(Archived Content)
Provides Certainty for Taxpayers & Closes Down Potential Loophole
Today the Treasury Department issued final tax regulations that relate to hedging transactions. A hedge is a transaction that allows a business to manage risks such as interest rate changes, price changes and currency fluctuations.
These regulations provide the certainty taxpayers need to engage in legitimate hedging activity that is essential to the running of a business today, stated Mark Weinberger, Treasury Assistant Secretary for Tax Policy. The regulations also close a loophole that some interpreted to allow taxpayers to avoid current tax on certain investments taxpayers used as hedges.
The regulations list a number of types of transactions as tax hedges, but also provide that certain types of hedges will not be considered tax hedges. For example, the regulations provide that an employer's investment hedging its deferred compensation obligations will not be treated as a tax hedge. Thus, the employer needs to pay tax currently on these investment earnings. Under the old rules, taxpayers had taken the position that the recognition of income from that type of investment could be delayed until the deferred compensation was paid to the employee. This non-hedge treatment will apply also to investments relating to other employee benefits.
It is improper to use the hedge rules to get full tax deferral on deferred executive compensation, explains Mr. Weinberger. Congress has set up a mechanism to get favored tax treatment for deferred compensation through qualified plans. It is not appropriate to use the hedging rules as a back door to obtain a favorable treatment for deferred compensation that Congress never intended.