Knowledge Center

Wednesday, July 22, 2015

HMB's Marilyn Wethekam Quoted in State Tax Notes on a Proposed Regulation Regarding the Use of Hedging Transactions in Apportionment

"Illinois DOR Proposes Reg on Using Hedging Transactions in Apportionment"

State Tax Notes, July 22, 2015

by David Sawyer

The Illinois Department of Revenue on July 17 issued a proposed regulation that would set forth its policy on when taxpayers may include in the sales factor income derived from hedging transactions.

The proposed regulation  addresses three types of hedging transactions, stating that two of these must be entirely excluded from a taxpayer's sales factor. The third type, however, would be included in both the numerator and denominator of the sales factor to the extent that inclusion reflects the marketplace for the taxpayer's goods and services.

The regulation does not, however, address the treatment of hedging transactions a company may use purely as part of its treasury function...

To clarify which hedges should be included in the sales factor, the department's proposed regulation includes several examples. One stipulates that the gain or loss from a hedge of raw material used by a manufacturer would not be included in the sales factor...

Marilyn Wethekam of Horwood Marcus & Berk Chtd. questioned whether the issues addressed by the regulation are so prevalent or troubling that they warrant such detailed and technical guidance.

She added that the regulation would be included under the alternative apportionment section of the Illinois Administrative Code, implying that the standard apportionment method does not accurately reflect these types of transactions. "I am not sure that has actually been shown," Wethekam said.

Finally, she said, while it is clear from the examples that taxpayers would be required to treat hedged transactions as a single transaction, it is not clear how a gain recognized on the hedging transaction will be treated for tax base purposes.

"If that gain is in the tax base then it would appear that it should be included in the factor. Similarly, if the loss is adjusting the receipts in the factor, that loss should adjust the tax base as well," Wethekam said.

Copyright 2015 Tax Analysts. Reprinted with permission.

 

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