SECTION 2. BACKGROUND

Under § 1.1221–2(b), a transaction is a hedging transaction only if (among other things) the transaction is entered into primarily to reduce the taxpayer’s risk. In general, under § 1.1221– 2(d)(1), if the taxpayer is a member of a consolidated group, the risk of all of the members of the group is considered in determining whether a transaction reduces the taxpayer’s risk (the singleentity approach). Under § 1.1221–2(d)(2), however, a consolidated group can elect out of single-entity treatment by making a separate-entity election.

Although § 1.1221–2 is generally retroactive, the single-entity approach of § 1.1221–2(d)(1) applies only to transactions entered into on or after March 8, 1996. A consolidated group, however, may elect to apply the singleentity approach of the regulations retroactively. If the group does so, the single-entity approach applies to all transactions entered into in the election year and in all subsequent consolidated return years until the effective date of any separate-entity election made by the group under § 1.1221–2(d)(2). Section 1.1221–2(g)(5)(i).