[Federal Register Volume 72, Number 61 (Friday, March 30, 2007)]
[Rules and Regulations]
[Pages 15043-15044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-5857]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9320]
RIN 1545-BF67


United States Dollar Approximate Separate Transactions Method

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations which provide the 
translation rates that must be used when translating into dollars 
certain items and amounts transferred by a qualified business unit 
(QBU) to its home office or parent corporation for purposes of 
computing dollar approximate separate transactions method (DASTM) gain 
or loss. This regulation is necessary to provide guidance under section 
985

[[Page 15044]]

regarding the proper translation rates that must be used under the 
DASTM method. Taxpayers affected by these regulations are taxpayers 
with QBUs required to use the DASTM method of accounting described in 
Sec.  1.985-3.

DATES: Effective Date: This regulation is effective March 30, 2007.
    Applicability Date: This regulation is applicable to any transfer, 
dividend, or distribution that is a return of capital that is made 
after March 8, 2005, and that gives rise to an adjustment under Sec.  
1.985-3(d)(3).

FOR FURTHER INFORMATION CONTACT: Sheila Ramaswamy, at (202) 622-3870.

SUPPLEMENTARY INFORMATION: 

Background

    On July 13, 2006, a notice of proposed rulemaking (REG-118897-06), 
United States Dollar Approximate Separate Transactions Method, was 
published in the Federal Register (71 FR 39604). The notice of proposed 
rulemaking proposed to amend Sec.  1.985-3(d)(3). No requests for a 
public hearing were received, and no public hearing was held. The IRS 
received no comments in response to the notice of proposed rulemaking. 
The proposed regulation is adopted without change by this Treasury 
decision.

Explanation of Provisions

    For taxable years beginning after August 24, 1994, a U.S. 
taxpayer's QBU that would otherwise be required to use a 
hyperinflationary currency as its functional currency generally must 
use the dollar as its functional currency and must compute income or 
loss under the DASTM method of accounting described in Sec.  1.985-3. 
See Sec.  1.985-1(b)(2)(ii). Under the DASTM method of accounting, a 
QBU's income or loss for a taxable year is computed in U.S. dollars and 
adjusted to account for its DASTM gain or loss. See Sec.  1.985-3(b). A 
QBU's DASTM gain or loss for a taxable year is determined under Sec.  
1.985-3(d) by first computing the QBU's change in net worth from the 
prior year. In computing the QBU's change in net worth, items whose 
dollar value fluctuates with changes in exchange rates are translated 
using the year-end exchange rate while items whose dollar value does 
not change with exchange rate fluctuations are translated using the 
exchange rate for the translation period in which the cost of the item 
was incurred. Specified adjustments are made to the QBU's change in net 
worth. Under Sec.  1.985-3(d)(3), one of the adjustments requires 
adding back to the change in net worth transactions that decrease the 
QBU's net worth without affecting the QBU's income or loss including 
dividend distributions, certain transfers, and returns of capital from 
the QBU to its home office or parent corporation. This final regulation 
provides the translation rate to be used in translating these items 
into dollars for purposes of computing DASTM gain or loss.
    Under Sec.  1.985-3(d)(3), the applicable translation rate to be 
used generally depends upon whether the dollar value of the item 
transferred changes with fluctuations in exchange rates. Accordingly, 
the regulation provides that if the item giving rise to the adjustment 
is an asset which would be translated under Sec.  1.985-3(d)(5) at the 
exchange rate for the last translation period of the taxable year if it 
were on the QBU's year-end balance sheet, the item will be translated 
at the exchange rate on the date the item is transferred. However, if 
the item giving rise to the adjustment is an asset which would be 
translated under Sec.  1.985-3(d)(5) at the exchange rate for the 
translation period in which the cost of the item was incurred if it 
were on the QBU's year-end balance sheet, the item will be translated 
at the same historical rate.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has been 
determined that sections 553 (b) and (d) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) do not apply to this regulation, and 
because this regulation does not impose a collection of information on 
small entities, the provisions of the Regulatory Flexibility Act (5 
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the 
Internal Revenue Code, the notice of proposed rulemaking preceding this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business.

Drafting Information

    The principal author of this regulation is Sheila Ramaswamy, Office 
of Associate Chief Counsel (International). However, 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.

Adoption of Amendment to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.985-3 is amended by revising paragraph (d)(3) to read 
as follows:


Sec.  1.985-3  United States dollar approximate separate transactions 
method.

* * * * *
    (d) * * *
    (3) Positive adjustments--(i) In general. The items described in 
this paragraph (d)(3) are dividend distributions for the taxable year 
and any items that decrease net worth for the taxable year but that 
generally do not affect income or loss or earnings and profits (or a 
deficit in earnings and profits). Such items include a transfer to the 
home office of a QBU branch and a return of capital.
    (ii) Translation. Except as provided by ruling or administrative 
pronouncement, items described in paragraph (d)(3)(i) of this section 
shall be translated into dollars as follows:
    (A) If the item giving rise to the adjustment would be translated 
under paragraph (d)(5) of this section at the exchange rate for the 
last translation period of the taxable year if it were shown on the 
QBU's year-end balance sheet, such item shall be translated at the 
exchange rate on the date the item is transferred.
    (B) If the item giving rise to the adjustment would be translated 
under paragraph (d)(5) of this section at the exchange rate for the 
translation period in which the cost of the item was incurred if it 
were shown on the QBU's year-end balance sheet, such item shall be 
translated at the same historical rate.
    (iii) Effective date. Paragraph (d)(3)(ii) of this section is 
applicable for any transfer, dividend, or distribution that is a return 
of capital that is made after March 8, 2005, and that gives rise to an 
adjustment under this paragraph (d)(3).
* * * * *

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Approved: March 20, 2007.
Eric Solomon,
Assistant Secretary for Tax Policy.
 [FR Doc. E7-5857 Filed 3-29-07; 8:45 am]
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