The U.S. dollar approximate separate transactions method of accounting (DASTM) rules of Regs. Sec. 1.985-3 govern the tax accounting of items from a qualified business unit (QBU) that uses a functional currency that becomes "hyperinflationary" for U.S. federal income tax purposes.
Generally, a U.S. taxpayer and each of its QBUs must make all determinations under subtitle A of the Code (regarding income taxes) in its respective functional currency (Regs. Sec. 1.985-1(a)(1)). However, U.S. taxpayers may not determine and report tax items of a QBU based on a hyperinflationary functional currency, because doing so generally would result in an overstatement or understatement of income, deduction, gain, or loss.
For U.S. federal income tax purposes, a currency becomes hyperinflationary when it has a cumulative compounded inflation rate of at least 100% over three consecutive calendar years (the base period) (Regs. Sec. 1.985-1(b)(2)(ii)(D)). U.S.-owned corporations and branches must use DASTM to determine and report gross income, taxable income or loss, or earnings and profits (E&P) of a QBU that used a hyperinflationary currency as its functional currency. A taxpayer must start using DASTM for the tax year that begins after the currency becomes hyperinflationary (Regs. Sec. 1.985-1(b)(2)(ii)).
Prior to implementing the DASTM rules of Regs. Sec. 1.985-3, a taxpayer first must apply the transition rules of Regs. Sec. 1.985-7. The transition rules are intended to mitigate the impact of hyperinflation on a taxpayer's U.S.-dollar tax basis with respect to assets in its QBU during the base period. Thus, to transition into DASTM, first the QBU must translate its hyperinflationary currency profit-and-loss statement (P&L), balance sheet, and E&P into U.S. dollars as of the last day of the tax year ending before the base period.
The transition rules recognize that a currency may become hyperinflationary over multiple tax years; accordingly, the first translation under DASTM occurs to the P&L statement and balance sheet as determined three years prior to when the currency becomes hyperinflationary. Therefore, to the extent tax attributes were affected by the currency's attaining its hyperinflationary status, that effect is captured by the transition rules and taken into account in the first year in which DASTM applies.
Although DASTM requires the QBU to use the U.S. dollar as its functional currency for U.S. federal income tax purposes...