The Sessions Group is a U.S. company and maintains headquarters in Delaware. Sessions opens a temporary office in London as part of an assessment of the European market. The London office is used by U.S. executives to support marketing activities while the U.S. executives are in London for brief periods. No sales are transacted, and Sessions closes the London office after nine months. Sessions deducts the London office start-up and closing expenses on its U.S. return. Sessions’ London office is not a QBU.
Assume, in example 2-2, that several sales are closed in the United Kingdom and that the Sessions Group London office hires a permanent full-time employee to fulfill post-sale service requirements. Arguably, the presence of a full-time employee creates a taxable presence under United Kingdom tax law and, if so, the Sessions’ London office is a QBU.
A trade or business is a unified group of activities that constitutes an independent economic enterprise carried on for profit. A trade or business must ordinarily include every operation, which forms a part of, or a step in, a process by which an enterprise may earn income or profit. A vertical, functional or geographic division of the same trade or business is itself a trade or business if it is capable of producing income independently.
Assume, in example 2-3, that the Sessions Group manufactures goods in the United States and sells the goods to European customers through its London sales office. The London sales office may be a trade or business separate from the manufacturing operation because the sales office could be carried on as an independent economic enterprise.
Activities at a particular location may be a trade or business separate from identical activities at another location.
Assume, in example 2-4, that the Sessions Group also maintains sales offices in Paris and Frankfurt in addition to the London sales office. The London, Frankfurt, and Paris sales offices may be three separate trades or businesses.
Merely ancillary activities are not a trade or business. (Treasury Regulation 1.989(a)-1(e), example 3).
Assume, in example 2-5, that the Sessions Group makes preliminary communications with potential Japanese customers from its headquarters in Delaware. Sessions needs to get documents to the potential Japanese customers to facilitate discussions. Sessions hires a contractor in Japan to deliver the documents. The contractor’s activities in Japan are not a trade or business because the activities are ancillary to the communications originating in the United States.
Assume, in example 2-6, that Sessions creates a Japanese subsidiary to carry on the courier activities. The subsidiary is a QBU because a corporation, whether or not it has a trade or business, is a QBU.
An individual is not a QBU, but an individual may have a QBU including a trade or business for which separate records are kept. Section 989(a).
U.S. citizen A distributes goods in Spain produced by various U.S. manufacturers. A’s activities in Spain are a trade or business and therefore a QBU if separate records are kept for the activities.
However, an individual’s activities as an employee are not a trade or business.
Assume, in example 2-8, that A hires B, also a U.S. citizen, to oversee A’s distributorship in Spain. B’s activities in Spain on behalf of A do not constitute a QBU.
A partner is deemed engaged in any business carried on by the partnership (indirect QBU). (Treasury Regulation 1.987-1(b)(4)(ii)).
Functional currency
Both FASB Statement No. 52, Foreign Currency Translation, and Section 985 of the IRC define an entity’s functional currency as the currency of the primary economic environment in which a significant part of such unit’s activities are conducted (a QBU) and which is used by such unit in keeping its books and records. Translation gains and losses result from exchange rate changes on transactions denominated in currencies other than the functional currency.
The economic environment of a QBU’s activities is determined from facts and circumstances, the analysis of which is driven primarily by the currencies in which the QBU (a) accrues revenues and incurs expenses, (b) collects revenues and pays expenses, (c) borrows and lends, and (d) makes pricing and other financial decisions. The location of a QBU’s principal place of business is also important, as are the duration of a QBU’s activities and the volume of its independent activities, because use of a currency is premised upon a long-term commitment to a specific environment. Whether a foreign activity is of sufficient duration to be a QBU depends, in part, on whether the host country taxes those activities.
A functional currency is a method of accounting, and adoption of or election of a new functional currency is a change of accounting method, normally accomplished only with consent of the IRS. Permission to change is usually given only if significant changes have occurred in the facts and circumstances of the QBU’s economic environment.
The functional currency of any QBU must be the dollar if activities are primarily conducted in dollars. The taxpayer may elect to use the dollar as the functional currency of any QBU if that unit keeps its books and records in dollars or the taxpayer uses a method of accounting that approximates a separate transactions method, that is, each transaction of the unit can be converted to dollars. In addition, Treasury Regulation 1.985-1(a) provides that the dollar shall be the functional currency of the following: (a) any taxpayer that is not a QBU, for example, an individual, (b) a QBU that conducts its activities primarily in dollars, (c) a QBU that has the United States, or any possession