IRS Defends Discretion to Withhold Section 1256 Exchange Designation for ISOs

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The IRS defended its decision not to designate independent system operators as qualified board or exchange (QBE) principally on the grounds that, as a matter of law, it is not required to designate any exchanges as QBEs under Category 3 of Section 1256 Contracts.

In Sesco Enterprises, LLC (Civ. No. 10-1470, D.N.J. Nov. 16, 2010), the Internal Revenue Service (IRS) defended its discretion to refrain from extending qualified board or exchange status under Code Section 1256 to U.S. Federal Energy Regulatory Commission (FERC)-regulated independent system operators. The district court dismissed the taxpayer’s claim that the IRS acted arbitrarily and capriciously when it refused to classify electricity derivatives that traded on independent system operators as “Section 1256 Contracts.

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