International Tax Aspects of Foreign Currency Transactions

dividends under Notice 88-71, the shareholder’s basis inthe stock is adjusted for the § 986(c) gain or lossimmediately before the § 367(b) transaction.(e)Translation of Section 961(a) and (b) Basis Adjustments.TAM 200141003 – the IRS addressed the translation of positive§ 961(a) basis adjustments attributable to an inclusion of subpart Fincome, and negative § 961(b) basis adjustments attributable to adistribution of PTI. In each case, the IRS advised that the historicUS Dollar cost of the PTI would be used for the basis adjustment,rather than the current US Dollar value of the PTI whendistributed. See also Prop. Reg. § 1.961-2(b)(2) (similarlyproviding that adjustments to stock basis use historical cost).(4) Translation of Asset Basis for Assets Entering the United States.(a)(b)(c)One issue that arises is how asset basis should be translated into ataxpayer’s functional currency where the acquisition cost wasincurred in a non-functional currency. Under Rev. Rul. 78-281, aU.S. dollar taxpayer takes a historic U.S. dollar basis in propertyacquired using a non-functional currency. If, however, ataxpayer’s functional currency changed subsequent to acquisition(e.g., a foreign subsidiary liquidated into a U.S. parent, orunderwent a § 381 transaction with another foreign subsidiary), thequestion is how its asset basis should be translated. 17PLR 8749008 – a foreign corporation 50% owned by a U.S.shareholder used a depreciable asset outside the United States, andthen put it to use in a trade or business in the United States. TheIRS ruled that (1) the asset had a depreciable basis reduced byallowable depreciation during the period the property was usedoutside the U.S., citing Gutwirth v. Commissioner, 40 T.C. 631(1963), and (2) the Dollar basis of the property was its original costdetermined using the exchange rate on the date the asset wasoriginally acquired, citing Rev. Rul. 78-281.Reg. § 1.367(b)-3(b)(3)(iii) reserves with respect to the U.S.shareholder’s recognition of exchange gain or loss on its capitalinvestment in a foreign subsidiary in an inbound liquidation. Asstated in the Preamble, the Proposed Regulation providing for thiswas intended to link the translation of asset basis at current spotrate values to the recognition of all FX gain / loss on both E&P and17Several excellent articles have addressed this topic. See, e.g., Robert Katcher, Back to Basis: Crossing the U.S.Frontier, 2002 TNT 209-27 (Oct. 25, 2002).25© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com