Euro conversion may be taxable.

• Author: Thomas, Jim

IRS personnel have publicly suggested that the looming introduction of the new European currency, the euro, probably should be treated as a change in functional currency and a change in accounting method for qualified business units (QBUs) that convert. The Service is currently studying the issue and intends to provide guidance on the matter.

The Treaty of Maastricht provides for the introduction of the euro in qualifying countries. The euro will be phased in from Jan. 1, 1999, until June 30, 2002. During that period, both the euro and the "old" currency will be legal tender. Effective July 1, 2002, the old national currencies of participating countries will cease to be legal tender. If the IRS maintains that the euro represents a new functional currency, it will have to determine the date at which such change occurs.

Officials will determine which countries have satisfied the requirements for inclusion under the treaty in the first half of 1998. It is a so expected that, during 1998, exchange rates between the eligible currencies and the euro will be permanently fixed. There are contradictory reports on which countries will meet the treaty requirements for inclusion, but the likely nominee to head the European Central Bank has cited the following: Austria, Belgium, Finland, France, Germany, Ireland, Luxembourg and the Netherlands. The United Kingdom and Denmark have stated that they will not participate immediately; others, such as Italy, Spain and Sweden, may not qualify.

Under Regs. Sec...