It’s April 29th; Do You Know Where Your Euros Are?

By David Shakow and Jonathan Prokup

By now, most observers of, and participants in, the European economy are familiar with the drama playing out in Greece.  Swamped by large debts and a seemingly uncontrollable fiscal deficit, the Greek government is facing the possibility of defaulting on its sovereign debt obligations.  Even if Greece’s monetary partners (and the IMF) come to its rescue, questions will remain about the ability of the Greek government to reorganize its fiscal affairs to avoid a repeat of this scenario one, two, or more years in the future.

Adding a new wrinkle to this fiscal crisis is Greece’s inability to use monetary policy to resolve the problem.  Historically, nations faced with unmanageable sovereign debt have often simply printed more money, thereby creating inflation, which reduces the real value of the government’s typically fixed-rate debt.  As a member of the European Monetary Union, however, Greece does not have this option.  As a result, an increasing chorus of commentators and public officials have been asking whether Greece might be forced to take a “holiday” from the Monetary Union or, even worse, whether the “Greek Tragedy” presages the eventual collapse of the entire Monetary Union.   (For recent coverage of this possibility, see here.)

As a blawg dedicated to “tax talk for tax pros,” the situation naturally causes us to ask: what federal tax consequences would result if Greece took a “holiday” from the euro or if the monetary union itself were to dissolve.  Assuming that holders of euros received legacy currencies in exchange for their euros, would that exchange be a realization event under Code section 1001?  On a more limited basis, would the exchange give rise to currency exchange gain or loss under Code section 988?  Finally, if the qualified business unit (“QBU”) of a taxpayer were forced to switch its functional currency from the euro to a legacy currency, should that switch be considered a change in the taxpayer’s method of accounting for purposes of Code section 481?

Of course, the Treasury Department previously addressed these issues in 1998 and 2001 when it issued temporary and final regulations, respectively, regarding the transition from the various legacy currencies to the euro.  The regulations generally treated the conversion as a non-taxable event, deferring any gain that would otherwise have been recognized under section 988.  In the event that the euro were abandoned, should these rules simply be applied in reverse, allowing taxpayers to switch back to a legacy currency while deferring the recognition of any currency exchange gains or losses?

While we have not yet formed any opinions about the potential impact of these prospective events, we raise the question in the hopes of spurring discussion within the tax community.  We don’t know if our colleagues at the Treasury Department have given any consideration to this issue; but it seems to us that they probably should.  After all, a withdrawal of one or more members from the European Monetary Union, or a dissolution of the Monetary Union altogether, is not going to be as easily anticipated or as well planned as the its original formation.

<!–[if !mso]> <! st1\:*{behavior:url(#ieooui) } –> By now, most observers of, and participants in, the European economy are familiar with the drama playing out in Greece.  Swamped by large debts and a seemingly uncontrollable fiscal deficit, the Greek government is facing the possibility of defaulting on its sovereign debt obligations.  Even if Greece’s monetary partners come to its rescue, questions will remain as to the ability of the Greek government to reorganize its fiscal affairs to avoid a repeat of this scenario one, two, or more years in the future.  Further clouding Greece’s economic prospects is the increasing possibility that Greece might be forced to withdraw from the European monetary union or, even worse, that the entire monetary union itself might collapse.  (See ___________.)
Explore posts in the same categories: Corporate, International

Tags: , , , , , , , ,

You can comment below, or link to this permanent URL from your own site.

3 Comments on “It’s April 29th; Do You Know Where Your Euros Are?”


  1. [...] Euro.  Not technically about tax, but a breakup of the Euro could have significant, if temporary, implications for U.S. taxpayers.  Then again, Europe might be headed in the opposite direction, towards closer fiscal [...]


  2. [...] we noted in the TaxBlawg a while back when the euro crisis was still focused primarily on Greece, a partial or complete [...]


  3. [...] the tax consequences of a potential breakup of the euro.  For our prior coverage, see here and here.  As the currency lurches towards and away from a potential dissolution (in part or in whole), the [...]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Follow

Get every new post delivered to your Inbox.

Join 100 other followers

%d bloggers like this: