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within the meaning of 26 C.F.R. section 1.1221-2 (1996) (former
section 1.1221-2). Respondent contends, among other things, that
Mr. Welter’s commodities trading activity is not described in
former section 1.1221-2.
B. Law
The term “capital asset” includes all classes of property
not specifically excluded by section 1221. Sec. 1.1221-1(a),
Income Tax Regs. Section 1221, as in effect during the years at
issue, did not contain a specific exclusion relating to hedging
transactions. However, former section 1.1221-2(a)(1) provided
that, notwithstanding section 1.1221-1(a), Income Tax Regs., the
term “capital asset” does not include property that is part of a
hedging transaction.2 Former section 1.1221-2(b) defined the
term “hedging transaction” as follows:3
(b) Hedging transaction defined. A hedging
transaction is a transaction that a taxpayer enters
into in the normal course of the taxpayer’s trade or
business primarily –
(1) To reduce risk of price changes or
currency fluctuations with respect to ordinary
2 That regulatory exclusion was codified in 1999. See sec.
1221(a)(7) and (b)(2), added by the Ticket to Work and Work
Incentives Improvement Act of 1999, Pub. L. 106-170, sec.
532(a)(3), 113 Stat. 1928.
3 Former sec. 1.1221-2(g)(2)(i) provided that, in the case
of transactions entered into prior to Oct. 1, 1994, taxpayers
could rely on the rules of sec. 1.1221-2T, Temporary Income Tax
Regs., 58 Fed. Reg. 54037 (Oct. 20, 1993) (former sec. 1.1221-
2T). The definitions of “hedging transaction” in former sec.
1.1221-2(b) and former sec. 1.1221-2T(b)(1), respectively, are
substantially identical.
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