International Tax Aspects of Foreign Currency Transactions

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(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
60© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
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Overview of the Taxation of Foreign
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Table of ContentsPage1. Determinat
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processes orders and maintains sepa
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(3) Examples.(a)(b)(c)Reg. § 1.985
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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 and 26: (a)(b)Specifically, losses attribut
Page 27 and 28: (i)Actual distributions of PTI to t
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: (a)(b)(c)(d)Reg. § 1.446-4 provide
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International Tax Aspects of Foreign Currency Transactions

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