Definition of Hyperinflationary Currency for
Purposes of Section 988

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-116567-99] RIN 1545-AX67

TITLE: Definition of Hyperinflationary Currency for Purposes of
Section 988

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Notice of proposed rulemaking and notice of public hearing

SUMMARY: This document contains proposed regulations concerning when
a currency will be considered hyperinflationary for purposes of
section 988. These regulations are intended to prevent distortions
associated with the computation of income and expense arising from
section 988 transactions denominated in hyperinflationary
currencies. This document also provides notice of a public hearing
on these regulations.

DATES: Written and electronic comments must be received by April 20,
2000. Requests to speak (with outlines of oral comments) at the
public hearing scheduled for May 17, 2000 at 10 a.m. must be
submitted by April 20, 2000.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-116567-99), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC. 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (REG-116567-99), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to the IRS site at
http://www.irs.ustreas.gov/tax-regs/regslist.html. The public
hearing is in room 2615, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Roger M. Brown at (202) 622-3830; concerning
submissions of comments, the hearing, and/or requests to be placed
on the building access list to attend the hearing, contact Guy R.
Traynor at (202)-622- 7180 (not toll-free numbers) .

SUPPLEMENTARY INFORMATION:

Background

This document contains a proposed amendment to the Income Tax
Regulations (26 CFR part 1) under section 988 of the Internal
Revenue Code (Code). On March 17, 1992, the IRS and Treasury
published final regulations in the Federal Register at 57 FR 9172
relating to the taxation of section 988 transactions, including,
inter alia, transactions denominated in hyperinflationary
currencies. Also on March 17, 1992, proposed regulations were
published in the Federal Register at 57 FR 9217 (INTL-15-91)
relating to the treatment of certain financial instruments
denominated in hyperinflationary currencies. The proposed
regulations did not separately define hyperinflationary currency.
Rather, they simply made reference to the definition in the final
regulations, �1.988-1(f).

Further, elsewhere in this issue of the Federal Register, TD 8860
finalized the proposed regulations issued in 1992. This notice of
proposed rulemaking is intended to accompany the publication of
these final regulations and propose a change in the period of years
that are considered in determining whether a currency is
hyperinflationary for purposes of section 988.

Explanation of Provisions

For purposes of section 988, the term hyperinflationary currency is
defined in �1.988-1(f), which utilizes the definition in �1.985-1(b)
(2)(ii)(D). This definition was developed in the context of the
Dollar Approximate Separate Transactions Method (DASTM) regulations,
�1.985-3, and generally considers the cumulative effects of
inflation over the base period in determining whether a currency is
hyperinflationary. The base period consists of the thirty-six
calendar month period immediately preceding the first day of the
current calendar year. Use of this base period is generally
appropriate in the context of DASTM because a qualified business
unit needs to know in advance if it is subject to �1.985-3
calculations. In part, this is because of the translation period
requirements of �1.985-3(c)(7).

However, failure to take the current year's inflation into account
for purposes of computing foreign currency gain or loss under
section 988 may lead to distortions in income and expense arising
from certain items whose cash flows reflect hyperinflationary
conditions because inflation may rise dramatically in single year.
Accordingly, the IRS and Treasury believe that for purposes of
section 988, it is more appropriate to consider the cumulative
inflation rate over the thirty-six month period ending on the last
day of the taxpayer's (or the qualified business unit's) current
taxable year. See also �1.905-3T(d)(4)(i) (including current year
inflation in determining whether a currency is hyperinflationary for
purposes of section 905). The change in the base period in this
notice of proposed rulemaking, however, applies only for the
purposes of section 988 and not for the purpose of determining
whether a taxpayer (or QBU) is subject to the provisions of
�1.985-3. However, other Code provisions may be affected by this
change, due to the relationship of their substantive rule to section
988. See, e.g., �1.267(f)-1(e) (relating to the application of the
loss disallowance rule of section 267(a)(1) as applied to related
party, nonfunctional currency loans).

Proposed Effective Date

These regulations are proposed to apply to transactions entered into
after February 14, 2000. Until these proposed regulations are
finalized, the existing final regulations under �1.988- 1(f) shall
remain in effect.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has
also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations, and, because these regulations do not impose a
collection of information on small entities, the provisions of the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply.
Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Small
Business Administration for comment on its impact on small
businesses.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic and written comments
(a signed original and eight (8) copies, if written) that are
submitted timely to the IRS. In particular, the IRS and Treasury are
interested in comments relating to the change in the measurement of
the base period, and suggesting other standards that may be applied
in determining whether a currency should be considered
hyperinflationary for purposes of section 988. Examples of the
latter category of comments.5 would be suggestions of alternative
time periods (base periods) and hyperinflationary thresholds (e.g.,
different from the current 100% cumulative inflation rate) which may
be used in determining whether a currency is hyperinflationary. All
comments will be available for public inspection and copying.

A public hearing has been scheduled for May 17, 2000, beginning at
10 a.m. in room 2615, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to building security procedures,
visitors must enter at the Constitution Avenue entrance, located
1111 Constitution Avenue. In addition, all visitors must present
photo identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate
entrance area more than 15 minutes before the hearing starts. For
information about having your name placed on the building access
list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT
section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons who wish to present oral comments at the hearing must submit
written comments by April 20, 2000, and submit an outline of the
topics to be discussed and the time to be devoted to each topic
(signed original and eight (8) copies) by April 20, 2000. A period
of ten (10) minutes will be allotted to each person for making
comments. An agenda showing the scheduling of speakers will be
prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the
hearing.

Drafting Information

The principal author of these regulations is Roger M. Brown of the
Office of the Associate Chief Counsel (International). However,
other personnel from the IRS and Treasury Department.6 also
participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements. Proposed
Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows: Authority: 26 U.S.C. 7805 * * *

Par. 2. In �1.988-1 paragraph (f) is revised to read as follows:
�1.988-1 Certain definitions and special rules.

* * * * *

(f) Hyperinflationary currency--(1) Definition. For purposes of
section 988, a hyperinflationary currency means a currency described
in �1.985-1(b)(2)(ii)(D). However, the base period means the thirty-
six calendar month period ending on the last day of the taxpayer's
(or qualified business unit's) current taxable year. Thus, for
example, if for 1996, 1997, and 1998, a country's annual inflation
rates are 6 percent, 11 percent, and 90 percent, respectively, the
cumulative inflation rate for the three-year base period is 124%
[((1.06 x 1.11 x 1.90) - 1.0 = 1.24) x 100 = 124%]. Accordingly,
assuming the QBU has a calendar year as its taxable year, the
currency of the country is hyperinflationary for the 1998 taxable
year..(2) Effective date. Paragraph (f)(1) shall apply to
transactions entered into after February 14, 2000.

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

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