§ 1.987-1T Scope, definitions, and special rules (temporary). ( a ) through ( b ) (1)(ii) [Reserved] For further guidance, see § 1.987-1(a) through (b)(1)(ii). (iii) *Certain provisions applicable to all taxpayers.* Notwithstanding § 1.987-1(b)(1)(ii), paragraphs (b)(6) and (g)(3)(i)(E) of this section and § 1.987-6T(b)(4) apply to any taxpayer that is an owner of a dollar QBU (as defined in paragraph (b)(6) of this section), and paragraphs (g)(2)(i)(B) and (g)(3)(i)(H) of this section and §§ 1.987-8T(d) and 1.987-12T apply to any taxpayer that is an owner of an eligible QBU (determined without regard to § 1.987-1(b)(3)(ii)) that is subject to section 987.
( b ) (2) through (b)(5) [Reserved] For further guidance, see § 1.987-1(b)(2) through (b)(5). (6) *Dollar QBUs*—(i) *In general.* Except as provided in paragraphs (b)(1)(iii) and (b)(6)(iii) of this section, section 987 and the regulations thereunder do not apply with respect to an eligible QBU (determined without regard to § 1.987-1(b)(3)(ii)) that has the U.S. dollar as its functional currency and that would be subject to section 987 if it had a functional currency other than the dollar (dollar QBU). This paragraph (b)(6) applies to all taxpayers, including entities described in § 1.987-1(b)(1)(ii). (ii) *Application of section 988 to a dollar QBU*—(A) *In general.* Except as provided in paragraphs (b)(6)(ii)(B) and (b)(6)(iii) of this section, a controlled foreign corporation (as defined in section 957(a)) (CFC) that is the owner of a dollar QBU applies section 988 with respect to any item that is properly reflected on the books and records of the dollar QBU and that would give rise to a section 988 transaction if such item were acquired, accrued, or entered into directly by the owner of the dollar QBU. Except as provided in paragraph (b)(6)(ii)(B) of this section, for purposes of determining the amount of section 988 gain or loss of the CFC, any item that is properly reflected on the books and records of the dollar QBU and that would give rise to a section 988 transaction if such item were acquired, accrued, or entered into directly by the owner of the dollar QBU is treated as properly reflected on the books and records of the owner of the dollar QBU, such that the amount of section 988 gain or loss with respect to such item is determined by reference to the owner's functional currency. (B) *Section 988 gain or loss characterized as effectively connected income.* Solely for the purpose of determining the amount of section 988 gain or loss of a CFC described in paragraph (b)(6)(ii)(A) of this section that is effectively connected with the conduct of a trade or business within the United States (ECI), any section 988 gain or loss that would be determined under section 988 as a result of the acquisition or accrual of any item and treated as ECI under § 1.988-4(c) if the item were treated as properly reflected on the books and records of the dollar QBU is determined by treating such item as properly reflected on the books and records of the dollar QBU. Consequently, solely for that purpose, such section 988 gain or loss is determined by reference to the U.S. dollar. (iii) *Election for a CFC to apply section 987 to a dollar QBU*—(A) *In general.* A CFC that is the owner of a dollar QBU may elect to apply section 987 and the regulations thereunder with respect to the dollar QBU in lieu of applying section 988 pursuant to paragraph (b)(6)(ii) of this section. If the dollar QBU or CFC is described in § 1.987-1(b)(1)(ii), however, the CFC must apply section 987 to the dollar QBU using the method it applied to the dollar QBU immediately prior to the effective date of this paragraph (b)(6) as provided in paragraph (h) of this section, provided such method was a reasonable interpretation of section 987, or, if no such method exists, a reasonable method. (B) *Section 988 gain or loss characterized as effectively connected income.* Solely for the purpose of determining the amount of section 988 gain or loss of a dollar QBU that is the subject of an election described in paragraph (b)(6)(iii)(A) of this section that is ECI, § 1.987-3T(b)(4)(i) and (ii) do not apply, and any section 988 gain or loss that would be determined under section 988 as a result of the acquisition or accrual of any item and treated as ECI under § 1.988-4(c) if the item were treated as properly reflected on the books and records of the dollar QBU is determined by treating such item as properly reflected on the books and records of the dollar QBU. Consequently, solely for that purpose, such section 988 gain or loss is determined by reference to the U.S. dollar. See § 1.987-6T(b)(4) for rules regarding the source of section 987 gain or loss with respect to a dollar QBU for which the CFC owner has made the election described in this paragraph.
( b ) (7) through (c)(1)(ii)(A) [Reserved] For further guidance, see § 1.987-1(b)(7) through (c)(1)(ii)(A). (B) *Election inapplicable with respect to certain amounts.* Except as provided in this paragraph (c)(1)(ii)(B), the election provided in § 1.987-1(c)(1)(ii)(A) does not apply for purposes of determining section 987 taxable income or loss (as defined in § 1.987-3(a)) with respect to a historic item (as defined in § 1.987-1(e)) if acquiring, accruing, or entering into such item gives rise to a section 988 transaction or specified owner functional currency transaction. However, the election provided in § 1.987-1(c)(1)(ii)(A) does apply for purposes of determining section 987 taxable income or loss with respect to a payable or receivable described in § 1.988-1(d)(3) under the circumstances described in § 1.988-1(d)(3).
( c ) (2) through (c)(3)(i)(D) [Reserved] For further guidance, see § 1.987-1(c)(2) through (c)(3)(i)(D). (E) *Section 988 transactions and specified owner functional currency transactions.* If acquiring, accruing, or entering into a historic item gives rise to a section 988 transaction of a section 987 QBU or a specified owner functional currency transaction described in § 1.987-3T(b)(4)(ii), the historic rate is the spot rate (as defined in paragraph (c)(1) of this section) on the date such item is acquired, accrued, or entered into. For this purpose, use of a spot rate convention under § 1.987-1(c)(1)(ii) is permitted only with respect to a payable or receivable described in § 1.988-1(d)(3) and only to the extent provided therein.
( c ) (3)(ii) through (d)(2) [Reserved] For further guidance, see § 1.987-1(c)(3)(ii) through (d) ( 2 ) .
( 3 ) Gives rise to a qualified short-term section 988 transaction (as defined in § 1.987-3T(b)(4)(iii)(B)) of the section 987 QBU, whether denominated in the functional currency of the owner or other nonfunctional currency with respect to the section 987 QBU, for which section 988 gain or loss is determined under § 1.987-3T(b)(4)(iii)(A) in, and by reference to, the functional currency of the section 987 QBU.
( e ) [Reserved] For further guidance, see § 1.987-1(e).
( f ) *Examples.* The following examples illustrate the application of § 1.987-1(d) and (e). Example 1. U.S. Corp is a domestic corporation with the U.S. dollar as its functional currency and is the owner of Business A, a section 987 QBU that has the pound as its functional currency. Assume all transactions of Business A are entered into in the ordinary course of its business. U.S. Corp has not made an election under § 1.987-3T(b)(4)(iii)(C) to adopt a foreign currency mark-to-market method of accounting for qualified short-term section 988 transactions. Items reflected on Business A's balance sheet include £10,000, $1,000, a building with a basis of £100,000, a light general purpose truck with a basis of £30,000, a computer with a basis of £1,000, a 60-day receivable for ¥15,000, an account payable of £5,000, and a foreign currency contract within the meaning of section 1256(g)(2) that requires Business A to exchange £100 for $125 in 90 days. Under paragraph (d) of this section, the £10,000, the £5,000 account payable and the £/$ section 1256 foreign currency contract are marked items. The other items are historic items under this paragraph (e) of this section.
Example 2. The facts are the same as *Example 1* except that U.S. Corp has elected under § 1.987-3T(b)(4)(iii)(C) to adopt the foreign currency mark-to-market method of accounting for qualified short-term section 988 transactions of Business A. Under paragraphs (d) and (e) of this section, the £10,000, the $1,000, the ¥15,000 receivable, the £5,000 account payable, and the £/$ section 1256 foreign currency contract are marked items.
( g ) ( 1 ) through(g)
( 2 ) ( i ) ( A ) [Reserved] For further guidance, see § 1.987-1(g)(1) through (g)(2)(i)(A).
( B ) *Annual deemed termination election* — ( 1 ) *In general.* Except as provided in paragraph (g)(2)(i)(B)( 2 ) of this section, an election under § 1.987-8T(d) (annual deemed termination election) applies to all section 987 QBUs owned by the taxpayer, as well as to all section 987 QBUs owned by any person that has a relationship to the taxpayer described in section 267(b) or section 707(b) (substituting “and the profits interest” for “or the profits interest” in section 707(b)(1)(A) and substituting “and profits interests” for “or profits interests” in section 707(b)(1)(B)) on the last day of the first taxable year for which the election applies (a related person). If a taxpayer makes the election under § 1.987-8T(d), the first taxable year of a related person for which the election applies is the first taxable year that ends with or within a taxable year of the taxpayer for which the taxpayer's election applies. An election under § 1.987-8T(d) may not be revoked. ( i ) *Fresh start taxpayers.* A taxpayer to which § 1.987-10 applies that is required under § 1.987-10(a) to apply the fresh start transition method described in § 1.987-10(b) (fresh start taxpayer) may make the election under § 1.987-8T(d) only if the first taxable year for which the election would apply to the taxpayer is either the first taxable year beginning on or after the transition date (as defined in § 1.987-11(c)) in which the election is relevant or a subsequent taxable year in which the taxpayer's controlled group aggregate section 987 loss, if any, does not exceed $5 million. For purposes of this paragraph (g)(2)(i)(B), a taxpayer's controlled group aggregate section 987 loss means the aggregate net amount of section 987 loss that would be recognized pursuant to the election by the taxpayer and all other persons to whom the taxpayer's election would apply in the first taxable year of each person for which the election would apply.
( ii ) *Other taxpayers.* Other taxpayers, including taxpayers described in § 1.987-1(b)(1)(ii) and taxpayers described in § 1.987-10(c), must follow the election rules provided in paragraph (g)(2)(i)(B)( 1 )( i ) of this section if any related party is a fresh start taxpayer. If no related party is a fresh start taxpayer, the election under § 1.987-8T(d) may be made only if the first taxable year for which the election would apply to the taxpayer is either the first taxable year beginning on or after December 7, 2016, in which the election is relevant or a subsequent taxable year in which the taxpayer's controlled group aggregate section 987 loss, if any, does not exceed $5 million.
( 2 ) *QBU-by-QBU elections in certain circumstances.* Notwithstanding paragraph (g)(2)(i)(B)( 1 ) of this section, a taxpayer may make a separate election under § 1.987-8T(d) with respect to any section 987 QBU owned by the taxpayer if the first taxable year for which the election would apply to the taxpayer with respect to the section 987 QBU is a taxable year in which there is a section 987 gain recognized with respect to the section 987 QBU pursuant to the election, or is a taxable year in which there is a section 987 loss of $1 million or less that would be recognized with respect to the section 987 QBU pursuant to the election
( C ) *Election to translate all items at the yearly average exchange rate.* An election under § 1.987-3T(d) (election to translate all items at the yearly average exchange rate) may be made with respect to a section 987 QBU only if the first taxable year for which the election would apply is the first taxable year for which an election under § 1.987-8T(d) (annual deemed termination election) applies with respect to the section 987 QBU. (g)(2)(ii) through (g)(3)(i)(D) [Reserved] For further guidance, see § 1.987-1(g)(2)(ii) through (g)(3)(i)(D).
( E ) *Election for a CFC to apply section 987 to a dollar QBU.* An election under § 1.987-1T(b)(6)(iii) for a CFC to apply section 987 to a dollar QBU must be titled “Section 987 Election for a CFC to Apply Section 987 to a Dollar QBU Under § 1.987-1T(b)(6)(iii)” and must provide the name and address of each QBU for which the election is being made.
( F ) *Election to apply the foreign currency mark-to-market method of accounting for qualified short-term section 988 transactions.* An election under § 1.987-3T(b)(4)(iii)(C) to apply the foreign currency mark-to-market method of accounting for qualified short-term section 988 transactions must be titled “Section 987 Election to Use Foreign Currency Mark-to-Market Method of Accounting for Qualified Short-Term Section 988 Transactions Under § 1.987-3(b)T(4)(iii)(C)” and must provide the name and address of each section 987 QBU for which the election is being made.
( G ) *Election to translate all items at the yearly average exchange rate.* An election under § 1.987-3T(d) to translate all items at the yearly average exchange rate must be titled “Section 987 Election to Translate All Items at the Yearly Average Exchange Rate Under § 1.987-3T(d)” and must provide the name and address of each section 987 QBU for which the election is being made.
( H ) *Annual deemed termination election.* An election under § 1.987-8T(d) for an owner to deem all of its section 987 QBUs to terminate on the last day of each taxable year must be titled “Section 987 Annual Deemed Termination Election Under § 1.987-8T(d)” and must provide the name and address of each section 987 QBU to which the election applies, including a section 987 QBU owned by a related person (within the meaning of paragraph (g)(2)(i)(B)( 1 ) of this section).
( g ) (4) through (6) [Reserved] For further guidance, see § 1.987-1(g)(4) through (6).
( h ) *Effective/applicability date.* Paragraphs (g)(2)(i)(B) and (g)(3)(i)(H) of this section apply to the first taxable year beginning on or after December 7, 2016. Paragraphs (b)(1)(iii), (b)(6), (c)(1)(ii)(B), (c)(3)(i)(E), (d)(3), (f), (g)(2)(i)(C), and (g)(3)(i)(E) through (G) of this section apply to taxable years beginning one year after the first day of the first taxable year following December 7, 2016. Notwithstanding the preceding sentence, if a taxpayer makes an election under § 1.987-11(b), then paragraphs (b)(1)(iii), (b)(6), (c)(1)(ii)(B), (c)(3)(i)(E), (d)(3), (f), (g)(2)(i)(C), and (g)(3)(i)(E) through (G) of this section apply to taxable years to which §§ 1.987-1 through 1.987-10 apply as a result of such election.
( i ) *Expiration date.* The applicability of this section expires on December 6, 2019.
[T.D. 9795, 81 FR 88868, Dec. 8, 2016]