When a taxpayer disposes of (or changes a material term of) the hedge, the qualifying debt instrument is treated as sold for its fair market value (FMV) on the date of disposition of the hedge (the leg-out date), and any gain or loss on the qualifying debt instrument from the date of identification to the leg-out date is recognized on the leg-out date.
988-5T(a)(6)(ii)(C), which provides that if a hedge has more than one component "and at least one but not all of the components" are disposed of or otherwise terminated (or if part of any component of the hedge is terminated), then the date the component (or part of it) is disposed of or terminated is considered the leg-out date, and the qualifying debt instrument is treated as sold for its FMV on that date.
988-5T(a)(6)(ii)(D) states that, "[i]f the qualifying debt instrument is disposed of or otherwise terminated in whole or in part, the date of such disposition or termination shall be considered the leg-out date" (emphasis added), and the hedge (including all components making up the hedge in their entirety) is treated as sold for its FMV on the leg-out date, and gain or loss is realized and recognized accordingly.
The temporary regulations were meant to address a perceived abuse of taxpayers claiming a foreign currency loss by partially legging out of an integrated transaction, and they applied to leg-outs that occurred on or after Sept.
Following the temporary regulations, the final regulations apply to leg-outs (within the meaning of Regs.