[Federal Register Volume 66, Number 83 (Monday, April 30, 2001)]
[Corrections]
[Page 21447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: C1-252]



  Federal Register / Vol. 66, No. 83 / Monday, April 30, 2001 / 
CORRECTIONS  

[[Page 21447]]



Department of the Treasury

Internal Revenue Service

26 CFR Part 1

[TD 8927]
RIN 1545-AW34


Conversion to the Euro

Correction

    In rule document 01-252 beginning on page 2215 in the issue of 
Thursday, January 11, 2001, make the following correction:

PART 1 [CORRECTED]

    On page 2217, second and third columns, Example 1 and 
Example 2 of Sec. 1.985-8 (c)(3)(ii) is reprinted to include 
the missing euro signs.


Sec. 1.985-8  [Corrected]

* * * * *
    (c)(3)(ii) *  *  * 
    Example 1. X, a calendar year QBU on the cash method of 
accounting, uses the deutschmark as its functional currency. X is 
not described in section 1281(b). On July 1, 1998, X converts 10,000 
deutschmarks (DM) into Dutch guilders (fl) at the spot rate of fl1 = 
DM1 and loans the 10,000 guilders to Y (an unrelated party) for one 
year at a rate of 10% with principal and interest to be paid on June 
30, 1999. On January 1, 1999, X changes its functional currency to 
the euro pursuant to this section. Assume that the euro/deutschmark 
conversion rate is set by the European Council at =1= DM2. 
Assume further that the euro/guilder conversion rate is set at 
=1 = fl2.25. Accordingly, under the terms of the note, on 
June 30, 1999, X will receive =4444.44 (fl10,000/2.25) of 
principal and =444.44 (fl1,000/2.25) of interest. Pursuant 
to this paragraph (c)(3), X will realize an exchange loss on the 
principal computed under the principles of Sec. 1.988-2(b)(5). For 
this purpose, the exchange rate used under Sec. 1.988-2(b)(5)(i) 
shall be the guilder/euro conversion rate. The amount under 
Sec. 1.988-2(b)(5)(ii) is determined by translating the fl10,000 at 
the guilder/deutschmark spot rate on July 1, 1998, and translating 
that deutschmark amount into euros at the deutschmark/euro 
conversion rate. Thus, X will compute an exchange loss for 1999 of 
=555.56 determined as follows: [=4444.44 (fl10,000/
2.25)-5000 ((fl10,000/1)/2) = - =555.56]. Pursuant to this 
paragraph (c)(3), the character and source of the loss are 
determined pursuant to section 988 and regulations thereunder. 
Because X uses the cash method of accounting for the interest on 
this debt instrument, X does not realize exchange gain or loss on 
the receipt of that interest.
    Example 2. (i) X, a calendar year QBU on the accrual 
method of accounting, uses the deutschmark as its functional 
currency. On February 1, 1998, X converts 12,000 deutschmarks into 
Dutch guilders at the spot rate of fl1 = DM1 and loans the 12,000 
guilders to Y (an unrelated party) for one year at a rate of 10% 
with principal and interest to be paid on January 31, 1999. In 
addition, assume the average rate (deutschmark/guilder) for the 
period from February 1, 1998, through December 31, 1998 is fl1.07 = 
DM1. Pursuant to Sec. 1.988-2(b)(2)(ii)(C), X will accrue eleven 
months of interest on the note and recognize interest income of 
DM1028.04 (fl1100/1.07) in the 1998 taxable year.
    (ii) On January 1, 1999, the euro will replace the deutschmark 
as the national currency of Germany pursuant to the Treaty on 
European Union signed February 7, 1992. Assume that on January 1, 
1999, X changes its functional currency to the euro pursuant to this 
section. Assume that the euro/deutschmark conversion rate is set by 
the European Council at =1 = DM2. Assume further that the 
euro/guilder conversion rate is set at =1 = fl2.25. In 1999, 
X will accrue one month of interest equal to =44.44 (fl100/
2.25). On January 31, 1999, pursuant to the note, X will receive 
interest denominated in euros of =533.33 (fl1200/2.25). 
Pursuant to this paragraph (c)(3), X will realize an exchange loss 
in the 1999 taxable year with respect to accrued interest computed 
under the principles of Sec. 1.988-2(b)(3). For this purpose, the 
exchange rate used under Sec. 1.988-2(b)(3)(i) is the guilder/euro 
conversion rate and the exchange rate used under Sec. 1.988-
2(b)(3)(ii) is the deutschmark/euro conversion rate. Thus, with 
respect to the interest accrued in 1998, X will realize exchange 
loss of =25.13 under Sec. 1.988-2(b)(3) as follows: 
[=488.89 (fl1100/2.25)- =514.02 (DM1028.04/2) =- 
=25.13]. With respect to the one month of interest accrued 
in 1999, X will realize no exchange gain or loss since the exchange 
rate when the interest accrued and the spot rate on the payment date 
are the same.
    (iii) X will realize exchange loss of =666.67 on 
repayment of the loan principal computed in the same manner as in 
Example 1 [=5333.33 (fl12,000/2.25)- =6000 fl12,000/
1)/2)]. The losses with respect to accrued interest and principal 
are characterized and sourced under the rules of section 988.

[FR Doc. C1-252 Filed 4-27-01; 8:45 am]
BILLING CODE 1505-01-D