Can Sec. 267(f) defer a debtor's currency loss?

• Author: Harper, Michael

Sec. 267(f) generally defers a loss on a sale or exchange of property between members of a controlled group until and unless certain timing conventions (akin to those applicable to consolidated group intercompany transactions) are met or the property leaves the group; see Sec. 267(f) and Regs. Sec. 1.267(f)-1. Sec. 267(f)(3)(C) and Regs. Sec. 1.267(f)-l(e) provide an exception for a holder of a debt instrument denominated in foreign currency, but do not address a debtor issuing a nonfunctional, currency-denominated instrument.

Cases

In Fairbanks, 306 US 436 (1939), the Supreme Court stated that an issuer's "payment and discharge of a bond is neither a sale nor exchange within the commonly accepted meaning of the words," even though Congress had provided for exchange treatment to the holder. Subsequently, in National-Standard Co., 80 TC 551 (1983), aff'd, 749 F2d 369 (6th Cir. 1984), satisfying a debt instrument denominated in a foreign currency was held not to be a "sale or exchange" in determining the character of the debtor's currency loss. The Sixth Circuit largely rested its decision on Fairbanks, despite the fact that nonfunctional currency was used to discharge the obligation. Around the same time, the Tax Court held that a borrower could deduct its foreign-currency loss arising from the redenomination of a loan obligation, because it was a closed and completed transaction (American Air Filter Co., 81 TC 709 (1983)).

Legislative Developments

Current Sec. 267(f) was added by the Deficit Reduction Act of 1984 (DRA '84). The legislative history does not mention any intent to change the debtor's treatment. Arguably, prior to the DRA '84, the enactment of Sec. 1234A, Gains or losses from certain terminations, reversed National-Standard, by causing gain or loss from terminating a foreign-currency obligation to be treated as from the sale of a capital asset; DRA '84, Section 102(e)(9), added a sentence to that provision, making Sec. 1234A inapplicable to the retirement of a debt instrument.

The Tax Reform Act of 1986 (TRA '86) added to the Code subpart J (foreign currency transactions) and Sec. 1271 (providing exchange treatment to the holder of a debt instrument on retirement). The legislative history of the TRA '86 refers to National-Standard several times, because the case relates to a separate transaction principle and the character of currency losses; see the General Explanation of the Tax Reform Act of 1986, p. 1068-1080. However, the...