraph (A) shall not apply to any posi-
tion with respect to debt if— 
‘‘(i) the interest payments (or other 
similar amounts) with respect to such posi-
tion meet the requirements of section 
860G(a)(1)(B)(i), and 
‘‘(ii) such position is not convertible 
(directly or indirectly) into stock of the 
issuer or any related person. 
‘‘(D) EXCEPTION
FOR
STRADDLES
CON-
SISTING OF QUALIFIED COVERED CALL OPTIONS 
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AND
THE
OPTIONED
STOCK.—Subparagraph 
(A) shall not apply to any position which is part 
of a straddle if— 
‘‘(i) all the offsetting positions which 
are part of such straddle consist of 1 or 
more qualified covered call options (as de-
fined in paragraph (6)) and the stock to be 
purchased from the taxpayer under such 
options, and 
‘‘(ii) such straddle is not part of a 
larger straddle. 
‘‘(3) APPLICATION
TO
BUILT-IN
LOSS
POSI-
TIONS.— 
‘‘(A) IN
GENERAL.—In the case of any 
built-in loss position to which subsection (a) ap-
plies by reason of paragraph (1), any gain or 
loss realized under subsection (a)(1) shall be 
properly adjusted so as not to take into account 
the loss referred to in subparagraph (B) with 
respect to such position. 
‘‘(B) BUILT-IN LOSS POSITION.—For pur-
poses of subparagraph (A), the term ‘built-in 
loss position’ means any position (other than a 
derivative to which subsection (a) applies) with 
respect to which a loss would be realized if such 
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position were sold for its fair market value at 
the time that the straddle is established with 
respect to such position. 
‘‘(4) HOLDING PERIOD OF NON-DERIVATIVES.— 
For purposes of section 1222, in the case of any po-
sition to which subsection (a) applies by reason of 
paragraph (1), the holding period of such position 
shall not include— 
‘‘(A) the period during which subsection 
(a) applies to such position, and 
‘‘(B) in the case of a built-in gain position, 
the period before such position is treated as 
sold under paragraph (2)(A). 
‘‘(5) STRADDLE.—For purposes of this sec-
tion— 
‘‘(A) the term ‘straddle’ has the meaning 
given such term by section 1092(c) applied by 
treating all offsetting positions as being with re-
spect to personal property, and 
‘‘(B) the term ‘position’ includes any deriv-
ative. 
‘‘(6) QUALIFIED COVERED CALL OPTIONS.— 
‘‘(A) IN GENERAL.—For purposes of para-
graph (2)(D), the term ‘qualified covered call 
option’ means any option granted by the tax-
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payer to purchase stock held by the taxpayer 
(or stock acquired by the taxpayer in connection 
with the granting of the option) but only if— 
‘‘(i) such option is traded on a na-
tional securities exchange which is reg-
istered with the Securities and Exchange 
Commission or other market which the 
Secretary determines has rules adequate to 
carry out the purposes of this paragraph, 
‘‘(ii) such option is granted— 
‘‘(I) more than 30 days before 
the day on which the option expires, 
and 
‘‘(II) not more than 90 days be-
fore the day on which the option ex-
pires, 
‘‘(iii) such option is not granted by an 
options dealer (as defined in subparagraph 
(B)) in connection with such dealer’s activ-
ity of dealing in options, and 
‘‘(iv) gain or loss with respect to such 
option would not be ordinary income or 
loss if determined without regard to this 
section. 
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‘‘(B) OPTIONS DEALER.—For purposes of 
subparagraph (A), the term ‘options dealer’ 
means— 
‘‘(i) any person registered with an ap-
propriate national securities exchange as a 
market maker or specialist in listed op-
tions, and 
‘‘(ii) to the extent provided by the 
Secretary consistent with the purposes of 
this paragraph, any person whom the Sec-
retary determines performs functions simi-
lar to the persons described in clause (i). 
‘‘(C) REGULATIONS.—The Secretary shall 
prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this 
paragraph and paragraph (2)(D). Such regula-
tions may include modifications to the provi-
sions of this paragraph and paragraph (2)(D) 
which are appropriate to take account of 
changes in the practices of option exchanges or 
to prevent the use of options for tax avoidance 
purposes. 
‘‘(d) TERMINATIONS, ETC.— 
‘‘(1) IN
GENERAL.—The rules of subsections 
(a) and (b) shall also apply to the termination (or 
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transfer) during the taxable year of the taxpayer’s 
obligation (or rights) with respect to a derivative by 
offsetting, by taking or making delivery, by exercise 
or being exercised, by assignment or being assigned, 
by lapse, by expiration, by settlement, or otherwise. 
‘‘(2) MARK TO MARKET OF ALL POSITIONS IN 
STRADDLE
IF
ANY
POSITION
TERMINATED
OR 
TRANSFERRED.—If paragraph (1) applies with re-
spect to any position which is part of a straddle, the 
rules of subsections (a) and (b) shall apply to every 
position which is part of such straddle. 
‘‘(e) DETERMINATION OF FAIR MARKET VALUE.— 
For purposes of this section— 
‘‘(1) TERMINATIONS, ETC.—For purposes of 
subsection (d), fair market value shall be determined 
at the time of the termination (or transfer). 
‘‘(2) BLOCKAGE FACTOR NOT TAKEN INTO AC-
COUNT.—To the extent provided in regulations pre-
scribed by the Secretary, fair market value shall be 
determined without regard to any premium or dis-
count based on the proportion of the total available 
trading units which are held. 
‘‘(f) COORDINATION WITH CERTAIN RULES.—The 
rules of sections 263(g) and 263A shall not apply to any 
derivative or other position to which subsection (a) applies, 
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and section 1091 shall not apply (and section 1092 shall 
apply) to any loss recognized under subsection (a). 
‘‘SEC. 486. DERIVATIVE DEFINED. 
‘‘(a) IN GENERAL.—For purposes of this part, except 
as otherwise provided in this section, the term ‘derivative’ 
means any contract (including any option, forward con-
tract, futures contract, short position, swap, or similar 
contract) the value of which, or any payment or other 
transfer with respect to which, is (directly or indirectly) 
determined by reference to one or more of the following: 
‘‘(1) Any share of stock in a corporation. 
‘‘(2) Any partnership or beneficial ownership 
interest in a partnership or trust. 
‘‘(3) Any evidence of indebtedness. 
‘‘(4) Except as provided in subsection (d), any 
real property. 
‘‘(5) Any commodity which is actively traded 
(within the meaning of section 1092(d)(1)). 
‘‘(6) Any currency. 
‘‘(7) Any rate, price, amount, index, formula, or 
algorithm. 
‘‘(8) Any other item as the Secretary may pre-
scribe. 
Such term shall not include any item described in para-
graphs (1) through (8). 
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‘‘(b) EXCEPTIONS.— 
‘‘(1) CERTAIN REAL PROPERTY.— 
‘‘(A) IN GENERAL.—For purposes of sub-
section (a)(4), the term ‘real property’ shall not 
include— 
‘‘(i) a tract of real property (as de-
fined in section 1237(c)), or 
‘‘(ii) any real property which would be 
property described in section 1221(a)(1) 
with respect to the taxpayer if held directly 
by the taxpayer. 
‘‘(B) REGULATIONS.—The Secretary shall 
prescribe regulations or other guidance under 
which multiple tracts of real property may be 
treated as a single tract of real property for 
purposes of subparagraph (A)(i) if the contract 
referred to in subsection (a) is of a type which 
is designed to facilitate the acquisition or dis-
position of such real property. 
‘‘(2) HEDGING TRANSACTIONS.— 
‘‘(A) IN GENERAL.—For purposes of this 
part, the term ‘derivative’ shall not include any 
contract which is part of a hedging transaction 
(as defined in section 1221(b)). 
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‘‘(B) 
SECTION
988
HEDGING
TRANS-
ACTIONS.—For exception for section 988 hedg-
ing transactions, see section 988(d)(1). 
‘‘(3) SECURITIES LENDING, SALE-REPURCHASE, 
AND
SIMILAR
FINANCING
TRANSACTIONS.—To the 
extent provided by the Secretary, for purposes of 
this part, the term ‘derivative’ shall not include the 
right to the return of the same or substantially iden-
tical securities transferred in a securities lending 
transaction, sale-repurchase transaction, or similar 
financing transaction. 
‘‘(4) OPTIONS RECEIVED IN CONNECTION WITH 
THE PERFORMANCE OF SERVICES.—For purposes of 
this part, the term ‘derivative’ shall not include any 
option described in section 83(e)(3) received in con-
nection with the performance of services. 
‘‘(5) INSURANCE CONTRACTS, ANNUITIES, AND 
ENDOWMENTS.—For purposes of this part, the term 
‘derivative’ shall not include any insurance, annuity, 
or endowment contract issued by an insurance com-
pany to which subchapter L applies (or issued by 
any foreign corporation to which such subchapter 
would apply if such foreign corporation were a do-
mestic corporation). 
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‘‘(6) DERIVATIVES WITH RESPECT TO STOCK 
OF
MEMBERS
OF
SAME
WORLDWIDE
AFFILIATED 
GROUP.—For purposes of this part, the term ‘deriv-
ative’ shall not include, and subsections (c) and 
(d)(2) of section 485 shall not apply to, any deriva-
tive (determined without regard to this subsection) 
with respect to stock issued by any member of the 
same worldwide affiliated group (as defined in sec-
tion 864(f)) in which the taxpayer is a member. 
‘‘(7) COMMODITIES USED IN NORMAL COURSE 
OF TRADE OR BUSINESS.—For purposes of this part, 
the term ‘derivative’ shall not include any contract 
with respect to any commodity if— 
‘‘(A) such contract requires physical deliv-
ery with the option of cash settlement only in 
unusual and exceptional circumstances, and 
‘‘(B) such commodity is used (and is used 
in quantities with respect to which such deriva-
tive relates) in the normal course of the tax-
payer’s trade or business (or, in the case of an 
individual, for personal consumption). 
‘‘(c) CONTRACTS WITH EMBEDDED DERIVATIVE 
COMPONENTS.— 
‘‘(1) IN GENERAL.—If a contract has derivative 
and nonderivative components, then each derivative 
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component shall be treated as a derivative for pur-
poses of this part. If the derivative component can-
not be separately valued, then the entire contract 
shall be treated as a derivative for purposes of this 
part. 
‘‘(2) EXCEPTION FOR CERTAIN EMBEDDED DE-
RIVATIVE COMPONENTS OF DEBT INSTRUMENTS.—A 
debt instrument shall not be treated as having a de-
rivative component merely because— 
‘‘(A) such debt instrument is denominated 
in a nonfunctional currency (as defined in sec-
tion 988(c)(1)(C)(ii)), 
‘‘(B) payments with respect to such debt 
instrument are determined by reference to the 
value of a nonfunctional currency (as so de-
fined), or 
‘‘(C) such debt instrument is a convertible 
debt instrument, contingent payment debt in-
strument, a variable rate debt instrument, an 
integrated debt instrument, an investment unit, 
a debt instrument with alternative payment 
schedules, or other debt instrument with respect 
to which the regulations under section 1275(d) 
apply. 
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‘‘(d) TREATMENT OF AMERICAN DEPOSITORY RE-
CEIPTS AND SIMILAR INSTRUMENTS.—Except as other-
wise provided by the Secretary, for purposes of this part, 
American depository receipts (and similar instruments) 
with respect to shares of stock in foreign corporations 
shall be treated as shares of stock in such foreign corpora-
tions.’’. 
(b) COORDINATION WITH RULES FOR DEALERS AND 
TRADERS.— 
(1) DERIVATIVES
NOT
TREATED
AS
SECURI-
TIES.—Section 475(c)(2) is amended— 
(A) by adding ‘‘and’’ at the end of sub-
paragraph (C), 
(B) by striking subparagraphs (D) and (E) 
and by redesignating subparagraph (F) as sub-
paragraph (D), 
(C) by striking ‘‘subparagraph (A), (B), 
(C), (D), or (E)’’ in subparagraph (D)(i), as so 
redesignated, and inserting ‘‘subparagraph (A), 
(B), or (C)’’, and 
(D) by amending the last sentence to read 
as follows: ‘‘Such term shall not include any po-
sition to which section 485(a) applies.’’ 
(2) DERIVATIVES NOT TREATED AS COMMOD-
ITIES.—Section 475(e)(2) is amended— 
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(A) by adding ‘‘and’’ at the end of sub-
paragraph (A), 
(B) by striking subparagraphs (B) and (C) 
and by redesignating subparagraph (D) as sub-
paragraph (B), and 
(C) by striking ‘‘subparagraph (A), (B) or 
(C)’’ in subparagraph (B)(i), as so redesig-
nated, and inserting ‘‘subparagraph (A)’’. 
(3) CONFORMING AMENDMENTS.— 
(A) Section 475(b) is amended by striking 
paragraph (4). 
(B) Section 475(d)(2)(B) is amended— 
(i) 
by 
striking 
‘‘subsection 
(c)(2)(F)(iii)’’ and inserting ‘‘subsection 
(c)(2)(D)(iii)’’, and 
(ii) by striking ‘‘subsection (c)(2)(F)’’ 
and inserting ‘‘subsection (c)(2)(D)’’. 
(C) Section 475(f)(1)(D) is amended by 
striking ‘‘subsections (b)(4) and (d)’’ and in-
serting ‘‘subsection (d)’’. 
(c) COORDINATION WITH STRADDLE RULES.— 
(1) IN GENERAL.—Section 1092(e) is amended 
to read as follows: 
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(B) Section 1221(b) is amended by striking 
paragraph (1). 
(7) Section 4975(f)(11)(D) is amended by 
striking clauses (i) and (ii) and inserting the fol-
lowing: 
‘‘(i) SECURITY.—The term ‘security’ 
means any security described in section 
475(c)(2) (without regard to subparagraph 
(D)(iii) thereof) and any derivative with re-
spect to such a security (within the mean-
ing of section 486). 
‘‘(ii) COMMODITY.—The term ‘com-
modity’ means any commodity described in 
section 475(e)(2) (without regard to sub-
paragraph (B)(iii) thereof) and any deriva-
tive with respect to such a commodity 
(within the meaning of section 486).’’. 
(8) The table of parts for subchapter E of 
chapter 1 is amended by adding at the end the fol-
lowing new item: 
‘‘PART IV. DERIVATIVES’’. 
(g) EFFECTIVE DATES.—The amendments made by 
this section shall apply to— 
(1) taxable years ending after December 31, 
2014, in the case of property acquired and positions 
established after December 31, 2014, and 
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