International Tax Aspects of Foreign Currency Transactions

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(d)Spot rate on date of sale of stock for § 1248 deemed dividendincome(3) § 986(c) – Exchange Gain or Loss on PTI.(a)(b)The US shareholder shall recognize currency gain or lossattributable to the fluctuation in exchange rates between the date ofa PTI inclusion and the date of the actual distribution. § 986(c)(1).Notice 88-71, § 2 on Computing § 986(c) Gain or Loss. § 986(c)gain is computed on an aggregate pooled basis for all post-1986PTI in each separate § 904(d) category (i.e., passive and general).The legislative history indicated that Congress generally intendedfor § 986(c) gain or loss to be computed on a pooled basis, whichprovides some support for the Notice’s use of an aggregate dollarbasis pool for PTI. 13At the same time, § 959 and the current final regulations allocatedistributions of PTI to the most recently accumulated previouslytaxed earnings. See Reg. § 1.959-3(b). Consistent with thisprinciple, Notice 88-71 provides for the general and passive basketcategories of PTI to be maintained in annual layers. Upon adistribution of PTI, the distribution is sourced from the most recentlayers of PTI first. Since passive and general basket layers aremaintained separately, this allocation changes the passive andgeneral basket mix of the PTI distribution.(c)Prop. Reg. § 1.959-3(b)(3) (2006) on Computing § 986(c) Gain orLoss.General rule. Shareholder maintains annual layers of (c)(1) and(c)(2) PTI. § 986(c) gain or loss is calculated based on thecategory and layer of PTI from which the distribution is sourcedunder normal § 959 ordering rules.Dollar-basis pooling election. The shareholder elects to maintain asingle aggregate basis pool for all (c)(1) and (c)(2) PTI. This is thesame approach as in Notice 88-71. It would seem that dollar basispooling, rather than tracing, should be the default rule, as it will besimpler to apply for many taxpayers.(d)Events Triggering Recognition of § 986(c) Gain or Loss.131986 TRA Bluebook, at p. 1090.23© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
(i)Actual distributions of PTI to the United Statesshareholder.Note that under the 2006 Proposed Regulations, an inter-CFC distribution of PTI excluded under § 959(b) is not anoccasion to recognize § 986(c) currency gains and losses.Rather, the U.S. shareholder continues to retain a carryover$USD basis in the PTI account. 14 If the distribution weremade to a CFC that uses the U.S. dollar as its functionalcurrency, it would seem necessary for the U.S. shareholderto recognize § 986(c) gain or loss on the distribution toprevent this gain or loss from disappearing.Also, under the Proposed Regulations, the re-classificationof the shareholder’s § 959(c)(2) PTI as § 959(c)(1) PTI as aresult of a § 956 investment does not trigger recognition of§ 986(c) gain or loss. 15(ii)§ 1248 sale of CFC stock. See Notice 88-71, § 2(c). Theshareholder’s basis in the CFC’s stock is adjusted for the§ 986(c) gain or loss that is deemed distributedimmediately before the § 1248 stock sale. This rule hassome logical justification because the § 986(c) gain or losshas economically accrued to the seller. Interestingly, the2006 Proposed Regulations do not contain the same rule oraddress this issue. 16In FSA 199949001, a taxpayer transferred stock of a CFCwith PTI cross chain in a § 304 transaction. Relying on theabove-cited provision of Notice 88-71, the Taxpayer arguedthat the § 986(c) gain increased the basis of its CFC’s stockfor purposes of § 301(c)(2) basis recovery in the § 304transaction. The IRS rejected this position and concludedthat the Notice was limited to § 1248 transactions. The§ 986(c) gain did not result in an adjustment to the basis ofthe CFC stock.(iii)Change of CFC’s functional currency to the US dollar. SeeReg. § 1.985-5(e)(2).(iv) Shareholder recognizes a § 367(b) inclusion. See Reg.§ 1.367(b)-2(j)(2). As in the case of § 1248 deemed141516See Prop. Regs. §§ 1.959-3(e)(3)(ii)(B) and 1.959-3(e)(6), Example 7.Prop. Reg. § 1.959-3(e)(2)(v).Prop. Reg. § 1.959-3(e)(6), Example 8.24© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
Page 1 and 2: Overview of the Taxation of Foreign
Page 3 and 4: Table of ContentsPage1. Determinat
Page 5 and 6: processes orders and maintains sepa
Page 7 and 8: (3) Examples.(a)(b)(c)Reg. § 1.985
Page 9 and 10: D. Changes in Functional Currency.(
Page 11 and 12: (1) Application of Mark-to-market.(
Page 13 and 14: (ii) Accrued foreign income tax pay
Page 15 and 16: Gain or loss is computed, without r
Page 17 and 18: (4) Rules Applicable to Debt Instru
Page 19 and 20: The obligor of a non-functional cur
Page 21 and 22: (iii) Rollover of an Existing Contr
Page 23 and 24: can rebut this presumption by showi
Page 25: (a)(b)Specifically, losses attribut
Page 29 and 30: the paid-in-capital account under R
Page 31 and 32: (d)Taxes for which the taxpayer mak
Page 33 and 34: were typically translated at the sp
Page 35 and 36: (b)Brazilian ORTNs.During a period
Page 37 and 38: Under the profit and loss method, t
Page 39 and 40: egard to the form of enterprise thr
Page 41 and 42: D. The 2006 Proposed § 987 Regulat
Page 43 and 44: Examples:i. Cashii. Payables and Re
Page 45 and 46: 3) Owner ceases to exist in a non-
Page 47 and 48: 5) Simply following GAAP may not be
Page 49 and 50: (5) Consequences of a Change to DAS
Page 51 and 52: (a)Certain cases have addressed a M
Page 53 and 54: E. Hyperinflationary Debt Instrumen
Page 55 and 56: (c)(d)The underlying transaction is
Page 57 and 58: allow a CFC to avoid the need to tr
Page 59 and 60: (a) PLR 200813026. IRS granted a PL
Page 61 and 62: (a)(b)(c)(d)Reg. § 1.446-4 provide
Page 63: 60© 2013 William R. Skinner, Esq.F

International Tax Aspects of Foreign Currency Transactions

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