PLR 201226011: IRS permits revocation of a foreign-currency election

Plain-English summary

A U.S. corporation asked to revoke an election made for its controlled foreign corporation under Treas. Reg. § 1.954-2(g)(4). The election affected how the corporation's foreign-currency gains and losses were taken into account in foreign personal holding company income. The IRS granted permission to revoke the election because circumstances had changed, including improved systems for tracking the controlled foreign corporation's currency transactions and a move of the relevant hedging program to that corporation. The revocation is effective for the taxpayer's taxable year in which the ruling is dated, and the taxpayer may not make a new election under the same regulation until the sixth taxable year after the first effective year of the revocation. The IRS expressed no opinion on whether the business-needs exception applies.

Ruling snapshot

• Question: May a taxpayer revoke an election under Treas. Reg. § 1.954-2(g)(4) for a controlled foreign corporation?
• Outcome: Approved
• Key authorities: IRC §§ 951, 952, 954, and 988; Treas. Reg. §§ 1.954-1 and 1.954-2

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201226011
Third Party Communication: None
Release Date: 6/29/2012
Date of Communication: Not Applicable
Person To Contact:
Index Number: 954.02-07
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Telephone Number:
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Refer Reply To:
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CC:INTL:B02
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PLR-138578-11
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Date:

March 19, 2012

LEGEND:

Taxpayer = -----------------------------
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CFC = ------------------------
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Country A = ---------

Year 1 = -------

Dear ---------------:

This is in response to a letter dated September 14, 2011, submitted on behalf of Taxpayer by its authorized representative, requesting a ruling granting Taxpayer permission to revoke an election made under Treas. Reg. § 1.954-2(g)(4) with respect to its controlled foreign corporation, CFC.

The ruling contained in this letter is based upon information and representations submitted by Taxpayer, and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of this request for ruling, such material is subject to verification upon examination. The information submitted in the request is substantially as set forth below.

FACTS

Taxpayer is a large corporation headquartered in the United States. It operates outside the United States in various foreign countries, including in Country A, where CFC is
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located. Taxpayer is the controlling U.S. shareholder of CFC. CFC uses the U.S. dollar as its functional currency.

In Year 1, Taxpayer made an election under Treas. Reg. § 1.954-2(g)(4) on behalf of CFC in the interest of administrative convenience. Specifically, at the time of the election, CFC did not have the systems in place that are necessary to appropriately track transactions generating currency gain or loss. As a result of the election, net foreign currency losses of CFC are taken into account to determine Taxpayer’s foreign personal holding company income (FPHCI), but net foreign currency gains cannot qualify for the business needs exception in § 1.954-2(g)(2) and are therefore FPHCI.

Because of significant changes of circumstances that have occurred since the Year 1 election, Taxpayer now wants to revoke the election. These changes of circumstances reflect changes in CFC’s business operations and its ability to track foreign currency transactions. Taxpayer believes that the business needs exception under Treas. Reg. § 1.954-2(g)(2) will likely allow it to exclude a significant portion of CFC’s section 988 foreign currency gains and losses from the calculation of FPHCI.

Volatility in the foreign currency markets has increased dramatically in recent years. Because of the increasing volatility of currency values and the significant number of non-functional currency transactions entered into by CFC, Taxpayer has undertaken a foreign currency hedging program across certain of its regional operating centers to manage the risks associated with certain of its non-functional currency exposures. To better match CFC’s non-functional currency exposures, Taxpayer is moving the hedging program for CFC’s region to CFC in 2012.

As a result of Taxpayer moving the regional hedging program to CFC, CFC now has better methods of tracking data associated with hedging operations than it did in Year 1, including the ability to track currency gains and losses for purposes of the business needs exception under Treas. Reg. § 1.954-2(g)(2).

RULINGS REQUESTED

Taxpayer requests permission to revoke the election under Treas. Reg. § 1.954-2(g)(4) that it made with respect to CFC.

LAW

Code section 951(a) requires a United States shareholder of a CFC to include in gross income its pro rata share of the CFC's subpart F income for the taxable year.

Code section 952(a) defines subpart F income to include, among other things, foreign base company income. Code section 954(a) defines foreign base company income to include FPHCI.
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Code section 954(c)(1)(D) provides that FPHCI includes the excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transactions unless the transaction is directly related to the business needs of the CFC.

Code section 988(a)(1) provides generally that any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss.

Code section 988(b)(1) defines foreign currency gain as any gain from a section 988 transaction to the extent such gain does not exceed gain realized by reason of changes in exchange rates on or after the booking date and before the payment date.

Code section 988(b)(2) defines foreign currency loss as any loss from a section 988 transaction to the extent such loss does not exceed the loss realized by reason of changes in exchange rates on or after the booking date and before the payment date.

Treas. Reg. § 1.954-1(c)(1)(ii) provides generally that a net loss in any category of FPHCI may not reduce income in any other category of FPHCI.

Treas. Reg. § 1.954-2(g)(2)(ii)(A) provides that foreign currency gain or loss directly related to the business needs of the CFC is excluded from FPHCI. Generally, foreign currency gain or loss is directly related to the business needs of a CFC if it falls within one of three categories of foreign currency transactions: (1) certain transactions or property related to the business activities of the CFC; (2) certain gains and losses from bona fide hedging transactions; or (3) transactions in dealer property. Foreign currency gains or losses that fall within the general definition of FPHCI under section 954(c)(1)(D) will be excluded from FPHCI if the business needs exceptions is met.

Treas. Reg. § 1.954-2(g)(4)(i) provides that a U.S. shareholder can elect to include in its computation of FPHCI the excess of foreign currency gains over losses or the excess of foreign currency losses over gains attributable to any section 988 transaction (except gains or losses treated as capital gain or loss under section 988(a)(i)(B)). Thus, the general rule of Treas. Reg. § 1.954-1(c)(1)(ii) that net foreign currency losses may not reduce income in any other category of FPHCI would not apply if the CFC has made this election because the regulations specifically provide that the excess of foreign currency losses over foreign currency gains may reduce other categories of FPHCI.

Treas. Reg. § 1.954-2(g)(4)(iii) provides that an election under Treas. Reg. § 1.954- 2(g)(4)(i) is effective for the taxable year of the CFC for which it is made and all subsequent years of such CFC unless revoked by or with the consent of the Commissioner.
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ANALYSIS

As a U.S. shareholder of CFC, Taxpayer must include in gross income its pro rata share of CFC’s subpart F income for the taxable year, including its FPHCI. Since Taxpayer made an election on behalf of CFC under Treas. Reg. § 1.954-2(g)(4), CFC is subject to the terms of that election for purposes of calculating its FPHCI. Therefore, in the absence of consent being granted to revoke the Treas. Reg. § 1.954-2(g)(4) election made by Taxpayer, CFC must include its net foreign currency gains as FPHCI, without application of any of the exceptions to inclusion of the gains as FPHCI that might otherwise apply.

RULING

Based upon the facts submitted, permission is granted for Taxpayer to revoke the election under Treas. Reg. § 1.954-2(g)(4). The revocation is effective for the taxable year of Taxpayer in which this letter ruling is dated. Additionally, Taxpayer is prohibited from making a new election under Treas. Reg. § 1.954-2(g)(4) until the sixth taxable year following the taxable year for which the revocation is first effective.

No opinion is expressed about whether the business needs exception is satisfied in this case.

This private letter ruling is directed only to the taxpayer who requested it. Code section 6110(k)(3) provides that it may not be used or cited as precedent.

A copy of this letter ruling must be attached to any federal income tax return to which it is relevant.

In accordance with the Power of Attorney on file with this office, copies of this letter are being sent to Taxpayer's representatives.

Sincerely,

Jeffery G. Mitchell
Chief, Branch 2
(International)