March 29, 2007

The Honorable Mark W. Everson

Commissioner of Internal Revenue

Room 5203

PO Box 7604, Ben Franklin Station

Washington, DC 20220

Fax: (202) 622-1051

Mr. Jeffrey L. Dorfman

Branch Chief, Associate Chief Counsel (International)

Room 4562, CC:Intl:Br5

Internal Revenue Service

1111 Constitution Avenue

Washington, DC 20224

Fax (202) 622-4476

Re:      Comments on 2006 Proposed Section 987 Regulations

Dear Commissioner Everson and Mr. Dorfman:

On September 6, 2006, the Department of the Treasury and the Internal Revenue Service issued proposed regulations under section 987 regarding the determination of income and loss of certain qualified business units using functional currencies that are different from their owners, and the timing, amount, character, and source of section 987 gain or loss.  The proposed regulations were published in the September 7, 2006 issue of the Federal Register (71 Fed. Reg. 52876).  The preamble to the proposed regulations requests comments concerning various issues raised by the proposed regulations.

The American Institute of Certified Public Accountants offers the attached comments with respect to the proposed regulations.  In summary, we suggest the Department of the Treasury and the Internal Revenue Service reconsider the approach of the proposed regulations.  We are concerned that the proposed regulations will frustrate the currency reforms made by The Tax Reform Act of 1986 and will pose an unreasonable compliance burden on taxpayers.  However, if the approach of the proposed regulations is followed, we suggest that the final regulations:

·         Provide an election to make a section 481 adjustment in the transition year.  In order to avoid “cherry-picking,” the election should be subject to the conformity rule of prop. reg. section 1.987-10(c)(2);

·         Provide an election to transition to the method prescribed by the 2006 proposed regulations in any open year;

·         Permit a taxpayer to cure any violation of the limitation on the use of the deferral transition method found in prop. reg. section 1.987-10(a)(2) and provide a de minimis exception to the limitation;

·         Permit the use of the spot rate to determine the amount of assets and liabilities transferred from the owner to the section 987 qualified business unit (QBU) on the transition date;

·         Provide a simplified method for translating inventory;

·         Provide an election to translate current assets and liabilities that are section 987 historic assets as section 987 marked items;

·         Provide an election to apply a yearly average exchange rate convention to translate all current assets and liabilities that are section 987 historic assets (other than inventory) and property, plant, and equipment;

·         Provide an election to treat sales of property and services in the ordinary course of business as regarded transactions;

·         Apply to section 987 QBUs that are engaged in the business of lending principally to related parties;

·         Allow for grouping by an owner of less than all of its section 987 QBUs with the same functional currency;

·         Allow for grouping of QBUs with the same functional currency owned by different members of a consolidated group;

·         Provide an election to apply a yearly average exchange rate convention to translate all current liabilities for purposes of section 752;

·         Take section 704(c) into account in determining a partner’s share of the assets and liabilities of a section 987 QBU held through a partnership;

·         Treat a partnership as a QBU for the purpose of determining its taxable income and loss with respect to any assets and liabilities not held in an eligible QBU;

·         Permit the adoption or change of translation conventions for any section 987 QBU acquired in a non-terminating transaction from a person not related to the taxpayer before the transaction;

·         Eliminate as a termination trigger the loss of controlled foreign corporation (CFC) status;

·         Eliminate as a termination trigger the acquisition of a CFC by a non-CFC in a tax-free reorganization;

·         Eliminate as termination triggers (1) inbound section 332 liquidations; (2) inbound and outbound tax-free reorganizations; and (3) all section 351 exchanges with the following exceptions:  (a) where the functional currency of the distributee or transferee corporation is the same as the functional currency of the section 987 QBU of the distributor or transferor corporation; and (b) in the case of an inbound transaction, where section 987 loss would be recognized; and

·         Forgo treating section 987 gain or loss as subpart F income.

The AICPA is the national, professional organization of certified public accountants comprised of approximately 330,000 members.  Our members advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans.  Our members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America’s largest businesses.

*     *     *     *     *

The attached comments were developed by the Section 987 Task Force and approved by the International Taxation Technical Resource Panel and Tax Executive Committee. We would be pleased to discuss our comments with you or a member of your staff.  You may contact me at jeffery.hoops@ey.com; Neil Feinstein, Section 987 Task Force Chair, at nfeinstein@deloitte.com; or Eileen Sherr, AICPA Technical Manager, at esherr@aicpa.org.

Sincerely,

Jeffery R. Hoops

Chair, Tax Executive Committee

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