There are several approaches that the Treasury Department and IRS could take to achieve tax neutrality within the current provisions of the Internal Revenue Code: (1) treatment of the conversion as a redenomination; (2) treatment of the change as an involuntary conversion; or (3) an intermediate approach, using functional currency concepts but requiring deferral of gains and losses.
Concededly, the euro conversion does not fit neatly within the redenomination criteria.
In addition, because the euro will replace more than one legacy currency, the redenomination approach implicitly treats individual legacy currencies as being the same currency.
Nevertheless, the redenomination approach provides a simple means of achieving U.S.
TEI believes that conversion to the euro should not be treated as a normal change in functional currency, even though, upon factual analysis, conversion to the euro more closely resembles a change of functional currency than a redenomination. Indeed, since conversion to the euro encompasses features of both approaches and fits squarely within neither, it may be appropriate to adopt an intermediate approach uniquely suited to the conversion.
A country leaving the conversion process during the transition period would probably return to its legacy currency; the dual-currency approach (like the redenomination approach) would ensure that a taxpayer that had not yet elected to change its functional currency to the euro is not treated as making two changes in functional currency.
In addition, redenomination of shares of stock may take the form of a tax-free reorganization, invoking notice requirements under sections 367 and 368, which should be waived.