U.S. Code » Title 26 » Subtitle Subtitle A— Income Taxes › Chapter CHAPTER 1— NORMAL TAXES AND SURTAXES › Subchapter Subchapter N— Tax Based on Income From Sources Within or Without the United States › Part PART III— INCOME FROM SOURCES WITHOUT THE UNITED STATES › Subpart Subpart J— Foreign Currency Transactions

26 U.S.C. § 985

Functional currency

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(a) In general

Unless otherwise provided in regulations, all determinations under this subtitle shall be made in the taxpayer’s functional currency.

(b) Functional currency(1) In generalFor purposes of this subtitle, the term “functional currency” means—(A) except as provided in subparagraph (B), the dollar, or(B) in the case of a qualified business unit, the currency of the economic environment in which a significant part of such unit’s activities are conducted and which is used by such unit in keeping its books and records.(2) Functional currency where activities primarily conducted in dollars

The functional currency of any qualified business unit shall be the dollar if activities of such unit are primarily conducted in dollars.

(3) ElectionTo the extent provided in regulations, the taxpayer may elect to use the dollar as the functional currency for any qualified business unit if—(A) such unit keeps its books and records in dollars, or(B) the taxpayer uses a method of accounting that approximates a separate transactions method.Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.(4) Change in functional currency treated as a change in method of accounting

Any change in the functional currency shall be treated as a change in the taxpayer’s method of accounting for purposes of section 481 under procedures to be established by the Secretary.

(Added Pub. L. 99–514, title XII, § 1261(a), Oct. 22, 1986, 100 Stat. 2585.)Statutory Notes and Related SubsidiariesEffective Date

Pub. L. 99–514, title XII, § 1261(e), Oct. 22, 1986, 100 Stat. 2591, provided that:“(1)In general.—Except as provided in paragraph (2), the amendments made by this section [enacting this subpart and amending sections 1092 and 1256 of this title] shall apply to taxable years beginning after December 31, 1986.“(2)Special rules for purposes of sections 902 and 960.—For purposes of applying sections [former] 902 and 960 of the Internal Revenue Code of 1986, the amendments made by this section shall apply to—“(A) earnings and profits of the foreign corporation for taxable years beginning after December 31, 1986, and“(B) foreign taxes paid or accrued by the foreign corporation with respect to such earnings and profits.”

Notes of Decisions
Cited in 7 cases, 1931–1996 · leading case: Prairie Oil & Gas Co. v. Motter, 66 F.2d 309 (10th Cir. 1933).
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Prairie Oil & Gas Co. v. Motter, 66 F.2d 309 (10th Cir. 1933). “Turning to subdivision 204 (a) of the act (26 USCA § 985' (a), we find that basis to be “the cost of such property,” which in the case at bar is coneededly $3,-350,000.”
Comm'r of Internal Revenue v. SA Woods MacH. Co., 57 F.2d 635 (1st Cir. 1932). “” The statute definition of “gross income” (Revenue Act of 1924, chapter 234, §§ 233, 213, 26 USCA § 985; § 954 and note) is in general terms which throw no light on the present question.”
Quijano v. United States, 93 F.3d 26 (1st Cir. 1996). “” 26 U.S.C. § 985 (b)(1)(B). Although appellants correctly assert that their residence was purchased “for a pound-denominated value” while they were “living and working in a pound-denominated economy,” under I.”
Helvering v. British-Am. Tobacco Co., 69 F.2d 528 (2d Cir. 1934). “41 , 26 USCA § 985(b), provides: “In the case of a foreign corporation, gross income means only gross income from sources within the United States, determined * * * in the manner provided in section 217 [section 958].”
Beneficial Loan Soc. of Bethlehem v. United States, 48 F.2d 686 (Ct. Cl. 1931). “In preparing and submitting its income-tax return for the period from May 1, 1925, to January 31, 1926, a prorated credit of $1,500 was taken instead of the full credit of $2,-000, which latter sum was the full specific credit allowed a domestic corporation with a net income of…”
Helvering v. Stockholms Enskilda Bank, 68 F.2d 407 (D.C. Cir. 1933). “Section 233 of the Revenue Act of 1926 (26 USCA § 985 (b) provides as follows: “ (b) In the ease of a foreign corporation, gross income means only gross income from sources within the United States, determined * * * in the manner provided in section 217 [section 968].”
Marquette Oil Distrib. Co. v. Comm'r of Internal Revenue, 73 F.2d 205 (8th Cir. 1934). “” Section 233 of the Revenue Acts of 1924 and 1926 (26 USCA § 985): “(a) In the case of a corporation subject to the tax imposed by section 230 the term ‘gross income’ means the gross income as defined in sections 213 Section 213 of the Revenue Acts of 1924 and 1926 (26 USCA §…”
— 26 U.S.C. § 985(b) — 1 case
Helvering v. British-Am. Tobacco Co., 69 F.2d 528 (2d Cir. 1934). “41 , 26 USCA § 985(b), provides: “In the case of a foreign corporation, gross income means only gross income from sources within the United States, determined * * * in the manner provided in section 217 [section 958].”
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