Permission to integrate foreign-currency hedges with an anticipated cross-border stock acquisition under section 988

Plain-English summary

A publicly traded U.S. parent, whose functional currency is the dollar, is using a subsidiary to acquire 100% of a foreign publicly traded target. Target shareholders can take cash (paid in the foreign currency) or, by election, parent stock. Because the subsidiary must pay the cash in a foreign currency while keeping its books in dollars, it faces foreign-currency risk, so it buys the foreign currency and currency derivatives to hedge up to the maximum cash it might owe. Ordinarily, the tax rules in Treas. Reg. § 1.988-5(b) let a taxpayer "integrate" a currency hedge with the underlying deal, so gain or loss on the hedge is folded into the deal instead of being taxed separately, but only if there is a qualifying "executory contract," and an anticipated stock purchase does not count. Using the Commissioner's special discretion under Treas. Reg. § 1.988-5(e), the IRS ruled that the subsidiary may apply the § 1.988-5(b) integration principles to its hedges of the anticipated acquisition, treating the anticipated stock purchase as an executory contract and the currency positions as hedges, subject to detailed conditions. Those conditions include disposing of any "unneeded" hedge on a first-in, first-out basis whenever the required cash amount is reduced, spreading the net hedge gain or loss into the basis of the acquired target shares, and, if the deal does not close within one year, treating the hedges as sold at fair market value with the resulting gain or loss recognized as section 988 gain or loss. The IRS also approved a closing agreement with the parent. This matters to multinationals because it shows how the IRS will let a buyer match the tax timing of its currency hedges to a large cross-border cash acquisition rather than recognizing volatile standalone currency gains and losses.

Ruling snapshot

• Question: May the subsidiary integrate its foreign-currency hedges with the anticipated cross-border stock acquisition under Treas. Reg. § 1.988-5(e), even though an anticipated stock purchase is not a qualifying executory contract under § 1.988-5(b)?
• Outcome: Approved (permission granted to apply the § 1.988-5(b) integration principles with specified modifications; a closing agreement with the parent was approved)
• Key authorities: IRC § 988(d); Treas. Reg. § 1.988-5(b), (e); IRC § 985(b); §§ 267(b), 707(c)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202152012 [Third Party Communication:
Release Date: 12/30/2021 Date of Communication: Month DD, YYYY]
Index Number: 988.05-00
Person To Contact:
--------------------- -----------------, ID No. -----------------
------------------------- Telephone Number:
------------------------------- --------------------
--------------------------------- Refer Reply To:
CC:INTL:BR5
PLR-108934-21
Date:
October 01, 2021

Legend

Amount A = ---------
Amount B = ------
Amount C = ---------
Amount D = ----------------------------
Amount E = ----------------------------
Amount F = ----------------------------
Amount G = ------
Amount H = ------
Amount I = ------
Amount J = ---------------------
Bank = ------------------------------------------------
Business A = -------------------------------------------------------------------------------------------
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Business B = ------------------------------------------
Country A = -----------------------------------------------------------------------------
Currency A = -----------------------------------------
Date A = ------------------
Date B = -------------------
Date C = ------------------
Method 1 = -------------------------------------------------------------------------------------------
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Method 2 = -------------------------------------------------------------------------------------------
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Number A = -------------------
Parent = -------------------------------------------------------------------------------------------
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Plan A = ----------------------------------------------------------------
PLR-108934-21 2

Subsidiary = -------------------------------------------------------------------------------------------
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Target = -------------------------------------------------------------------------------------------
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Dear -------------:

This letter responds to a letter dated Date A, requesting a ruling pursuant to Treas. Reg.
§1.988-5(e) regarding the U.S. federal income tax treatment of hedges of Subsidiary’s
foreign currency exposure with respect to the anticipated acquisition of Target shares.

The rulings contained in this letter are based on information and representations
submitted by you and your representatives and accompanied by a penalties of perjury
statement executed by the appropriate party. While this office has not verified any of
the materials submitted in support of the ruling request, it is subject to verification on
examination.

                                               Facts

Parent represents the following facts:

Parent is a widely-held, publicly-traded domestic corporation and the common parent of
an affiliated group of corporations that files a consolidated U.S. federal income tax
return. Subsidiary is an indirect, wholly-owned subsidiary of Parent that is a member of
Parent’s consolidated group. All the entities between Parent and Subsidiary are wholly-
owned directly or indirectly by Parent and members of Parent’s consolidated group.
Parent and Subsidiary’s functional currency (as defined in section 985(b)) is the United
States dollar (“USD”). Parent and Subsidiary are calendar year taxpayers that use the
accrual method of accounting.

The Parent consolidated group engages in Business A, which is subject to significant
regulation. Subsidiary was formed on Date B to acquire Target. Subsidiary will not
have any assets or activities unrelated to the acquisition of the Target shares (the
“Acquisition”) and will not have any Currency A hedges (including Currency A deposits)
other than the hedges for the Maximum Cash Amount (as defined below) and the
refinancing of certain Target debt.

Target is a widely-held, publicly-traded Country A entity that is treated as a corporation
for U.S. federal income tax purposes. Target and its subsidiaries engage in Business B.

In addition to outstanding Target shares, certain employees of Target have, or will have,
stock options awarded under Plan A that vest and become exercisable on the date the
PLR-108934-21 3

court approves the Acquisition under Method 1 or the date the Method 2 closing and
acceptance conditions are satisfied, as applicable, resulting in additional Target shares
outstanding immediately prior to the closing of the Acquisition or if the closing occurs in
multiple stages, the first closing (the stock options, the “Employee Stock Options” and
the Target shares that result from the deemed exercise of the Employee Stock Options,
the “Employee Shares”). An Employee Stock Option may lapse for various reasons,
including, except in certain limited permitted circumstances, when a Target employee
ceases to be an employee of the Target before the Employee’s Stock Option vests.
Any Employee Stock Option not outstanding on Date A will be projected based on Plan
A to be issued between Date A and the closing date and is limited pursuant to the terms
of the offer announcement to Employee Stock Option issuances that would occur in the
ordinary course of business, which projections will be updated as necessary.

Parent and Subsidiary (together, the “Offerors”) intend to acquire 100% of the
outstanding Target shares (including the Employee Shares, which will be outstanding
Target shares immediately prior to the closing of the Acquisition), and, unless the
Acquisition does not occur, there should not be any scenario in which the Offerors
acquire less than 100% of Target. The Acquisition will occur pursuant to Method 1 or
Method 2, and in either case will be completed within one year of Date A. The Offerors
have not and will not acquire Target shares other than pursuant to the Acquisition.

Method 1 requires acceptances of an acquisition by a target’s shareholders attending a
special shareholder meeting representing (i) more than Amount I in number of
shareholders voting, in person or by proxy, and (ii) at least Amount G in value of the
shares being voted on a class-by-class basis, as well as approval of the applicable court
under Country A law. This is the Method 1 acceptance requirement.

Method 2 requires acceptances of more than Amount I of a target’s voting stock. The
Method 2 acceptance requirement is the acceptance percentage specified by an offeror
that is more than Amount I. If Amount H of target’s voting stock accepts, then the
offeror can squeeze out any remaining target shareholders. To squeeze-out
shareholders that did not accept the offer, the offeror must provide those shareholders
with a notice that states the shares will be compulsorily acquired at the end of a six-
week period (the “Squeeze-out Period”). If no squeeze-out shareholder succeeds in
overturning the squeeze-out in court by the last day of the Squeeze-out Period, the
offeror will acquire the shares on that day (the “Squeeze-out Date”).

Under both Method 1 and Method 2, an offering is commenced by an announcement
(the “offering announcement”), which effectively commits the offeror to make the offer.
The offeror must proceed with the offer unless a condition to the offer is not met. The
permitted conditions are narrow and outside the control of the offeror, and generally
cannot include financing. An offeror can make an offering announcement only if it has
the ability to satisfy any cash consideration offered to the target shareholders.
PLR-108934-21 4

Under the laws of Country A, the offeror is required to proceed with an announced offer
unless, subject to those laws, a condition set forth in the announcement is not met.
Under the laws of Country A, the offeror may invoke the failure to obtain regulatory
approval or the occurrence of a material adverse change in only very limited
circumstances. To the best of Parent’s knowledge, there has never been a successful
attempt to invoke a material adverse change condition to terminate an offer under
Country A law.

Parent issued an offering announcement on Date A to acquire Target shares pursuant
to Method 1 on behalf of the Offerors, subject to the following closing conditions: (i)
approval of Parent’s shareholders to issue new Parent stock for the Stock Consideration
(as defined below), which requires a majority of votes cast by Parent shareholders at
Parent’s shareholder meeting, (ii) approval from certain regulators in a limited number of
jurisdictions, and (iii) the absence of a material adverse change. The announcement
was made with the support of Target’s board of directors, which voted to support the
Acquisition. Under the terms of Parent’s announcement, a Target shareholder receives
Amount A per Target share (the “Cash Consideration”) or, at the election of the Target
shareholder, Amount B of Parent shares per Target share (the “Stock Consideration”),
the value of which equaled Amount C per Target share on Date A. A Target
shareholder (including any person that will be a Target shareholder as a result of the
exercise of an Employee Stock Option) will receive Cash Consideration unless the
Target shareholder elects Stock Consideration.

All Cash Consideration will be paid by Subsidiary. All Stock Consideration will be paid
by Parent. Parent will contribute the Target shares it acquires down the chain of
ownership to Subsidiary, and Subsidiary will receive the Target shares acquired by
Parent in the Acquisition within two days of Parent acquiring the shares.

Under Method 1, Target shareholders have until a week before the court approval to
make or revoke an election to take Stock Consideration. Under Method 2, Target
shareholders that accept the Acquisition offer can elect Stock Consideration at that
time, which cannot be subsequently revoked unless the acceptance condition for
Method 2 is not satisfied within 42 days after the offering circular has been mailed to the
Target shareholders, in which case any Target shareholder may change the type of
consideration it is requesting until the acceptance condition is met or the offer under
Method 2 lapses. No changes to the form of consideration that a Target shareholder
will receive can be made after the offer under Method 2 becomes unconditional (in other
words, once all the acceptance and closing conditions are satisfied). The Offerors will
provide Target shareholders subject to the squeeze out with an additional opportunity to
elect Stock Consideration, which also cannot be subsequently revoked. Employee
Shares are not taken into account in determining whether the acceptance condition has
been satisfied under Method 1 or Method 2. Under Method 2, the Employee Shares are
acquired when Method 2 becomes unconditional. The Employee Shares will not be part
of the squeeze out.
PLR-108934-21 5

As of Date A, Target shareholders representing Amount D of Target’s outstanding stock
have irrevocably agreed to vote for the Acquisition and Target shareholders
representing Amount E of Target’s outstanding stock have irrevocably agreed to elect
Stock Consideration (the “Irrevocable Stock Elections”). In addition, as of Date A,
Parent shareholders representing Amount F of the outstanding Parent stock have
irrevocably agreed to vote for the issuance of new shares to pay the Stock
Consideration.

While the Offerors may be entitled to switch to Method 2 in additional circumstances,
the Offerors will only switch to Method 2 if (i) a third party announces a firm intention to
make an offer for all or part of the Target stock or (ii) Method 1 does not receive the
required court approval, neither of which is expected to occur. It is not expected that
the Offerors will switch to Method 2. If the Offerors switch to Method 2, they intend to
require acceptances by Amount H of Target’s outstanding shares and follow up with a
squeeze out transaction to acquire any remaining outstanding Target shares.

Taking into account the Irrevocable Stock Elections, the amount of Currency A that
Subsidiary would be required to pay for Target shares pursuant to the Acquisition if no
other Target shareholders elected Stock Consideration as of Date A (the “Initial
Maximum Cash Amount”) is Amount J. Amount J equals the Cash Consideration for (1)
all outstanding Target shares on Date A other than the Target shares subject to an
Irrevocable Stock Election (the Target shares subject to the election, the “Irrevocable
Stock Election Shares”), (2) all Employee Shares resulting from the conversion of the
Employee Stock Options outstanding as of Date A pursuant to the Acquisition, and (3)
all Employee Shares resulting from the conversion of the Employee Stock Options
pursuant to the Acquisition projected based on Plan A to be issued between Date A and
the closing date, limited pursuant to the terms of the offer announcement to Employee
Stock Option issuances that would occur in the ordinary course of business as of Date
A.

Subsidiary has potential Currency A exposure as a result of the Acquisition because the
Cash Consideration must be paid in Currency A and Subsidiary has the USD as its
functional currency. Subsidiary will purchase Currency A and Currency A derivatives to
hedge its Currency A exposure relative to the USD up to the Maximum Cash Amount.
The “Maximum Cash Amount” is, at any given time, the total Cash Consideration that
Subsidiary would be required to pay for all outstanding Target shares and Employee
Shares other than Target shares that are (i) required to elect Stock Consideration (for
example, the Irrevocable Stock Election Shares) or (ii) subject to an election to receive
Stock Consideration that cannot be changed.

The Maximum Cash Amount will start as the Initial Maximum Cash Amount and will only
be reduced when the amount of Cash Consideration required to be paid to the Target
shareholders decreases because: (1) additional outstanding Target shares or Employee
Shares are irrevocably required to be acquired with consideration other than Cash
Consideration (for example, as a result of an election to receive Stock Consideration
PLR-108934-21 6

that cannot be changed subsequently or because the Target shareholder has
irrevocably agreed to make an election to receive Stock Consideration as consideration
for its Target shares), (2) the Cash Consideration required to be paid for a Target share
is reduced (for example, as a result of a distribution other than an ordinary course
dividend in the amount specified in the offer announcement), (3) the number of
outstanding Target shares or Employee Shares to be acquired has declined (for
example, as a result of Target shares being acquired pursuant to the Acquisition or an
Employee Stock Option lapsing or not being issued as projected), or (4) the Acquisition
is terminated (each, a “Reduction Event”). The Maximum Cash Amount will be reduced
by the amount necessary to reflect the reduction in the amount of Cash Consideration
required to be paid for the Reduction Event (each, a “Reduction”). The Maximum Cash
Amount will only be increased if the Cash Consideration offered for Target shares
pursuant to the Acquisition is increased and then only by the amount of that increase.
The Maximum Cash Amount will never be adjusted based on projections of the
Maximum Cash Amount, including projections regarding the number of Target shares
that will elect Stock Consideration or the number of Employee Shares (except the
number of Employee Shares resulting from the conversion of the Employee Stock
Options pursuant to the Acquisition projected based on Plan A to be issued between
Date A and the closing date).

It is expected that at a minimum, the Maximum Cash Amount will be reduced on any of
the following days (in the case of (1) and (2), only to the extent of Target shareholders
electing Stock Consideration beyond the Irrevocable Stock Elections): (1) the date the
applicable court approves the Acquisition under Method 1, (2) the date the offer under
Method 2 becomes unconditional (and any subsequent dates on which a Target
shareholder elects Stock Consideration and the Squeeze-out Date), and (3) the date the
Acquisition is terminated. However, if at any other time there is a Reduction (for
example, a lapsed Employee Stock Option), the Maximum Cash Amount will be
reduced at that time too.

Until all the conditions for the Acquisition are satisfied, Subsidiary will not know when
the Acquisition will accrue or close. Whether the conditions for the Acquisition will be
satisfied and the aggregate amount of Cash Consideration will not be known until very
close to the time of the Acquisition. For example, the Acquisition is dependent on
regulatory approvals. In addition, under Method 1 the Acquisition is dependent on court
approval, and under Method 2 the timing might be determined by Target shareholder
acceptances, if the minimum percentage is reached after the regulatory approvals have
been received.

With the exception of the expiration date of the option between Subsidiary and Bank
acquired on Date C with reference number Number A, each hedge that Subsidiary has
or will both acquire and identify as a hedge of the anticipated Acquisition of outstanding
Target shares and Employee Shares, other than the Irrevocable Stock Election Shares,
that might be acquired for Cash Consideration (the acquisition of those Target shares,
the “Target Share Acquisition,” and those Target shares acquired pursuant to the Target
PLR-108934-21 7

Share Acquisition, the “Target Share Acquisition Shares”) for purposes of Treas. Reg.
§1.988-5(e) has and will satisfy the requirements of Treas. Reg. §1.988-5(b) (treating
the offer announcement as the date on which the executory contract is entered and the
anticipated Target Share Acquisition as the executory contract) (each of those hedges,
a “Hedge”), including:
(i) each Hedge is either (A) a Currency A deposit placed in a hedging
account as defined in Treas. Reg. §1.988-5(b)(2)(iii)(D) (any such Hedge,
a “Deposit”) or (B) a forward, future, or option described in Treas. Reg.
§1.988-1(a)(1)(ii) and (2)(iii) and Treas. Reg. §1.988-5(b)(2)(iii)(A), in
either case that is a “section 988 transaction” within the meaning of
section 988(c)(1),
(ii) each Hedge has or will be timely identified in accordance with Treas. Reg.
§1.988-5(b)(3) as a hedge for integration with the anticipated Target Share
Acquisition pursuant to the Treas. Reg. §1.988-5(e) private letter ruling, if
received,
(iii) each Hedge was or is entered into on or after the offer announcement
(and after Date A) and before the accrual date as defined in Treas. Reg.
§1.988-5(b)(2)(iv) (the “Accrual Date”) in accordance with Treas. Reg.
§1.988-5(b)(2)(i)(B), treating each transaction separately and not
combining any Hedge with a subsequent transaction, even if the item is or
was acquired or entered into to replace or otherwise succeed a Hedge,
(iv) the anticipated Target Share Acquisition is hedged in whole or in part with
Hedges through the period beginning with the date the first Hedge was
identified in accordance with Treas. Reg. §1.988-5(b)(3) and ending on or
after the Accrual Date,
(v) none of the parties to any Hedge are related within the meaning of section
267(b) or 707(c)(1), and
(vi) each Hedge will only hedge Subsidiary’s Currency A exposure to the
anticipated Target Share Acquisition.

Subsidiary will never hedge more than the Maximum Cash Amount. Subsidiary has not
and will never reduce and then increase afterwards the Currency A amount of the
Hedges, even if the Maximum Cash Amount increases subsequently. On any day the
Maximum Cash Amount is subject to a Reduction, Subsidiary will reduce (or treat as
sold for its fair market value at that time) the portion of the Hedges in excess of the
Maximum Cash Amount that day and clearly identify what portion of the Hedges has
been reduced (or treated as sold).

The Accrual Date for the Target Share Acquisition under Method 1 is the date the
applicable court approves the Acquisition. The Accrual Dates for the Target Share
Acquisition under Method 2 are the dates the offer becomes unconditional (in other
words, the date all the closing and acceptance conditions are satisfied), any subsequent
dates on which a Target shareholder accepts the offer during the offer period, and if
there is a squeeze-out, the Squeeze-out Date.
PLR-108934-21 8

Subsidiary will include any interest income from Deposits in income as provided in
section 61. Subsidiary will not treat any item as a Hedge that does not meet the
definition of a “Hedge,” including the requirements listed above. Hedges will be used
only to pay Cash Consideration. If all or a portion of the Hedges are determined to be
unneeded as a result of a Reduction (the “Unneeded Hedge”), the Unneeded Hedge will
be sold or terminated, or treated as sold for its fair market value at that time, on the day
of the Reduction. Subsidiary has not and will not make an election pursuant to section
988(a)(1)(B) with respect to any Hedge.

Parent has determined that the Acquisition and the Hedges are not eligible for hedge
accounting treatment. Subsidiary will only adjust the amount of the Hedges as provided
above and will not engage in speculative trading with respect to any foreign currency.

                                Law and Analysis

Section 988(d)(1) of the Code provides that, to the extent provided in regulations, if any
section 988 transaction is part of a 988 hedging transaction, all transactions which are
part of such 988 hedging transaction shall be integrated and treated as a single
transaction or otherwise treated consistently for purpose of this subtitle.

Section 988(d)(2) of the Code provides that the term “988 hedging transaction” means
any transaction—(A) entered into by the taxpayer primarily—(i) to manage risk of
currency fluctuations with respect to property which is held or to be held by the
taxpayer, or (ii) to manage risk of currency fluctuations with respect to borrowings made
or to be made, or obligations incurred or to be incurred, by the taxpayer, and (B)
identified by the Secretary or the taxpayer as being a 988 hedging transaction

Treas. Reg. §1.988-5(b)(2)(i) provides that a hedged executory contract is an executory
contract as defined in paragraph (b)(2)(ii) of this section that is the subject of a hedge as
defined in paragraph (b)(2)(iii) of this section, provided that the following requirements
are satisfied—(A) The executory contract and the hedge are identified as a hedged
executory contract as provided in paragraph (b)(3) of this section; (B) The hedge is
entered into (i.e., settled or closed, or in the case of nonfunctional currency deposited in
an account with a bank or other financial institution, such currency is acquired and
deposited) on or after the date the executory contract is entered into and before the
accrual date as defined in paragraph (b)(2)(iv) of this section; (C) The executory
contract is hedged in whole or in part throughout the period beginning with the date the
hedge is identified in accordance with paragraph (b)(3) of this section and ending on or
after the accrual date; (D) None of the parties to the hedge are related. The term related
means the relationships defined in section 267(b) and section 707(c)(1); (E) In the case
of a qualified business unit with a residence, as defined in section 988(a)(3)(B), outside
of the United States, both the executory contract and the hedge are properly reflected
on the books of the same qualified business unit; (F) Subject to the limitations of
paragraph (b)(2)(i)(E) of this section, both the executory contract and the hedge are
entered into by the same individual, partnership, trust, estate, or corporation. With
PLR-108934-21 9

respect to a corporation, the same corporation must enter into both the executory
contract and the hedge whether or not such corporation is a member of an affiliated
group of corporations that files a consolidated return; and (G) With respect to a foreign
person engaged in a U.S. trade or business that enters into an executory contract or
hedge through such trade or business, all items of income and expense associated with
the executory contract and the hedge would have been effectively connected with such
U.S. trade or business throughout the term of the hedged executory contract had this
paragraph (b) not applied.

Treas. Reg. §1.988-5(b)(2)(ii) provides that an “executory contract” is an agreement
entered into before the accrual date to pay nonfunctional currency (or an amount
determined with reference thereto) in the future with respect to the purchase of property
used in the ordinary course of the taxpayer's business, or the acquisition of a service (or
services), in the future, or to receive nonfunctional currency (or an amount determined
with reference thereto) in the future with respect to the sale of property used or held for
sale in the ordinary course of the taxpayer's business, or the performance of a service
(or services), in the future. Notwithstanding the preceding sentence, a contract to buy or
sell stock shall be considered an executory contract. On the accrual date, such
agreement ceases to be considered an executory contract and is treated as an account
payable or receivable.

Treas. Reg. §1.988-5(b)(2)(iii)(A) provides that the term “hedge” means a deposit of
nonfunctional currency in a hedging account (as defined paragraph (b)(2)(iii)(D) of this
section), a forward or futures contract described in § 1.988-1(a)(1)(ii) and (2)(iii), or
combination thereof, which reduces the risk of exchange rate fluctuations by reference
to the taxpayer's functional currency with respect to nonfunctional currency payments
made or received under an executory contract. The term hedge also includes an option
contract described in § 1.988-1(a)(1)(ii) and (2)(iii), but only if the option's expiration
date is on or before the accrual date. The premium paid for an option that lapses shall
be integrated with the executory contract.

Treas. Reg. §1.988-5(b)(2)(iii)(D) provides that a hedging account is an account with a
bank or other financial institution used exclusively for deposits of nonfunctional currency
used to hedge executory contracts. For purposes of determining the basis of units in
such account that comprise the hedge, only those units in the account as of the accrual
date shall be taken into consideration. A taxpayer may adopt any reasonable
convention (consistently applied to all hedging accounts) to determine which units
comprise the hedge as of the accrual date and the basis of the units as of such date.

Treas. Reg. §1.988-5(b)(3) provides that a taxpayer must establish a record and before
the close of the date the hedge is entered into, the taxpayer must enter into the record a
clear description of the executory contract and the hedge and indicate that the
transaction is being identified in accordance with paragraph (b)(3) of this section.
PLR-108934-21 10

Treas. Reg. §1.988-5(b)(4)(i) provides that if a taxpayer enters into a hedged executory
contract, amounts paid or received under the hedge by the taxpayer are treated as paid
or received by the taxpayer under the executory contract, or any subsequent account
payable or receivable, or that portion to which the hedge relates. Also, the taxpayer
recognizes no exchange gain or loss on the hedge. If an executory contract, on the
accrual date, becomes an account payable or receivable, the taxpayer recognizes no
exchange gain or loss on such payable or receivable for the period covered by the
hedge.

Treas. Reg. §1.988-5(b)(4)(ii) provides the effect of integrating an executory contract
and a hedge that partially hedges such contract is to treat the amounts paid or received
under the hedge as paid or received under the portion of the executory contract being
hedged, or any subsequent account payable or receivable. The income or expense of
services performed or received under the executory contract, or the amount realized or
basis of property sold or purchased under the executory contract, that is attributable to
that portion of the executory contract that is not hedged shall be translated into
functional currency on the accrual date. Exchange gain or loss shall be realized when
payment is made or received with respect to any payable or receivable arising on the
accrual date with respect to such unhedged amount.

Treas. Reg. §1.988-5(b)(4)(iii) provides that if a taxpayer identifies an executory
contract as part of a hedged executory contract as defined in paragraph (b)(2) of this
section, and disposes of (or otherwise terminates) the executory contract prior to the
accrual date, the hedge shall be treated as sold for its fair market value on the date the
executory contract is disposed of and any gain or loss shall be realized and recognized
on such date. Such gain or loss shall be an adjustment to the amount received or
expended with respect to the disposition or termination, if any. The spot rate on the date
the hedge is treated as sold shall be used to determine subsequent exchange gain or
loss on the hedge. If a taxpayer identifies a hedge as part of a hedged executory
contract as defined in paragraph (b)(2) of this section, and disposes of the hedge prior
to the accrual date, any gain or loss realized on such disposition shall not be recognized
and shall be an adjustment to the income from, or expense of, the services performed
or received under the executory contract, or to the amount realized or basis of the
property sold or purchased under the executory contract.

Treas. Reg. §1.988-5(e) provides that in his sole discretion, the Commissioner may
issue an advance ruling addressing the income tax consequences of a taxpayer's
system of hedging either its net nonfunctional currency exposure or anticipated
nonfunctional currency exposure. The ruling may address the character, source, and
timing of both the section 988 transaction(s) making up the hedge and the underlying
transactions being hedged. The procedures for obtaining a ruling shall be governed by
such pertinent revenue procedures and revenue rulings as the Commissioner may
provide. The Commissioner will not issue a ruling regarding hedges of a taxpayer's
investment in a foreign subsidiary.
PLR-108934-21 11

The anticipated Target Share Acquisition is not an executory contract as defined in
Treas. Reg. §1.988-5(b)(2)(ii) and therefore there is no executory contract at the time
the hedging transactions are entered into which would qualify for integrated hedging
treatment under Treas. Reg. §1.988-5(b). Absent an advance ruling to the contrary
under Treas. Reg. §1.988-5(e), Subsidiary is required to treat the Hedges as
separate section 988 transactions that are not integrated with the anticipated Target
Share Acquisition. Without an advance ruling, foreign currency gains or losses on
Hedges would be realized and recognized under appropriate timing principles of the
Internal Revenue Code. We have determined that Subsidiary should be allowed to
generally apply the principles of Treas. Reg. §1.988-5(b) (with the modifications set
forth below) to integrate its hedges of underlying foreign currency exposure with respect
to its anticipated Target Share Acquisition.

                                    Rulings

Based solely on the information provided and the facts set forth above, we rule as
follows:

  Under the authority provided in Treas. Reg. §1.988-5(e):

  (1)    If the Acquisition is completed within one year of Date A or if the
         Acquisition is terminated within one year of Date A (including a termination
         because the closing or acceptance conditions were not satisfied or
         Method 1 was rejected and the Offerors determined not to pursue Method
         2), we grant Subsidiary permission to apply the principles of Treas. Reg.
         §1.988-5(b) (treating the anticipated Target Share Acquisition as an
         executory contract under Treas. Reg. §1.988-5(b)(2)(ii) and the Hedges as
         hedges under Treas. Reg. §1.988-5(b)(2)(iii)) subject to the following
         modifications:

         a. For any Unneeded Hedge amount, Subsidiary will dispose of (or treat
            as sold for fair market value) the Hedges in an amount equal to the
            Unneeded Hedge amount on the day it is determined that there is an
            Unneeded Hedge, which will be the same day as the relevant
            Reduction, in the order in which the Hedges were acquired (in other
            words, under a first in, first out method). For this purpose, each
            transaction is treated separately and no subsequent transaction is
            combined with a prior Hedge, even if the item is or was acquired or
            entered into to replace or otherwise succeed a Hedge. If more than
            one Hedge was acquired on a single day, the Hedges for that day will
            be disposed of on a pro rata basis (based on the number of Currency
            A hedged by each transaction). Any amount disposed of (or treated as
            sold) will no longer be a Hedge and Subsidiary will revise the
            identification for any amount it treated as sold at that time. The foreign
            currency gain or loss from any Unneeded Hedge amount will be

PLR-108934-21 12

               treated the same as the other Hedges. Any foreign currency gain or
               loss from a section 988 transaction that is retained after it is no longer
               a Hedge will not be covered by this ruling and instead will be subject to
               the general rules under section 988.
          b. Subsidiary will allocate a pro rata portion of the net foreign currency
               gain or loss from the Hedges to the basis of each Target Share
               Acquisition Share acquired in the Target Share Acquisition by
               Subsidiary, whether acquired directly by Subsidiary for Cash
               Consideration or by Parent for Stock Consideration and then
               contributed down to Subsidiary (which, for the avoidance of doubt,
               excludes all Irrevocable Stock Election Shares).
          c. If the amount of the Hedges is less than the total Cash Consideration
               required to be paid pursuant to the Target Share Acquisition,
               Subsidiary will apply the rule in Treas. Reg. §1.988-5(b)(4)(ii) to the
               portion of the Target Share Acquisition Shares for which the Hedges
               were not sufficient to pay for the Cash Consideration, except
               paragraph (1)b will still apply to those shares.
   (2)    If the Acquisition is not completed within one year of Date A for any
          reason not addressed by paragraph (1), Subsidiary will treat the Hedges
          as sold for fair market value on the day that is one year after Date A and
          the resulting gain or loss is recognized on such date as section 988 gain
          or loss.
   (3)    The basis for Currency A in the Deposit account will not be averaged but
          instead will be determined under the first in, first out method.

                               Closing Agreement

We have approved a closing agreement with Parent with respect to those issues
affecting its tax liability on the basis set forth above. In pursuance of our practice with
respect to such agreements, the agreement contains a stipulation to the effect that any
change or modification of applicable statutes enacted subsequent to the date of the
agreement and made applicable to the taxable period involved will render the
agreement ineffective to the extent that it is dependent upon such statutes.

                                     Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter or the method for computing exchange gain or loss for any item not addressed
by these rulings. In particular, other than as provided above, no opinion is expressed or
implied about the U.S. federal income tax consequences of the Acquisition or any
related hedges, including what the accrual date is for any item.

                             Procedural Information

PLR-108934-21 13

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

Pursuant to a power of attorney on file in this office, a copy of this ruling is being
furnished to your authorized representatives.

                                    Sincerely,


                                    _________________________
                                    Anthony J. Marra
                                    Senior Counsel, Branch 5
                                    Office of Associate Chief Counsel (International)

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