[Title 26 CFR 1.985-6]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.985-6 - Transition rules for a QBU that uses the dollar approximate separate transactions method for its first taxable year beginning in 1987.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01false1.985-6Sec. 1.985-6INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.985-6  Transition rules for a QBU that uses the dollar approximate separate transactions method for its first taxable year beginning in 1987.

    (a) In general. This section sets forth transition rules for a QBU 
that used the dollar approximate separate transactions method of 
accounting set forth in Sec. 1.985-3 or Sec. 1.985-3T (as contained in 
the April 1, 1989 edition of 26 CFR part 1 (1.908 to 1.1000)) for its 
first taxable year beginning in 1987 (DASTM QBU). A DASTM QBU must 
determine the

[[Page 558]]

dollar and hyperinflationary currency basis of its assets and the dollar 
and hyperinflationary currency amount of its liabilities that were 
acquired or incurred in taxable years beginning before January 1, 1987. 
In addition, a DASTM QBU must determine its net worth, including its 
retained earnings, at the end of the QBU's last taxable year beginning 
before January 1, 1987. This section provides rules for controlled 
foreign corporations (as defined in section 957 or section 
953(c)(1)(B)), other foreign corporations, and branches of United States 
persons that must make these determinations.
    (b) Certain controlled foreign corporations. If a DASTM QBU was a 
controlled foreign corporation for its last taxable year beginning 
before January 1, 1987, and it had a significant event as described in 
Sec. 1.964-1(c)(6) in a taxable year beginning before January 1, 1987, 
then the rules of this paragraph (b) shall apply.
    (1) Basis in assets and amount of liabilities. The hyperinflationary 
currency adjusted basis of the QBU's assets and the hyperinflationary 
currency amount of the QBU's liabilities acquired or incurred by the QBU 
in a taxable year beginning before January 1, 1987, shall be the basis 
or the amount as determined under Sec. 1.964-1(e) prior to translation 
under Sec. 1.964-1(e)(4). The dollar adjusted basis of such assets and 
the dollar amount of such liabilities shall be the adjusted basis or the 
amount as determined under the rules of Sec. 1.964-1(e) after 
translation under Sec. 1.964-1(e)(4).
    (2) Retained earnings. The dollar amount of the QBU's retained 
earnings at the end of its last taxable year beginning before January 1, 
1987, shall be the dollar amount determined under Sec. 1.964-1(e)(3).
    (c) All other foreign corporations. If a foreign corporation is a 
DASTM QBU that is not described in paragraph (b) of this section, then 
the hyperinflationary currency and dollar adjusted basis in the QBU's 
assets acquired in taxable years beginning before January 1, 1987, the 
hyperinflationary currency and dollar amount of the QBU's liabilities 
acquired or incurred in taxable years beginning before January 1, 1987, 
and the dollar amount of the QBU's net worth, including its retained 
earnings, at the end of its last taxable year beginning before January 
1, 1987, shall be determined by applying the principles of Sec. 1.985-3T 
or Sec. 1.985-3. Thus, for example, the dollar basis of plant and 
equipment shall be determined using the appropriate historical exchange 
rate.
    (d) Pre-1987 section 902 amounts--(1) Translation of pre-1987 
section 902 accumulated profits and taxes into United States dollars. 
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, shall be translated into dollars at the spot exchange rate on the 
first day of its first taxable year beginning after December 31, 1986. 
Once translated into dollars, these accumulated profits and taxes shall 
(absent a change in functional currency) remain in dollars for all 
federal income tax purposes.
    (2) Carryforward of accumulated deficits in accumulated profits from 
pre-1987 taxable years to post-1986 taxable years. For purposes of 
sections 902 and 960, the post-1986 undistributed earnings of a foreign 
corporation that is subject to the rules of this section shall be 
reduced by the dollar amount of the corporation's deficit in accumulated 
profits, if any, determined under section 902 and the regulations 
thereunder, that was accumulated at the end of the corporation's last 
taxable year beginning before January 1, 1987. The dollar amount of the 
accumulated deficit shall be determined by multiplying the foreign 
currency amount of such deficit by the spot exchange rate on the last 
day of the corporation's last taxable year beginning before January 1, 
1987, and shall be taken into account on the first day of the 
corporation's first taxable year beginning after December 31, 1986. 
Post-1986 undistributed earnings may not be reduced by the dollar amount 
of a pre-1987 deficit in retained earnings determined under Sec. 1.964-
1(e).
    (e) Net worth branch. If a DASTM QBU is a branch of a United States 
person and the QBU used a net worth method of accounting for its last 
taxable year beginning before January 1,

[[Page 559]]

1987, then the rules of this paragraph (e) shall apply. A net worth 
method of accounting is any method of accounting under which the 
taxpayer calculates the taxable income of a QBU based on the net change 
in the dollar value of the QBU's equity (assets minus liabilities) 
during the course of a taxable year, taking into account any 
contributions or remittances made during the year. See, e.g., Rev. Rul. 
75-106, 1975-1 C.B. 31. (See Sec. 601.601(d)(2)(ii)(b) of this chapter).
    (1) Basis in assets and amount of liabilities--(i) Hyperinflationary 
amounts. For the first taxable year beginning in 1987, the 
hyperinflationary currency adjusted basis of a QBU's assets or the 
hyperinflationary currency amounts of its liabilities acquired or 
incurred in a taxable year beginning before January 1, 1987 is the 
hyperinflationary currency basis or amount at the date when acquired or 
incurred, as adjusted according to United States generally accepted 
accounting and tax accounting principles. If a hyperinflationary 
currency basis or amount was not determined at such date, the dollar 
basis or amount, as adjusted according to United States generally 
accepted accounting and tax accounting principles, shall be translated 
into hyperinflationary currency at the spot exchange rate on the date 
when the asset or liability was acquired or incurred.
    (ii) Dollar amounts. For the first taxable year beginning in 1987, 
the dollar adjusted basis of the QBU's assets and the amounts of its 
liabilities shall be those amounts reflected on the QBU's dollar books 
and records at the end of the taxpayer's last taxable year beginning 
before January 1, 1987, after adjusting the books and records according 
to United States generally accepted accounting and tax accounting 
principles.
    (2) Ending net worth. The dollar amount of the QBU's net worth at 
the end of its last taxable year beginning before January 1, 1987 shall 
equal the QBU's net worth at that date as determined under paragraph 
(e)(1)(ii) of this section.
    (f) Profit and loss branch. If a DASTM QBU is a branch of a United 
States person and the QBU used a profit and loss method of accounting 
for its last taxable year beginning before January 1, 1987, then the 
United States person shall first apply the transition rules of 
Sec. 1.987-5 in order to determine the beginning amount and dollar basis 
of the branch's EQ pool, the hyperinflationary currency basis of the 
branch's assets, and the hyperinflationary currency amounts of its 
liabilities. A profit and loss method of accounting is any method of 
accounting under which the taxpayer calculates the profits of a QBU by 
computing the QBU's profits in its functional currency and translating 
the net result into dollars. See e.g., Rev. Rul. 75-107, 1975-1 C.B. 32. 
(See Sec. 601.601(d)(2)(ii)(b) of this chapter). The QBU and the 
taxpayer must then make the adjustments required by Sec. 1.985-5, e.g., 
the QBU must take into account unrealized exchange gain or loss on 
dollar-denominated section 988 transactions, the taxpayer must account 
for the deemed termination of the branch, and the taxpayer must 
translate the QBU's balance sheet items from hyperinflationary currency 
into dollars at the spot rate.

[T.D. 8464, 58 FR 234, Jan. 5, 1993]