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deduction under section 163(a). Respondent now argues that
Intergraph was a mere guarantor of the overdraft amount and
therefore that Intergraph is not entitled to the claimed foreign
currency loss under section 988 and the claimed interest expense
deduction under section 163(a).
OPINION
Foreign Currency Loss and Interest Expense
Generally, under section 988 a taxpayer is entitled to an
ordinary loss deduction for a foreign currency loss arising from
a “section 988 transaction”. Sec. 988(a)(1)(A). Where a
taxpayer is a primary obligor on a debt obligation that is
denominated in a nonfunctional currency, repayment of the debt
obligation generally qualifies as a “section 988 transaction”.
Sec. 988(c)(1)(A) and (B). A foreign currency loss occurs to the
extent a loss is realized by reason of a change in the exchange
rate between the obligor's functional currency and the
nonfunctional currency from the date the obligor becomes
obligated on the debt obligation to the date the obligor makes
payment on the debt obligation. Sec. 988(b)(2) and (c)(2)(A) and
(3)(A).
On brief, petitioner notes that the provisions of section
988 and the legislative regulations thereunder do not expressly
provide that a taxpayer's payment, as a mere guarantor, under a
guaranty agreement would not qualify as a "section 988
transaction" giving rise to a recognizable foreign currency loss.
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