40366 Federal Register / Vol. 63, No. 145 /Wednesday, July 29, 1998 /Rules and Regulations

List of Subjects in 21 CFR Part 862

Medical devices.

Therefore, under the Federal Food,

Drug, and Cosmetic Act and under

authority delegated to the Commissioner

of Food and Drugs, 21 CFR part 862 is

amended as follows:

PART 862—CLINICAL CHEMISTRY

AND CLINICAL TOXICOLOGY

DEVICES

1. The authority citation for 21 CFR

part 862 continues to read as follows:

Authority: 21 U.S.C. 351, 360, 360c, 360e,

360j, 371.

2. Section 862.1825 is added to

subpart B to read as follows:

§ 862.1825 Vitamin D test system.

(a) Identification. A vitamin D test

system is a device intended for use in

clinical laboratories for the quantitative

determination of 25-hydroxyvitamin D

(25–OH–D) and other hydroxylated

metabolites of vitamin D in serum or

plasma to be used in the assessment of

vitamin D sufficiency.

(b) Classification. Class II (special

controls).

Vitamin D test systems must comply

with the following special controls: (1)

Labeling in conformance with 21 CFR

809.10 and (2) compliance with existing

standards of the National Committee on

Clinical Laboratory Standards.

Dated: July 17, 1998.

D.B. Burlington.

Director, Center for Devices and Radiological

Health.

[FR Doc. 98–20241 Filed 7–28–98; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8776]

RIN 1545–AW34

Conversion to the Euro

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary

regulations.

SUMMARY: This document contains

temporary Income Tax Regulations

relating to U.S. taxpayers operating,

investing or otherwise conducting

business in the currencies of certain

European countries that are replacing

their national currencies with a single,

multinational currency called the euro.

These regulations provide rules relating

to adjustments required for qualified

business units operating in such

currencies and rules relating to the tax

effect of holding such currencies or

financial instruments or contracts

denominated in such currencies. The

text of these temporary regulations also

serves as the text of proposed

regulations published elsewhere in this

issue of the Federal Register.

DATES: These regulations are effective

July 29, 1998.

FOR FURTHER INFORMATION CONTACT:

Howard Wiener of the Office of

Associate Chief Counsel (International),

(202) 622–3870, regarding the change in

functional currency rules and Thomas

Preston of the Office of Assistant Chief

Counsel (Financial Institutions and

Products), (202) 622–3930, regarding

section 1001 (not toll free calls).

SUPPLEMENTARY INFORMATION:

Background

On March 9, 1998, the IRS issued

Announcement 98–18 (1998–9 IRB 44)

requesting comments relating to the tax

issues for U.S. taxpayers operating,

investing or otherwise conducting

business in a currency that is converting

to the euro. Numerous comments were

received. After consideration of these

comments, these regulations are

adopted as a temporary Treasury

decision to provide immediate guidance

to taxpayers.

Explanation of Provisions

I. Background

The Treaty on European Union signed

February 7, 1992, (31 I.L.M. 247)

(entered into force November 1, 1993),

sets forth a plan to replace the national

currencies of participating members

(legacy currencies) that meet certain

economic criteria with a single

European currency (euro). Pursuant to

directives of the European Council, the

process of converting the legacy

currencies into the euro will take place

in three phases.

On January 1, 1999, the currency of

participating member states of the

European Union shall be the euro. At

that time, the euro will be substituted

for the currency of each state at a

conversion rate established pursuant to

the Treaty on European Union.

Thereafter, the bills and coins of each of

the legacy currencies will remain in

circulation but will cease to have

independent value apart from the euro.

On January 1, 2002, euro bills and coins

will be introduced into circulation.

From January 1, 1999, until June 30,

2002 (transition period), the legacy

currencies will remain in circulation as

subunits of the euro. The transition

period is referred to as the ‘‘no

prohibition, no compulsion’’ period

because during this time amounts may

generally be denominated in the legacy

currencies and/or the euro at the option

of individuals and businesses. Finally,

by July 1, 2002, the legacy currencies

will no longer be accepted as legal

tender.

On May 3, 1998, the European Union

announced the eleven countries that

would initially participate in the

conversion and the expected rates at

which the respective currencies would

convert to the euro. The eleven

countries are Austria, Belgium, Finland,

France, Germany, Ireland, Italy,

Luxembourg, Netherlands, Portugal, and

Spain. Four current members of the

European Union (Denmark, Greece,

Sweden, and the United Kingdom) will

not participate in the initial conversion

to the euro. These countries, along with

other countries that later join the

European Union, however, may convert

their currencies to the euro at some

future time.

II. Temporary Regulations

1. In General

These temporary regulations provide

guidance regarding certain of the federal

income tax consequences arising from

the introduction of the euro. Consistent

with comments received from taxpayers,

the regulations generally minimize the

tax consequences that arise by reason of

the euro conversion. In a limited

number of circumstances, however, the

Treasury and IRS determined that

considerations, such as administrative

feasibility, made a different result more

appropriate.

The regulations provide guidance

with respect to two issues: (i) the

circumstances under which the euro

conversion creates a realization event

with respect to instruments and

contracts denominated in a legacy

currency, and (ii) the circumstances

under which the euro conversion

constitutes a change in functional

currency for a qualified business unit

(QBU) whose functional currency is a

legacy currency, and certain

consequences thereof.

2. Realization

The temporary regulations provide

that the conversion of legacy currencies

to the euro does not result in a

realization event under section 1001.

This rule is broadly applicable to all

situations where the rights and

obligations of a taxpayer are altered

solely by reason of the euro conversion.

Thus, conversion to the euro of legacy
Federal Register / Vol. 63, No. 145 /Wednesday, July 29, 1998 /Rules and Regulations 40367

currency held by a taxpayer and

conversion of legacy currency

denominated contractual relationships,

financial instruments, and other claims

or obligations are not realization events

solely as a result of the conversion. In

addition, as a result of this rule,

exchange gains and losses on section

988 transactions denominated in a

legacy currency will not be taken into

account until a subsequent realization

event with respect to the underlying

instrument. For example, when the

Dutch guilder is converted into the euro,

a U.S. dollar functional currency

taxpayer will not recognize either

market gain or loss or exchange gain or

loss on a fixed interest rate Dutch

guilder debt instrument.

Other aspects of the euro conversion

may result in taxable events. For

example, if an unscheduled fractional

principal payment is made on a debt

instrument in order to facilitate a

rounding convention, this payment is

accounted for under the rules governing

payments on debt instruments (such as

§§ 1.446–2 and 1.1275–2) and under

section 988 (in the case of a section 988

transaction). Other changes may or may

not constitute realization events

depending on the terms of the changes.

For example, accrual periods, holiday

conventions or indices on a floating rate

instrument may be altered. Whether

these changes are realization events

must be determined under existing law.

See, e.g., § 1.1001–3.

Limitations that under otherwise

applicable principles prevent or defer

the recognition of realized gains and

losses continue to apply. Thus, for

example, recognition of losses between

related parties under section 267 and

§ 1.988–1(a)(10) remain subject to the

limitations set forth in those sections.

3. Change in Functional Currency

The regulations provide that QBUs

with a legacy functional currency will

be deemed to have automatically

changed their functional currency to the

euro at the beginning of the year they

are required to make such change.

Because of the significant administrative

burdens that will be imposed on QBUs

when they are required to change their

internal systems to accommodate the

introduction of the euro, the regulations

provide that a QBU that currently uses

a legacy functional currency is deemed

to automatically change its functional

currency to the euro in the year the QBU

changes its books and records to the

euro. That change, however, must be

made no later than the last taxable year

beginning on or before the first day such

legacy currency is no longer valid legal

tender.

The euro conversion implicates the

policy concerns underlying § 1.985–5,

namely, the preservation of built-in

exchange gains and losses arising from

the fact that positions that had once

been denominated in a nonfunctional

currency will now be made or received

in a QBU’s functional currency.

In the context of the euro conversion,

two items are of particular concern in

properly accounting for exchange gains

and losses: (1) section 988 transactions

denominated in a legacy currency other

than the QBU’s legacy functional

currency, and (2) unremitted earnings of

a branch with a legacy functional

currency different from the home

office’s legacy functional currency. In

both these instances, positions that had

previously been accounted for in a

nonfunctional currency (against which

exchange gains and loses would be

computed) will, after the conversion, be

accounted for in euros (against which

exchange gains and losses would not be

computed when a QBU’s functional

currency is also the euro).

Rather than requiring immediate

recognition, as would be required under

§ 1.985–5, the temporary regulations

provide special rules for the euro

conversion. These rules provide that for

affected section 988 transactions (other

than transactions in or holdings of

nonfunctional currency cash), exchange

gains and losses that would have been

recognized immediately if the § 1.985–5

change in functional currency rules

applied will be deferred until otherwise

realized. This is accomplished by

providing that section 988 transactions

continue to be treated as nonfunctional

currency transactions under the

principles of section 988 even though

the remaining payments on the asset or

liability will be made in the QBU’s new

functional currency (i.e., the euro).

In response to comments by

taxpayers, an election is provided for

QBUs to realize exchange gain or loss on

accounts receivable and payable

immediately prior to the year of change.

A QBU making this election must

realize exchange gains and losses on all

of its accounts receivable and payable

that are legacy currency denominated

section 988 transactions. The election

responds to the administrative burdens

associated with tracking exchange gains

and losses on large quantities of

accounts receivable and payable.

Taxpayers not making the election will

continue to treat these positions as

section 988 transactions under the

general rule described above.

Exchange gains and losses on

transactions in, or holdings of,

nonfunctional currency cash are

recognized immediately because cash

accounts are generally turned over

rapidly and the administrative burdens

in tracking exchange gains and losses

outweigh the benefits of deferral.

The regulations also provide special

rules for taking into account exchange

gain or loss when the taxpayer and a

branch of the taxpayer change their

functional currencies to the euro. The

rules provide that exchange gains and

losses on unremitted earnings of

affected branches be recognized ratably

over a four-year period beginning in the

year of change. Some commentators

recommended that the principles of

section 987 continue to be applied after

the conversion. As in the case with

cash, however, the Treasury and IRS

believe that the administrative burdens

for taxpayers and the government as

well as the potential for abuse, outweigh

the benefit of extended deferral.

These temporary regulations also

provide rules for the proper translation

of a QBU’s balance sheet accounts in a

manner that preserves any accrued but

unrecognized currency gain or loss.

These rules are consistent with the

existing § 1.985–5, change in functional

currency rules.

III. Other Issues

Finally, these regulations do not

address certain issues that taxpayers

have commented upon that are not

unique to the euro conversion. In

particular, these regulations do not

address the deductibility of costs

associated with the euro conversion and

foreign tax credit mismatches that can

occur as a result of tax accounting

differences between the United States

and other countries.

Special Analysis

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 also been determined that section

553(b) of the Administrative Procedures

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, these temporary

regulations will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on their impact on small business.

Drafting Information: The principal

authors of these regulations are Howard

A. Wiener of the Office of the Associate

Chief Counsel (International) and

Thomas Preston of the Office of

Associate Chief Counsel (Domestic).
40368 Federal Register / Vol. 63, No. 145 /Wednesday, July 29, 1998 /Rules and Regulations

Other personnel from the IRS and

Treasury Department also participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

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 § 1.985–1, paragraph (c)(6)

is amended by adding a sentence at the

end to read as follows:

§ 1.985–1 Functional currency.

* * * * *

(c) * * *

(6) * * * For special rules relating to

the conversion to the euro, see § 1.985–

8T.

* * * * *

§ 1.985–4 [Amended]

Par. 3. In § 1.985–4, the last sentence

of paragraph (a) is amended by

removing the reference ‘‘§ 1.985–2’’ and

adding ‘‘§ 1.985–2 or 1.985–8T’’ in its

place.

Par. 4. Section 1.985–8T is added to

read as follows:

§ 1.985–8T Special rules applicable to the

European Monetary Union (conversion to

the euro) (temporary).

(a) Definitions—(1) Legacy currency.

A legacy currency is the national

currency of a participating member state

of the European Union used prior to the

substitution of the euro for the national

currency of that state in accordance

with the Treaty on European Union

signed February 7, 1992. The term

legacy currency shall also include the

European Currency Unit.

(2) Conversion rate. The conversion

rate is the rate at which the euro is

substituted for a legacy currency.

(b) Operative rules—(1) Initial

adoption. A QBU (as defined in

§ 1.989(a)–1(b)) whose first taxable year

begins after the euro has been

substituted for a legacy currency may

not adopt that legacy currency as its

functional currency.

(2) QBU with a legacy functional

currency—(i) Required change. A QBU

with a legacy currency as its functional

currency is required to change its

functional currency to the euro

beginning the first day of the first

taxable year:

(A) That begins on or after the day

that the euro is substituted for that

legacy currency (in accordance with the

Treaty on European Union); and

(B) In which the QBU begins to

maintain its books and records (as

described in § 1.989(a)–1(d)) in the euro.

(ii) Notwithstanding paragraph

(b)(2)(i) of this section, a QBU with a

legacy currency as its functional

currency is required to change its

functional currency to the euro no later

than the last taxable year beginning on

or before the first day such legacy

currency is no longer valid legal tender.

(iii) Consent of Commissioner. A

change made pursuant to paragraph

(b)(2)(i) of this section shall be deemed

to be made with the consent of the

Commissioner for purposes of § 1.985–

4. A QBU changing its functional

currency to the euro pursuant to this

paragraph (b)(2) must make adjustments

as provided in paragraph (c) of this

section.

(3) Statement to file upon change.

With respect to a QBU that changes its

functional currency to the euro under

paragraph (b)(2) of this section, an

affected taxpayer shall attach to its

return for the taxable year of change a

statement that includes the following:

‘‘TAXPAYER CERTIFIES THAT A QBU

OF THE TAXPAYER HAS CHANGED

ITS FUNCTIONAL CURRENCY TO THE

EURO PURSUANT TO TREAS. REG.

§ 1.985–8T.’’ For purposes of this

paragraph (b)(3), an affected taxpayer

shall be in the case where the QBU is:

a QBU of an individual U.S. resident (as

a result of the activities of such

individual), the individual; a QBU

branch of a U.S. corporation, the

corporation; a controlled foreign

corporation (as described in section

957)(or QBU branch thereof), each

United States shareholder (as described

in section 951(b)); a partnership, each

partner separately; a noncontrolled

section 902 corporation (as described in

section 904(d)(2)(E)) (or branch thereof),

each domestic shareholder as described

in § 1.902–1(a)(1); or a trust or estate,

the fiduciary of such trust or estate.

(c) Adjustments required—(1) In

general. A QBU that changes its

functional currency to the euro pursuant

to paragraph (b) of this section must

make the adjustments described in

paragraphs (c)(2) through (5) of this

section. Section 1.985–5 shall not apply.

(2) Determining the euro basis of

property and the euro amount of

liabilities and other relevant items. The

euro basis in property and the euro

amount of liabilities and other relevant

items shall equal the product of the

legacy functional currency adjusted

basis or amount of liabilities multiplied

by the applicable conversion rate.

(3) Taking into account exchange gain

or loss on legacy currency section 988

transactions—(i) In general. Except as

provided in paragraphs (c)(3) (iii) and

(iv) of this section, a legacy currency

denominated section 988 transaction

(determined after applying section

988(d)) outstanding on the last day of

the taxable year immediately prior to

the year of change shall continue to be

treated as a section 988 transaction after

the change and the principles of section

988 shall apply.

(ii) Examples. The application of this

paragraph (c)(3) may be illustrated by

the following examples:

Example 1. X, a calendar year QBU on the

cash method of accounting, uses the

deutschmark as its functional currency. X is

not described in section 1281(b). On July 1,

1998, X converts 10,000 deutschmarks(DM)

into Dutch guilders(fl) at the spot rate of fl1

= DM1 and loans the 10,000 guilders to Y (an

unrelated party) for one year at a rate of 10%

with principal and interest to be paid on June

30, 1999. On January 1, 1999, X changes its

functional currency to the euro pursuant to

this section. The euro/deutschmark

conversion rate is set by the European

Council at 1= DM2. The euro/guilder

conversion rate is set at 1 = fl2.25.

Accordingly, under the terms of the note, on

June 30, 1999, X will receive 4444.44

(f110,000/2.25) of principal and 444.44

(fl1,000/2.25) of interest. Pursuant to this

paragraph (c)(3), X will realize an exchange

loss on the principal computed under the

principles of § 1.988–2(b)(5). For this

purpose, the exchange rate used under

§ 1.988–2(b)(5)(i) shall be the guilder/euro

conversion rate. The amount under § 1.988–

2(b)(5)(ii) is determined by translating the

fl10,000 at the guilder/deutschmark spot rate

on July 1, 1998, and translating that

deutschmark amount into euros at the

deutschmark/euro conversion rate. Thus, X

will compute an exchange loss for 1999 of

555.56 determined as follows: [ 4444.44

(fl10,000/2.25)– 5000 ((fl10,000/1)/2) =–

555.56]. Pursuant to this paragraph (c)(3),

the character and source of the loss are

determined pursuant to section 988 and

regulations thereunder. Because X uses the

cash method of accounting for the interest on

this debt instrument, X does not realize

exchange gain or loss on the receipt of that

interest.

Example 2. (i) X, a calendar year QBU on

the accrual method of accounting, uses the

deutschmark as its functional currency.

On February 1, 1998, X converts 12,000

deutschmarks into Dutch guilders at the spot

rate of fl1 = DM1 and loans the 12,000

guilders to Y (an unrelated party) for one year

at a rate of 10% with principal and interest

to be paid on January 31, 1999. In addition,

assume the average rate (deutschmark/

guilder) for the period from February 1, 1998,

through December 31, 1998 is fl1.07 = DM1.

Pursuant to § 1.988–2(b)(2)(ii)(C), X will

accrue eleven months of interest on the note
Federal Register / Vol. 63, No. 145 /Wednesday, July 29, 1998 /Rules and Regulations 40369

and recognize interest income of DM1028.04

(fl1100/1.07) in the 1998 taxable year.

(ii) On January 1, 1999, the euro will

replace the deutschmark as the national

currency of Germany pursuant to the Treaty

on European Union signed February 7, 1992.

Assume that on January 1, 1999, X changes

its functional currency to the euro pursuant

to this section. The euro/deutschmark

conversion rate is set by the European

Council at 1 = DM2. The euro/guilder

conversion rate is set at 1 = fl2.25. In 1999,

X will accrue one month of interest equal to

44.44 (fl100/2.25). On January 31, 1999,

pursuant to the note, X will receive interest

denominated in euros of 533.33 (fl1200/

2.25). Pursuant to this paragraph (c)(3), X

will realize an exchange loss in the 1999

taxable year with respect to accrued interest

computed under the principles of § 1.988–

2(b)(3). For this purpose, the exchange rate

used under § 1.988–2(b)(3)(i) is the guilder/

euro conversion rate and the exchange rate

used under § 1.988–2(b)(3)(ii) is the

deutschmark/euro conversion rate. Thus,

with respect to the interest accrued in 1998,

X will realize exchange loss of 25.13 under

§ 1.988–2(b)(3) as follows: [ 488.89 (fl1100/

2.25)– 514.02 (DM1028.04/2) = – 25.13].

With respect to the one month of interest

accrued in 1999, X will realize no exchange

gain or loss since the exchange rate when the

interest accrued and the spot rate on the

payment date are the same.

(iii) X will realize exchange loss of 666.67

on repayment of the loan principal computed

in the same manner as in Example 1

[ 5333.33 (fl12,000/2.25)– 6000 fl12,000/1)/

2)]. The losses with respect to accrued

interest and principal are characterized and

sourced under the rules of section 988.

(iii) Special rule for legacy

nonfunctional currency. The QBU shall

realize or otherwise take into account

for all purposes of the Internal Revenue

Code the amount of any unrealized

exchange gain or loss attributable to

nonfunctional currency (as described in

section 988(c)(1)(C)(ii)) that is

denominated in a legacy currency as if

the currency were disposed of on the

last day of the taxable year immediately

prior to the year of change. The

character and source of the gain or loss

are determined under section 988.

(iv) Legacy currency denominated

accounts receivable and payable—(A) In

general. A QBU may elect to realize or

otherwise take into account for all

purposes of the Internal Revenue Code

the amount of any unrealized exchange

gain or loss attributable to a legacy

currency denominated item described in

section 988(c)(1)(B)(ii) as if the item

were terminated on the last day of the

taxable year ending prior to the year of

change.

(B) Time and manner of election.

With respect to a QBU that makes an

election described in paragraph

(c)(3)(iv)(A) of this section, an affected

taxpayer (as described in paragraph

(b)(3) of this section) shall attach a

statement to its tax return for the taxable

year of change which includes the

following: ‘‘TAXPAYER CERTIFIES

THAT A QBU OF THE TAXPAYER

HAS ELECTED TO REALIZE

CURRENCY GAIN OR LOSS ON

LEGACY CURRENCY DENOMINATED

ACCOUNTS RECEIVABLE AND

PAYABLE UPON CHANGE OF

FUNCTIONAL CURRENCY TO THE

EURO.’’ A QBU making the election

must do so for all legacy currency

denominated items described in section

988(c)(1)(B)(ii).

(4) Adjustments when a branch

changes its functional currency to the

euro—(i) Branch changing from a legacy

currency to the euro in a taxable year

during which taxpayer’s functional

currency is other than the euro. If a

branch changes its functional currency

from a legacy currency to the euro for

a taxable year during which the

taxpayer’s functional currency is other

than the euro, the branch’s euro equity

pool shall equal the product of the

legacy currency amount of the equity

pool multiplied by the applicable

conversion rate. No adjustment to the

basis pool is required.

(ii) Branch changing from a legacy

currency to the euro in a taxable year

during which taxpayer’s functional

currency is the euro. If a branch changes

its functional currency from a legacy

currency to the euro for a taxable year

during which the taxpayer’s functional

currency is the euro, the taxpayer shall

realize gain or loss attributable to the

branch’s equity pool under the

principles of section 987, computed as

if the branch terminated on the last day

prior to the year of change. Adjustments

under this paragraph (c)(4)(ii) shall be

taken into account by the taxpayer

ratably over four taxable years beginning

with the taxable year of change.

(5) Adjustments to a branch’s

accounts when a taxpayer changes to

the euro—(i) Taxpayer changing from a

legacy currency to the euro in a taxable

year during which a branch’s functional

currency is other than the euro. If a

taxpayer changes its functional currency

to the euro for a taxable year during

which the functional currency of a

branch of the taxpayer is other than the

euro, the basis pool shall equal the

product of the legacy currency amount

of the basis pool multiplied by the

applicable conversion rate. No

adjustment to the equity pool is

required.

(ii) Taxpayer changing from a legacy

currency to the euro in a taxable year

during which a branch’s functional

currency is the euro. If a taxpayer

changes its functional currency from a

legacy currency to the euro for a taxable

year during which the functional

currency of a branch of the taxpayer is

the euro, the taxpayer shall take into

account gain or loss as determined

under paragraph (c)(4)(ii) of this section.

(6) Additional adjustments that are

necessary when a corporation changes

its functional currency to the euro. The

amount of a corporation’s euro currency

earnings and profits and the amount of

its euro paid-in capital shall equal the

product of the legacy currency amounts

of these items multiplied by the

applicable conversion rate. The foreign

income taxes and accumulated profits or

deficits in accumulated profits of a

foreign corporation that were

maintained in foreign currency for

purposes of section 902 and that are

attributable to taxable years of the

foreign corporation beginning before

January 1, 1987, also shall be translated

into the euro at the conversion rate.

(d) Effective date. This section applies

to tax years ending after July 29, 1998.

Par. 5. Section 1.1001–5T is added to

read as follows:

§ 1.1001–5T European Monetary Union

(conversion to the euro)(temporary).

(a) Conversion of currencies. For

purposes of § 1.1001–1(a), the

conversion to the euro of legacy

currencies (as defined in § 1.985–

8T(a)(1)) is not the exchange of property

for other property differing materially in

kind or extent.

(b) Effect of currency conversion on

other rights and obligations. For

purposes of § 1.1001–1(a), if, solely as

the result of the conversion of legacy

currencies to the euro, rights or

obligations denominated in a legacy

currency become rights or obligations

denominated in the euro, that event is

not the exchange of property for other

property differing materially in kind or

extent. Thus, for example, when a debt

instrument that requires payments of

amounts denominated in a legacy

currency becomes a debt instrument

requiring payments of euros, that

alteration is not a modification within

the meaning of § 1.1001–3(c).

(c) Effective date. This section applies

to tax years ending after July 29, 1998.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: July 17, 1998.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 98–20023 Filed 7–28–98; 8:45 am]

BILLING CODE 4830–01–U