Rev. Rul. 75-106

The taxpayer, a domestic corporation, is engaged in a branch operation in country Y. In a prior year the taxpayer acquired assets and incurred liabilities in country Y in establishing its branch operation. The home office contributed no assets to the branch operation during the taxable year nor did the home office incur any liabilities on behalf of the branch operation during the taxable year. At the beginning of the current taxable year the current assets in excess of current liabilities located in country Y, measured in terms of country Y's currency (units), are 100,000 units. The branch in country Y has no noncurrent liabilities for the current taxable year. The currency exchange rate as of the beginning of the year was $3 to 1 unit. The noncurrent assets (all assets other than current assets) located in country Y have an adjusted basis of $450,000 as of the beginning of the taxable year based on the currency exchange rate in existence when the assets were acquired. The branch remitted 1,000 units to the home office during the year at a time when the currency exchange rate was $3 to 1 unit. The exchange rate at the end of the taxable year is $2.80 to 1 unit. The current assets in excess of the current liabilities was 130,000 units at the end of the current taxable year and the fixed assets' adjusted basis was $408,000.

Held, the taxpayer may use the "net worth" or "balance sheet" method of reporting income or loss from the operations of its foreign branch. The taxpayer's current assets and current liabilities recorded on its books in terms of a foreign country's currency should be appraised in dollars (whether actually converted or not) at the close of each taxable year in which the taxpayer is engaged in active business at the currency exchange rate then prevailing. Noncurrent assets and noncurrent (long term) liabilities are to be recorded at the currency exchange rate which existed at the time of acquisition or incurrence.

The calculation made in accordance with the above in determining the income of the taxpayer's branch in country Y may be illustrated as follows:

     (1) Branch net worth as of the beginning of the taxable year:

     (a) Dollar value of the excess of current

O.D. 489, 2 C.B. 60 (1920), is superseded, since the applicable portion thereof is restated under the current statute and regulations in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.