Esmark, Inc. is the parent of a group of corporations that files a consolidated income tax return. Esmark and its subsidiaries use a calendar tax year. One of its subsidiaries is Armour, Inc. Armour has a long history of making various meat products, including bacon. Because of the fluctuation in price and quantity in the pork belly market (the main ingredient in bacon), Armour frequently enters into futures contracts on the Chicago Board of Trade.

1. Can such contracts qualify as hedges under IRC §1221(7), and if so, how?

2. At the end of Esmark’s tax year (which is Armour’s, since the Esmark group files a consolidated income tax return) Armour has various futures contracts outstanding. Assuming all of the outstanding contracts are hedges under §1221(a)(7) and are traded on the Chicago Board of Trade, how are they taxed, if at all, at the end of the year?