October 9, 1989
TO: TAX MEMBERS NO. 37-89
CLOSED-END FUND MEMBERS NO. 51-89
INTERNATIONAL FUNDS TASK FORCE NO. 15-89
ACCOUNTING/TREASURERS COMMITTEE NO. 43-89
RE: FUNCTIONAL CURRENCY REGULATIONS ON QUALIFIED
BUSINESS UNIT
__________________________________________________________
As we previously informed you, last year the Treasury
Department published two sets of temporary regulations providing
guidance on functional currency issues. (See Institute
Memorandum to Tax Members No. 35-88, Closed-End Fund Members No.
33-88 and Accounting/Treasurers Advisory Committee No. 26-88,
dated June 27, 1988). These regulations provided guidance with
respect to the foreign currency requirements in Code sections 985
through 989 which require generally that all federal income tax
determinations be made in a taxpayer's functional currency.
The first set of temporary regulations issued last year
(under section 985) defined functional currency and provided
certain rules for taxpayer elections and methods of accounting.
The second set of temporary regulations (issued under section
989) set forth the requirements for a qualified business unit
("QBU"). Under these rules, a QBU is a separate and clearly
identified unit of a trade or business of a taxpayer that may, in
certain instances, have its own functional currency.
The attached recently published regulations finalize the
temporary regulations issued last June under section 985 and, in
addition, contain new temporary and proposed regulations under
section 985 regarding (1) adjustments required upon a change in
functional currency, (2) transition rules for a QBU that uses the
dollar approximate separate transactions method of accounting,
and (3) the definition of weighted average exchange rate.
The final regulations resolve one issue not addressed by
the earlier temporary regulations. Specifically, an example has
been added to illustrate that a domestic regulated investment
company ("RIC") "operating exclusively abroad" can have a QBU
which has a non-dollar functional currency. In the example, the
principal activities of the "branch" of a single-country fund
consist of buying and selling stock and securities of the foreign
country's companies and the securities issued by the foreign
country. Under United States generally accepted accounting
principles ("GAAP"), the functional currency of the branch would
be the U.S. dollar. The example concludes, however, that since
GAAP is not based on facts and circumstances substantially
similar to those in these regulations, the branch may choose the
foreign country's currency as its functional currency, provided
it keeps its books and records in the foreign country's currency.
The final regulations, and the removal of the temporary
regulations they replace, are effective for all taxable years
beginning after October 20, 1989 and may be applied to all
taxable years beginning after December 31, 1986. The temporary
and proposed regulations published in this set of regulations are
effective for all taxable years beginning after December 31,
1986.
Written comments and requests for a public hearing with
respect to the new temporary and proposed regulations must be
submitted to IRS by November 20, 1989. Please contact the
undersigned at (202) 955-3585 by November 3, 1989 if you would
like the Institute to file comments on these regulations.
We will keep you informed of developments.
Keith D. Lawson
Assistant General Counsel
Attachment