[Federal Register Volume 71, Number 134 (Thursday, July 13, 2006)]
[Proposed Rules]
[Pages 39604-39606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-10998]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118897-06]
RIN 1545-BF67


United States Dollar Approximate Separate Transactions Method

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains a proposed regulation which provides 
the translation rates that must be used when translating into dollars 
certain items and amounts transferred by a qualified business unit 
(QBU) to its home office or parent corporation for purposes of 
computing dollar approximate separate transactions method (DASTM) gain 
or loss.

DATES: Written or electronic comments and requests for a public hearing 
must be received by October 11, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-118897-06), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
118897-06), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the IRS 
Internet site at http://www.irs.gov/regs or via the Federal eRulemaking 
Portal at http://www.regulations.gov (IRS REG-118897-06).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Sheila Ramaswamy, at (202) 622-3870; concerning submissions of 
comments, Richard [email protected], (202) 622-7180 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Generally, a taxpayer and each of its qualified business units 
(QBUs) must make all determinations under subtitle A of the Internal 
Revenue Code in its respective functional currency. See Sec.  1.985-
1(a)(1). For taxable years beginning after August 24, 1994, a U.S. 
corporation's QBU that would otherwise be required to use a 
hyperinflationary currency as its functional currency generally must 
use the dollar as its functional currency and must compute income or 
loss under the DASTM method of accounting described in

[[Page 39605]]

Sec.  1.985-3. See Sec.  1.985-1(b)(2)(ii). Section 1.985-3(d)(3) 
contains a rule for translating into dollars dividends, certain 
transfers, and returns of capital from the QBU to its home office or 
parent corporation. On March 8, 2005, Notice 2005-27, 2005-13 IRB 795, 
(see Sec.  601.601(d)(2) of this chapter), announced the intention to 
amend Sec.  1.985-3(d)(3) regarding the proper exchange rate for 
determining DASTM gain or loss when translating certain current and 
historical assets upon a transfer from a QBU to its home office or 
parent corporation, as the case may be.

Explanation of Provisions

    Under the DASTM method of accounting, a QBU's income or loss for a 
taxable year is computed in U.S. dollars and adjusted to account for 
its DASTM gain or loss. See Sec.  1.985-3(b). A QBU's DASTM gain or 
loss for a taxable year is determined under Sec.  1.985-3(d) by first 
computing the QBU's change in net worth from the prior year and then 
making specified adjustments. The QBU's change in net worth is computed 
by comparing the year-end balance sheets for the current and preceding 
taxable years. See Sec.  1.985-3(d)(1)(i). Special rules provide that 
some balance-sheet items are translated at the exchange rate for the 
translation period in which the cost of the item was incurred and so do 
not give rise to DASTM gain or loss from year to year (``historical 
items''). See Sec.  1.985-3(d)(5). Other items are translated at the 
exchange rate for the last translation period for the taxable year and 
therefore do give rise to DASTM gain or loss (``current items''). See 
Sec.  1.985-3(d)(5).
    The classification of an item as historical or current generally 
reflects the extent to which the item's dollar value changes with 
fluctuations in exchange rates. For example, the dollar value of a 
financial asset, such as a unit of hyperinflationary local currency, 
necessarily changes with fluctuations in exchange rates. Accordingly, a 
financial asset generally is a current item. See Sec.  1.985-
3(d)(5)(iv). By contrast, the value of a nonfinancial asset generally 
does not change with fluctuations in exchange rates. Accordingly, a 
nonfinancial asset generally is an historical item. See Sec.  1.985-
3(d)(5)(v).
    The computed change in the QBU's net worth is then adjusted to 
reflect transactions that increase or decrease the QBU's net worth 
without affecting the QBU's income or loss. For example, an asset 
transferred from a QBU branch to its home office decreases the QBU's 
net worth but does not affect the QBU's income or loss and so must be 
added back to the QBU's net worth for purposes of computing DASTM gain 
or loss. See Sec.  1.985-3(d)(3).
    The DASTM method of accounting provides that adjustments described 
in the preceding paragraphs generally shall be translated into dollars 
at the exchange rate on the date the amount is paid. See Sec.  1.985-
3(d)(3). This rule ensures that the QBU branch properly takes into 
account a current item's change in value due to currency fluctuations 
while the item was in the QBU branch. However, applying this 
translation rule to historical items could potentially lead to 
distortions in the calculation of DASTM gain or loss. Because the value 
of historical items generally does not change with fluctuations in 
exchange rates, translating adjustments relating to historical items at 
the exchange rate on the date of distribution or transfer would 
inappropriately give rise to DASTM gain or loss.
    The potentially anomalous results that may arise due to the 
application of the existing translation rule in Sec.  1.985-3(d)(3) can 
be prevented by modifying the rule to ensure that only the assets whose 
dollar value changes with fluctuations in exchange rates will give rise 
to DASTM gain or loss upon a transfer from a QBU to its home office. 
Accordingly, this proposed regulation amends Sec.  1.985-3(d)(3) in 
accordance with Notice 2005-27 as follows. The proposed regulation 
provides that if the item giving rise to the adjustment is a current 
asset which would be translated under Sec.  1.985-3(d)(5) at the 
exchange rate for the last translation period of the taxable year if it 
were on the QBU's year-end balance sheet, the item will be translated 
at the exchange rate on the date the item is transferred. However, if 
the item giving rise to the adjustment is a historical asset which 
would be translated under Sec.  1.985-3(d)(5) at the exchange rate for 
the translation period in which the cost of the item was incurred if it 
were on the QBU's year-end balance sheet, the item will be translated 
at the same historical rate.

Proposed Effective Date

    Consistent with Notice 2005-27, this regulation is proposed to be 
effective for any transfer, dividend, or distribution that is a return 
of capital that is made after March 8, 2005, and that gives rise to an 
adjustment under Sec.  1.985-3(d)(3).

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply. Pursuant to section 7805(f) of the Internal 
Revenue Code, this notice of proposed rulemaking will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for a public hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Sheila 
Ramaswamy, Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

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. Section 1.985-3 is amended by revising paragraph (d)(3) to 
read as follows:


Sec.  1.985-3  United States dollar approximate separate transactions 
method.

* * * * *
    (d) * * *

[[Page 39606]]

    (3) Positive adjustments--(i) In general. The items described in 
this paragraph (d)(3) are dividend distributions for the taxable year 
and any items that decrease net worth for the taxable year but that 
generally do not affect income or loss or earnings and profits (or a 
deficit in earnings and profits). Such items include a transfer to the 
home office of a QBU branch and a return of capital.
    (ii) Translation. Except as provided by ruling or administrative 
pronouncement, items described in paragraph (d)(3)(i) of this section 
shall be translated into dollars as follows:
    (A) If the item giving rise to the adjustment would be translated 
under paragraph (d)(5) of this section at the exchange rate for the 
last translation period of the taxable year if it were shown on the 
QBU's year-end balance sheet, such item shall be translated at the 
exchange rate on the date the item is transferred.
    (B) If the item giving rise to the adjustment would be translated 
under paragraph (d)(5) of this section at the exchange rate for the 
translation period in which the cost of the item was incurred if it 
were shown on the QBU's year-end balance sheet, such item shall be 
translated at the same historical rate.
    (iii) Effective date. Paragraph (d)(3)(ii) of this section is 
applicable for any transfer, dividend, or distribution that is a return 
of capital that is made after March 8, 2005, and that gives rise to an 
adjustment under this paragraph (d)(3).
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E6-10998 Filed 7-12-06; 8:45 am]
BILLING CODE 4830-01-P