[Federal Register Volume 65, Number 9 (Thursday, January 13, 2000)]
[Proposed Rules]
[Pages 2084-2085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-645]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-116567-99]
RIN 1545-AX67


Definition of Hyperinflationary Currency for Purposes of Section 
988

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations concerning when a 
currency will be considered hyperinflationary for purposes of section 
988. These regulations are intended to prevent distortions associated 
with the computation of income and expense arising from section 988 
transactions denominated in hyperinflationary currencies. This document 
also provides notice of a public hearing on these regulations.

DATES: Written and electronic comments must be received by April 20, 
2000. Requests to speak (with outlines of oral comments) at the public 
hearing scheduled for May 17, 2000 at 10 a.m. must be submitted by 
April 20, 2000.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-116567-99), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC. 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-
116567-99), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS site at http://www.irs.ustreas.gov/tax-regs/regslist.html. The 
public hearing is in room 2615, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Roger M. Brown at (202) 622-3830; concerning submissions of comments, 
the hearing, and/or requests to be placed on the building access list 
to attend the hearing, contact Guy R. Traynor at (202) 622-7180 (not 
toll-free numbers) .

SUPPLEMENTARY INFORMATION:

Background

    This document contains a proposed amendment to the Income Tax 
Regulations (26 CFR part 1) under section 988 of the Internal Revenue 
Code (Code). On March 17, 1992, the IRS and Treasury published final 
regulations in the Federal Register at 57 FR 9172 relating to the 
taxation of section 988 transactions, including, inter alia, 
transactions denominated in hyperinflationary currencies. Also on March 
17, 1992, proposed regulations were published in the Federal Register 
at 57 FR 9217 (INTL-15-91) relating to the treatment of certain 
financial instruments denominated in hyperinflationary currencies. The 
proposed regulations did not separately define hyperinflationary 
currency. Rather, they simply made reference to the definition in the 
final regulations, Sec. 1.988-1(f).
    Further, elsewhere in this issue of the Federal Register, TD 8860 
finalized the proposed regulations issued in 1992. This notice of 
proposed rulemaking is intended to accompany the publication of these 
final regulations and propose a change in the period of years that are 
considered in determining whether a currency is hyperinflationary for 
purposes of section 988.

Explanation of Provisions

    For purposes of section 988, the term hyperinflationary currency is 
defined in Sec. 1.988-1(f), which utilizes the definition in 
Sec. 1.985-1(b)(2)(ii)(D). This definition was developed in the context 
of the Dollar Approximate Separate Transactions Method (DASTM) 
regulations, Sec. 1.985-3, and generally considers the cumulative 
effects of inflation over the base period in determining whether a 
currency is hyperinflationary. The base period consists of the thirty-
six calendar month period immediately preceding the first day of the 
current calendar year. Use of this base period is generally appropriate 
in the context of DASTM because a qualified business unit needs to know 
in advance if it is subject to Sec. 1.985-3 calculations. In part, this 
is because of the translation period requirements of Sec. 1.985-
3(c)(7).
    However, failure to take the current year's inflation into account 
for purposes of computing foreign currency gain or loss under section 
988 may lead to distortions in income and expense arising from certain 
items whose cash flows reflect hyperinflationary conditions because 
inflation may rise dramatically in a single year. Accordingly, the IRS 
and Treasury believe that for purposes of section 988, it is more 
appropriate to consider the cumulative inflation rate over the thirty-
six month period ending on the last day of the taxpayer's (or the 
qualified business unit's) current taxable year. See also Sec. 1.905-
3T(d)(4)(i) (including current year inflation in determining whether a 
currency is hyperinflationary for purposes of section 905). The change 
in the base period in this notice of proposed rulemaking, however, 
applies only for the purposes of section 988 and not for the purpose of 
determining whether a taxpayer (or QBU) is subject to the provisions of 
Sec. 1.985-3. However, other Code provisions may be affected by this 
change, due to the relationship of their substantive rule to section 
988. See, e.g., Sec. 1.267(f)-1(e) (relating to the application of the 
loss disallowance rule of section 267(a)(1) as applied to related 
party, nonfunctional currency loans).

Proposed Effective Date

    These regulations are proposed to apply to transactions entered 
into after February 14, 2000. Until these proposed regulations are 
finalized, the existing final regulations under Sec. 1.988-1(f) shall 
remain in effect.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and, because 
these regulations do not impose a collection of information on small 
entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply. Pursuant to section 7805(f) of the Internal 
Revenue Code, this notice of proposed rulemaking will be submitted to 
the Small Business Administration for comment on its impact on small 
businesses.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments (a 
signed original and eight (8) copies, if written) that are submitted 
timely to the IRS. In particular, the IRS and Treasury are interested 
in comments relating to the change in the measurement of the base 
period, and suggesting other

[[Page 2085]]

standards that may be applied in determining whether a currency should 
be considered hyperinflationary for purposes of section 988. Examples 
of the latter category of comments would be suggestions of alternative 
time periods (base periods) and hyperinflationary thresholds (e.g., 
different from the current 100% cumulative inflation rate) which may be 
used in determining whether a currency is hyperinflationary. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for May 17, 2000, beginning at 
10 a.m. in room 2615, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance, located 1111 
Constitution Avenue. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons who wish to present oral comments at the hearing must 
submit written comments by April 20, 2000, and submit an outline of the 
topics to be discussed and the time to be devoted to each topic (signed 
original and eight (8) copies) by April 20, 2000. A period of ten (10) 
minutes will be allotted to each person for making comments. An agenda 
showing the scheduling of speakers will be prepared after the deadline 
for receiving outlines has passed. Copies of the agenda will be 
available free of charge at the hearing.
    Drafting Information: The principal author of these regulations is 
Roger M. Brown of the Office of the Associate Chief Counsel 
(International). However, 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.

Proposed Amendments 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. 1.988-1 paragraph (f) is revised to read as 
follows:


Sec. 1.988-1  Certain definitions and special rules.

* * * * *
    (f) Hyperinflationary currency--(1) Definition. For purposes of 
section 988, a hyperinflationary currency means a currency described in 
Sec. 1.985-1(b)(2)(ii)(D). However, the base period means the thirty-
six calendar month period ending on the last day of the taxpayer's (or 
qualified business unit's) current taxable year. Thus, for example, if 
for 1996, 1997, and 1998, a country's annual inflation rates are 6 
percent, 11 percent, and 90 percent, respectively, the cumulative 
inflation rate for the three-year base period is 124% [((1.06  x  1.11 
x  1.90) - 1.0 = 1.24)  x  100 = 124%]. Accordingly, assuming the QBU 
has a calendar year as its taxable year, the currency of the country is 
hyperinflationary for the 1998 taxable year.
    (2) Effective date. Paragraph (f)(1) shall apply to transactions 
entered into after February 14, 2000.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-645 Filed 1-12-00; 8:45 am]
BILLING CODE 4830-01-P