Change From the Dollar Approximate Separate Transactions Method (DASTM) to the Profit and Loss Method of Accounting

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[INTL-0066-92]

RIN 1545-AS68

Change From the Dollar Approximate Separate Transactions Method

(DASTM) to the Profit and Loss Method of Accounting

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed Income Tax Regulations that

would require a qualified business unit (QBU) using the dollar

approximate separate transactions method of accounting (DASTM) to

change its functional currency when the local currency ceases to be

hyperinflationary. These regulations provide rules for taxpayers to

determine when a change from DASTM is required and provide guidance on

required adjustments relating to the change in method.

DATES: Comments and requests for a public hearing must be received by

September 23, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (INTL-0066-92), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Jacob Feldman or Teresa B. Hughes,

(202) 622-3870 (not a toll free call).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax

Regulations (26 CFR part 1) under section 985 of the Internal Revenue

Code of 1986. The proposed regulations would require a qualified

business unit that uses the dollar approximate separate transactions

method to change its functional currency and its method of accounting

to the profit and loss method when the QBU is no longer operating in an

environment that has a hyperinflationary currency.

Explanation of Provisions

Proposed Sec. 1.985-1(b)(2)(ii)(E) provides that a QBU required to

use the dollar as its functional currency pursuant to Sec. 1.985-

1(b)(2) or a QBU that has elected to use the dollar as its functional

currency pursuant to Sec. 1.985-2 must redetermine its functional

currency if for three consecutive taxable years the currency of the

QBU's economic environment is not a hyperinflationary currency. The

change in functional currency is treated as made with the consent of

the Commissioner, and the adjustments required under Sec. 1.985-5 must

be made in connection with the change.

The IRS believes it appropriate to require a QBU that is no longer

operating in a hyperinflationary environment to stop using the dollar

to compute its income or loss or earnings and profits because of the

general preference expressed in section 985(b) to use the currency of

the QBU's economic environment for this purpose. A three year

measurement period for determining non-hyperinflationary status was

thought desirable to avoid frequent changes in functional currency for

QBUs operating in borderline hyperinflationary environments. Comments

are requested as to whether the three year period is appropriate.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. 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 a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (preferably a

signed original and eight (8) copies) that are submitted timely to the

IRS. All comments will be available for public inspection and copying.

A public hearing may be scheduled if requested in writing by a person

that timely submits written comments. If a public hearing is scheduled,

notice of the date, time, and place for the hearing will be published

in the Federal Register.

Drafting Information

The principal authors of these proposed regulations are Jacob

Feldman and Teresa B. Hughes of the Office of Associate Chief Counsel

(International), within the Office of Chief Counsel, IRS. 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. In Sec. 1.985-1, paragraph (b)(2)(ii)(E) is added to read

as follows:

Sec. 1.985-1 Functional currency.

* * * * *

(b) * * *

(2) * * *

(ii) * * *

(E) Change in functional currency when currency ceases to be

hyperinflationary--(1) In general. A QBU that has been required to use

the dollar as its functional currency under paragraph (b)(2) of this

section, or has elected to use the dollar as its functional currency

under paragraph (b)(2)(ii)(B)(2) of this section or Sec. 1.985-2, must

change its functional currency as of the first day of the first taxable

year that follows three consecutive taxable years in which the currency

of its economic environment, determined under paragraph (c)(2) of this

section, is not a hyperinflationary currency. The functional currency

of the QBU for such year shall be determined in accordance with

paragraph (c) of this section. For purposes of Sec. 1.985-4, the change

is considered to be made with the consent of the Commissioner. See

Sec. 1.985-5 for adjustments that are required upon a change in

functional currency.

(2) Effective date. Section 1.985-1(b)(2)(ii)(E) is effective for

taxable years beginning after the date which is 30 days after the

publication of final regulations in the Federal Register.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 94-17569 Filed 7-22-94; 8:45 am]

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