PORTFOLIO

Tax Aspects of Foreign Currency (Portfolio 921)

Tax Management Portfolio, Tax Aspects of Foreign Currency, examines U.S. taxation of transactions translating foreign currency into U.S. dollars.

Price: $400 Print

GET MORE WITH THE FULL PORTFOLIO LIBRARY

This Portfolio is part of the Premier International Tax Library, a comprehensive resource including nearly 100 international tax Portfolios, practice tools, primary sources and timely news.

FREE TRIAL

DESCRIPTION

The Tax Reform Act of 1986 added to the Internal Revenue Code a comprehensive set of rules governing U.S. taxation of gain or loss arising from fluctuations in the value of foreign currency and the conversion of foreign currency into U.S. dollars. Entering a then-uncodified area, the 1986 Act created Subpart J of the Code to settle conflicting and confused decisional and administrative law. Subpart J (Code §§985–989) and its accompanying regulations provide a set of comprehensive and cohesive rules which govern the taxation of foreign currency gain or loss and certain transactions in which foreign currency plays a part. To do so, it works with three key concepts: (i) functional currency, (ii) transactions in foreign currency, and (iii) foreign currency translation.
The rules of Subpart J control the timing, amount, character, and source of exchange gain or loss in relation to “section 988 transactions” (certain transactions in relation to which the amount the taxpayer is entitled to receive, or is required to pay, is determined in terms of, or by reference to, the value of a “nonfunctional currency”).
Most of the law to date is in Code Subpart J and its enabling regulations. Although together they provide notable guidance, the law in the area is in a state of ongoing development. Little decisional law exists in relation to Subpart J, regulations in a number of areas are still in the proposed stage, or have not yet been proposed, and there are few post-1986 Act administrative rulings or other pronouncements. At the same time, transactions involving U.S. persons and foreign currency are increasing in number and sophistication. Thus the subject is one in which detailed knowledge and skill, brought to bear both in the planning and compliance stages of tax practice, can provide affected taxpayers with useful benefits.


Buy Tax Aspects of Foreign Currency (Portfolio 921) now


AUTHORS

Tax Aspects of Foreign Currency was authored by the following experts.
MICHAEL MULRONEY
Michael Mulroney, B.S.C., University of Iowa (1954); J.D., Harvard Law School (1959); Order of Coif; Professor of Law (1988-present), Director, Graduate Tax Program, Villanova School of Law (1988-2007); Adjunct Professor, Georgetown University Graduate Tax Program (1986-present); Partner, Lee, Toomey & Kent, Washington, D.C. (1969-1988) (Associate 1965-1969); Appellate Attorney, Tax Division, U.S. Department of Justice, Washington, D.C. (1961-1965); Attorney Advisor, U.S. Tax Court (1959-1961). Teacher: Federal taxation; professional responsibility; faculty advisor, Villanova Law School Tax Clinic. Admitted to practice: District of Columbia; Iowa; U.S. Supreme Court; Iowa Supreme Court; U.S. Circuit Courts of Appeal for the Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth and Tenth Circuits; U.S. Tax Court; U.S. District Court for the District of Columbia; District of Columbia Court of Appeals. Professional organizations: District of Columbia Bar; Iowa State Bar Association; Federal Bar Association; American Bar Association, Section of Taxation (Tax Lawyer Committee, former Managing Editor, The Tax Lawyer, Chair Annual Reports Subcommittee; Court Procedure Committee; Standards of Practice Committee; Teaching Taxation Committee; Committee on Government Submissions), Section of Legal Education and Admissions to the Bar; District of Columbia Bar (Tax Section); Federal Bar Association (Tax Section); Iowa Bar Association (Tax Section); Fellow, American College Tax Counsel; J. Edgar Murdock American Inn of Court (Founding Master); American Association of Law Schools (Tax Section); International Fiscal Association (U.S.A. Director); Washington Tax Lawyers' Study Group; Philadelphia Tax Conference (Director, Executive Committee); Reporter, Invitational Conference on Professionalism in Tax Practice (1993); Commentator, Statute of the Bar of the Republic of Belarus (CEELI); author of various books and tax articles. Competition license holder, Sports Car Club of America.

CLIFFORD E. MULLER
Clifford E. Muller, B.S., B.A., Bucknell University (magna cum laude 1978), Delta Mu Delta; J.D., George Washington University (with high honors 1981), Order of the Coif; Professional Lecturer in Law, George Washington University Law School, 1987–1990. Member, District of Columbia Bar Association; member, American Bar Association, Section of Taxation; Chairman, Subcommittee on International Financial Transactions; member, Committee on Foreign Activities of U.S. Taxpayers, Foreign Currency Subcommittee. Lecturer: World Trade Institute, New York, “Taxation of Foreign Currency” and “Foreign Currency Exposure Management.”

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. First Principles

B. Foreground and Background

II. Functional Currency

A. First Principles

B. Background and Overview

C. Definition of a Qualified Business Unit

1. First Principles

2. Separate and Clearly Identified Unit of a Trade or Business

a. Corporations as QBUs

b. Partnerships, Trusts and Estates as QBUs

c. Activities Qualifying as a QBU

d. Effectively Connected Income

e. Activities Engaged in by Individuals

f. Effective Date

3. Separate Books and Records Requirement

D. Definition of Functional Currency

1. First Principles

2. U.S. Dollar Required as Functional Currency in Certain Cases

a. Operations Not Treated as a QBU

b. Operations Primarily Conducted in U.S. Dollars

c. Residence of a QBU Is the United States

d. Currencies of Books and Records and Economic Environment Are Different

e. Effectively Connected Income or Loss

f. Hyperinflationary Currency

3. Determination of Functional Currency of QBUs Not Required to Use the U.S. Dollar

a. General

b. Economic Environment of a QBU

(1) Duration of Operations

(2) Inflation as a Factor

(3) Consistency Requirement

(4) Multiple Functional Currencies

(5) Relevance of U.S. GAAP to the Functional Currency Determination

c. Books and Records Requirement

(1) General

(2) Deemed Maintenance of Books and Records

d. Changed Circumstances

4. Special Rule for Foreign Corporations with Two or More QBUs Having Different Functional Currencies

5. Election to Treat the U.S. Dollar as Functional Currency of a QBU

a. Overview

b. Background of the U.S. Dollar Election

(1) Legislative History

(2) Regulations

(a) Taxable Years Beginning On or Before August 24, 1994

(b) Taxable Years Beginning After August 24, 1994

c. Operation of U.S. Dollar Election

d. Procedure for Electing U.S. Dollar as Functional Currency

(1) Branches of U.S. Persons

(2) Foreign Corporations and Branches of Foreign Corporations

e. Effect of U.S. Dollar Election

(1) General

(2) Conformity Rules

(3) Required Adjustments

E. Exception to the General Rule that Transactions Are Accounted for in Functional Currency

F. Functional Currency Treated as a Method of Accounting

1. Changes in Functional Currency as a Change in Method of Accounting

2. Adjustments with Respect to Changes in Functional Currency

a. General

b. Adjustments Required

(1) Recognition of Unrealized Exchange Gain or Loss on Certain § 988 Transactions

(2) New Functional Currency Basis and Other Items

(a) General Rule

(b) Application under U.S. Dollar Election Transition Rules

(3) Additional Adjustments with Respect to Branches and Corporations

(a) Branches

(i) Branch and Taxpayer Have Different Pre- and Post-Change Functional Currencies

(ii) Branch and Taxpayer Have the Same Post-Change Functional Currency

(iii) Branch and Taxpayer Have the Same Pre-Change but Different Post-Change Functional Currencies

(iv) Branch Adjustments Upon Change in Taxpayer's Functional Currency

(b) Corporations

c. Application of Regs. § 1.985-5 to the Initial Adoption of a Functional Currency

(1) General

(2) Interaction of Regs. § 1.985-5 and § 987 Transition Rules

III. Foreign Currency Transactions

A. First Principles

B. Background

C. Section 988 Foreign Currency Transactions

1. Definition of § 988 Transactions

a. First Principles

b. General Rules

(1) Functional and Nonfunctional Currency

(2) Summary of Items Covered by § 988

(a) Disposition of Nonfunctional Currency

(b) Debt Instruments

(c) Payable and Receivables

(d) Forward, Futures and Option Contracts

(3) Denomination

(4) De Minimis Exception

(5) Section 1256 and Definition of § 988 Transactions

(6) Intrataxpayer Transactions

(7) Commissioner's Authority to Require or Preclude § 988 Treatment

(8) Fair Market Value of § 988 Transactions

c. Acquisition and Disposition of Nonfunctional Currency

d. Acquiring or Becoming an Obligor Under a Debt Instrument

e. Payables, Receivables, Expenses, Income

f. Forward Contracts, Futures Contracts, Options, Warrants, or Similar Financial Instruments

2. Definition of Foreign Currency Gain or Loss

a. First Principles

b. General

c. Mark to Market Election for Nondealers

3. General Consequences of § 988 Transactions

a. Timing and Amount of Exchange Gain or Loss

(1) Realization and Recognition Principles

(2) The Separate Transaction or "Bifurcation" Principle Under § 988

(3) General Rule for Determining Applicable Exchange Rate

(a) Spot Rate

(b) Use of Spot Rate Conventions

(c) Determination of Spot Rate Where the Free Market Rate Differs from an Official Government-Established Rate

b. Character of Exchange Gain or Loss

(1) General

(2) Interest Income or Expense Characterization Under § 988

(3) Pre-1986 Tax Reform Act Law

c. Source of Exchange Gain or Loss

(1) General

(2) Determination of Residence for Purposes of the § 988 Sourcing Rule

(3) Pre-1986 Tax Reform Act Law

d. Effective Dates

4. Disposition of Nonfunctional Currency

a. General

b. Basis Determination

(1) General Rule

(2) Special Rule for Taxpayers Using Spot Rate Convention

(3) Determining the Basis of Nonfunctional Currency Withdrawn from an Account with a Bank or Other Financial Institution

5. Realization of Exchange Gain or Loss from the Disposition of Nonfunctional Currency

a. General

b. Realization Rule for Exchanging Nonfunctional Currency for Property

c. Recognition of Gain or Loss on the Disposition of Nonfunctional Currency

(1) General Rule

(2) Section 1031 Implications

(3) Exceptions: Nonfunctional Currency Denominated Exchanges, Deposits, Withdrawals, Transfers, and Certificates of Deposit

(4) Demand Account Interest

d. Purchase and Sale of Stock or Securities Traded on an Established Securities Market

6. Accounts Payable and Accounts Receivable

a. General

b. Realization and Recognition

(1) General

(2) Section 267: Foreign Currency Exchange Losses Between Certain Related Persons

(a) General

(b) Application to the Holder of an Account Receivable

(c) Application to the Holder of an Account Payable

(3) Determination of Exchange Gain or Loss with Respect to Items of Gross Income or Receipts

(4) Determination of Exchange Gain or Loss with Respect to an Item of Expense

7. Foreign Currency Debt Instruments

a. General

b. Section 988 Debt Instruments

(1) General

(2) Contingent Payment and Multi-Currency Debt Instruments

c. Exchange Gain or Loss with Respect to Debt Instruments: Realization and Recognition Principles

(1) Nonfunctional Currency Principal Amount

(a) General

(b) Deemed Realization Events

(i) Conversion of Debt Instrument into Functional Currency

(ii) Other Deemed Realization Events

(2) Nonfunctional Currency Accrued Interest Income and Expense

(3) Section 267-Exchange Losses Between Certain Related Parties

(a) Application to the Lender

(b) Application to the Borrower

(4) Section 1092

(5) Cancellation of Indebtedness Income

(6) Treatment of Nonfunctional Currency Debt Exchanged for Stock of the Obligor

(7) Treatment of Debt-for-Debt Exchanges

(8) Treatment of Replacement of Nonfunctional Currency-Related Party Debt with a Debt of the Same or Different Related Person

d. Amount of Exchange Gain or Loss with Respect to Principal and Interest

(1) Determining Amount of Exchange Gain or Loss on Repayment or Disposition of Principal

(a) Amount as to the Holder

(b) Amount as to the Obligor: § 988

(c) Amount as to the Obligor: Pre-§ 988 Treatment

(d) The Netting Rule for Exchange Gain or Loss on Payment or Disposition of a Debt Instrument

(2) Determining the Amount of Interest Income or Expense and Exchange Gain or Loss Associated Therewith

(a) Translation of Interest Income or Expense: General Rule

(b) Interest Income or Expense Which Is Not Accrued Prior to Receipt or Payment

(c) Interest Income or Expense Which Is Accrued Prior to Receipt or Payment

e. Character of Exchange Gain or Loss with Respect to Debt Instruments

(1) Nonfunctional Currency Loans

(a) Section 988

(b) Pre-1986 Tax Reform Act Law: Hedging Transactions

(2) Nonfunctional Currency Debt Obligations

(a) Section 988

(b) Pre-1986 Tax Reform Act Law

f. Source of Exchange Gain or Loss with Respect to Debt Instruments

(1) Nonfunctional Currency Loans

(a) Section 988

(b) Special Resourcing Rule: Related Party Loans

(c) Pre-1986 Tax Reform Act Law

(2) Nonfunctional Currency Borrowings

(a) Section 988

(b) Pre-1986 Tax Reform Act Law

g. Original Issue Discount

h. Payment Ordering Rules: Principal, Interest and OID

i. Treatment of Amortizable Bond Premium

j. Treatment of Market Discount

8. Obligations Denominated in Hyperinflationary Currencies

a. Section 988 Transactions in Hyperinflationary Currencies

b. The Nature of the Problem: Potential Distortions

(1) General

(2) Congressional Consideration

c. Regulations: Year-End Adjustments

d. Regulations: Offsets

e. Hyperinflationary Currencies and Controlled Foreign Corporations

(1) The Potential Problem: Distortions

(2) Application of the Regulations

f. Section 267: Exchange Losses Between Members of an Affiliated Group

9. Forward, Futures, Options and Similar Financial Instruments

a. General Rules

(1) Definitions

(a) Forward and Spot Contracts

(b) Futures Contracts

(c) Option Contracts

(d) Similar Financial Instruments

(2) Underlying Property Requirement

(3) Interaction Between § § 988 and 1256

b. Realization and Recognition Principles

(1) Section 988

(a) In General

(b) Sale or Other Termination

(c) Making or Taking Delivery

(d) Offset

(e) Extension of Maturity

(f) Mark-to-Market Treatment

(g) Special Realization Rules for Hyperinflationary Denominated Contracts

(2) Pre-1986 Tax Reform Act Law

c. Amount of Exchange Gain or Loss

d. Character of Exchange Gain or Loss

(1) Section 988

(a) General

(b) Electing Capital Characterization

(i) Nature of the Election

(ii) Procedure for Making Election

(iii) Special Rule for Straddles

(2) Pre-1986 Tax Reform Act Law

(a) General

(b) Classification of Capital Gain or Loss as Short-Term or Long-Term

e. Source of Exchange Gain or Loss

(1) Section 988 Rules

(2) Pre-1986 Tax Reform Act Law

f. Special Rules for Regulated Futures Contracts and Nonequity Options

(1) Electing § 988 Treatment

(2) Election Procedure

(3) Time for Making the Election

(4) Late Election

(5) Transition Rule

(6) Effective Date

g. Special Rules for Qualified Funds Buying and Selling Forwards, Futures or Options with Respect to Commodities

(1) In General

(2) Definition of Qualified Fund

(3) Election Procedure

(4) Time for Making the Election

(5) Effect of the Election

(6) Consequences of Failing to Qualify as a Qualified Fund

(7) Transition Rule

10. Currency Swaps and Other Notional Principal Contracts

a. General

b. Section 988 Notional Principal Contracts (Other than Currency Swaps)

(1) Definition of Notional Principal Contract

(2) Exchange Gain or Loss with Respect to Notional Principal Contracts: Realization and Recognition Principles

(3) Amount of Exchange Gain or Loss on Notional Principal Contracts

(4) Character of Exchange Gain or Loss on Notional Principal Contracts

(5) Source of Exchange Gain or Loss

c. Currency Swaps

(1) General

(2) Characterization of Currency Swaps: Pre-§ 988

(3) Currency Swaps under the Regulations

(4) Characterization and Consequences of Currency Swaps

(a) Hypothetical Debt Instrument Characterization

(b) Exceptions to the General Rules

(c) Special Rule for Swap Premium or Discount: The Treatment of Off-Market Currency Swaps

(d) Anti-Abuse Rules

(e) Swaps with Significant Nonperiodic Interim Payments

(f) Special Realization Rules for Hyperinflationary Denominated Currency Swaps

(5) Character of Exchange Gain or Loss on Currency Swaps

(6) Source of Exchange Gain or Loss on Currency Swaps

(7) Withholding Tax Implications of Currency Swap Payments

(8) Effective Dates for Currency Swap Provisions

11. Special Rules for Foreign Currency Transactions of an Individual

D. Non-Section 988 Foreign Currency Transactions

1. General

a. Non-Section 988 Transactions Described

b. Preemptive Effect of § 988?

2. Stock Transactions

a. General: Mariani Frozen Foods, Inc.

b. Exchange Gain or Loss

IV. Hedging Transactions

A. First Principles

B. Overview

1. Pre-1986 Tax Reform Act Consequences

2. Fully Integrated Transactions under § 988

3. Consistent Treatment of Partial Hedges

4. Non-Section 988(d) Hedging Transactions

C. Hedging Transactions within § 988(d)

1. Definition of 988 Hedging Transactions

2. Advance Rulings for Net Hedging and Anticipatory Hedging

3. Section 988(d) Hedging Transactions: Hedged Debt Instruments

a. Background and Effective Date

b. Debt Instrument Hedges: Requirements for Integrated Treatment

(1) General

(2) Definitions

(a) Qualified Hedging Transaction

(b) Integrated Economic Transaction

(c) Qualifying Debt Instrument

(d) Section 1.988-5(a) Hedge

(e) Nonfunctional Currency Hedges

(i) Hedged Qualified Payment

(ii) Qualified Payment

(iii) Hedge

(iv) Special Rules

(3) Currency Swap Contracts

(4) Required Characteristics of a Qualified Hedging Transaction

(a) Partial Hedges

(b) Early and Late Hedges

(c) Related Parties and Centralized Hedging

(d) Identification Requirements

c. Nonfunctional Currency Debt Instrument Hedges: Consequences of Integrated Treatment

(1) General

(2) Interest Income, Expense and Original Issue Discount

(3) Integrated vs. Separate Transaction Treatment: Timing, Character, Source, and Allocation and Apportionment of Expense

(4) Example of Integrated vs. Separate Transaction Treatment

(5) Legging In and Legging Out of a Hedged Debt Instrument

(a) Legging In

(b) Legging Out

4. Section 988 Hedging Transactions: Hedged Executory Contracts

a. Background and Effective Date

b. Executory Contract Hedges: Requirements for Integrated Treatment

(1) General

(2) Definitions

(a) Executory Contract

(b) Hedge

(c) The Accrual Date

(d) Payment Date

(3) Required Characteristics of a Hedged Executory Contract

(a) Partial Hedges

(b) Early and Late Hedges

(c) Related Parties and Centralized Hedging

(d) Series of Hedges and Historical Rate Rollovers

(i) Series of Hedges

(ii) Historical Rate Rollovers: Special Rule for Forward Contract Hedges

(e) Identification Rules for Hedged Executory Contracts

c. Hedged Executory Contracts: Consequences of Integrated Treatment

(1) General

(2) Partial Integration

(3) Disposition of a Hedge or Executory Contract Before or After the Accrual Date

(4) Integrated vs. Separate Transaction Treatment: Timing, Character, Source, and Allocation and Apportionment of Expense

(a) Timing

(b) Character of Income as Ordinary or Capital

(c) Source of Income, and Allocation and Apportionment of Loss or Expense

(d) Special Rule: Treatment of Interest on Deposits of Nonfunctional Currency

(5) Examples and Commentary

5. Hedges to Reduce Risk of Currency Fluctuation Between Trade and Settlement Dates as to Cash Basis Taxpayer's Purchase or Sale of Publicly Traded Stock

a. General Rule and Effective Date

b. Definition of Hedge

c. Requirements for Integrated Treatment

6. Integration of Hedges of Dividends, Rents, and Royalties

7. Mark-to-Market Method of Accounting Election for Nondealers in Functional Currency

D. Balance Sheet Hedges

1. Background

2. U.S. Tax Considerations

a. Branches vs. Subsidiaries

b. Timing of Income or Loss from Balance Sheet Hedging Transactions

(1) Section 1256

(2) Section 1092

(3) Section 988(d)

c. Character of Income or Loss on Balance Sheet Hedging Transactions

d. Source of Income or Loss on Balance Sheet Hedges

(1) General

(2) Section 988(d)

E. Hedging Transactions and the Corn Products Doctrine

1. Overview

2. Regs. § 1.1221-2

a. General

b. Hedging Transaction

c. Ordinary Property and Obligations

d. Identification and Record Keeping Requirements

V. Subpart F

A. First Principles

B. Nonfunctional Currency Transaction Gains and Losses

1. Pre-1986 Tax Reform Act Law

2. The 1986 Act Approach

3. Applicable Subpart F Regulations: § 988 Transactions

a. General Rules

b. Income and Loss

c. Exclusion for Ordinary Business Needs Transactions

d. Election to Include in Another Subpart F Category

e. Gain, Loss and Income Not Covered

(1) Capital Gain or Loss

(2) Non-Section 988 Items

(3) QBUs Using DASTM

(4) Application of Commodity Rule

(a) Qualified Active Sales Transactions

(b) Hedging Exception to Commodity Rule

C. Nonfunctional Currency Translation Gains and Losses

1. Prior Law

2. Profit and Loss Method and U.S. Dollar Election

3. Subpart F Regulations

VI. Sections 1092 and 263(g)

A. First Principles

B. Covered Transactions: § 1092

C. Loss Deferral Rules

D. Capitalization of Interest and Carrying Charges: § 263(g)

E. Exceptions

1. Section 1092(e) Hedging Exception

2. Section 988 Hedging Transactions

3. Identified Straddle Exception

4. Section 1256 Contract Exception

VII. Section 1256 Transactions

A. First Principles

B. Section 1256 Contracts

1. In General

2. Regulated Futures Contracts

3. Foreign Currency Contracts

4. Nonequity Options

5. Dealer Equity Options

C. Mark-to-Market Treatment

D. Character and Source of Exchange Gain or Loss

E. Exceptions to § 1256 Treatment

1. Section 1256(e) Hedging Transactions

a. In General

b. Ordinary Income or Loss

c. Section 1256(f)(1)

d. Identification

2. Section 988 Hedging Transactions

3. Mixed Straddle Election

VIII. Foreign Currency Translation

A. First Principles

B. Background

C. Overview of Translation Rules Under Pre-1986 Act Law

1. Rules Applicable to Branches

a. Determination of Profit or Loss of Foreign Branch

(1) Net Worth Method

(2) Profit and Loss Method

(3) Specific Transactions Method

b. Foreign Tax Credit Considerations

2. Rules Applicable to Foreign Corporations

a. Translation of Earnings and Profits Distributions

(1) Noncontrolled Foreign Corporations

(2) Controlled Foreign Corporations

b. Foreign Tax Credit

D. Translation Rules After the 1986 Act

1. Rules Applicable to Branches

a. Overview of Changes

b. Reasons for Change

c. Determination of Branch Income or Loss

(1) In General

(2) Profit and Loss Method of Accounting for a QBU Branch

(3) Appropriate Exchange Rate for Translation of QBU Functional Currency Profit or Loss

(4) Special Translation Rule for Branches Electing to Credit Foreign Taxes

d. Gain or Loss on Branch Remittances

(1) General Rules

(2) Calculating Gain or Loss on Remittance

(a) In General

(b) Attribution of Remittance to Earnings Pool

(3) Anti-Abuse Rules and Other Issues Under Consideration

(4) Branch Terminations

(5) Application of § 987 to Branches of Foreign Corporations

(6) Other Rules Regarding Branch Remittances

e. Transition Rules for Branches Previously Using Pre-1987 Methods

f. Foreign Tax Credit Considerations

(1) General

(2) Rules Regarding Tax Payments

(3) Rules Regarding Tax Refunds

(4) Example Illustrating Translation Rules

(5) Post-1986 Foreign Tax Redeterminations

(6) Pre-1987 Foreign Tax Redeterminations

2. Rules Applicable to Foreign Corporations

a. Overview of 1986 Act Changes

b. Reasons for Changes

c. Translation of Actual and Deemed Distributions of Earnings and Profits

d. Exchange Gain or Loss on Actual and Deemed Distributions of Previously Taxed Income

(1) In General

(2) Determination of Exchange Gain or Loss

(3) Distributions of PTI Through Tiers of Related Entities

(4) Deemed Distributions of PTI in Connection with § 1248 Transactions

e. Special Rule Applicable to § 1504(d) Companies

f. Foreign Tax Credit Considerations

(1) Overview

(2) Reasons for Changes

(3) Detailed Analysis

(4) Post-1986 Foreign Tax Redeterminations

(a) General

(b) Adjustments on Account of Refunds of Foreign Taxes

(c) Adjustments on Account of Increased Foreign Tax Assessments

(d) Redetermination of U.S. Tax Liability Required in Certain Cases

(i) Deficit Created in Pool of Foreign Taxes

(ii) Operations in Hyperinflationary Currencies

(iii) Redeterminations Caused by Overaccruals

(iv) Redeterminations Involving Distributions of PTI from CFCs Operating Under Certain Integrated Systems of Taxation

(v) Redeterminations Involving Pre-1987 Earnings and Profits

3. Special Translation Rules Applicable to Operations in Hyperinflationary Economies

a. First Principles

b. Affected QBUs

c. DASTM Method Described

(1) General

(2) Conversion into U.S. Dollars

(3) Income Statement: Conforming Adjustments

(4) Dollar Transactions

(5) Computation of DASTM Gain or Loss

(6) Effect of DASTM on Gain or Loss, Gross Income, Taxable Income, or Earnings and Profits

(a) General

(b) Small QBU Simplified Method

(i) Qualification for Election

(ii) Method of Electing

(iii) Effect of Election

(c) Regular Method

d. Change from Dollar to Local Functional Currency When Hyperinflation Ceases

e. Early Transition Rules Applicable to Change to U.S. Dollar Functional Currency

f. Regulations Regarding Adjustments Required When Changing from Profit and Loss Method to DASTM

(1) Introduction

(2) Foreign Corporations

(a) Pre-1987 Earnings and Profits of All Foreign Corporations

(b) Post-1986 Earnings and Profits of Noncontrolled Foreign Corporations

(c) Post-1986 Undistributed Earnings of Controlled Foreign Corporations

(3) U.S. Shareholders of Controlled Foreign Corporations

(a) Computation of Subpart F Income Adjustment

(b) Foreign Tax Credit

(4) QBU Branches


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 H.R. Rep. No. 795, Miscellaneous Revenue Act of 1988 (H.R. 4333), 100th Cong., 2d Sess., 294-298 (July 26, 1988)

Worksheet 2 H.R. Rep. No. 1104 (Conf.), Technical and Miscellaneous Revenue Act of 1988 (H.R. 4333), 100th Cong., 2d Sess. I-201-205, II-187-195 (Oct. 21, 1988)

Worksheet 3 S. Rep. No. 445, Technical Corrections Act of 1988 (S. 2238) 100th Cong., 2d Sess. 309-313 (Aug. 3, 1988)

Worksheet 4 Joint Committee on Taxation, 100th Cong., 2d Sess. Description of the Technical Corrections Act of 1988, 313-317 (JCS-10-88, March 31, 1988)

Worksheet 5 H.R. Rep. No. 841 (Conf.), Tax Reform Act of 1986 (H.R. 3838), 99th Cong., 2d Sess. II-609, II-614-616, II-659-678 (Sept. 18, 1986)

Worksheet 6 H.R. Rep. No. 426, Tax Reform Act of 1985 (H.R. 3838), 99th Cong., 1st Sess. 449-481 (Dec. 7, 1985)

Worksheet 7 S. Rep. No. 313, Tax Reform Act of 1986 (H.R. 3838) 99th Cong., 2d Sess. 361-370, 433-474 (May 29, 1986)

Worksheet 8 Joint Committee on Taxation, 100th Cong., 1st Sess., General Explanation of the Tax Reform Act of 1986, 962, 964, 966, 973, 976, 1068-1114 (Jt. Comm. Print 1987)

Worksheet 9 Senate Committee on Finance, Deficit Reduction Act of 1984, S. Prt. 98-169 (Vol. I), 98th Cong., 2d Sess., Explanation of Provisions Approved by the Committee on March 21, 1984, 284-297 (April 2, 1984)

Worksheet 10 S. Rep. No. 144, Economic Recovery Tax Act of 1981 (H.J. Res. 266), 97th Cong., 1st Sess. 143-152, 155-161 (July 6, 1981)

Worksheet 11 Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of 1981, 97th Cong., 1st Sess. 294-304 (JCS-71-81, December 29, 1981)

Worksheet 12 127 Congressional Record S8643 (Daily Ed. July 28, 1981), Senate Colloquy on Technical Amendments to Tax Straddles in Economic Recovery Tax Act of 1981

Worksheet 13 U.S. Treasury Department, The President's Tax Proposals to the Congress for Fairness Growth and Simplicity, 409-422 (May, 1985)

Worksheet 14 U.S. Treasury Department, The Treasury Department Report to the President: Tax Reform for Fairness, Simplicity and Economic Growth, (Vol. 2), 371-372 (Nov. 1984)

Worksheet 15 U.S. Treasury Department, Discussion Draft on Taxing Foreign Exchange Gains and Losses, 45 Fed. Reg. 81,711-721 (Dec. 11, 1980)

Bibliography

OFFICIAL

Statutes:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Accounting Standards:

Treatises:

Articles:

1981

1983

1984

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2004

2007

2008