International Tax Aspects of Foreign Currency Transactions

(iii)Detriment of election is waiver of business needs exception– election also is one-time and irrevocable.C. Hedges of Investment in an Entity’s Balance Sheet.(1) Financial accounting rules generally allow balance sheet / net investmenthedges to be recorded as an adjustment to the translation of a subsidiary’searnings. Thus, hedging gains and losses would be deferred.(2) Tax treatment of hedges of a CFC’s stock.(a)Authorities on Ordinary vs. Capital.(i)(ii)Hoover Co. v. Commissioner, 72 T.C. 206 (1979) – losseson hedges of taxpayer’s net investment in a subsidiary didnot constitute bona fide hedges under pre-Arkansas Bestcase law. Accordingly, under pre-1986 Act law, theselosses produced capital losses.Barnes Group, Inc. v. United States, 697 F. Supp. 591 (D.Conn. 1988) – reaching same result under post-ArkansasBest law. Accordingly, the net investment hedges effectedthrough § 1256 contracts resulted in capital losses to thetaxpayer.(b)T.D. 8400 (1992) – revisiting the issue in the context of theintegrated transaction rules of § 1.988-5 and concluding thatbalance sheet hedges would not qualify for integrated treatment.(c) Prop. Reg. § 1.988-5(d) (1992).(i)If ever finalized, this proposed regulation would haveallowed integration of a hedge with respect to declared, butunpaid dividends and other qualified payments. Thiswould have been a limited example of cash flow hedgingunder the IRS regulations.(3) Hedges of a DRE’s Balance Sheet or Items Payable from a DRE.(a)Taxpayer may hedge a DRE’s net balance sheet, or may enter intoinvestment hedges of disregarded transactions from the DRE(royalties, interest). The item being hedged for financial statementpurposes will not exist for tax purposes. It would appear that therelevant inquiry is whether the hedge of the underlying exposuresof the DRE qualifies for § 1221(b)(2) / bona fide hedgingtreatment.59© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com