Vanderbilt Journal of Transnational Law

First Page



In 1967 the British government devalued the pound as against the dollar. The year 1969 witnessed the floating of the German mark. More recently the dollar has fluctuated widely in international money markets. Under presently accepted accounting principles United States multinational corporations are required to convert their foreign assets and liabilities into dollars at the year's end rate of exchange. When a foreign currency is devalued against the dollar, the value of that foreign subsidiary's assets also declines. In a corporation's consolidated financial statement such a drop in value may distract investors from the corporation's operating successes, with a corresponding loss of prestige in the investment community. The corporate response to this dilemma has been to "hedge" against currency devaluations by making forward purchases of currency futures contracts. This paper examines the proper tax characterization of gains and losses produced by currency futures hedging. To benefit from tax advantages, corporations attempt to characterize gains and losses from hedging activities as either ordinary or capital, depending on their particular financial situation. Wrestling with this problem in Hoover Co. and American Home Products Corp. v. United States, the courts refined and clarified holdings from the earlier related cases of Corn Products Refining Co. v. Commissioner and International Flavors & Fragrances Inc. v. Commissioner.