Final and proposed DASTM regulations.

• Position: Dollar approximate separate transactions method - Tax Executives Institute International Tax Committee

On February 22, 1995, Tax Executives Institute submitted the following comments to the Internal Revenue Service and the U.S. Department of the Treasury on final regulations under section 985 of the Internal Revenue Code, relating to the computation and characterization of income and earnings and profits under the dollar approximate separate transactions method (DASTM). The comments, which took the form of a letter from TEI President Linda B. Burke to IRS Commissioner Margaret M. Richardson and Assistant Treasury Secretary Leslie B. Samuels, address several issues raised by the final DASTM regulations issued on December 31, 1992, and July 21, 1994, and the proposed transition rules issued on December 31, 1992. The Institute's submission was prepared under the aegis of its International Tax Committee whose chair is Philip J. Bergquist of Apple Computer, Inc. The following members of the Institute also contributed to the project: Thomas E. Berowski of the Aluminum Company of America, James A. McFall of Xerox Corporation, and Robert G. Sedlacek of Gerber Products Company.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on the proposed regulations under section 985 of the Internal Revenue Code, relating to the computation and characterization of income and earnings and profits under the dollar approximate separate transactions method (DASTM). In addition, this letter addresses several issues raised by the final DASTM regulations issued on December 31, 1992, and July 21, 1994, and the proposed transition rules issued on December 31, 1992.

The Institute commends the Treasury and IRS for issuing the final DASTM regulations which represent a significant improvement over the 1991 and 1989 proposed regulations. By bringing the DASTM method into even closer conformity with U.S. generally accepted accounting principles (GAAP), the final regulations will not only more accurately reflect taxable income and earnings and profits, but also significantly ease the administrative burden on taxpayers. TEI believes, however, that the final regulations seriously underestimate the administrative burden imposed in calculating DASTM gain or loss. The rules are simply unadministrable. In addition, the Institute remains concerned about the mandatory nature of the use of DASTM - a concern that has been compounded by the mandatory reversion requirements imposed by the 1994 proposed regulations. Finally, the Institute urges the Treasury and IRS to issue the final [sections] 1.985-7 transition rules as soon as possible.(1)

1. Proposed Regulations:

   Cessation of Hyperinflationary

   Status

   1. Mandatory Reversion from DASTM. TEI strongly objects to the mandatory reversion from DASTM when the currency ceases to be hyperinflationary. Prop. Reg. [sections] 1.985-1(b)(2)(ii)(E) requires that a qualified business unit (QBU) that has elected or been required to use the dollar as its functional currency under DASTM must change its functional currency as of the first day of the first taxable year that follows three consecutive taxable years in which the currency of its economic environment, determined under paragraph (c)(2) of this section, is not a hyperinflationary currency." The required movement in and out of DASTM imposes both harsh conversion rules and substantial administrative burdens on taxpayers.

      Under the mandatory requirement, a three-year inflation rate of less than 100 percent can easily cause taxpayers operating in countries with highly volatile foreign currencies to bounce between hyperinflationary and non-hyperinflationary status. Consider, for example, the financial situation in Mexico - a leading trading partner of the United States - where the economy has suddenly become unstable. In addition, since 1986, at least four countries - Afghanistan, Nigeria, Paraguay, and Suriname - have flipped' in and out of hyperinflationary status.

      Under Treas. Reg. [sections] 1.985-5, changing from DASTM requires the taxpayer to make adjustments to the QBU - s earnings and profits. When the QBU reverts from use of DASTM, its fixed assets will be translated under local currency spot rates.(2) Such an approach will distort the QBU's depreciation charges in relation to its operating income - a situation Congress wanted to avoid in providing for the DASTM election. See S. Rep. No. 99-841, 99th Cong., 2d Sess. 459 (1986). Eliminating the mandatory reversion will more closely effectuate congressional intent.(3)

      Moreover, flipping in and out of DASTM entails substantial administrative burdens. For example, taxpayers could be repeatedly required to change a QBU's reporting systems. Indeed, the requirement could well force taxpayers to maintain two reporting systems in the interim non-hyperinflationary period. In addition, under Financial Accounting Standard No. 52 (which is the basis for the DASTM rules), a QBU could maintain the dollar as its functional currency, even though the local currency may no longer be hyperinflationary for purposes of Treas. Reg. [sections] 1.985-1(b)(2)(ii)(D). If the QBU is forced to "flip" back...