NYSBA Members Address Proposed Foreign Currency Hedging Regs

New York State Bar Association Tax Section

Karen Sowell of the New York State Bar Association Tax Section has submitted a report on proposed regulations (<a href="/lr/resolve//1xfhr">REG-119514-15</a>) under sections 446, 954, and 988, addressing issues raised by the regs regarding the application of the foreign personal holding company income rules for transactions that hedge foreign currency risk. The report notes that the preamble to the proposed regs identified several aspects of the current rules that result in mismatches between the classification (as subpart F income or not subpart F income) or timing of related items of foreign currency gain or loss incurred by a controlled foreign corporation. The tax section states that the regs proposed sensible adjustments to those rules that will help ensure that a U.S. shareholder’s economically realized section 988 gain or loss is appropriately reflected in the U.S. shareholder’s subpart F inclusion. The report also notes that the proposed regs were released the same week that the Tax Cuts and Jobs Act (<a href="/lr/resolve//1xftl">P.L. 115-97</a>) was enacted. The new current inclusion regime for non-subpart F income of CFCs increases the need to appropriately measure the subpart F income arising from section 988 transactions, section members say. Further, section members state that — given the rate differential for subpart F inclusions, section 951A inclusions, and dividends eligible for a section 245A deduction — the proper delineation affects rates. Under the pre-TCJA law, it only implicated timing. Section members also address some issues regarding the regs that arise under the TCJA. Section members state that the proposed regs are helpful in addressing the treatment of a CFC’s foreign currency hedge of a net investment when it conducts business operations in a currency environment that differs from the CFC’s functional currency. The report includes several comments and suggestions on what section members say is a complex topic. The preamble to the proposed regs describes applicability dates for the various provisions that section members say are significant for several reasons, including that some of the new provisions could be viewed as adjustments or clarifications of the rules to conform them to existing taxpayer positions. Section members have asked Treasury and the IRS to clarify how they intend to treat pre-effective date transactions.

Karen Sowell of the New York State Bar Association Tax Section has submitted a report on proposed regulations under sections 446, 954, and 988, addressing issues raised by the regs regarding the application of the foreign personal holding company income rules for transactions that hedge foreign currency risk.

Karen Sowell of the New York State Bar Association Tax Section has submitted a report on proposed regulations (REG-119514-15) under sections 446, 954, and 988, addressing issues raised by the regs regarding the application of the foreign personal holding company income rules for transactions that hedge foreign currency risk. The report notes that the preamble to the proposed regs identified several aspects of the current rules that result in mismatches between the classification (as subpart F income or not subpart F income) or timing of related items of foreign currency gain or loss incurred by a controlled foreign corporation. The tax section states that the regs proposed sensible adjustments to those rules that will help ensure that a U.S. shareholder’s economically realized section 988 gain or loss is appropriately reflected in the U.S. shareholder’s subpart F inclusion. The report also notes that the proposed regs were released the same week that the Tax Cuts and Jobs Act (P.L. 115-97) was enacted. The new current inclusion regime for non-subpart F income of CFCs increases the need to appropriately measure the subpart F income arising from section 988 transactions, section members say. Further, section members state that — given the rate differential for subpart F inclusions, section 951A inclusions, and dividends eligible for a section 245A deduction — the proper delineation affects rates. Under the pre-TCJA law, it only implicated timing. Section members also address some issues regarding the regs that arise under the TCJA. Section members state that the proposed regs are helpful in addressing the treatment of a CFC’s foreign currency hedge of a net investment when it conducts business operations in a currency environment that differs from the CFC’s functional currency. The report includes several comments and suggestions on what section members say is a complex topic. The preamble to the proposed regs describes applicability dates for the various provisions that section members say are significant for several reasons, including that some of the new provisions could be viewed as adjustments or clarifications of the rules to conform them to existing taxpayer positions. Section members have asked Treasury and the IRS to clarify how they intend to treat pre-effective date transactions.

Sec. 954 Foreign base company income

Sec. 988 Treatment of certain foreign currency transactions

Sec. 446 General rule for methods of accounting

United States

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NYSBA Members Address Proposed Foreign Currency Hedging Regs