[Federal Register Volume 66, Number 2 (Wednesday, January 3, 2001)]
[Rules and Regulations]
[Pages 279-280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32188]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8914]
RIN 1545-AX67


Definition of Hyperinflationary Currency for Purposes of Section 
988

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning when a 
currency will be considered hyperinflationary for purposes of section 
988. These final regulations are intended to prevent distortions 
associated with the computation of income and expense arising from 
section 988 transactions denominated in hyperinflationary currencies.

DATES: The effective date of this regulation is February 14, 2000.

FOR FURTHER INFORMATION CONTACT: John W. Rogers III of the Office of 
Associate Chief Counsel (International) at (202) 622-3870.

SUPPLEMENTARY INFORMATION:

Background

    This document contains final Income Tax Regulations (26 CFR part 1) 
under section 988 of the Internal Revenue Code (Code). On March 17, 
1992, the IRS and Treasury published final regulations (57 FR 9172) 
relating to the taxation of section 988 transactions, including, inter 
alia, transactions denominated in hyperinflationary currencies. Also on 
March 17, 1992, proposed regulations were published (57 FR 9217) 
relating to the treatment of certain financial instruments denominated 
in hyperinflationary currencies. The proposed regulations did not 
separately define hyperinflationary currency. Rather, they simply made 
reference to the definition in the final regulations, Sec. 1.988-1(f).
    TD 8860 (65 FR 2026) (January 13, 2000) finalized the proposed 
regulations relating to the treatment of financial instruments 
denominated in hyperinflationary currencies. Also in that issue of the 
Federal Register was a notice of proposed rulemaking regarding a 
proposed change in the period of years that are considered in 
determining whether a currency is hyperinflationary for purposes of 
section 988 (base period). The notice of proposed rulemaking also 
provided notice of a public hearing on the proposed regulations. No 
requests to speak were received, and the public hearing was canceled. 
This Treasury decision finalizes the proposed regulations relating to 
the change in base period, with certain minor changes.

Explanation of Provisions

    As set out in the notice of proposed rulemaking, the term 
hyperinflationary currency, as defined in Sec. 1.988-1(f), utilizes the 
definition in Sec. 1.985-1(b)(2)(ii)(D). This definition was developed 
in the context of the Dollar Approximate Separate Transactions Method 
(DASTM) regulations, Sec. 1.985-3, and generally considers the 
cumulative effects of inflation over the base period in determining 
whether a currency is hyperinflationary. In Sec. 1.985-1(b)(2)(ii)(D), 
the base period consists of the thirty-six calendar month period 
immediately preceding the first day of the current calendar year. Use 
of this base period is generally appropriate in the context of DASTM 
because a qualified business unit needs to know in advance if it is 
subject to Sec. 1.985-3 calculations.
    However, failure to take the current year's inflation into account 
for purposes of computing foreign currency gain or loss under section 
988 may lead to distortions in income and expense because inflation may 
rise dramatically in single year. Accordingly, the IRS and Treasury 
believe that for purposes of section 988, it is more appropriate to 
consider the cumulative inflation rate over the thirty-six month period 
ending on the last day of the taxpayer's (or the qualified business 
unit's) current taxable year. This change in the base period, however, 
applies only for the purposes of section 988 and not for the purpose of 
determining whether a taxpayer (or QBU) is subject to the provisions of 
Sec. 1.985-3.

Summary of Comments

    One comment was received in connection with the proposed change in 
the measurement of the base period under section 988. This comment 
relates to the application of the rule to regulated investment 
companies (RICs). The commenter stated that sections 852(a) and 4982 
effectively require a RIC to distribute essentially all of its income 
during the calendar year in which it is earned. Thus, the commenter 
concluded that RICs need to know before the end of their tax year 
whether a particular currency is hyperinflationary. The Treasury and 
IRS recognize that the revised definition of base period could present 
an administrative burden for RICs. Accordingly, the final regulation 
provides that RICs are not subject to the revised base period standard 
of these final regulations.
    A similar exclusion from the revised base period standard has been 
made for REITs due to their similar distribution requirements. The 
regulation has also been amended to provide that the Service may by 
notice provide that the revised base period standard shall not apply to 
any section 988 transaction of an entity with distribution requirements 
similar to that of RICs and REITs.
    In addition, the regulation was amended to provide that generally 
accepted accounting principles may not apply to alter the base period 
outlined in paragraph (f)(1)(ii)(A) of this section. This change is 
intended to clarify that the last sentence of Sec. 1.985-1(b)(2)(ii)(D) 
may not be used to alter the base period for purposes of section 988.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedures Act (5 
U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 
6) do not apply to these regulations, and therefore, a Regulatory 
Flexibility Analysis is not required.

Drafting Information

    The principal author of these regulations is John W. Rogers III of 
the Office of the Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury Department also participated 
in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

[[Page 280]]

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In Sec. 1.988-1, paragraph (f) is revised to read as 
follows:


Sec. 1.988-1  Certain definitions and special rules.

* * * * *
    (f) Hyperinflationary currency--(1) Definition--(i) General rule. 
For purposes of section 988, a hyperinflationary currency means a 
currency described in Sec. 1.985-1(b)(2)(ii)(D). Unless otherwise 
provided, the currency in any example used in Secs. 1.988-1 through 
1.988-5 is not a hyperinflationary currency.
    (ii) Special rules for determining base period. In determining 
whether a currency is hyperinflationary under Sec. 1.985-1(b)(2)(ii)(D) 
for purposes of this paragraph (f), the following rules will apply:
    (A) The base period means the thirty-six calendar month period 
ending on the last day of the taxpayer's (or qualified business unit's) 
current taxable year. Thus, for example, if for 1996, 1997, and 1998, a 
country's annual inflation rates are 6 percent, 11 percent, and 90 
percent, respectively, the cumulative inflation rate for the three-year 
base period is 124% [((1.06  x  1.11  x  1.90) - 1.0 = 1.24)  x  100 = 
124%]. Accordingly, assuming the QBU has a calendar year as its taxable 
year, the currency of the country is hyperinflationary for the 1998 
taxable year. This change in the Sec. 1.985-1(b)(2)(ii)(D) base period 
shall not apply to any section 988 transaction of an entity described 
in section 851 (regulated investment company (RIC)) or section 856 
(real estate investment trust (REIT)). The Service may, by notice, 
provide that the foregoing change in the Sec. 1.985-1(b)(2)(ii)(D) base 
period does not apply to any section 988 transaction of an entity with 
distribution requirements similar to a RIC or REIT.
    (B) The last sentence of Sec. 1.985-1(b)(2)(ii)(D) shall not apply 
to alter the base period for purposes of this paragraph (f) in 
determining whether a currency is hyperinflationary for purposes of 
section 988. Accordingly, generally accepted accounting principles may 
not apply to alter the base period for purposes of this paragraph (f).
    (2) Effective date. Paragraph (f)(1) of this section shall apply to 
transactions entered into after February 14, 2000.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: November 29, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-32188 Filed 12-29-00; 8:45 am]
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