78134 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–132422–17] 

RIN 1545–BO07 

Income and Currency Gain or Loss 

With Respect to a Qualified Business 

Unit 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and partial withdrawal of notice of 

proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations relating to the 

determination of taxable income or loss 

and foreign currency gain or loss with 

respect to a qualified business unit. 

These proposed regulations include an 

election to treat all items of a qualified 

business unit as marked items (subject 

to a loss suspension rule), an election to 

recognize all foreign currency gain or 

loss with respect to a qualified business 

unit on an annual basis, and a new 

transition rule. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by February 12, 2024. 

ADDRESSES: Commenters are strongly 

encouraged to submit public comments 

electronically via the Federal 

eRulemaking Portal at https://

www.regulations.gov (indicate IRS and 

REG–132422–17) by following the 

online instructions for submitting 

comments. Requests for a public hearing 

must be submitted as prescribed in the 

‘‘Comments and Requests for a Public 

Hearing’’ section. Once submitted to the 

Federal eRulemaking Portal, comments 

cannot be edited or withdrawn. The 

Department of the Treasury (Treasury 

Department) and the IRS will publish 

for public availability any comments 

submitted to the IRS’s public docket. 

Send paper submissions to: 

CC:PA:01:PR (REG–132422–17), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations 

generally, Raphael J. Cohen at (202) 

317–6938; concerning consolidated 

groups, Jeremy Aron-Dine at (202) 317– 

6847; concerning submissions of 

comments, requests for a public hearing, 

and access to a public hearing, Vivian 

Hayes at (202) 317–5306 (not toll-free 

numbers) or by email to 

publichearings@irs.gov (preferred). 

SUPPLEMENTARY INFORMATION: 

Background 

I. Overview 

This document contains proposed 

regulations (the ‘‘proposed regulations’’) 

under section 987 and related 

provisions under sections 861, 985 

through 989, and 1502 of the Internal 

Revenue Code (‘‘Code’’). Section 987 

applies to any taxpayer that has a 

qualified business unit (‘‘QBU’’) with a 

functional currency other than the 

dollar. Section 987(1) and (2) provide 

rules for determining and translating 

taxable income or loss (‘‘section 987 

taxable income or loss’’) with respect to 

the QBU. In addition, foreign currency 

gain or loss must be determined under 

section 987(3) (‘‘section 987 gain or 

loss’’), which requires proper 

adjustments (as prescribed by the 

Secretary) for transfers of property 

between QBUs of the taxpayer having 

different functional currencies. Section 

989(c) authorizes the Secretary to 

prescribe necessary and appropriate 

regulations, including regulations 

limiting the recognition of foreign 

currency loss on certain remittances 

from QBUs. 

II. Regulations Addressing the 

Application of Section 987 

A. 1991 Proposed Regulations and 

Notice 2000–20 

On September 25, 1991, the Treasury 

Department and the IRS published in 

the Federal Register proposed 

regulations under section 987 (56 FR 

48457, September 25, 1991) (‘‘1991 

proposed regulations’’). The 1991 

proposed regulations provided that 

section 987 taxable income or loss is 

computed in the QBU’s functional 

currency and is translated into the 

taxpayer’s functional currency at the 

weighted average exchange rate for the 

taxable year. For purposes of 

determining section 987 gain or loss, 

taxpayers were required to maintain an 

equity pool in the QBU’s functional 

currency and a basis pool in the 

taxpayer’s functional currency. The 

equity and basis pools were increased 

by the QBU’s earnings and by capital 

contributed to the QBU, and they were 

reduced by remittances, losses, and 

other transfers from the QBU. Taxpayers 

recognized section 987 gain or loss at 

the time of a remittance or upon a 

termination of the QBU. The amount of 

section 987 gain or loss recognized was 

equal to the difference between the 

value of the remittance in the taxpayer’s 

functional currency (translated at the 

applicable spot rate) and the portion of 

the basis pool attributable to the 

remittance. Thus, under the 1991 

proposed regulations, section 987 gain 

or loss was determined by reference to 

a taxpayer’s entire equity interest in a 

QBU. The 1991 proposed regulations 

reserved on the treatment of 

partnerships. 

On April 3, 2000, the Treasury 

Department and the IRS issued Notice 

2000–20, 2000–1 C.B. 851. The Notice 

expressed concern that the 1991 

proposed regulations may not have 

achieved their goal of providing 

administrable rules that result in foreign 

currency gain and loss recognition 

under the appropriate circumstances. 

The Notice also identified certain 

abusive transactions that could 

inappropriately accelerate recognition of 

section 987 loss under the 1991 

proposed regulations. 

B. 2006 Proposed Regulations 

1. Concerns Relating to the 1991 

Proposed Regulations 

On September 7, 2006, the Treasury 

Department and the IRS withdrew the 

1991 proposed regulations and 

published in the Federal Register new 

proposed regulations under section 987 

(71 FR 52876, September 7, 2006) 

(‘‘2006 proposed regulations’’). The 

preamble to the 2006 proposed 

regulations explained that the IRS had 

identified many cases in which 

taxpayers inappropriately claimed 

substantial section 987 losses resulting 

from the application of the 1991 

proposed regulations when a QBU’s 

functional currency depreciated relative 

to the functional currency of its owner. 

The 1991 proposed regulations also 

could create a ‘‘trap for the unwary’’ by 

requiring recognition of large section 

987 gains when a QBU’s functional 

currency appreciated. 

These results arose because the 1991 

proposed regulations imputed section 

987 gain or loss to all assets and 

liabilities of a QBU, regardless of 

whether those assets and liabilities were 

economically exposed to currency 

fluctuations or had been subject to a 

realization event, and because the 1991 

proposed regulations did not limit the 

selective recognition of section 987 

losses. Consequently, under the 1991 

proposed regulations, exchange rate 

fluctuations that, at most, had only an 

uncertain and remote effect on the 

economic results experienced by the 

owner of a QBU could give rise to 

substantial section 987 gains and losses 

that taxpayers could selectively 

recognize by strategically timing 

remittances or causing a termination of 

the QBU. For example, the 1991 

proposed regulations provided 

taxpayers with substantial flexibility to 


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recognize section 987 losses selectively 

by causing QBUs with a weak functional 

currency to make remittances while 

avoiding remittances from QBUs with a 

strong functional currency that would 

give rise to gains. 

2. Foreign Exchange Exposure Pool 

Method 

To address the concerns relating to 

the 1991 proposed regulations, the 2006 

proposed regulations provided a new 

method of applying section 987, referred 

to as the foreign exchange exposure pool 

(‘‘FEEP’’) method. Under the FEEP 

method, the owner of a QBU that is 

subject to section 987 (‘‘section 987 

QBU’’) determines all items of income, 

gain, deduction, and loss attributable to 

the QBU in the QBU’s functional 

currency, and then translates those 

items into the owner’s functional 

currency. For this purpose, the basis of 

certain assets (referred to as ‘‘historic 

assets’’) is translated at the exchange 

rate for the date on which the asset was 

acquired (the ‘‘historic rate’’). For 

example, cost recovery deductions, such 

as depreciation, in respect of historic 

assets are translated at the historic rate. 

Other items (including the amount 

realized on a sale or exchange of a 

historic asset) are translated into the 

owner’s functional currency at the 

average exchange rate for the taxable 

year. 

In addition, the owner of a section 

987 QBU must determine the pool of 

unrecognized section 987 gain or loss 

(‘‘net unrecognized section 987 gain or 

loss’’) based on the annual increase or 

decrease to the section 987 QBU’s 

balance sheet that is attributable to 

foreign exchange rate fluctuations. The 

amount of section 987 gain or loss that 

is added to the pool each year is equal 

to the increase or decrease in the basis 

of assets (net of the amount of liabilities) 

of the section 987 QBU, measured in the 

owner’s functional currency and 

adjusted for transfers between the 

section 987 QBU and its owner and 

section 987 taxable income or loss. See 

§ 1.987–4(d) of the 2006 proposed 

regulations. For this purpose, certain 

assets and liabilities (referred to as 

‘‘historic items’’) are translated into the 

owner’s functional currency at the 

historic rate, while others (referred to as 

‘‘marked items’’) are translated into the 

owner’s functional currency at the 

applicable spot rate. As a result, when 

translated into the owner’s functional 

currency, the balance sheet value of 

marked items fluctuates when the 

QBU’s functional currency strengthens 

or weakens, but the balance sheet value 

of historic items does not. 

Marked items and historic items are 

defined by reference to section 988. A 

marked item is an asset or liability that 

would generate gain or loss under 

section 988 if it were held or entered 

into directly by the owner of the section 

987 QBU but is not a section 988 

transaction with respect to the QBU 

itself. A historic item is an asset or 

liability that is not a marked item. Thus, 

under the FEEP method, section 987 

gain or loss reflects currency 

fluctuations with respect to marked 

items, which would be subject to 

section 988 in the hands of the QBU’s 

owner. By contrast, section 987 gain or 

loss is not imputed to historic items that 

are not subject to section 988. 

As a result of the use of a balance 

sheet approach, together with the use of 

historic rates for historic items, the 

FEEP method distinguishes between 

those items whose value is highly 

correlated with exchange rates and 

those items for which exchange rate 

fluctuations have no effect on value, or 

only an uncertain or remote effect that 

is more appropriately recognized upon 

a realization event with respect to that 

item. Unlike the 1991 proposed 

regulations, which imputed section 987 

gain or loss to all assets and liabilities 

of a QBU, section 987 gain or loss under 

the FEEP method relates to those assets 

and liabilities that are economically 

exposed to currency fluctuations. The 

FEEP method also minimizes a 

taxpayer’s ability to recognize large 

section 987 losses unrelated to its 

economic exposure and, thus, the need 

for a limitation on the selective 

recognition of such losses. 

3. Partnerships 

The 2006 proposed regulations 

applied section 987 to partnerships 

using an aggregate approach. Under this 

approach, an individual or corporation 

that is a partner in a partnership is 

treated as an indirect owner of a portion 

of the assets and liabilities of the 

partnership for purposes of section 987. 

If the partner indirectly owns a QBU 

with a functional currency different 

from that of the partner, the QBU is a 

section 987 QBU, and the partner 

determines and recognizes section 987 

gain or loss with respect to the section 

987 QBU under the FEEP method. An 

elective de minimis exception was 

provided for partners with a less than 

five percent interest in a partnership. 

4. Transition Rules 

The 2006 proposed regulations 

provided two alternative methods for 

taxpayers to transition from their prior 

method of applying section 987: the 

‘‘deferral transition method’’ and the 

‘‘fresh start transition method.’’ Under 

both transition methods, all the 

taxpayer’s section 987 QBUs were 

deemed to terminate on the day before 

the transition date, and the owner was 

treated as having transferred each 

section 987 QBU’s assets and liabilities 

to a new section 987 QBU on the 

transition date. The transition date was 

defined as the first day of the first 

taxable year to which the 2006 proposed 

regulations apply to a taxpayer. 

Under the deferral transition method, 

section 987 gain or loss determined on 

the date of the deemed termination 

(under the taxpayer’s prior method) was 

treated as net unrecognized section 987 

gain or loss of the new section 987 QBU, 

which could be recognized on a 

remittance (or termination) in 

subsequent taxable years. The assets and 

liabilities that were deemed transferred 

to the section 987 QBU on the transition 

date (including marked assets and 

liabilities) were translated using historic 

rates, increased or decreased to take into 

account any amount treated as net 

unrecognized section 987 gain or loss 

determined with respect to the deemed 

termination. The deferral transition 

method thus preserved the taxpayer’s 

section 987 gain or loss computed under 

its prior method and adjusted the 

applicable exchange rates to avoid 

double counting. 

Under the fresh start transition 

method, section 987 gain or loss that 

would have been recognized under the 

taxpayer’s prior method as a result of 

the deemed termination was neither 

recognized nor carried forward as net 

unrecognized section 987 gain or loss. 

The assets and liabilities that were 

deemed transferred to the section 987 

QBU on the transition date (including 

marked assets and liabilities) were 

translated using historic rates without 

adjustment. 

The fresh start transition method was 

designed to prevent recognition of noneconomic section 987 gain or loss that 

was not recognized before the transition 

date. Because marked assets and 

liabilities were translated at historic 

rates under the fresh start transition 

method, any section 987 gain or loss 

inherent in those assets and liabilities 

would be added to the pool of net 

unrecognized section 987 gain or loss in 

the taxable year beginning on the 

transition date. However, exchange rate 

fluctuations with respect to historic 

items would not give rise to section 987 

gain or loss. In addition, section 987 

gain or loss attributable to items that 

were no longer reflected on the section 

987 QBU’s balance sheet on the 

transition date (for example, assets that 


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had been sold before the transition date) 

would never be taken into account. 

Only taxpayers that were applying 

section 987(3) using a reasonable 

method before the transition date were 

permitted to use the deferral transition 

method. A taxpayer whose prior method 

was unreasonable, or that failed to make 

required determinations under section 

987 in prior years, was required to use 

the fresh start transition method. 

For this purpose, the preamble to the 

2006 proposed regulations explained 

that the method of applying section 987 

provided in the 1991 proposed 

regulations would be treated as a 

reasonable method. The preamble to the 

2006 proposed regulations further stated 

that the use of an ‘‘earnings only’’ 

method would be treated as a reasonable 

method. Under an ‘‘earnings only’’ 

method, section 987 gain or loss is 

recognized on a distribution out of a 

QBU’s earnings, but not on a 

distribution in excess of earnings 

(which represents a return of capital). 

C. 2016 Final Regulations 

On December 8, 2016, the Treasury 

Department and the IRS published final 

regulations (TD 9794) in the Federal 

Register (81 FR 88806, December 8, 

2016) (the ‘‘2016 final regulations’’). The 

2016 final regulations largely adopt the 

FEEP method contained in the 2006 

proposed regulations but modify those 

regulations to make the FEEP method 

easier for the IRS to administer and for 

taxpayers to apply. For example, the 

2016 final regulations permit taxpayers 

to use the yearly average exchange rate 

as the historic rate applicable to historic 

items. See § 1.987–3(c)(3). The 2016 

final regulations also modify the 

computation of net unrecognized 

section 987 gain or loss for a taxable 

year by requiring adjustments for 

nondeductible expenses and tax-exempt 

income. See § 1.987–4(d)(7) and (8). 

The 2016 final regulations maintain 

the aggregate approach of the 2006 

proposed regulations for partnerships. 

However, in response to comments 

relating to the complexity of the 

aggregate approach, the 2016 final 

regulations apply only to partnerships 

that are wholly owned by related 

persons (‘‘section 987 aggregate 

partnerships’’). The preamble to the 

2016 final regulations indicated that the 

treatment of other partnerships under 

section 987 would be addressed 

separately and such partnerships might 

be subject to a different approach. 

The 2016 final regulations require 

taxpayers to transition using the fresh 

start transition method. See § 1.987–10. 

The Treasury Department and the IRS 

were concerned that an election 

between two transition methods (as 

permitted under the 2006 proposed 

regulations) would result in a whipsaw 

to the fisc, because each taxpayer could 

choose the method that produces more 

section 987 loss and less section 987 

gain (as was noted by comments on the 

2006 proposed regulations). The 

Treasury Department and the IRS were 

also concerned about administrative 

difficulties and planning opportunities 

associated with adjustments to the 

translation rate under the deferral 

transition method. 

Section 1.987–11(a) provides that the 

2016 final regulations generally apply to 

taxable years beginning on or after one 

year after the first day of the first taxable 

year following December 7, 2016. 

However, taxpayers could choose to 

apply them to an earlier taxable year 

under § 1.987–11(b). 

D. 2016 Temporary and Proposed 

Regulations 

On December 8, 2016, the Treasury 

Department and the IRS published 

Treasury Decision 9795 (the ‘‘temporary 

regulations’’) in the Federal Register (81 

FR 88854, December 8, 2016) and 

published a notice of proposed 

rulemaking (81 FR 88882, December 8, 

2016) (the ‘‘2016 proposed regulations’’) 

in the Federal Register by crossreference to the temporary regulations. 

The temporary regulations (other than 

§ 1.987–12T) had the same applicability 

date as the 2016 final regulations. 

The temporary regulations and the 

2016 proposed regulations include: (1) 

rules relating to the recognition and 

deferral of section 987 gain or loss in 

connection with certain QBU 

terminations and certain other 

transactions involving partnerships; (2) 

an annual deemed termination election; 

(3) an elective method, available to 

taxpayers that make the annual deemed 

termination election, for translating all 

items of income or loss with respect to 

a section 987 QBU at the yearly average 

exchange rate; (4) rules regarding the 

treatment of section 988 transactions of 

a section 987 QBU; (5) rules regarding 

QBUs with the U.S. dollar as their 

functional currency; (6) rules regarding 

combinations and separations of section 

987 QBUs; (7) rules regarding the 

translation of income used to pay 

creditable foreign income taxes; (8) rules 

regarding the allocation of assets and 

liabilities of certain partnerships for 

purposes of section 987; and (9) rules 

requiring the deferral of certain section 

988 loss that arises with respect to 

related-party loans. 

Under the annual deemed termination 

election provided in the temporary 

regulations, a taxpayer could elect to 

deem all of its section 987 QBUs to 

terminate on the last day of each taxable 

year, resulting in the recognition of all 

net unrecognized section 987 gain or 

loss on an annual basis. See § 1.987– 

8T(d). The assets and liabilities of a 

section 987 QBU subject to the election 

were deemed to be distributed to the 

owner pursuant to the deemed 

termination on the last day of each 

taxable year and recontributed on the 

first day of the following taxable year. 

The temporary regulations further 

provided that a taxpayer who made an 

annual deemed termination election 

could elect to translate all items of 

section 987 taxable income or loss at the 

yearly average exchange rate. See 

§ 1.987–3T(d). 

The temporary regulations (other than 

those finalized or withdrawn in 2019, as 

described in part II.E of this Background 

section) expired on December 6, 2019. 

The Treasury Department and the IRS 

intend to remove the temporary 

regulations from the Federal Register 

when the proposed regulations are 

finalized. 

The following parts of the 2016 

proposed regulations remain 

outstanding: (1) rules regarding the 

treatment of section 988 transactions of 

a section 987 QBU (see §§ 1.987–1, 

1.987–3, and 1.988–1 of the 2016 

proposed regulations); (2) rules 

regarding QBUs with the U.S. dollar as 

their functional currency (see §§ 1.987– 

1 and 1.987–6 of the 2016 proposed 

regulations); (3) rules regarding the 

translation of income used to pay 

creditable foreign income taxes (see 

§ 1.987–3 of the 2016 proposed 

regulations); and (4) rules requiring the 

deferral of certain section 988 loss that 

arises with respect to related-party loans 

(see § 1.988–2 of the 2016 proposed 

regulations). A notice reopening the 

comment period for the parts of the 

2016 proposed regulations that remain 

outstanding is published in this issue of 

the Federal Register. 

E. 2019 Final Regulations 

On May 13, 2019, the Treasury 

Department and the IRS published 

Treasury Decision 9857 (84 FR 20790, 

May 13, 2019) (the ‘‘2019 final 

regulations’’ and, collectively with the 

2016 final regulations, the ‘‘final 

regulations’’) in the Federal Register. 

The 2019 final regulations finalized 

parts of the 2016 proposed regulations 

relating to combinations and separations 

of section 987 QBUs and the recognition 

and deferral of section 987 gain or loss 

in connection with certain QBU 

terminations and certain other 

transactions involving partnerships. The 

2019 final regulations also withdrew 


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Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 78137 

1The relevant U.S. GAAP financial accounting 

rules are contained in Financial Accounting 

Standards Board (‘‘FASB’’), Accounting Standards 

Codification (‘‘ASC’’), Foreign Currency Matters, 

Topic 830 (formerly known as FASB Statement No. 

52, Foreign Currency Translation). 

2A foreign entity is an operation, including a 

subsidiary, division, and branch, whose financial 

statements are both (a) prepared in a currency other 

than the reporting currency of the reporting entity, 

and (b) combined or consolidated with or 

accounted for on the equity basis in the financial 

statements of the reporting entity. FASB, 2023, ASC 

sec. 830–10–20. 

§ 1.987–7T of the temporary regulations, 

relating to the allocation of assets and 

liabilities of a section 987 aggregate 

partnership to its partners for purposes 

of section 987, in response to comments 

noting that these rules could cause 

distortions in the computation of 

section 987 gain or loss. The 2019 final 

regulations (other than § 1.987–12) have 

the same applicability date as the 2016 

final regulations. 

III. Executive Order 13789 and Interim 

Report to the President 

Executive Order 13789, issued on 

April 21, 2017, instructs the Secretary of 

the Treasury (the ‘‘Secretary’’) to review 

all significant tax regulations issued on 

or after January 1, 2016, and to take 

action to mitigate the burden of 

regulations that, in relevant part, impose 

an undue financial burden on U.S. 

taxpayers or add undue complexity to 

the Federal tax laws. The Executive 

order further instructs the Secretary to 

submit two reports to the President: an 

interim report that identifies regulations 

that meet the criteria described in the 

Executive order; and a report that 

recommends specific actions to mitigate 

the burden imposed by regulations 

identified in the interim report. 

In an interim report to the President 

dated June 22, 2017, the Treasury 

Department identified eight regulations, 

including the 2016 final regulations, as 

meeting at least one of the criteria 

described in the Executive order. In 

Notice 2017–38, 2017–30 I.R.B. 147, 

which was published on July 24, 2017, 

the Treasury Department and the IRS 

requested comments on whether the 

regulations identified in the interim 

report (including the 2016 final 

regulations) should be rescinded or 

modified and, if not rescinded, how the 

regulations should be modified to 

reduce the burden and complexity. 

The Treasury Department and the IRS 

received several comments in response 

to Notice 2017–38. In addition, one 

comment was submitted in response to 

Notice 2017–57, 2017–42 I.R.B. 325 

(which was the first of the deferral 

notices described in part V of this 

Background section). The comments 

that are relevant to the proposed 

regulations are discussed in the 

Explanation of Provisions. 

IV. Second Report to the President on 

Identifying and Reducing Tax 

Regulatory Burdens 

On October 16, 2017, the Secretary 

published a report (the ‘‘Report’’) in the 

Federal Register (82 FR 48013, October 

16, 2017) recommending specific 

actions to mitigate the burden imposed 

by the regulations identified in the 

interim report. The Report stated that 

the Treasury Department and the IRS 

intend to propose modifications to the 

2016 final regulations and to issue 

guidance permitting taxpayers to elect 

to defer the application of §§ 1.987–1 

through 1.987–10. 

In particular, the Report stated that, in 

response to comments, the Treasury 

Department and the IRS intend to 

propose rules that would permit 

taxpayers to elect to adopt a simplified 

method of calculating section 987 gain 

or loss and translating section 987 

taxable income or loss, subject to certain 

limitations on the recognition of section 

987 loss. One simplified method 

discussed in the Report would allow a 

taxpayer to treat all assets and liabilities 

of a section 987 QBU as marked items 

and to translate all items of income and 

expense at the average exchange rate for 

the taxable year. Under this method, the 

amount of section 987 gain or loss 

would generally be consistent with the 

amount determined under the 1991 

proposed regulations and would more 

closely conform to the applicable 

financial accounting rules. 

The Report also noted that the 

Treasury Department and the IRS were 

considering limitations on the 

recognition of section 987 loss that 

would apply to taxpayers using the 

simplified method. Two potential 

limitations were mentioned in the 

Report: (1) a rule that would allow the 

electing taxpayer to recognize net 

section 987 loss only to the extent of net 

section 987 gain recognized in prior or 

subsequent years; and (2) a rule that 

would defer the recognition of all 

section 987 gain or loss until the earlier 

of (i) the year that the trade or business 

conducted by the section 987 QBU 

ceases to be performed by any member 

of its controlled group or (ii) the year 

that substantially all of the assets and 

activities of the QBU are transferred 

outside of the controlled group. 

Finally, the Report stated that the 

Treasury Department and the IRS were 

considering alternative transition rules. 

One alternative would allow taxpayers 

to carry forward unrealized section 987 

gains and losses (measured on the 

transition date with appropriate 

adjustments), and a second alternative 

would allow taxpayers to translate all 

items of the section 987 QBU at the spot 

rate on the transition date without 

carrying forward any unrecognized 

section 987 gain or loss. 

V. Deferral Notices 

The Treasury Department and the IRS 

have issued several notices stating that 

future guidance would defer the 

applicability dates of the 2016 final 

regulations, §§ 1.987–2(c)(9) and 1.987– 

4(c)(2) and (f) of the 2019 final 

regulations (the ‘‘related 2019 final 

regulations’’), and §§ 1.987–1T (other 

than §§ 1.987–1T(g)(2)(i)(B) and 

(g)(3)(i)(H)) through 1.987–4T, 1.987– 

6T, 1.987–7T, 1.988–1T, and 1.988– 

2T(i) of the temporary regulations. Most 

recently, on August 22, 2022, Notice 

2022–34, 2022–34 I.R.B. 150, 

announced that future guidance would 

defer the applicability date of the 2016 

final regulations and the related 2019 

final regulations by one additional year 

to taxable years beginning after 

December 7, 2023. Thus, following the 

amendments described in that Notice, 

the 2016 final regulations and the 

related 2019 final regulations would 

first apply to the taxable year beginning 

on January 1, 2024, for calendar year 

taxpayers. The applicability date of 

§ 1.987–12 would not be affected by 

these amendments. 

VI. Financial Accounting Rules 

The rules of the final regulations 

under section 987 differ from the U.S. 

generally accepted accounting 

principles (‘‘U.S. GAAP’’) relating to 

foreign currency translation gain or 

loss.1 For financial accounting 

purposes, the consolidated financial 

statements of a reporting entity may 

include operations denominated or 

measured in currencies other than the 

reporting currency (each such operation, 

a foreign entity),2 resulting in the need 

to translate those operations into the 

reporting currency of the reporting 

entity. FASB, 2023, ASC par. 830–10– 

10–1. The assets and liabilities and 

other elements, such as revenues and 

expenses, of the financial statements of 

a foreign entity are translated to the 

reporting currency using a current 

exchange rate. FASB, 2023, ASC pars. 

830–30–45–3 through 830–30–45–5. For 

example, assets and liabilities of the 

foreign entity are translated into the 

reporting currency using the spot rate 

on the balance sheet date. Translation 

adjustments resulting from the process 

of translating a foreign entity’s financial 

statements to the reporting currency are 

not included in determining net income 


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3Previously, section 987 gain or loss recognized 

by a CFC generally would be taken into account in 

determining a U.S. shareholder’s taxable income 

only if a portion of the section 987 gain or loss 

affected the calculation of subpart F income or 

when the earnings of the CFC were relevant, such 

as on a distribution or sale. 

but are reported in the cumulative 

translation adjustment (CTA), which is 

part of other comprehensive income, 

included in the in the equity section of 

the reporting entity’s consolidated 

balance sheet. FASB, 2023, ASC par. 

830–30–45–12. Upon the sale or 

liquidation of the investment in the 

foreign entity, the CTA attributable to 

that foreign entity is removed from 

equity and is reported as part of the gain 

or loss on the sale or liquidation of the 

investment. FASB, 2023, ASC par. 830– 

30–40–1. 

The treatment of translation gain or 

loss under FASB, ASC Topic 830, under 

which translation gain or loss is 

deferred until a sale or liquidation, 

differs from the requirements of section 

987(3), under which a taxpayer is 

required to make proper adjustments for 

the transfer of property between QBUs 

of a taxpayer by including section 987 

gain or loss in income upon a 

remittance. Further, in contrast to the 

translation adjustments in the financial 

accounting rules, which apply to all 

assets and liabilities of a foreign entity, 

the FEEP method imputes section 987 

gain or loss only to marked items of a 

section 987 QBU and requires the basis 

of historic assets to be translated at 

historic rates for purposes of computing 

section 987 taxable income or loss. 

Explanation of Provisions 

The proposed regulations retain the 

basic approach and structure of the final 

regulations, while adopting a number of 

the simplifications discussed in the 

Report and providing additional 

guidance regarding the determination of 

section 987 taxable income or loss and 

section 987 gain or loss. 

I. FEEP Method 

As explained in parts II.B and II.C of 

the Background section, the final 

regulations provide that section 987 

gain or loss and section 987 taxable 

income or loss are determined under the 

FEEP method. This method uses a 

balance sheet approach to determine 

section 987 gain or loss. In addition, 

historic items are translated at historic 

rates (both for purposes of determining 

section 987 gain or loss and for 

purposes of translating recovery of basis 

with respect to historic assets in 

computing section 987 taxable income 

or loss). As a result, the FEEP method 

does not impute section 987 gain or loss 

to historic items, for which exchange 

rate changes have only an uncertain or 

remote effect on value that is more 

appropriately recognized upon a 

realization event. 

Several comments asserted that the 

FEEP method is overly complex and 

presents significant compliance 

burdens, primarily related to the 

treatment of historic items. Comments 

stated that, because the requirement to 

use historic rates to translate historic 

items diverges from financial 

accounting rules, taxpayers would need 

to keep a separate set of books with 

respect to each section 987 QBU and to 

develop costly reporting systems to 

maintain information that is not used 

for any other purpose. 

Comments recommended that, to 

reduce the complexity and 

administrative burden of the final 

regulations, taxpayers should be 

permitted to apply a method similar to 

that provided in the 1991 proposed 

regulations. Comments noted that this 

method could be coupled with rules to 

prevent the selective recognition of 

section 987 losses, as discussed in part 

III of this Explanation of Provisions. 

The proposed regulations retain the 

FEEP method of the 2016 final 

regulations, with modifications 

discussed in this Explanation of 

Provisions, as the default rule for 

determining section 987 taxable income 

or loss and net unrecognized section 

987 gain and loss. See proposed 

§§ 1.987–3 and 1.987–4. The FEEP 

method is an appropriate default rule 

because it generally provides a more 

precise measure of section 987 gain or 

loss. Moreover, the enactment of the Tax 

Cuts and Jobs Act, Public Law 115–97, 

131 Stat. 2054 (2017), on December 22, 

2017, has made it even more important 

to accurately calculate taxable income 

with respect to a section 987 QBU. For 

example, section 951A, relating to 

global intangible low-taxed income 

(‘‘GILTI’’), has significantly expanded 

the scope of taxable income of a 

controlled foreign corporation (‘‘CFC’’) 

that is subject to current U.S. taxation.3

In addition, because the 2016 final 

regulations permit the yearly average 

exchange rate to be used as the historic 

rate, a taxpayer that knows the year in 

which an asset was acquired or placed 

in service can determine the applicable 

historic rate based on publicly available 

information. Information relating to the 

year in which an asset was acquired or 

placed in service is often tracked for 

other reasons, including for purposes of 

computing depreciation and 

amortization. For example, in 

computing a CFC’s qualified business 

asset investment, section 951A(d)(3)(A) 

now requires the adjusted basis of assets 

to be determined using the alternative 

depreciation system under section 

168(g). 

However, the Treasury Department 

and the IRS acknowledge that in some 

cases it may be burdensome to translate 

the basis of each historic asset using a 

different historic rate (including for 

purposes of depreciation) in 

determining section 987 taxable income 

or loss. Accordingly, as described in 

parts II and IV of this Explanation of 

Provisions, the proposed regulations 

provide several simplifying elections 

that permit section 987 to be applied in 

a way that more closely conforms to the 

financial accounting rules and reduces 

the compliance burden. Taxpayers who 

make these elections would still 

compute section 987 gain or loss by 

reference to the year-end balance sheet 

of the section 987 QBU (though the 

computation would be modified, as 

described in part V of this Explanation 

of Provisions). The proposed regulations 

do not include an election to use the 

method prescribed in the 1991 proposed 

regulations, because the use of 

fundamentally different computational 

methods by different taxpayers (or by 

the same taxpayer in different years) 

would increase the complexity of the 

section 987 regulations and make them 

more difficult to administer. 

II. Current Rate Election 

As discussed in part I of this 

Explanation of Provisions section, 

comments noted that the compliance 

burden associated with the FEEP 

method relates primarily to the 

treatment of historic items. Under the 

2016 final regulations, taxpayers are 

required to track the historic rate for 

historic items and to use the historic 

rate for purposes of computing section 

987 taxable income or loss and section 

987 gain or loss. 

To alleviate this compliance burden, 

proposed § 1.987–1(d)(2) would provide 

an election to treat all items that are 

properly reflected on the books and 

records of a section 987 QBU as marked 

items (the ‘‘current rate election’’). If a 

current rate election applies, all items of 

income, gain, deduction, and loss with 

respect to a section 987 QBU would be 

translated at the yearly average 

exchange rate for the current taxable 

year for purposes of computing section 

987 taxable income or loss. See 

proposed § 1.987–3(c)(2). In addition, all 

items of a section 987 QBU would be 

translated at the year-end spot rate for 

purposes of computing section 987 gain 

or loss. 

The current rate election is expected 

to produce an amount of section 987 


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4See part VI of this Explanation of Provisions 

(requesting comments concerning the treatment of 

section 987 gain or loss as ECI). 

gain or loss and section 987 taxable 

income or loss that is similar to the 

amounts determined under the 1991 

proposed regulations. If a current rate 

election is made, all assets and 

liabilities of a section 987 QBU would 

generate section 987 gain or loss, in 

conformity with the approach used for 

financial reporting purposes and the 

1991 proposed regulations. 

In general, a current rate election 

would increase the pool of net 

unrecognized section 987 gain or loss 

with respect to a section 987 QBU 

(relative to the pool that would be 

determined without the current rate 

election). In addition, under a current 

rate election amounts in the pool may 

substantially exceed any economic gain 

or loss attributable to currency 

fluctuations. The Treasury Department 

and the IRS are concerned that without 

appropriate limitation, the current rate 

election would facilitate the abuses and 

inappropriate outcomes that occurred 

under the 1991 proposed regulations, 

including the potential for taxpayers to 

choose to recognize significant, and 

potentially uneconomic, section 987 

losses while avoiding or deferring 

section 987 gains. Accordingly, the 

proposed regulations include a rule that 

would suspend the recognition of 

section 987 loss when a current rate 

election is in effect. See part III of this 

Explanation of Provisions. 

III. Suspension of Section 987 Loss 

Under a Current Rate Election 

Comments discussed several options 

for addressing the potential for selective 

recognition of section 987 losses. First, 

comments asserted that certain rules 

provided in the 2016 final regulations 

(for example, the annual netting of 

contributions and distributions to 

determine the amount of a remittance 

under § 1.987–5(c)) would be sufficient 

to prevent abuse. Alternatively, 

comments recommended that the 

recognition of section 987 gain or loss 

be deferred until a QBU is terminated or 

its assets are sold to an unrelated party, 

consistent with the financial accounting 

rules. Comments also suggested that 

section 987 loss could be deferred until 

the owner recognizes an equal or greater 

amount of section 987 gain from the 

same QBU. Finally, some comments 

proposed a ‘‘lookback’’ approach, under 

which section 987 loss would be 

deferred only to the extent that the loss 

exceeded section 987 gain previously 

recognized with respect to the same 

section 987 QBU. 

The Treasury Department and the IRS 

are concerned that, notwithstanding the 

annual netting rule of § 1.987–5(c) and 

the other rules provided in the 2016 

final regulations, taxpayers generally 

have a significant degree of control over 

whether and when their section 987 

QBUs make remittances and, therefore, 

could still selectively recognize section 

987 losses. In addition, because 

taxpayers that make a current rate 

election are expected to have substantial 

pools of net unrecognized section 987 

gain or loss, special rules are needed to 

prevent the selective recognition of 

losses. 

Accordingly, if a current rate election 

is in effect, the proposed regulations 

generally would suspend the 

recognition of section 987 loss until a 

taxable year in which an equal or greater 

amount of section 987 gain is 

recognized (as described in part III.A of 

this Explanation of Provisions) or until 

the occurrence of certain recognition 

events (as described in part III.B of this 

Explanation of Provisions). 

A. General Rules Relating to Suspended 

Section 987 Loss 

1. In General 

In a taxable year in which a current 

rate election applies, any section 987 

loss that would otherwise be recognized 

as a result of a remittance (including a 

deemed remittance resulting from the 

termination of a section 987 QBU) is 

treated as suspended section 987 loss. 

Proposed § 1.987–11(c). In general, an 

owner of a section 987 QBU would 

recognize suspended section 987 loss in 

a taxable year in which the owner 

recognizes section 987 gain that has the 

same source and character as the 

suspended section 987 loss (the ‘‘lossto-the-extent-of-gain rule’’). Proposed 

§ 1.987–11(e). Whether section 987 gain 

has the same source and character as 

suspended section 987 loss would be 

determined on the basis of the initial 

assignment in proposed § 1.987– 

6(b)(2)(i). See proposed § 1.987–11(e)(1) 

and (f). 

The Treasury Department and the IRS 

considered applying the loss-to-theextent-of-gain rule at the QBU level, 

such that suspended section 987 loss 

with respect to a section 987 QBU 

would be recognized only to the extent 

of section 987 gain recognized with 

respect to the same section 987 QBU (as 

was recommended by some comments). 

However, the Treasury Department and 

the IRS were concerned that a QBUlevel limitation would be overly 

restrictive. Moreover, if an owner has 

suspended section 987 loss with respect 

to one QBU, the concern of selective 

loss recognition may be mitigated to the 

extent that the same owner recognizes 

section 987 gain with respect to another 

QBU. 

Therefore, under the proposed 

regulations, the loss-to-the-extent-ofgain rule applies at the owner level. An 

owner of a section 987 QBU recognizes 

suspended section 987 loss to the extent 

that it recognizes section 987 gain, 

regardless of which QBU generates the 

gain. However, because this rule applies 

at the owner level, the Treasury 

Department and the IRS were concerned 

that an owner might trigger the 

recognition of section 987 gain that is 

not subject to residual U.S. tax (or is 

taxed at a low rate) to release suspended 

section 987 loss of a different source or 

character. Accordingly, proposed 

§ 1.987–11(e)(1) provides that an owner 

does not recognize suspended section 

987 loss until it recognizes section 987 

gain in the same recognition grouping as 

the suspended section 987 loss. 

In general, section 987 gain and 

suspended section 987 loss are in the 

same recognition grouping if they are 

both initially assigned to U.S. source 

income or to foreign source income in 

the same section 904 category. Proposed 

§ 1.987–11(f)(1). In addition, if the 

owner of a section 987 QBU is a CFC, 

in order to be in the same recognition 

grouping, section 987 gain and 

suspended section 987 loss must both 

be initially assigned to the same 

statutory and residual grouping of 

subpart F income, tentative tested 

income, income described in section 

952(b) (certain income that is effectively 

connected with the conduct of a trade 

or business within the United States 

(‘‘ECI’’) and excluded from subpart F 

income), or other income.4 Proposed 

§ 1.987–11(f)(2). 

Suspended section 987 loss that is not 

recognized in a taxable year is 

recognized in the next taxable year in 

which (and to the extent that) the owner 

recognizes section 987 gain in the same 

recognition grouping. The Treasury 

Department and the IRS also considered 

a lookback rule, under which suspended 

section 987 loss could be recognized to 

the extent that section 987 gain was 

recognized in a prior taxable year. 

However, a lookback rule would permit 

taxpayers to selectively trigger section 

987 gain in taxable years in which such 

gain would not give rise to additional 

U.S. tax (for example, because the gain 

is offset by losses or because the 

additional U.S. tax is offset with foreign 

tax credits). In light of these concerns, 

the Treasury Department and the IRS 

request comments regarding, if a 

lookback rule were to be adopted, how 

to prevent section 987 gain that has no 


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net effect on U.S. tax from releasing 

suspended section 987 loss that reduces 

U.S. tax. 

2. Suspension of Section 987 Loss When 

an Annual Recognition Election Is Made 

In general, a taxpayer who makes an 

annual recognition election will 

recognize the full amount of net 

unrecognized section 987 gain or loss 

that is added to the pool each year. If 

an annual recognition election and a 

current rate election are both in effect 

for a taxable year, section 987 loss 

generally would not be suspended 

under proposed § 1.987–11(c). See part 

IV of this Explanation of Provisions. 

The Treasury Department and the IRS 

are concerned that taxpayers who are 

subject to a current rate election might 

seek to avoid the application of the lossto-the-extent-of-gain rule by making an 

annual recognition election after net 

unrecognized section 987 loss has 

accrued. Similarly, the Treasury 

Department and the IRS are concerned 

that taxpayers that have not made a 

current rate election, but which have 

substantial pools of net unrecognized 

section 987 loss, might make an annual 

recognition election to recognize the 

loss without the need for a remittance. 

Accordingly, the proposed regulations 

would treat any net accumulated 

unrecognized section 987 loss and 

deferred section 987 loss as suspended 

section 987 loss in the first year in 

which an annual recognition election 

takes effect if either (1) a current rate 

election was in effect in the previous 

year or (2) the owner had more than $5 

million of net section 987 losses. 

Proposed § 1.987–11(d). 

3. Recognition of Suspended Section 

987 Loss When an Annual Recognition 

Election Is in Effect 

The proposed regulations also contain 

a special rule relating to the recognition 

of suspended section 987 loss when a 

current rate election and an annual 

recognition election are both in effect. 

The Treasury Department and the IRS 

are concerned that, absent a 

modification to the general loss-to-theextent-of-gain rule in proposed § 1.987– 

11(e)(1), taxpayers that have suspended 

section 987 loss would get an 

unwarranted benefit from making an 

annual recognition election. 

Specifically, absent a modification, 

these taxpayers would be able to 

recognize suspended section 987 loss 

even if they had net losses on a 

cumulative basis for the taxable years to 

which the annual recognition election 

applied. 

For example, assume that an owner of 

a section 987 QBU has suspended 

section 987 loss of $400 that arose in 

prior years (for example, under a current 

rate election). The owner’s functional 

currency is the U.S. dollar, and the 

section 987 QBU’s functional currency 

is the euro. In year 1, the owner makes 

an annual recognition election. The euro 

weakens in year 1 and partially recovers 

in year 2. As a result of the annual 

recognition election, the owner 

recognizes section 987 loss of $200 in 

year 1 and recognizes section 987 gain 

of $150 in year 2. Under the general 

loss-to-the-extent-of-gain rule in 

§ 1.987–11(e)(1), even though the owner 

recognized net section 987 loss of $50 

on a cumulative basis (over years 1 and 

2), the owner would recognize 

suspended section 987 loss equal to the 

section 987 gain in the same recognition 

grouping that it recognizes in year 2. 

Assuming all of the section 987 gain or 

loss is in the same recognition grouping, 

the owner would recognize $350 of total 

section 987 loss (equal to $200 of 

section 987 loss recognized under the 

annual recognition election in year 1 

and $150 of suspended section 987 loss 

recognized under the loss-to-the-extentof-gain rule in year 2), even though it 

recognizes only $150 of section 987 

gain. 

Accordingly, if a taxpayer makes both 

an annual recognition election and a 

current rate election, the loss-to-theextent-of-gain rule would apply by 

reference to the net cumulative amount 

of section 987 gain in each recognition 

grouping that is recognized by the 

taxpayer during the relevant testing 

period (rather than the gross amount 

recognized each taxable year). Proposed 

§ 1.987–11(e)(2). The testing period 

generally is the period in which section 

987 loss is suspended and both a 

current rate election and an annual 

recognition election are in effect. 

Proposed § 1.987–11(e)(2)(iii). The 

Treasury Department and the IRS 

request comments on whether any 

modifications to the limitation in 

proposed § 1.987–11(e)(2) would allow 

for simplification while preventing 

inappropriate outcomes. 

B. Suspended Section 987 Loss 

Recognized or Attributed to a Successor 

on Termination 

The proposed regulations provide a 

successor rule that applies when a 

section 987 QBU with suspended 

section 987 loss terminates. Under the 

successor rule, suspended section 987 

loss is not recognized in the taxable year 

of termination, but instead becomes 

attributable to a successor suspended 

loss QBU. 

For this purpose, an eligible QBU is 

treated as a successor of a section 987 

QBU if it holds a significant portion of 

the assets of the section 987 QBU 

following its termination, is engaged in 

the same trade or business, and is 

owned by the owner of the section 987 

QBU or a member of the owner’s 

controlled group. Proposed § 1.987– 

13(b)(1). For this purpose, any eligible 

QBU may qualify as a successor, 

whether or not it is a section 987 QBU 

(that is, whether or not it has a different 

functional currency than its owner). 

Thus, for example, if an owner of a 

section 987 QBU with suspended 

section 987 loss contributes the assets of 

the section 987 QBU to a subsidiary 

where they are held by an eligible QBU 

of the subsidiary that uses them in the 

same trade or business (the ‘‘subsidiary 

QBU’’), the subsidiary QBU is a 

successor suspended loss QBU even if it 

is not a section 987 QBU. Similar 

principles apply when a successor 

terminates. Proposed § 1.987–13(c)(1). 

If a section 987 QBU (or its successor) 

terminates without a successor, the 

original owner of the section 987 QBU 

recognizes all of its suspended section 

987 loss with respect to the section 987 

QBU (or its successor). Proposed 

§ 1.987–13(b)(2) and (c)(2). Therefore, an 

owner generally would recognize 

suspended section 987 loss when it 

transfers the section 987 QBU’s assets to 

an unrelated party or the section 987 

QBU ceases its trade or business (such 

that there is no successor suspended 

loss QBU). These events are similar to 

the events that result in a release of the 

CTA for financial reporting purposes. 

Moreover, the Treasury Department and 

the IRS expect that taxpayers would be 

less likely to sell or wind up the trade 

or business of a section 987 QBU for the 

purpose of selectively recognizing 

section 987 losses and, accordingly, 

there is less of a need for continued 

suspension of section 987 loss after 

these events occur. 

In addition, suspended section 987 

loss is recognized if the owner of the 

successor ceases to be related to the 

original owner of the suspended loss 

QBU due to a direct or indirect transfer 

of interests in the owner of the 

successor. Proposed § 1.987–13(d). If the 

owner of a successor suspended loss 

QBU ceases to be related to the original 

owner of the section 987 QBU for a 

different reason (for example, due to a 

transfer of interests in the original 

owner of the suspended loss QBU), the 

successor suspended loss QBU is no 

longer treated as a successor, and 

suspended section 987 loss can no 

longer be recognized in connection with 

a termination (though it can still be 

recognized under the loss-to-the-extentof-gain rule). Proposed § 1.987–13(e). 


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This rule is intended to prevent 

taxpayers from transferring the stock of 

the original owner out of its controlled 

group for the purpose of selectively 

recognizing suspended section 987 loss, 

while leaving behind the assets and 

activities of the section 987 QBU in the 

hands of a different controlled group 

member. 

Similarly, suspended section 987 loss 

is not recognized when the owner of a 

section 987 QBU liquidates in a 

transaction described in section 331. 

Proposed § 1.987–13(f). Instead, 

suspended section 987 loss that is not 

recognized in the taxable year of the 

liquidation is eliminated and will never 

be recognized. This rule is intended to 

prevent taxpayers from entering into 

section 331 transactions in order to 

trigger the recognition of suspended 

section 987 loss. For example, a U.S. 

shareholder could cause an upper-tier 

CFC that owns a section 987 QBU with 

suspended section 987 loss to transfer 

all of its assets and liabilities to a lowertier CFC in a section 351 contribution, 

and then cause the upper-tier CFC to 

liquidate in a transaction described in 

section 331 in order to recognize the 

suspended loss. The Treasury 

Department and the IRS are aware that 

similar transactions have been used to 

claim large section 987 losses under 

current law. 

In the case of a combination or 

separation, the suspended section 987 

loss of a combined or separated QBU is 

determined under rules similar to those 

applicable to net accumulated 

unrecognized section 987 gain or loss 

under proposed § 1.987–4(f). Proposed 

§ 1.987–11(b)(2) and (3). Therefore, the 

suspended section 987 loss of a 

separating QBU is allocated to the 

separated QBUs in proportion to the 

assets properly reflected on the books 

and records of each separated QBU after 

the separation. Proposed § 1.987– 

11(b)(3) 

C. Special Rule for Inbound 

Liquidations and Reorganizations 

Under the proposed regulations, if a 

foreign corporation liquidates or merges 

into a domestic corporation in a section 

381(a) transaction, the domestic 

corporation does not succeed to or take 

into account any unused suspended 

section 987 loss of the foreign 

corporation. Proposed § 1.987–13(g). 

This rule is intended to prevent the 

importation of suspended section 987 

loss that was generated offshore. Due to 

differences in how income of a CFC is 

taxed to its U.S. shareholders, these 

losses may relate to income subject to 

tax at a significantly reduced effective 

rate. For example, a suspended section 

987 loss that is allocated and 

apportioned to the other income 

grouping under proposed § 1.987–6 may 

effectively reduce only earnings that 

would typically not be subject to current 

U.S. tax, and which may be eligible for 

a dividends received deduction under 

section 245A upon distribution. As a 

result, depending on the particular facts, 

such losses may have little or no impact 

on the U.S. tax liability of a CFC’s U.S. 

shareholder when they are recognized 

and are generally not equivalent to the 

section 987 gains or losses typical of a 

domestic corporation. 

Furthermore, even if the domestic 

corporation could, in theory, succeed to 

the suspended section 987 loss, the loss 

may have been assigned to an income 

group, such as the tested income group, 

that is not relevant to a domestic 

corporation, in which case, it would be 

highly unlikely that the suspended 

section 987 loss could ever be used 

(absent a subsequent outbound asset 

transfer by the domestic corporation to 

a foreign successor) under the loss-tothe-extent-of-gain rule because the 

domestic corporation would not 

recognize section 987 gain in the same 

recognition grouping. 

D. Rejection of Financial Accounting 

Deferral Rule 

The Treasury Department and the IRS 

also considered a rule that would defer 

the recognition of all section 987 gain 

and loss of a section 987 QBU until a 

taxable year in which the section 987 

QBU’s trade or business ceases to be 

performed by any member of the 

controlled group or substantially all of 

the assets and activities of the QBU are 

transferred outside of the controlled 

group. This approach would more 

closely parallel the rules for 

determining when the CTA is released 

for financial accounting purposes. 

However, the loss limitation rule 

provided in the proposed regulations is 

more consistent with the statutory 

provisions of section 987(3), which 

contemplates the recognition of section 

987 gain or loss at the time of a 

remittance, and section 989(c)(2), which 

authorizes regulations limiting the 

recognition of foreign currency loss on 

certain remittances. Moreover, the 

Treasury Department and the IRS are 

concerned that a rule that defers the 

recognition of all section 987 gain or 

loss may be difficult to administer. For 

example, as a practical matter, taxpayers 

might not properly track section 987 

gain or loss on an annual basis if it is 

not expected to be recognized in the 

foreseeable future and the sale or 

liquidation of a section 987 QBU might 

occur many years after the accrual of 

section 987 gain or loss (at which time 

the necessary records may no longer be 

available). 

IV. Annual Recognition Election 

A. Annual Deemed Termination 

Election Provided in the 2016 

Temporary and Proposed Regulations 

As explained in part II.D of the 

Background section, the 2016 temporary 

and proposed regulations contained an 

annual deemed termination election. 

Under this election, a section 987 QBU 

would be deemed to terminate on the 

last day of each taxable year, resulting 

in the remittance of all the gross assets 

of the section 987 QBU to its owner and 

the recognition of all net unrecognized 

section 987 gain or loss on an annual 

basis. See §§ 1.987–8T(d) and 1.987– 

8(e). The assets and liabilities of a 

section 987 QBU subject to the election 

would then be deemed to be contributed 

to the section 987 QBU on the first day 

of the following taxable year. See 

§ 1.987–8T(d). 

A comment asserted that it was 

difficult to apply the rules under the 

annual deemed termination election. If 

the election was made, a section 987 

QBU’s historic assets and the amount of 

its historic liabilities would be 

translated at the end of each year into 

the owner’s functional currency using 

historic rates (due to the deemed 

termination and remittance); the historic 

rate would generally be the yearly 

average exchange rate for the year of the 

deemed termination. The assets and 

liabilities would then be retranslated 

into the section 987 QBU’s functional 

currency at the beginning of the 

following taxable year at the yearly 

average exchange rate for the following 

taxable year (due to the deemed 

contribution). See §§ 1.987–2(d)(2) and 

1.987–5(f)(3). As a result, the basis of a 

section 987 QBU’s assets and the 

amount of its liabilities (determined in 

the section 987 QBU’s functional 

currency) generally would change from 

one year to the next, which would 

increase the compliance burden of 

applying the section 987 regulations. 

B. Annual Recognition Election 

Provided in the Proposed Regulations 

The proposed regulations would 

replace the annual deemed termination 

election with an annual recognition 

election. Like the annual deemed 

termination election, an owner that 

makes the annual recognition election 

would recognize the full amount of net 

unrecognized section 987 gain or loss 

each year. However, the proposed 

annual recognition election does not 

result in a deemed termination of a 


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section 987 QBU and a deemed 

remittance of its assets or a deemed 

contribution to the section 987 QBU. 

Instead, the owner of a section 987 QBU 

simply recognizes the full amount of its 

net unrecognized section 987 gain or 

loss on an annual basis. Therefore, the 

annual recognition election would not 

alter the functional currency basis of a 

section 987 QBU’s assets, the amount of 

its liabilities, or their historic exchange 

rates. 

C. Special Rules That Apply When a 

Current Rate Election and an Annual 

Recognition Election Are Both in Effect 

The annual recognition election is 

available to owners whether or not they 

make a current rate election. If an owner 

makes both an annual recognition 

election and a current rate election for 

a taxable year, the loss suspension rule 

described in part III of this Explanation 

of Provisions does not apply to net 

unrecognized section 987 loss accrued 

while the election is in effect. Because 

the annual recognition election requires 

both gains and losses to be recognized 

without regard to whether a remittance 

occurs, selective recognition of losses is 

not possible and, accordingly, a loss 

limitation should not be needed. 

However, see part III.A.3 of this 

Explanation of Provisions regarding the 

application of the loss-to-the-extent-ofgain rule when an annual recognition 

election is in effect. 

D. Translation of Taxable Income Under 

an Annual Recognition Election When a 

Current Rate Election Is Not in Effect 

If an owner of a section 987 QBU 

makes an annual recognition election, 

but does not make a current rate 

election, section 987 taxable income or 

loss is determined by translating all 

items at the yearly average exchange 

rate. Unlike under the 2016 temporary 

and proposed regulations, this rule is 

mandatory (rather than elective). Use of 

the yearly average exchange rate 

simplifies the determination of section 

987 taxable income or loss without 

sacrificing accuracy and is consistent 

with financial accounting principles. 

Therefore, an election to use historic 

rates for this purpose should not be 

needed. 

E. Consequences of Making an Annual 

Recognition Election if a Current Rate 

Election Is Not in Effect 

As described in part IV.D of this 

Explanation of Provisions, if an owner 

of a section 987 QBU makes an annual 

recognition election, and does not make 

a current rate election, the owner would 

use the yearly average exchange rate for 

purposes of determining section 987 

taxable income or loss. However, the 

owner would use historic rates to 

translate historic items for purposes of 

determining section 987 gain or loss. 

Thus, the same historic item would be 

translated at different exchange rates for 

different purposes. Under the 

mechanics of the FEEP method, if a 

historic asset is sold or depreciated 

during the taxable year, the difference 

between the historic rate basis and the 

current year average rate basis would be 

added to the pool of unrecognized 

section 987 gain or loss (and recognized 

pursuant to the annual recognition 

election). 

The effect of these rules is that—with 

respect to historic assets of a section 987 

QBU—an owner that does not make a 

current rate election would recognize 

the same total amount of taxable income 

each year regardless of whether it makes 

an annual recognition election. For 

example, assume a section 987 QBU has 

the euro as its functional currency, and 

its owner is a calendar year taxpayer 

with the U.S. dollar as its functional 

currency. At the end of year 1, the 

section 987 QBU owns a nondepreciable historic asset (Asset A) with 

a basis of 100 euros, and the historic 

rate for Asset A is Ö1=$1. The yearly 

average exchange rate in year 2 and the 

spot rate on December 31, year 2 is 

Ö1=$2. In year 2, the section 987 QBU 

sells Asset A for 150 euros and holds 

the 150 euros on its balance sheet until 

the end of year 2. 

If the owner does not make an annual 

recognition election, the owner will 

have section 987 taxable income of $200 

for year 2. This reflects the excess of the 

amount realized (150 euros, translated 

at the yearly average exchange rate of 

Ö1=$2 into $300) over the basis of Asset 

A (100 euros, translated at the historic 

rate of Ö1=$1 into $100). The owner will 

have no unrecognized section 987 gain 

or loss for the taxable year under 

§ 1.987–4(d). A comparison of the year 

2 and year 1 year-end balance sheets 

under § 1.987–4(d)(1) will reflect an 

increase of $200 (the excess of 150 euros 

held at the end of year 2, translated at 

the year 2 year-end spot rate of Ö1=$2 

into $300, over the Ö100 basis of Asset 

A, which was held at the end of year 1, 

translated at the historic rate of Ö1=$1 

into $100). However, this increase is 

fully offset by the negative adjustment 

for taxable income of $200 under 

§ 1.987–4(d)(6). 

By contrast, if the owner makes an 

annual recognition election, the owner 

will have section 987 taxable income in 

year 2 of only $100 (50 euros of taxable 

income, translated at the yearly average 

exchange rate of Ö1=$2). The owner will 

also have unrecognized section 987 gain 

for the taxable year of $100 under 

§ 1.987–4(d), which reflects the balance 

sheet increase of $200 (computed under 

§ 1.987–4(d)(1) as described in the 

preceding paragraph) reduced by the 

negative adjustment for taxable income 

of $100. Thus, the difference between 

Asset A’s basis translated at the yearly 

average exchange rate (which is $200) 

and its basis translated at the historic 

rate (which is $100) is added to the pool 

of unrecognized section 987 gain or loss 

and this amount is recognized in year 2 

due to the annual recognition election. 

The example illustrates that, whether 

or not the annual recognition election is 

made, the owner recognizes the same 

amount of total income with respect to 

Asset A (that is, $200). However, the 

annual recognition election has the 

effect of converting a portion of the 

owner’s income into section 987 gain or 

loss. Because section 987 gain or loss is 

subject to special source and character 

rules under proposed § 1.987–6, the 

annual recognition election can change 

the source and character of an owner’s 

taxable income. 

F. Impact of an Annual Recognition 

Election on the Timing of Recognition 

With Respect to Marked and Historic 

Items 

Under an annual recognition election, 

section 987 gain or loss with respect to 

marked items would be recognized 

annually (whereas, in the absence of an 

annual recognition election, section 987 

gain or loss would be deferred until the 

section 987 QBU makes a remittance). 

Therefore, with respect to marked items, 

an annual recognition election would 

accelerate the recognition of section 987 

gain or loss. If a current rate election is 

in effect, all items of the section 987 

QBU will be treated as marked items 

generating section 987 gain or loss; this 

gain or loss would be accelerated if an 

annual recognition election is made. 

However, if a current rate election is 

not in effect, the annual recognition 

election would not accelerate the 

recognition of income with respect to 

historic assets. As explained in part IV.E 

of this Explanation of Provisions, in the 

absence of a current rate election, the 

owner of a section 987 QBU recognizes 

the same amount of total income with 

respect to historic assets whether or not 

an annual recognition election is in 

effect (though the annual recognition 

election has the effect of changing the 

portion of the income that is section 987 

gain or loss and the portion that is 

section 987 taxable income or loss). In 

addition, as explained in part IV.D of 

this Explanation of Provisions, an 

annual recognition election is expected 

to simplify the computation of section 


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5Proposed § 1.987–4(g) contains new examples 

illustrating the proposed modifications to the 

computation of unrecognized section 987 gain or 

loss under proposed § 1.987–4(d). The Treasury 

Department and the IRS intend to make conforming 

changes to the existing examples in § 1.987–4 of the 

final regulations when the proposed regulations are 

finalized. 

6The proposed regulations would also make a 

clarifying change to § 1.861–9T(g)(2)(ii)(A)(1) to 

clarify that the references to beginning-of-year and 

end-of-year functional currency amounts are to the 

owner functional currency amounts and to move 

certain provisions from § 1.861–9T to proposed 

§ 1.861–9. 

987 taxable income or loss (because all 

items would be translated at the yearly 

average exchange rate). Therefore, for 

section 987 QBUs that do not have a 

significant amount of marked assets or 

liabilities, the election is expected to 

reduce the compliance burden on 

taxpayers without materially 

accelerating the recognition of income. 

V. Changes to the Computation of 

Unrecognized Section 987 Gain or Loss 

for a Taxable Year 

The proposed regulations contain 

several changes to the computation of 

unrecognized section 987 gain or loss 

for a taxable year under § 1.987–4(d) 

(that is, the amount added to the pool 

of net unrecognized section 987 gain or 

loss each year).5 These modifications 

are intended to ensure that section 987 

gain or loss is attributable only to 

exchange rate fluctuations. For example, 

the proposed regulations would modify 

the adjustments for tax-exempt income 

and non-deductible expenses to cover 

all items of income, gain, deduction, or 

loss that affect the section 987 QBU’s 

balance sheet but are not taken into 

account in determining section 987 

taxable income or loss for the taxable 

year. Proposed § 1.987–4(d)(7) and (8). 

The proposed regulations would also 

require an adjustment for items of 

income, gain, deduction, or loss that are 

taken into account in determining 

section 987 taxable income or loss but 

do not affect the section 987 QBU’s 

balance sheet for the taxable year. 

Proposed § 1.987–4(d)(9). 

Thus, the proposed regulations would 

account for deferred items that are 

expected to be taken into account in 

computing taxable income in a 

subsequent year by taking them into 

account in the year in which they 

impact the section 987 QBU’s balance 

sheet and effectively backing them out 

in the future year when they impact 

taxable income but do not change the 

balance sheet. For example, if a section 

987 QBU incurs an expense in year 1, 

but the deduction associated with the 

expense is deferred until year 5, 

proposed § 1.987–4(d)(7) would treat the 

expense as a non-deductible expense in 

year 1, increasing the year 1 

unrecognized section 987 gain or loss. 

In year 5, the deduction would have no 

net effect on unrecognized section 987 

gain or loss, since the deduction would 

result in a positive adjustment under 

proposed § 1.987–4(d)(6) (because the 

deduction reduces taxable income, and 

taxable income is a negative adjustment 

to unrecognized section 987 gain or 

loss), and an offsetting negative 

adjustment under proposed § 1.987– 

4(d)(9) (since the deduction represents a 

taxable deduction that does not affect 

the balance sheet). As a result, the 

expense would impact the calculation of 

section 987 gain or loss in the same 

manner as if it had been deductible in 

year 1. 

In addition, the proposed regulations 

require an adjustment to unrecognized 

section 987 gain or loss for any residual 

increase or decrease to the adjusted 

balance sheet of the section 987 QBU 

(determined in the functional currency 

of the section 987 QBU) that is not 

accounted for under the other 

computational steps. Proposed § 1.987– 

4(d)(10). This residual amount is 

translated into the owner’s functional 

currency at the yearly average exchange 

rate. The residual increase or decrease is 

computed by applying the other 

computational steps described in 

proposed § 1.987–4(d) (steps 1 through 

9) in the functional currency of the 

section 987 QBU. Because these steps 

must already be performed in the 

owner’s functional currency, 

determining the residual increase or 

decrease to the adjusted balance sheet 

under proposed § 1.987–4(d)(10) is not 

expected to significantly increase the 

burden of determining net unrecognized 

section 987 gain or loss. 

The application of proposed § 1.987– 

4(d)(10) would ensure that noncurrency-related changes to the balance 

sheet do not artificially increase or 

decrease the pool of net unrecognized 

section 987 gain or loss. However, if the 

computational steps are applied 

correctly in the functional currency of a 

section 987 QBU, there should not be 

any residual increase or decrease to the 

balance sheet under proposed § 1.987– 

4(d)(10) (unless a current rate election 

or an annual recognition election is 

made). Rather, the year-over-year 

increase (or decrease) to the functional 

currency balance sheet (step 1) should 

equal the functional currency amount of 

net transfers to the section 987 QBU 

(steps 2 through 5) and income of the 

section 987 QBU (steps 6 through 8), 

after backing out items of income that 

do not impact the balance sheet (step 9). 

By contrast, when these steps are 

applied in owner functional currency, 

they serve to identify the balance sheet 

change attributable to currency 

movements. 

For taxpayers that make a current rate 

election or an annual recognition 

election, the proposed regulations 

provide that steps 6 through 9 of the 

computation (relating to income, gain, 

deduction, or loss) do not need to be 

applied. For these taxpayers, all items of 

income, gain, deduction, or loss would 

be taken into account as a residual 

increase or decrease to the section 987 

QBU’s balance sheet and translated at 

the yearly average exchange rate. The 

Treasury Department and the IRS 

request comments on whether any 

additional adjustments are needed for 

section 988 gain or loss of a section 987 

QBU that is subject to a current rate 

election or an annual recognition 

election. See part XV of this Explanation 

of Provisions (requesting comments as 

to whether section 988 gain or loss of a 

section 987 QBU should be determined 

in the owner’s functional currency or 

the section 987 QBU’s functional 

currency). 

VI. Source and Character of Section 987 

Gain or Loss 

The final regulations provide that the 

source and character of section 987 gain 

or loss is determined in the year of a 

remittance using the asset method of 

§§ 1.861–9(g) and 1.861–9T(g). See 

§ 1.987–6(b)(2). For this purpose, only 

the assets of the section 987 QBU are 

taken into account. The proposed 

regulations would generally retain this 

character and source rule, subject to 

certain modifications, and would 

further provide that taxpayers must 

apply only the tax book value method 

in characterizing the assets under 

proposed §§ 1.861–9(g) and 1.861– 

9T(g).6 See proposed § 1.987– 

6(b)(2)(i)(A). 

Proposed § 1.987–6(b)(2)(i) would 

provide special rules for the application 

of the tax book value method for 

initially characterizing section 987 gain 

or loss. Under these proposed 

regulations, the assets of the section 987 

QBU would be initially assigned to 

statutory and residual groupings under 

the tax book value method. However, to 

prevent circularity, the proportions in 

which the tax book value of the assets 

would be initially assigned to the 

statutory and residual groups are 

determined without regard to section 

987 gain or loss. Proposed § 1.987– 

6(b)(2)(i)(B). The initial assignment 

would occur after the application of the 

income attribution rules of § 1.904– 

4(f)(2)(vi) or 1.951A–2(c)(7) (or the 


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principles of these rules), but before 

expenses are allocated and apportioned 

to gross income and before the 

application of provisions that require a 

net income computation, such as the 

high-tax exception to passive category 

income in § 1.904–4(c), the high-tax 

exception to foreign base company 

income in § 1.954–1(d), and the high-tax 

exclusion from tested income in 

§ 1.951A–2(c)(7). 

In addition, because, at the time of the 

initial assignment, a taxpayer may not 

yet know whether a GILTI high-tax 

election will be in effect in the taxable 

year in which the section 987 gain or 

loss is recognized (since deferred 

section 987 gain or loss and suspended 

section 987 loss may be recognized in 

future year), the proposed regulations 

would initially assign all of the section 

987 gain or loss that would have been 

assigned to a tested income group if no 

GILTI high-tax election was in effect to 

a tentative tested income group. See 

proposed § 1.987–6(b)(2)(i)(D). 

The initial assignment would 

generally be made in the taxable year in 

which section 987 gain or loss is treated 

as recognized, deferred, or suspended 

under proposed § 1.987–6(b)(1). Then, 

in the taxable year in which the section 

987 gain or loss is recognized (which 

may be the same taxable year as the year 

in which the initial assignment was 

made or a future taxable year), any 

section 987 gain or loss that was 

initially assigned to a tentative tested 

income group would be reassigned to a 

tested income group or residual group 

based on whether the GILTI high-tax 

election is in effect in that taxable year 

and, if so, whether the income is hightax. The initial characterization under 

proposed § 1.987–6(b)(2)(i) would be 

used for purposes of applying the lossto-the-extent-of-gain rule in proposed 

§ 1.987–11(e) and (f), and also applies as 

the starting point for net income 

calculations required for other 

provisions such as the high-tax 

exception to passive category income 

under § 1.904–4(c) and the GILTI and 

subpart F high-tax exceptions under 

§§ 1.954–1(d) and 1.951A–2(c)(7). 

Proposed § 1.987–6(b)(2)(ii). 

Proposed § 1.987–6(b)(2)(iii) would 

also provide that if a GILTI high-tax 

election is made under § 1.951A– 

2(c)(7)(viii), it applies to all of the 

section 987 gain or loss in a tentative 

tested income group that is recognized 

by the CFC in the taxable year as if the 

section 987 gain and loss were all 

assigned to its own separate tested unit 

of the CFC. In other words, all section 

987 gain or loss recognized by the CFC 

in that taxable year in the same section 

904 category would be treated as a 

single tentative tested income item for 

purposes of applying the GILTI high-tax 

exclusion. 

For example, if section 987 gain and 

loss in a section 904 category is initially 

assigned to a tentative tested income 

group under proposed § 1.987–6(b)(i) 

and a GILTI high-tax election is in effect 

in the year in which the section 987 

gain or loss is recognized, the section 

987 gain or loss in the section 904 

category would be treated as its own 

tentative tested income item for 

purposes of determining whether it is 

excluded from tested income under 

§ 1.951A–2(c)(7), after which the section 

987 gain or loss will be reassigned to a 

tested income group (if the item is not 

excluded from tested income) or to the 

residual category (if the item is 

excluded from tested income). Because 

foreign countries generally do not 

impose tax on section 987 gain, 

allocation and apportionment of a 

foreign income tax to section 987 gain 

under § 1.861–20 and proposed § 1.987– 

6(b)(3) will likely be uncommon. As a 

result, a tentative tested income item 

consisting of section 987 gain may often 

have a zero percent effective rate of 

foreign tax and, therefore, would 

generally not qualify for the GILTI hightax exclusion. 

As described above, the proposed 

regulations would provide that, for 

purposes of determining the source and 

character of section 987 gain and loss, 

the initial assignment of suspended 

section 987 loss and deferred section 

987 gain and loss is generally made in 

the taxable year it becomes suspended 

or deferred (generally in the year of a 

remittance or the year the section 987 

QBU is transferred to a related party), 

rather than the taxable year in which it 

is recognized. Proposed § 1.987–6(b)(1). 

The Treasury Department and the IRS 

anticipate that making the initial 

assignment in the year of suspension or 

deferral, rather than the year the section 

987 gain or loss is recognized, will 

generally result in determining the 

source and character in a year closer in 

time to the year in which the section 

987 loss originated, and therefore will 

tend to be more accurate. In addition, 

making an initial assignment in the 

taxable year of deferral or suspension 

means that the source and character are 

determined by reference to the assets of 

the section 987 QBU while they are still 

owned by the owner, rather than after 

they have been transferred, which 

would be both administratively difficult 

and more likely to introduce distortions 

to the determination. 

The Treasury Department and the IRS 

request comments as to whether it 

would be appropriate to determine the 

source and character of unrecognized 

section 987 gain or loss by making the 

initial assignment in the taxable year in 

which the section 987 gain or loss is 

initially included in unrecognized 

section 987 gain or loss under § 1.987– 

4(d), rather than in the year of a 

remittance. Making the initial 

assignment on an annual basis would 

require more extensive tracking of 

section 987 gain or loss in separate 

categories. However, this approach 

could avoid distortions that could arise 

from changes in the bases of a section 

987 QBU’s assets or shifts in the 

character of its income or assets 

between the time unrecognized section 

987 gain or loss is added to the pool and 

the time it is recognized. In addition, 

this approach could align more closely 

with the character of income generated 

by the section 987 QBU’s assets at the 

time of the exchange rate fluctuations 

that give rise to section 987 gain or loss. 

The proposed regulations would not 

change the rule in the final regulations 

that section 987 gain or loss that is 

assigned to a subpart F income group is 

treated as foreign currency gain or loss 

attributable to section 988 transactions 

not directly related to the business 

needs of the CFC. See proposed § 1.987– 

6(b)(2)(i)(C). The Treasury Department 

and the IRS request comments as to 

whether it would be appropriate to 

eliminate this rule and characterize 

section 987 gain or loss by reference to 

subpart F income groups (as defined in 

§ 1.960–1(d)(2)(ii)(B)) or whether to 

retain this rule generally but apply a 

different rule to taxpayers that make a 

current rate election (under which 

section 987 gain or loss can arise with 

respect to assets that would not generate 

section 988 gain or loss in the hands of 

the owner). 

A qualified business unit that 

produces income or loss that is, or is 

treated as, ECI is required to use the 

dollar as its functional currency. See 

§ 1.985–1(b)(1)(v). The 2016 proposed 

regulations would provide an election 

under which a qualified business unit 

with a dollar functional currency may 

be treated as a section 987 QBU. See 

§ 1.987–1(b)(6)(iii) of the 2016 proposed 

regulations. The Treasury Department 

and the IRS also request comments as to 

whether, and in what circumstances, 

section 987 gain or loss should be 

treated as ECI. 

VII. Expansion of Entities Covered 

In general, the final regulations do not 

apply to a bank, insurance company, 

leasing company, finance coordination 

center, regulated investment company, 

or real estate investment trust (a 

‘‘specified entity’’), unless it engages in 


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7A partner’s basis in the partnership was 

adjusted to take into account any section 987 gain 

or loss that it recognized on any section 987 QBUs 

owned indirectly through the partnership. 

transactions primarily with related 

persons within the meaning of section 

267(b) or section 707(b) that are not 

themselves specified entities. 

Additionally, the final regulations do 

not apply to trusts, estates, S 

corporations, and partnerships other 

than section 987 aggregate partnerships. 

See § 1.987–1(b)(1)(ii). 

The Treasury Department and the IRS 

are concerned that excluding these 

entities from the application of the 

regulations under section 987 would not 

provide taxpayers with sufficient 

guidance to ensure these entities are 

using an appropriate method to 

calculate their section 987 gain or loss. 

Furthermore, if these entities are not 

subject to the regulations under section 

987, they may use different methods of 

applying section 987 that vary in 

material ways. Applying a consistent set 

of rules to all taxpayers facilitates the 

fair and effective administration of the 

tax law by treating similarly situated 

taxpayers similarly as well as 

eliminating subjectivity and 

uncertainty. 

In addition, the Treasury Department 

and the IRS anticipate that the new 

current rate election and annual 

recognition election described in parts II 

and IV of this Explanation of Provisions 

would provide sufficient flexibility to 

permit the entities excluded under the 

2016 final regulations to apply the 

proposed regulations. As discussed in 

part VIII of this Explanation of 

Provisions, the proposed regulations 

also provide new rules relating to 

partnerships (other than section 987 

aggregate partnerships) and S 

corporations. See part VIII of this 

Explanation of Provisions. These rules 

are expected to significantly reduce the 

administrative burden and complexity 

of applying section 987 to partnerships 

as compared to the aggregate rules. 

Accordingly, proposed § 1.987– 

1(b)(1)(ii) generally removes the 

exclusion for entities excluded from the 

2016 final regulations, making them 

subject to the proposed regulations. 

The proposed regulations generally 

continue to exclude foreign non-grantor 

trusts and foreign estates if the aggregate 

interests of beneficiaries that are United 

States persons is less than 10 percent, 

and foreign partnerships if the aggregate 

interests of the partners that are United 

States persons is less than 10 percent of 

the capital and profits interests. 

Proposed § 1.987–1(b)(1)(ii). The 

Treasury Department and the IRS are 

concerned that the shareholders, 

partners, and beneficiaries of these 

entities may not be able to obtain the 

information needed to apply the 

regulations to these entities, and it 

would be difficult for the IRS to 

administer the regulations with respect 

to these entities. For the same reason, 

the proposed regulations generally 

exclude foreign corporations that are not 

CFCs and foreign corporations that are 

CFCs but which have no U.S. 

shareholders (which are not excluded 

under the final regulations). Foreign 

individuals are also generally excluded 

as they are typically not subject to U.S. 

tax. 

The Treasury Department and the IRS 

request comments on whether any 

additional rules are needed to facilitate 

the application of the proposed 

regulations to the entities that were 

excluded from the 2016 final 

regulations. See also part VIII of this 

Explanation of Provisions, requesting 

comments on the application of the 

proposed regulations to partnerships 

and S corporations. 

VIII. Partnerships 

A. Background 

As explained in part II.C of the 

Background section, the 2006 proposed 

regulations and 2016 final regulations 

applied aggregate theory to 

partnerships. As explained in the 

preamble to the 2006 proposed 

regulations, the 2006 proposed 

regulations applied the FEEP method 

directly at the partner level under 

aggregate theory with the goal of more 

appropriately preserving the correct 

amounts of exchange gain or loss as 

measured from the perspective of the 

partner. Measuring the currency gain or 

loss by reference to the partner, rather 

than the partnership, was considered 

preferable because the partners would 

generally bear the economic risk from 

the exposure. 

Comments to the 2006 proposed 

regulations requested that the Treasury 

Department and the IRS reconsider the 

aggregate approach and instead treat a 

partnership as a separate entity with its 

own functional currency. The comments 

indicated that the aggregate approach 

was overly complex and that minority 

partners would not have the power to 

compel a partnership to provide them 

with the information needed to make 

the calculations required under the 

aggregate approach. One comment 

acknowledged the economic rationale 

for the aggregate approach but, in light 

of its complexity, recommended that it 

apply only in cases in which a partner’s 

interest in partnership capital or profits 

exceeds a certain threshold, such as 10 

percent. 

In the preamble to the 2016 final 

regulations, the Treasury Department 

and the IRS acknowledged concerns 

regarding the complexity of the 

applying the aggregate approach to 

partnerships, but determined that it 

would be feasible to apply an aggregate 

approach to partnerships that are 

wholly owned by related persons. 

Furthermore, the aggregate approach 

was preserved in order to prevent a 

group of related parties from holding 

eligible QBUs through partnerships 

instead of directly, and thereby altering 

the section 987 treatment of the eligible 

QBU without meaningfully altering the 

group’s economic position. 

As a result, the 2016 final regulations 

retained the aggregate approach to 

partnerships, but applied it only to 

section 987 aggregate partnerships, as 

discussed in Part II.C of the Background 

section. The 2016 final regulations did 

not address other partnerships. 

Under the aggregate approach set 

forth in the 2016 final regulations, assets 

and liabilities reflected on the books 

and records of an eligible QBU of a 

section 987 aggregate partnership are 

allocated to each partner, which is 

considered an indirect owner of the 

eligible QBU. If the eligible QBU has a 

different functional currency than its 

indirect owner, then the assets and 

liabilities of the eligible QBU that are 

allocated to the partner are treated as a 

section 987 QBU of the indirect owner. 

B. Method for Determining Share of 

Assets and Liabilities 

The 2006 proposed regulations 

provided that a partner’s share of assets 

and liabilities reflected on the books 

and records of an eligible QBU is 

determined in a manner consistent with 

how the partners had agreed to share the 

economic benefits and burdens 

corresponding to partnership assets and 

liabilities, taking into account the rules 

and principles of subchapter K.7

A comment noted that the rules in the 

2006 proposed regulations for allocating 

assets and liabilities to a partner’s 

indirectly owned section 987 QBU were 

ambiguous and that the rules and 

principles of subchapter K do not 

provide sufficient guidance in this 

regard. The Treasury Department and 

the IRS acknowledged the ambiguity in 

the preamble to the 2016 final 

regulations, and the 2016 temporary 

regulations provided more specific rules 

for determining a partner’s share of the 

assets and liabilities reflected on the 

books and records of an eligible QBU 

owned indirectly through a section 987 

aggregate partnership. 


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In particular, the temporary 

regulations provided that, in any taxable 

year, a partner’s share of each asset and 

liability of a section 987 aggregate 

partnership was proportional to the 

partner’s liquidation value percentage 

with respect to the aggregate 

partnership. A partner’s liquidation 

value percentage was defined as the 

ratio of the liquidation value of the 

partner’s interest in the partnership to 

the aggregate liquidation value of all the 

partners’ interests in the partnership. 

The liquidation value of the partner’s 

interest in the partnership was defined 

as the amount of cash the partner would 

receive with respect to its interest if, 

immediately following the applicable 

determination date, the partnership sold 

all of its assets for cash equal to the fair 

market value of such assets (taking into 

account section 7701(g)), satisfied all of 

its liabilities (other than those described 

in § 1.752–7), paid an unrelated third 

party to assume all of its § 1.752–7 

liabilities in a fully taxable transaction, 

and then liquidated. 

Comments recommended alternative 

approaches for determining a partner’s 

share of the assets and liabilities of a 

section 987 aggregate partnership. Some 

comments recommended that § 1.987–7 

be withdrawn and replaced with the 

approach of the 2006 proposed 

regulations under section 987, which 

provided that a partner’s share of assets 

and liabilities reflected on the books 

and records of an eligible QBU held 

indirectly through the partnership must 

be determined in a manner consistent 

with how the partners have agreed to 

share the economic benefits and 

burdens corresponding to those 

partnership assets and liabilities, taking 

into account the rules and principles of 

subchapter K. A comment indicated that 

the liquidation value percentage 

approach was inconsistent with certain 

principles of subchapter K, resulting in 

distortions in the calculation of section 

987 gain or loss in certain cases. 

The Treasury Department and the IRS 

determined that, in the absence of a 

more comprehensive set of rules for 

determining a partner’s share of assets 

and liabilities reflected on the books 

and records of an eligible QBU held 

indirectly through the partnership that 

also articulates the interaction of those 

rules with applicable rules in 

subchapter K, a more flexible approach 

was warranted. Moreover, the Treasury 

Department and the IRS determined 

that, in certain instances, the liquidation 

value percentage methodology set forth 

in the 2016 temporary regulations could 

be interpreted as applying in a way that 

inappropriately distorts the 

computation of section 987 gain or loss. 

Specifically, under such an 

interpretation, certain changes in a 

partner’s liquidation value percentage 

could introduce distortions in the 

calculation of net unrecognized section 

987 gain or loss under § 1.987–4, giving 

rise to net unrecognized section 987 

gain or loss that is not attributable to 

fluctuations in exchange rates. For 

example, an appreciation or 

depreciation in property value could 

result in a change in liquidation value 

percentage that causes a change in 

owner functional currency net value for 

purposes of step 1 of the § 1.987–4(d) 

calculation of unrecognized section 987 

gain or loss for a taxable year without 

creating an offsetting adjustment under 

step 6 or otherwise that would prevent 

the change in liquidation value 

percentage from distorting the 

calculation of unrecognized section 987 

gain or loss. As a result, such 

unrecognized appreciation or 

depreciation generally could result in 

unrecognized section 987 gain or loss 

for a taxable year being allocated to each 

partner that indirectly owned a section 

987 QBU even when there was no 

change in exchange rates. 

Accordingly, the Treasury Department 

and the IRS withdrew § 1.987–7T in the 

2019 final regulations. The preamble to 

the 2019 final regulations stated that, 

until new regulations are proposed and 

finalized, taxpayers may use any 

reasonable method for determining a 

partner’s share of assets and liabilities 

reflected on the books and records of an 

eligible QBU held indirectly through the 

partnership. For this purpose, taxpayers 

may rely on subchapter K principles 

(consistent with the 2006 proposed 

regulations) or an approach similar to 

the liquidation value percentage method 

set forth in § 1.987–7T. However, it 

would not be reasonable to apply the 

liquidation value percentage method in 

§ 1.987–7T without corresponding 

adjustments to the determination of net 

unrecognized section 987 gain or loss. 

Thus, for example, a taxpayer using the 

liquidation value percentage method 

may be required to adjust its 

determination of net unrecognized 

section 987 gain or loss of a section 987 

QBU that is owned indirectly through a 

partnership to prevent the 

determination of unrecognized section 

987 gain or loss that is not attributable 

to fluctuations in exchange rates. These 

adjustments may include, for example, 

treating any change in a partner’s owner 

functional currency net value that is 

attributable to a change in the partner’s 

liquidation value percentage as resulting 

in a transfer to or from an indirectly 

owned section 987 QBU. 

C. The Proposed Regulations Apply 

Entity Theory to Non-Section 987 

Aggregate Partnerships 

As previously discussed in part VIII.A 

of this Explanation of Provisions, 

although the final regulations applied 

the aggregate approach to section 987 

aggregate partnerships, the final 

regulations did not provide rules for 

applying section 987 to other 

partnerships. The preamble to the 2016 

final regulations stated that section 987 

regulations would be developed for 

these other partnerships in a separate 

project and indicated that a different 

approach might be taken. To that end, 

the preamble requested comments on 

how an entity approach should work for 

non-section 987 aggregate partnerships. 

Several comments were received 

asserting that the aggregate approach to 

partnerships under the 2016 final 

regulations was overly complex. 

Comments recommended that a 

partnership be treated as a separate 

entity with its own functional currency 

that can be the owner of a section 987 

QBU. Comments also indicated that 

entity treatment would be more 

consistent with the principles of 

subchapter K. 

The Treasury Department and the IRS 

agree that treating non-section 987 

aggregate partnerships as an entity and 

therefore potentially an ‘‘owner’’ of 

section 987 QBUs would be more 

administrable than an aggregate 

approach and would reduce the 

compliance burden on taxpayers and 

the IRS. However, the Treasury 

Department and the IRS continue to 

study whether partners might be able to 

achieve inappropriate outcomes under 

entity theory. For example, the Treasury 

Department and the IRS are concerned 

that if partnerships maintained section 

987 gain and loss pools under a ‘‘pure’’ 

entity theory paradigm, partners would 

effectively be able to transfer their share 

of net unrecognized section 987 gain or 

loss to another partner, thereby avoiding 

gain recognition or trafficking in losses. 

To prevent a partner from transferring 

its share of net unrecognized section 

987 gain or loss to another partner, the 

proposed regulations would generally 

apply a hybrid approach to entity 

theory, under which a partnership’s net 

unrecognized section 987 gain or loss 

with respect to its section 987 QBUs is 

allocated to its partners on an annual 

basis (the ‘‘hybrid approach to entity 

theory’’), as described in part VIII.D of 

this Explanation of Provisions. 

The hybrid approach to entity theory 

may reduce concerns about 

inappropriate outcomes that might 

otherwise arise from the transfer of 


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partnership interests under an entity 

theory approach. However, as described 

in part VIII.D and E of this Explanation 

of Provisions, while the Treasury 

Department and the IRS study whether 

the hybrid approach to entity theory (or 

a variation thereof) is suitable for all 

partnerships, the proposed regulations 

maintain the aggregate approach to 

section 987 aggregate partnerships in 

the final regulations, as modified by the 

2019 final regulations, with minimal 

changes. Special rules are provided in 

proposed § 1.987–7C for partnerships 

that become (or cease to be) section 987 

aggregate partnerships. In addition, for 

consistency with other transfers of a 

section 987 QBU, the proposed 

regulations would treat a change in the 

form of ownership from direct to 

indirect as a termination of the section 

987 QBU under proposed § 1.987– 

8(b)(6), subject to the deferral rules 

pursuant to proposed § 1.987– 

12(g)(1)(i)(A). The Treasury Department 

and the IRS anticipate publishing a 

subsequent notice of proposed 

rulemaking that more thoroughly 

addresses the application of section 987 

to partnerships. 

D. The Hybrid Approach to Entity 

Theory 

Under the proposed regulations, a 

partnership (other than a section 987 

aggregate partnership) would be treated 

as a qualified business unit having its 

own functional currency. See 

§ 1.989(a)–1(b)(2)(i)(C); see also § 1.985– 

1(a)(1). If a partnership owns an eligible 

QBU with a functional currency that is 

different from the functional currency of 

the partnership, the eligible QBU would 

be treated as a section 987 QBU and the 

partnership (and not the partner) would 

generally be treated as the owner of the 

eligible QBU. See proposed §§ 1.987– 

1(b)(4) through (5) and 1.987–7A(b). 

A partnership that owns a section 987 

QBU would determine its unrecognized 

section 987 gain or loss for a taxable 

year under proposed § 1.987–4(d) by 

reference to the functional currency of 

the partnership and the section 987 

QBU. Proposed § 1.987–7A(b). Under 

the hybrid approach, the partnership 

would allocate to each partner a share 

of the unrecognized section 987 gain or 

loss for the taxable year with respect to 

each section 987 QBU owned by the 

partnership on an annual basis. The 

partnership would determine a partner’s 

share of the unrecognized section 987 

gain or loss for the taxable year for each 

section 987 QBU based on the partner’s 

distributive share of profits and losses 

attributable to that section 987 QBU for 

the taxable year. At the partner level, 

each partner would translate its share of 

the unrecognized section 987 gain or 

loss into its functional currency at the 

yearly average exchange rate and 

calculate its net unrecognized section 

987 gain or loss with respect to each 

section 987 QBU of the partnership 

based on this share. Proposed § 1.987– 

7A(c)(1). 

Section 987 gain or loss attributable to 

a section 987 QBU owned by a 

partnership would be recognized and 

taken into account at the partner level. 

Notwithstanding that the section 987 

gain or loss pools are allocated to the 

partners and maintained at the partner 

level, the portion of the net 

unrecognized section 987 gain or loss 

that a partner would recognize (or 

suspend) each year under proposed 

§ 1.987–5(a) would be determined by 

reference to the partnership’s remittance 

proportion with respect to the section 

987 QBU. Proposed § 1.987–7A(c)(3). In 

other words, if the section 987 QBU is 

treated as remitting 20 percent of its 

gross assets to its owner, the 

partnership, in a taxable year of the 

partnership, each partner that has net 

unrecognized section 987 gain or loss 

with respect to the section 987 QBU 

would recognize (or suspend) 20 

percent of the net unrecognized section 

987 gain or loss. 

The proposed regulations provide a 

framework for adjusting a partner’s basis 

in its partnership interest based on the 

principles of section 705 when a partner 

recognizes section 987 gain or loss, 

defers section 987 gain or loss, or 

suspends section 987 loss attributable to 

a partnership. See proposed § 1.987– 

7A(d). Similarly, if a partner in an 

upper-tier partnership (UTP) recognizes 

section 987 gain or loss, defers section 

987 gain or loss, or suspends section 

987 loss attributable to a lower-tier 

partnership (LTP), then the proposed 

regulations would provide that UTP 

makes a corresponding basis adjustment 

to its interest in LTP, with similar rules 

applying to each successive partnership 

through which the section 987 gain or 

loss is attributable. The basis adjustment 

between UTP and LTP or between LTPs 

constitutes a basis adjustment solely 

with respect to the partner that 

recognizes section 987 gain or loss, 

defers section 987 gain or loss, or 

suspends section 987 loss attributable to 

the partnership. The Treasury 

Department and the IRS request 

comments on the coordination of these 

proposed regulations applicable to 

partnerships with rules for capital 

accounts determined and maintained in 

accordance with § 1.704–1(b)(2)(iv). 

Additionally, the Treasury Department 

and the IRS request comments on the 

appropriate currency in which section 

743(b) basis adjustments with respect to 

assets of a section 987 QBU of a 

partnership should be maintained. 

The proposed regulations would also 

provide rules for applying proposed 

§§ 1.987–11 through 1.987–13 

(regarding deferred section 987 gain or 

loss and suspended section 987 loss) to 

partners and partnerships. Specifically, 

the application of the loss-to-the-extentof-gain rule to suspended section 987 

loss of the partner is done at the partner 

level. Proposed § 1.987–7A(c)(4). As a 

result, any section 987 gain recognized 

by a partner is taken into account in 

determining the suspended section 987 

loss that may be recognized by the 

partner under proposed § 1.987–11(e), 

without regard to whether the section 

987 gain was allocated to the partner 

from that partnership (or any other 

partnership) or was attributable to a 

section 987 QBU owned directly by the 

partner. Other rules under proposed 

§§ 1.987–11 through 1.987–13 would 

generally apply with respect to a 

partnership, but may be applied with 

respect to a partner that ceases to be a 

partner in the partnership. 

In general, the section 987 elections 

would be made by the partnership. 

However, if a partner terminates its 

partnership interest, any annual 

recognition election in effect with 

respect to the partner would apply with 

respect to its deferred section 987 gain 

or loss or suspended section 987 loss 

that had been allocated to the partner by 

the partnership. The partner would also 

be permitted to make the election to 

recognize pretransition section 987 gain 

or loss ratably over the transition period 

under the transition rules. See proposed 

§§ 1.987–7A(c)(5)(ii) and 1.987– 

10(e)(5)(ii). 

The Treasury Department and the IRS 

are studying the appropriate method for 

determining the portion of a partner’s 

net unrecognized section 987 gain or 

loss, deferred section 987 gain or loss, 

and suspended section 987 loss that 

should be recognized, deferred, or 

suspended when a portion of a partner’s 

interest in a partnership is transferred or 

redeemed (or the partner’s interest in 

the partnership is otherwise reduced) 

and whether any special rules are 

needed in respect of a transfer or 

redemption of a partnership interest to 

account for the recognition of section 

987 gain or loss at the partner level. 

Accordingly, the proposed regulations 

reserve on the treatment of transfers and 

redemptions of a partner’s partnership 

interest. The Treasury Department and 

the IRS request comments on the 

appropriate method of determining the 

partner’s interest in the partnership and 

the reduction to its interest in the 


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78148 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

partnership, as well as how increases to 

a partner’s partnership interest during 

the year should be taken into account. 

In addition, the Treasury Department 

and the IRS request comments on the 

appropriate treatment of transfers of a 

partnership interest between related 

parties or between member of a 

consolidated group. 

In general, proposed § 1.987–6 would 

provide rules governing the character 

and source of section 987 gain or loss. 

See part VI of this Explanation of 

Provisions. The proposed regulations 

reserve on whether any special rules are 

needed in addition to proposed § 1.987– 

6 for purposes of determining the 

character and source of section 987 gain 

or loss of a partner with respect to a 

section 987 QBU owned by a 

partnership. Proposed § 1.987–7A(e). 

Comments are requested on whether 

special rules are needed. 

The proposed regulations would treat 

S corporations in the same manner as 

partnerships. Proposed § 1.987–7A(f). 

Comments are requested on whether 

additional guidance is needed with 

regard to S corporations and whether 

there are instances in which the rules 

for S corporations should differ from the 

rules for partnerships. 

The Treasury Department and the IRS 

also request comments as to whether, 

under an entity theory of partnerships, 

section 987 gain or loss could be 

recognized at the partnership level and 

then allocated to the partners while 

preventing the transfer of unrecognized 

section 987 gain or loss among the 

partners or between a transferor and 

transferee partner. Under the hybrid 

approach in the proposed regulations, a 

partner’s recognition of section 987 gain 

or loss upon a sale or other disposition 

of a partnership interest results in the 

conversion of capital gain or loss to 

ordinary gain or loss without any 

remittance from the partnership QBU 

and without any change in the 

relationship between the QBU and its 

owner. Comments are requested on 

whether special rules are needed to 

prevent the conversion of capital gain or 

loss to ordinary gain or loss. In addition, 

comments are requested on whether the 

recognition of section 987 gain or loss 

upon a transfer or redemption of a 

partnership interest should be limited to 

the gain or loss that would otherwise be 

recognized on transfer or redemption, 

under rules similar to § 1.988–2(b)(8). 

E. Expanding the Application of Entity 

Theory 

The Treasury Department and the IRS 

continue to study the application of 

entity theory and aggregate theory to 

partnerships in the section 987 context, 

including whether it would be 

appropriate to apply a hybrid approach 

to entity theory to all partnerships, 

regardless of whether the partners are 

related parties. Such an approach would 

generally result in a partnership 

generating the same amount of section 

987 gain or loss as it would if it were 

a corporation or an individual. 

In connection with these 

considerations, the Treasury 

Department and the IRS are studying the 

concerns expressed in the 2006 

proposed regulations and the final 

regulations that parties could achieve a 

substantially different section 987 result 

by owning a section 987 QBU through 

a partnership, rather than owning the 

section 987 QBU directly, without 

meaningfully changing the economic 

relationship of the parties. 

Consider, for example, a domestic 

corporation that wholly owns two CFCs, 

each of which use the euro as their 

functional currency, and which each 

own fifty percent of an entity treated as 

a foreign partnership (‘‘P’’) that operates 

a British trade or business for which 

books and records are maintained in 

pounds. P also has a smaller separate 

French trade or business that is an 

eligible QBU that maintains books and 

records in euros. If just one CFC owned 

P, then P would be treated as an entity 

disregarded from its owner, and the CFC 

would have section 987 gain or loss 

with respect to its interest in P’s pound 

operations. However, if an election was 

made to treat P as a corporation under 

§ 301.7701–3, P would be treated as a 

CFC that uses the pound as its 

functional currency and section 987 

gain or loss with respect to P’s euro 

operations would be measured against 

the pound, rather than against the 

functional currency of P’s partners. 

Accordingly, it could be argued that, for 

section 987 purposes, when a 

partnership is held by CFCs, aggregate 

theory achieves a result that is more 

akin to treating P as a disregarded entity 

and entity theory achieves a result more 

akin to treating P as a corporation. 

However, if instead of being owned by 

two CFCs, P were owned by two 

domestic corporations that use the 

dollar as their functional currency, 

aggregate theory would achieve a result 

akin to treating P as a disregarded 

entity, while entity theory may provide 

a means of allowing the domestic 

corporations to avoid the application of 

section 987 to P’s pound trade or 

business without needing to contribute 

the trade or business to a CFC, which 

might have other tax consequences. See, 

e.g., section 367(a) and (d). Accordingly, 

the Treasury Department and the IRS 

are concerned that if only entity theory 

is applied to partnerships, there may be 

instances in which the business of the 

partnership should be subject to section 

987 but is not, such as when two 

domestic corporations own a 

partnership doing business in the 

pound. 

When a partner’s functional currency 

differs from that of the partnership, 

creating a separate layer of currency 

exposure, the Treasury Department and 

the IRS are studying whether it might be 

possible to achieve a result consistent 

with aggregate theory without the 

administrative burden of allocating a 

portion of a partnership’s assets and 

liabilities to each partner and 

calculating the income and balance 

sheets of the partnership in the 

functional currency of each partner. One 

such approach might determine a 

partner’s section 987 gain or loss with 

respect to the partnership by reference 

to the partner’s outside basis in the 

partnership, rather than its share of the 

inside asset basis and liabilities (the 

‘‘outside basis approach’’). 

The outside basis approach would be 

layered on top of the hybrid approach 

to entity theory taken by the proposed 

regulations. Under this system, a 

partnership would first determine its 

section 987 gain or loss with respect to 

any section 987 QBUs of the 

partnership, and allocate the pool to the 

partners, as described in § 1.987–7A of 

the proposed regulations. If a partner 

has the same functional currency as the 

partnership, no additional steps are 

taken. 

If a partner has a different functional 

currency than the partnership, under 

one alternative (‘‘alternative 1’’), the 

partner would calculate its section 987 

gain or loss with respect to its interest 

in the partnership (including its interest 

in the functional currency trade or 

business of the partnership and its 

interest in each of the partnership’s 

section 987 QBUs) using a method 

similar to the calculation of 

unrecognized section 987 gain or loss 

for an owner applying the current rate 

election under proposed § 1.987–4(d) 

(that is, steps 1 through 5 and 10), but 

by reference to the partner’s adjusted 

basis in its partnership interest 

(‘‘outside basis’’) in the partnership. 

Specifically, the partner’s annual 

section 987 gain or loss attributable to 

its share of the partnership as a whole 

would be equal to its outside basis 

determined as of the end of the 

partnership’s taxable year (after taking 

into account other adjustments 

prescribed under section 705 but before 

any adjustments for section 987 gain or 

loss recognized under the outside basis 

approach) and translated into the 


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partnership’s functional currency 

reduced by its outside basis determined 

as of the beginning of the same 

partnership taxable year and translated 

into the partnership’s functional 

currency (the ‘‘partnership functional 

currency change in value’’) (step 1). The 

partnership functional currency change 

in value would then be adjusted to 

subtract the partnership functional 

currency amounts of contributions to 

the partnership from the partner and 

add the partnership functional currency 

amounts of distributions from the 

partnership to the partner (steps 2 

through 5). The result would then be 

adjusted to back out the partnership 

functional currency amount of the 

partner’s allocable share of income, 

gain, deduction, and loss of the 

partnership (step 10). The result is the 

partner’s unrecognized section 987 gain 

or loss attributable to its partnership 

interest. Under alternative 1, the 

partner’s unrecognized section 987 gain 

or loss attributable to its partnership 

interest would be recognized annually 

and its basis in the partnership would 

be increased or decreased accordingly. 

Alternative 1 approximates the result a 

partner would achieve under aggregate 

theory if it applied the current rate 

election and the annual recognition 

election. 

Annual recognition is necessary 

under alternative 1 to prevent 

differences in the partnership’s adjusted 

bases in its assets (‘‘inside basis’’) 

attributable to fluctuations in the 

functional currency of the partnership 

itself or any section 987 QBUs owned by 

the partnership and the partners’ 

outside bases (an ‘‘inside-outside basis 

disparity’’). By adjusting outside basis 

for these currency fluctuations, the 

partner’s section 987 gain or loss with 

respect to the partnership will include 

section 987 gain or loss on the 

partnership’s owner functional currency 

net value of the partnership’s section 

987 QBUs. As a result, the sum of the 

owner’s section 987 gain or loss 

attributable to its partnership interest 

under the outside basis approach, plus 

its allocable share of the partnership’s 

net unrecognized section 987 gain or 

loss attributable to the partnership’s 

section 987 QBUs should generally be 

equivalent to the sum of its 

unrecognized section 987 gain or loss 

attributable to section 987 QBUs 

indirectly owned by the partner through 

the partnership under the aggregate 

approach (assuming there are no other 

inside-outside basis disparities). 

Alternatively, under another 

alternative (‘‘alternative 2’’), it may not 

be necessary to require recognition of 

the partner’s section 987 gain or loss 

annually. Under this approach, the same 

method is used to determine the 

partner’s section 987 gain or loss with 

respect to its partnership interest as in 

alternative 1, except that the partnership 

functional currency change in value 

would be determined, not just by 

reference to the partner’s outside basis 

in the partnership, but to the sum of its 

outside basis and its net accumulated 

unrecognized section 987 gain or loss 

attributable to the partnership and the 

partnership’s section 987 QBUs (that is, 

the amount that would have been 

recognized if the partner had been 

recognizing its section 987 gain and loss 

attributable to the partnership annually 

as under alternative 1). Under 

alternative 2, the partner’s unrecognized 

section 987 gain or loss attributable to 

its partnership interest might be 

recognized when it receives a 

distribution from the partnership or 

disposes of a portion of its partnership 

interest. 

Both alternative 1 and alternative 2 

approximate the result a partner would 

achieve under aggregate theory if it 

applied the current rate election to its 

partnership interest. However, 

alternative 1, but not alternative 2, 

requires annual recognition of the 

partner’s net unrecognized section 987 

gain or loss. Accordingly, no additional 

loss limitations may be needed for 

alternative 1. See part IV.C of this 

Explanation of Provisions. However, it 

may be appropriate for the partner’s net 

accumulated unrecognized section 987 

gain or loss under alternative 2 to be 

subject to the loss-to-the-extent-of-gain 

rule in § 1.987–11(e) of the proposed 

regulations. 

Under one variation to these 

alternative approaches, the partner’s net 

accumulated unrecognized section 987 

gain or loss attributable to its 

partnership interest would net with the 

partner’s net unrecognized section 987 

gain or loss with respect to the 

partnership’s section 987 QBUs when 

one amount reflects section 987 gain 

and the other reflects section 987 loss. 

Comments are requested on whether 

the outside basis approach or a similar 

system would achieve results consistent 

with aggregate theory in a more 

administrable manner. Furthermore, 

comments are requested on instances in 

which this system might 

inappropriately diverge from aggregate 

theory and how such divergences might 

be addressed. For example, if inside 

basis and outside basis are not 

equivalent (for example, because a 

partner acquires a partnership interest 

in a year in which a section 754 election 

is not in effect), how the resulting 

mismatch might be minimized or 

eliminated for purposes of measuring 

the partner’s currency exposure with 

respect to the partnership. Comments 

are also requested on whether the 

outside basis approach or a similar 

system should apply to partners of (i) all 

partnerships, (ii) only those 

partnerships currently treated as section 

987 aggregate partnerships, or (iii) only 

those partnerships in which the partner 

owns more than 50 percent of the 

partnership interest (taking into account 

constructive ownership). 

In addition, comments are also 

requested on any additional rules that 

might be necessary to coordinate the 

outside basis approach or a similar 

system with the section 987 regulations 

or with subchapter K, when the 

functional currency of a partner, the 

partnership, and the partnership’s 

section 987 QBU differ. 

IX. Attribution of Items to the Section 

987 QBU 

The final regulations provide rules 

regarding when assets and liabilities, as 

well as items of income, gain, 

deduction, and loss are attributable to 

an eligible QBU, and when a section 987 

QBU is treated as making a contribution 

or distribution to its owner or another 

eligible QBU of the owner. See § 1.987– 

2. In general, the proposed regulations 

retain the rules in the final regulations 

with minor or clarifying revisions. 

However, in a change from the final 

regulations, the proposed regulations 

would treat a change in the form of 

ownership of a section 987 QBU as a 

termination, as discussed above. 

In general, the final regulations 

provide that items are attributable to an 

eligible QBU if they are reflected on the 

separate set of books and records of the 

eligible QBU, as defined in § 1.989(a)– 

1(d). § 1.987–2(b)(1). The proposed 

regulations would revise the crossreference to refer to § 1.989(a)–1(d)(1) or 

(2), as § 1.989(a)–1(d)(3) refers back to 

§ 1.987–2(b). Proposed § 1.987–2(b)(1). 

In addition, the final regulations 

provide that an eligible QBU is not 

treated as owning stock of a corporation 

unless the owner of the eligible QBU 

owns less than 10 percent of the value 

of the corporation (after taking into 

account certain attribution rules). 

§ 1.987–2(b)(2)(i). In order to generally 

prevent an eligible QBU from owning 

stock of a CFC, the proposed regulations 

would expand the exclusion to cover all 

stock unless the owner owns less 10 

percent of both the vote and value of the 

corporation, and to revise the relevant 

attribution rules. Proposed § 1.987– 

2(b)(2)(i). The proposed regulations also 

provide that any type of basis that does 

not affect the income and loss of the 


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eligible QBU, such as section 743(b) 

basis, would not be treated as included 

on the books and records of the eligible 

QBU. Proposed § 1.987–2(b)(5). 

Similarly, the final regulations 

provide rules regarding when a 

transaction or the recording of an asset 

or liability as on (or not on) the books 

and records of a section 987 QBU is 

treated as a disregarded transaction 

between the section 987 QBU and its 

owner or another eligible QBU of the 

owner. § 1.987–2(c). The proposed 

regulations generally retain the 

substance of these rules but make minor 

revisions for clarity. See proposed 

§ 1.987–2(c). 

X. Transition Rules 

As explained in part II.C of the 

Background section, the 2016 final 

regulations require all owners of section 

987 QBUs to apply the fresh start 

transition method. Under this method, 

unrecognized section 987 gain or loss 

determined for years before the 

transition date generally would not be 

taken into account under section 987. In 

addition, for purposes of applying the 

FEEP method in the first year in which 

the regulations apply, the assets and 

liabilities of the section 987 QBU must 

be translated using historic rates. 

Comments stated that the fresh start 

transition method is difficult to apply 

because taxpayers did not track historic 

rates before the transition date and the 

data needed to determine historic rates 

for items acquired in prior taxable years 

is not readily available. In addition, 

comments asserted that the fresh start 

transition method imposes an undue 

financial burden by permanently 

eliminating unrecognized section 987 

losses determined before the transition 

date. 

The Treasury Department and the IRS 

acknowledge that the fresh start 

transition method could increase the 

compliance burden on taxpayers for the 

initial year in which the regulations 

apply and would fail to account for 

section 987 gain or loss that arose before 

the transition date (to the extent 

attributable to assets and liabilities that 

are no longer reflected on the books and 

records of the section 987 QBU on the 

transition date). Therefore, the proposed 

regulations provide a new transition 

rule that would replace the fresh start 

transition method. 

The new transition rule would 

account for unrecognized section 987 

gain or loss accrued before the transition 

date. In addition, the new transition rule 

would not require taxpayers to 

retrospectively determine historic rates 

for items acquired before the transition 

date. As explained in the Applicability 

Dates section, the fresh start transition 

method can no longer be applied to any 

taxable year for which the tax return or 

information return is filed on or after 

November 9, 2023. 

A. Translation of a Section 987 QBU’s 

Assets and Liabilities at the Spot Rate 

The transition rules under proposed 

§ 1.987–10 would apply in the taxable 

year beginning on the transition date 

(that is, the first day of the first taxable 

year in which the regulations apply). 

For purposes of determining 

unrecognized section 987 gain or loss in 

the first taxable year in which the 

regulations apply, the assets and 

liabilities reflected on a section 987 

QBU’s balance sheet at the end of the 

previous year would be translated into 

the owner’s functional currency at the 

spot rate on the day before the transition 

date. Proposed § 1.987–10(d)(1). 

Similarly, for taxpayers that do not 

make a current rate election, the historic 

rate for historic assets and liabilities 

would generally be the spot rate on the 

day before the transition date. Proposed 

§ 1.987–10(d)(2). These rules are 

intended to simplify the application of 

the FEEP method by eliminating the 

need to determine actual historic rates 

in the first taxable year in which the 

regulations apply. 

B. Pretransition Gain or Loss 

Under the proposed regulations, an 

owner of a section 987 QBU must 

determine the amount of section 987 

gain or loss that has accrued before the 

transition date (‘‘pretransition gain or 

loss’’). Proposed § 1.987–10(e). By 

default, in the first taxable year in 

which the regulations apply, 

pretransition gain is treated as net 

unrecognized section 987 gain, and 

pretransition loss is treated as 

suspended section 987 loss. Proposed 

§ 1.987–10(e)(5)(i). This proposed rule is 

intended to prevent taxpayers from 

selectively recognizing pretransition 

loss (which, like section 987 loss 

generated under a current rate election, 

may be computed using a method that 

results in large section 987 pools) while 

deferring pretransition gain until a 

remittance. Alternatively, taxpayers can 

elect to amortize pretransition gain or 

loss over a period of ten years beginning 

on the transition date. Proposed 

§ 1.987–10(e)(5)(ii). 

In order to prevent owners subject to 

this election from offshoring 

pretransition gain or importing 

pretransition loss, proposed § 1.987– 

10(e)(5)(ii)(B) provides that, 

immediately before an inbound or 

outbound transaction described in 

section 381(a), any unrecognized 

pretransition gain is recognized and any 

unrecognized pretransition loss is 

suspended. As a result, the suspended 

section 987 loss may be recognized, 

subject to the loss-to-the-extent-of-gainrule under § 1.987–11(e). In the case of 

an inbound section 381(a) transaction of 

a foreign owner with pretransition loss, 

any suspended section 987 loss that is 

not recognized before the transaction 

would not carry over to the domestic 

acquiring corporation under proposed 

§ 1.987–13(g). See part III.C of this 

Explanation of Provisions. 

C. Computation of Pretransition Gain or 

Loss 

Under proposed § 1.987–10(e)(2), a 

taxpayer that applied section 987 before 

the transition date using an ‘‘eligible 

pretransition method’’ (described in part 

X.D of this Explanation of Provisions) 

would use that method to compute 

pretransition gain or loss. Pretransition 

gain or loss generally is equal to the 

amount of section 987 gain or loss that 

would have been recognized under the 

eligible pretransition method if the QBU 

terminated on the day before the 

transition date. Proposed § 1.987– 

10(e)(2)(i)(A). The amount of 

pretransition gain or loss must be 

adjusted to reflect any change to the 

basis of the section 987 QBU’s assets 

(net of liabilities) that occurs as a result 

of the transition (for example, where the 

taxpayer previously used a method that 

would determine the owner’s basis in 

distributed assets using historic rates). 

Proposed § 1.987–10(e)(2)(i)(B). 

A taxpayer that did not apply an 

eligible pretransition method before the 

transition date would determine 

pretransition gain or loss using the 

method provided in § 1.987–10(e)(3). 

Under this method, pretransition gain or 

loss is equal to the sum of the annual 

amounts of unrecognized section 987 

gain or loss for each taxable year since 

the section 987 QBU’s inception, 

reduced by any section 987 gain or loss 

recognized before the transition date. 

Proposed § 1.987–10(e)(3)(ii). 

The amount of unrecognized section 

987 gain or loss for each taxable year 

would be computed using a simplified 

version of the method provided in 

§ 1.987–4(d). Proposed § 1.987– 

10(e)(3)(iii). The only information 

needed to apply this simplified method 

is the information reflected in the 

section 987 QBU’s opening and closing 

balance sheets for each year. Because 

this method does not require the 

translation of contributions and 

distributions at the applicable spot rate, 

it would only approximate the actual 

amount of section 987 gain or loss 

accrued before the transition date. 


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D. Eligible Pretransition Method 

1. In General 

An eligible pretransition method 

includes any reasonable method of 

applying section 987 before the 

transition date that fully accounts for 

foreign currency gain or loss attributable 

to the assets and liabilities of a section 

987 QBU (including foreign currency 

gain or loss that is recognized in 

computing taxable income with respect 

to the section 987 QBU or its owner). 

The method provided in the 1991 

proposed regulations, which determines 

section 987 gain or loss based on 

currency fluctuations with respect to the 

earnings and capital of a section 987 

QBU (an ‘‘earnings and capital’’ 

method) is considered an eligible 

pretransition method, provided that it is 

applied in a reasonable manner. 

Proposed § 1.987–10(e)(4)(i). In 

addition, any other reasonable method 

of applying section 987 is an eligible 

pretransition method if it produces the 

same total amount of income over the 

life of the owner (taking into account 

the aggregate of section 987 gain or loss, 

section 987 taxable income or loss, and 

gain or loss on the disposition of assets 

and liabilities transferred by a section 

987 QBU to the owner) as a reasonable 

earnings and capital method. Proposed 

§ 1.987–10(e)(4)(ii). However, a method 

under which the owner does not 

recognize section 987 gain or loss at the 

time of a remittance because the 

recognition of all section 987 gain or 

loss is deferred until the section 987 

QBU terminates is not considered an 

eligible pretransition method because it 

is inconsistent with the statutory 

requirements under section 987(3). 

Proposed § 1.987–10(e)(4)(iv). 

2. Earnings Only Method 

An earnings only method can qualify 

as an eligible pretransition method 

under proposed § 1.987–10(e)(4)(ii) if it 

is applied in a way that produces the 

same total amount of income as a 

reasonable earnings and capital method. 

This can be accomplished by 

maintaining a separate set of equity and 

basis pools for the section 987 QBU’s 

capital account and assigning a 

proportionate amount of the capital 

basis pool to property distributed out of 

capital. See proposed § 1.987–10(l)(2) 

(Example 2). 

The Treasury Department and the IRS 

are aware that certain taxpayers apply 

an earnings only method in a manner 

that creates a permanent difference in 

their income (as compared to the 

earnings and capital method). Under 

this approach, when a section 987 QBU 

makes a distribution (whether out of 

earnings or capital), the owner 

determines its basis in the distributed 

assets by translating the section 987 

QBU’s basis into the owner’s functional 

currency at the spot rate applicable on 

the distribution date (‘‘spot-rate basis’’). 

See proposed § 1.987–10(l)(3) (Example 

3). As a result, the owner’s basis may be 

higher or lower than the actual cost of 

acquiring the assets (in the owner’s 

functional currency) due to exchange 

rate fluctuations. 

When a section 987 QBU makes a 

distribution out of earnings, which 

triggers the recognition of section 987 

gain or loss under an earnings only 

method, the use of a spot-rate basis is 

appropriate. However, when a section 

987 QBU makes a distribution out of 

capital (on which no section 987 gain or 

loss is recognized under an earnings 

only method), the use of a spot-rate 

basis artificially steps up (or steps 

down) the basis of the distributed assets 

in the absence of a recognition event. As 

a result, if a spot-rate basis is used for 

capital distributions under an earnings 

only method, the owner would not 

recognize the same total amount of 

income as it would under an earnings 

and capital method. 

The Treasury Department and the IRS 

are concerned that the use of a spot-rate 

basis for capital distributions under an 

earnings only method does not 

accurately measure an owner’s 

economic income with respect to a 

section 987 QBU. However, the 

Treasury Department and the IRS 

acknowledge that the preamble to the 

2006 proposed regulations endorsed the 

use of an earnings only method without 

explaining how the basis of distributed 

assets should be determined. Taxpayers 

may have misunderstood the preamble 

to suggest that an owner of a section 987 

QBU can take a spot-rate basis in all 

distributed assets under an earnings 

only method. 

Therefore, the proposed regulations 

provide that an earnings only method 

that does not produce the same total 

amount of income as a reasonable 

earnings and capital method can qualify 

as an eligible pretransition method, 

provided it was first applied on a tax 

return filed before November 9, 2023 

and is consistently applied to all section 

987 QBUs of the same owner. Proposed 

§ 1.987–10(e)(4)(iii). A taxpayer that 

begins applying this method on or after 

November 9, 2023 or fails to apply this 

method consistently to all of its section 

987 QBUs will not be treated as 

applying an eligible pretransition 

method. 

XI. Deferral Events and Outbound Loss 

Events 

A. Final Regulations 

Section 1.987–12 of the final 

regulations contains rules that defer the 

recognition of section 987 gain or loss 

in connection with two categories of 

related party transactions: deferral 

events and outbound loss events. A 

deferral event is defined to include 

certain transactions in which a section 

987 QBU terminates and its assets are 

reflected on the books and records of a 

successor QBU after the termination. 

See § 1.987–12(b)(2). A successor QBU 

is a section 987 QBU that is owned by 

a member of the same controlled group 

as the original owner (except if the 

original owner is a U.S. person and the 

owner of the successor QBU is a foreign 

person). See § 1.987–12(b)(4). Section 

987 gain or loss that is not recognized 

in connection with a deferral event 

(‘‘deferred section 987 gain or loss’’) is 

recognized by the original owner of the 

section 987 QBU when the successor 

QBU makes a remittance to its owner. 

See § 1.987–12(c)(2). 

An outbound loss event is defined to 

include a termination of a section 987 

QBU that is owned by a U.S. person and 

has net unrecognized section 987 loss in 

connection with a transfer of the section 

987 QBU’s assets to a related foreign 

person. See § 1.987–12(d)(2). If the 

transfer is a transaction described in 

section 351 or section 361, any section 

987 loss that is not recognized in 

connection with the outbound loss 

event (‘‘outbound section 987 loss’’) is 

added to the basis of stock received by 

the owner of the section 987 QBU. See 

§ 1.987–12(d)(4). Otherwise, outbound 

section 987 loss is recognized when the 

owner of the section 987 QBU and the 

related foreign person cease to be 

members of the same controlled group. 

See § 1.987–12(d)(5). 

B. Proposed Regulations 

1. Deferral Events 

The proposed regulations generally 

retain the principles of the final 

regulations relating to deferral events 

but modify the rules in several respects. 

For example, the final regulations 

provide a de minimis rule pursuant to 

which § 1.987–12 would not apply to a 

section 987 QBU if the section 987 gain 

or loss that would not be recognized 

under § 1.987–12 would not exceed $5 

million. § 1.987–12(a)(3)(ii). To prevent 

the de minimis rule from allowing an 

owner to recognize more than the 

threshold by transferring multiple 

section 987 QBUs to members of its 

controlled group, the proposed 


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regulations would retain the de minimis 

rule but apply the threshold to the total 

deferred section 987 gain or loss that 

would otherwise be recognized by the 

owner in a single taxable year. Proposed 

§ 1.987–12(a)(2)(ii). In addition, because 

the proposed regulations would apply 

the suspended section 987 loss rules to 

outbound loss events, any amount 

treated as a suspended section 987 loss 

is not taken into account in determining 

whether the threshold has been met. Id. 

The final regulations also provide 

that, if a deferral event results in 

multiple successor QBUs, the 

remittance proportion is determined by 

treating all the successor QBUs as a 

single successor QBU. § 1.987– 

12(c)(2)(ii). The Treasury Department 

and the IRS are concerned that 

aggregating the contributions and 

distributions of various successor QBUs 

in order to treat them as the same 

successor QBU both increases the 

administrative burden of determining 

the remittance proportion and is less 

precise than determining a remittance 

proportion for each successor QBU. 

Therefore, the proposed regulations 

would apportion an amount of deferred 

section 987 gain or loss to each 

successor QBU and recognize (or 

suspend) a portion of deferred section 

987 gain or loss annually with respect 

to each successor QBU based on the 

specific successor QBU’s remittance 

proportion and on whether that 

successor QBU is subsequently 

transferred. Proposed § 1.987–12(b)(2) 

and (c). 

Although the proposed regulations 

generally retain the deferral rules of 

§ 1.987–12(b) with respect to those 

circumstances in which they apply 

under the final regulations, the Treasury 

Department and the IRS recognize that 

this can lead to odd results in certain 

cases, because similar transactions may 

sometimes be subject to the deferral 

rules and other times be subject to no 

limitation or the suspended loss rules. 

For example, if a CFC (‘‘CFC1’’) with 

a euro functional currency owns a 

section 987 QBU (‘‘QBU1’’) with a 

pound functional currency, and CFC1 

transfers QBU1 to a wholly owned 

subsidiary CFC (‘‘CFC2’’), the deferral 

rules would generally apply if CFC2’s 

functional currency is not the pound. 

However, if CFC2’s functional currency 

is the pound, the deferral rules would 

not apply because QBU1 would cease to 

be a section 987 QBU upon transfer to 

CFC2, because it would have the same 

functional currency as its owner. As a 

result, if CFC1 does not have a current 

rate election in effect (or has both a 

current rate election and an annual 

recognition election in effect), CFC1 

would recognize its net unrecognized 

section 987 gain or loss with respect to 

QBU1 on the transfer. However, if CFC1 

has a current rate election in effect (and 

does not have an annual recognition 

election in effect), CFC1 would 

recognize net unrecognized section 987 

gain on the transfer, but net 

unrecognized section 987 loss would 

become suspended section 987 loss. 

The Treasury Department and the IRS 

request comments on whether the 

deferral rules of proposed § 1.987–12 

should remain a separate deferral 

regime or should be modified or 

combined with the suspended loss rules 

of proposed §§ 1.987–11 and 1.987–13. 

2. Outbound Loss Events 

The proposed regulations generally 

retain the definition of an outbound loss 

event contained in the final regulations. 

However, the proposed regulations 

provide that outbound section 987 loss 

is treated as suspended section 987 loss, 

instead of being added to the basis of 

stock or recognized solely when the 

owner of the section 987 QBU and the 

related foreign person cease to be 

related. This rule is intended to permit 

the recognition of outbound section 987 

loss to the extent the owner recognizes 

section 987 gain in the same recognition 

grouping, as described in part III of this 

Explanation of Provisions. In addition, 

applying the loss suspension rules to 

outbound loss events simplifies the 

proposed regulations by reducing the 

number of different types of deferral 

regimes that apply to section 987 losses. 

XII. Making and Revoking Elections 

The final regulations contain a 

number of elections relating to section 

987. The proposed regulations contain 

several new elections, including the 

current rate election, the annual 

recognition election, and elections 

under the transition rules. 

Under the final regulations, elections 

generally are made separately for each 

section 987 QBU. See § 1.987–1(g)(1)(i). 

Elections cannot be revoked without the 

Commissioner’s consent. See § 1.987– 

1(g)(5). Under the 2016 temporary and 

proposed regulations, an annual deemed 

termination election generally cannot be 

made (except in the first taxable year in 

which the election was relevant) if the 

aggregate net loss that would be 

recognized by all owners to which the 

election applied exceeds $5 million. See 

§ 1.987–1T(g)(2)(i)(B). The annual 

deemed termination election provided 

in the 2016 temporary and proposed 

regulations is irrevocable. 

The proposed regulations would 

provide a consistency requirement that 

applies to both the existing elections 

under the final regulations and the new 

elections under the proposed 

regulations. Under proposed § 1.987– 

1(g), these elections would be required 

to be made or revoked consistently for 

all members of the same consolidated 

group and all CFCs, partnerships, nongrantor trusts, and estates in which the 

ownership interests or beneficiary 

interests of the U.S. shareholder (or 

members of its consolidated group) 

exceed 50 percent. The consistency 

requirement is intended to make the 

application of the proposed rules less 

complex and more administrable; in 

most cases, consistent application of the 

regulations is also expected to reduce 

the compliance burden on taxpayers. 

The proposed regulations would 

permit a current rate election or an 

annual recognition election to be made 

or revoked without the Commissioner’s 

consent. The Treasury Department and 

the IRS recognize that these elections 

can have important consequences for 

the substantive application of section 

987 and the associated compliance 

burden, and that taxpayers may wish to 

change these elections in response to 

changes in the nature and size of their 

business operations. 

However, the current rate and annual 

recognition elections are proposed to be 

subject to timing restrictions and a loss 

suspension rule. If a current rate 

election or an annual recognition 

election is made, it cannot be revoked 

for five years without the 

Commissioner’s consent. Similarly, 

once revoked, these elections cannot be 

made again for five years without 

consent. Proposed § 1.987–1(g)(3)(ii)(B). 

These timing requirements are intended 

to make the proposed regulations easier 

to administer. In addition, because the 

Commissioner’s consent is not required 

to make or revoke these elections, the 

timing requirements are needed to 

prevent taxpayers from 

opportunistically making or revoking 

elections in response to exchange rate 

fluctuations. 

Proposed § 1.987–11(d)(2) provides 

that, in the first year in which a current 

rate election is revoked, net 

accumulated unrecognized section 987 

loss is converted into suspended section 

987 loss. This rule is needed to prevent 

net unrecognized section 987 loss 

generated under a current rate election 

from being recognized without 

limitation after the election is revoked. 

Similarly, if an annual recognition 

election is made, and either (1) a current 

rate election was in effect for the 

previous year or (2) the aggregate 

accumulated net unrecognized section 

987 loss that would be recognized by 

the owner as a result of the recognition 


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election exceeds $5 million, net 

accumulated unrecognized section 987 

loss is converted into suspended section 

987 loss. See § 1.987–11(d)(1). As 

discussed in part III.A of this 

Explanation of Provisions, this rule is 

intended to prevent a taxpayer from 

using an annual recognition election to 

trigger the recognition of net 

unrecognized section 987 loss that arose 

in years before the annual recognition 

election was made. 

XIII. Removal of the Election To Use 

Spot Rates in Lieu of Yearly Average 

Exchange Rates 

As explained in part II.C of the 

Background section, the historic rate 

under § 1.987–1(c)(3) of the 2016 final 

regulations is equal to the yearly average 

exchange rate for the year in which a 

historic asset was acquired or a historic 

liability was entered into. The 2016 

final regulations provide an election 

under § 1.987–1(c)(1)(iii) to use spot 

rates in lieu of yearly average exchange 

rates. 

The Treasury Department and the IRS 

understand that this election may not be 

helpful to taxpayers, as it would 

increase the compliance burden of 

applying section 987 due to the need to 

track historic spot rates for each day in 

a taxable year on which the section 987 

QBU acquires an asset or incurs a 

liability. In addition, the availability of 

this election adds to the complexity of 

the regulations and makes the rules 

more difficult for the IRS to administer. 

Accordingly, the proposed regulations 

remove the election under § 1.987– 

1(c)(1)(iii) to use spot rates in lieu of 

yearly average exchange rates. 

XIV. Consolidated Groups 

A. Intercompany Transactions 

A section 987 QBU of a member of a 

consolidated group is a component of 

that member. Therefore, a transaction 

between that QBU and a different 

member of the same group constitutes 

an intercompany transaction (as defined 

in § 1.1502–13(b)(1)(i)) and is subject to 

the intercompany transaction 

regulations in § 1.1502–13. 

The Treasury Department and the IRS 

have become aware that achieving 

single entity treatment under § 1.1502– 

13 may be difficult for certain 

intercompany transactions involving 

section 987 QBUs. Accordingly, to 

facilitate single entity treatment, the 

proposed regulations would treat a 

transaction between the section 987 

QBU of one member and any other 

member of the same group (including a 

section 987 QBU of that other member) 

as a combination of (i) an intercompany 

transaction between the members, and 

(ii) a transfer between each section 987 

QBU and its owner (see § 1.987–2(c)) as 

necessary to take into account the effect 

of the transaction on the assets and 

liabilities of each section 987 QBU. 

The purpose of § 1.1502–13 is to 

provide rules to clearly reflect the 

taxable income and tax liability of a 

consolidated group as a whole by 

preventing intercompany transactions 

from creating, accelerating, avoiding, or 

deferring consolidated taxable income 

(CTI) or consolidated tax liability. See 

§ 1.1502–13(a)(1). The matching rule in 

§ 1.1502–13(c) (Matching Rule) is one of 

the principal mechanisms for achieving 

this goal. See § 1.1502–13(a)(6)(i). 

The Matching Rule is a principlebased rule that redetermines the 

attributes of a selling member’s (S) 

intercompany item and a buying 

member’s (B) corresponding item to 

produce the effect of transactions 

between divisions of a single 

corporation (single entity treatment). 

See § 1.1502–13(a)(2). The Matching 

Rule also can affect the timing of these 

items so that, whenever possible, the 

effect of these items on the group’s CTI 

and consolidated tax liability is the 

same as if S and B were divisions of a 

single corporation. See § 1.1502– 

13(c)(1)(i). 

For example, assume that S sells land 

at a gain to B, which later sells that land 

at a gain to an unrelated person. To 

achieve the same result as if S and B 

were divisions of a single corporation, S 

does not take into account its gain or 

loss on the sale until B sells the land to 

the unrelated person, and S’s and B’s 

holding periods for the land are 

aggregated. See § 1.1502–13(a)(2), 

(c)(1)(ii), and (c)(2); see also Example 1 

in § 1.1502–13(c)(7)(ii)(A). 

The Matching Rule relies on an 

alignment between S’s and B’s items 

that may be unclear in transactions 

involving section 987 QBUs. For 

example, assume that Lender (that is, S) 

and Borrower (that is, B) are members 

of a consolidated group, and Lender has 

a section 987 QBU (Lender QBU) whose 

functional currency is the euro. Lender 

QBU lends Ö100 to Borrower. If 

Borrower and Lender were divisions of 

a single corporation, the loan would be 

treated as a transfer from Lender QBU 

when funded and a transfer to Lender 

QBU when repaid (or when interest is 

paid). These transfers would be taken 

into account in determining the amount 

of a remittance from Lender QBU 

(potentially triggering the recognition of 

section 987 gain or loss), and the single 

corporation might recognize section 988 

gain or loss when the loan is repaid. See 

§§ 1.987–5 and 1.988–1(a)(10)(ii)(A). 

However, under current law, the 

foreign currency gain or loss of Lender 

and Borrower in the foregoing example 

does not perfectly offset in amount on 

the group’s consolidated return. This is 

the case because Borrower has foreign 

currency gain or loss under section 988 

when the loan is repaid, whereas 

Lender’s foreign currency gain or loss 

under section 987 will be taken into 

account only when Lender QBU makes 

a remittance. See §§ 1.987–5(a) and 

1.988–2(b)(6). Because these amounts 

are calculated at different times based 

on different exchange rates, and because 

section 988 applies to individual 

transactions while section 987 gain or 

loss is determined on a pooled basis by 

reference to the assets and liabilities of 

a section 987 QBU, achieving single 

entity treatment under § 1.1502–13 may 

be difficult. In other words, under 

current law, it may be difficult to 

‘‘match’’ Lender’s section 987 gain or 

loss with Borrower’s section 988 gain or 

loss. Similar mismatches would occur 

with regard to transactions between 

section 987 QBUs of different 

consolidated group members. 

The proposed regulations would 

address the matching issue in this 

example by treating the loan as if it were 

made directly between Lender and 

Borrower. See proposed § 1.1502– 

13(j)(9). Thus, when the loan is made, 

Lender QBU would be treated as 

transferring Ö100 to Lender, which in 

turn would be treated as lending Ö100 

to Borrower in an intercompany 

transaction. The loan would be treated 

as a section 988 transaction with respect 

to both Lender and Borrower. When 

Borrower pays interest on the loan and 

repays the loan principal, Lender would 

be treated as transferring the interest or 

principal amount it receives from 

Borrower to Lender QBU. Lender’s 

interest income and Borrower’s interest 

expense, and their section 988 gain and 

loss with respect to principal and 

interest, would offset each other in 

amount, producing no net effect on CTI 

(thereby achieving single entity 

treatment). The group would report any 

foreign currency gain or loss (under 

section 987 or 988) on the transfers 

between Lender and Lender QBU (for 

example, when Lender QBU loans the 

Ö100 to Borrower, which is first treated 

as a remittance of the Ö100 from Lender 

QBU to Lender) on the group’s 

consolidated return. 

The proposed regulations also would 

replace Examples 4 and 15 in § 1.987– 

2(c)(10) with new examples in § 1.1502– 

13(j) to illustrate the application of the 

proposed rule. The new examples make 

clear that the proposed approach 

applies to reach single entity treatment 


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for all consolidated groups, regardless of 

whether the taxpayer had a principal 

purpose of avoiding tax through the use 

of section 987. Cf. § 1.987–2(b)(3)(i) and 

(c)(10), Example 15 (providing that the 

IRS may reallocate a receivable from a 

section 987 QBU to its owner if a 

principal purpose of avoiding tax 

through the use of section 987 is 

present). 

B. Separate Return Limitation Years 

When a corporation joins a 

consolidated group, the regulations 

under section 1502 may limit the 

group’s ability to use the corporation’s 

preexisting tax attributes. For example, 

§ 1.1502–21(c) generally restricts the 

group’s ability to use a member’s net 

operating loss (NOL) that arose in a year 

when the corporation was not a member 

of the group. In general, § 1.1502–21(c) 

allows the group to use only the portion 

of the NOL that does not exceed the 

member’s ‘‘cumulative register,’’ which 

reflects the member’s items of income, 

gain, deduction, and loss that have been 

included in the group’s CTI. See 

§ 1.1502–21(c)(1)(i). 

Under the proposed regulations, a 

corporation that is the owner of a 

section 987 QBU may have suspended 

or deferred section 987 losses when it 

joins a consolidated group. The 

Treasury Department and the IRS 

request comments about how rules 

similar to the rules of § 1.1502–21(c) 

should apply to such losses. 

XV. Section 988 Transactions of a 

Section 987 QBU 

The temporary regulations provided 

special rules relating to section 988 

transactions of a section 987 QBU, 

including transactions denominated in 

the owner’s functional currency. 

Although the temporary regulations 

have expired, the corresponding 

provisions of the 2016 proposed 

regulations remain outstanding. 

In general, under the 2016 proposed 

regulations, whether a transaction is a 

section 988 transaction is determined by 

reference to the section 987 QBU’s 

functional currency, but any section 988 

gain or loss is determined in the owner’s 

functional currency. See § 1.987– 

3(b)(4)(i) of the 2016 proposed 

regulations. In addition, certain section 

988 transactions of a section 987 QBU 

that are denominated in, or determined 

by reference to, the owner’s functional 

currency (‘‘specified owner functional 

currency transactions’’) are not treated 

as section 988 transactions of the 

section 987 QBU. See § 1.987–3(b)(4)(ii) 

of the 2016 proposed regulations. 

The 2016 proposed regulations further 

provide that section 988 gain or loss 

with respect to certain short-term 

section 988 transactions of a section 987 

QBU (‘‘qualified short-term section 988 

transactions’’) that are accounted for 

under a mark-to-market method of 

accounting is determined in the 

functional currency of the section 987 

QBU, and not the functional currency of 

its owner. See § 1.987–3(b)(4)(iii) of the 

2016 proposed regulations. 

Under the final regulations, a 

transaction denominated in a currency 

other than the section 987 QBU’s 

functional currency is a historic item. 

See § 1.987–1(d) and (e). However, the 

2016 proposed regulations provide that 

a qualified short-term section 988 

transaction for which section 988 gain 

or loss is determined by reference to the 

functional currency of the section 987 

QBU is a marked item. See § 1.987– 

1(d)(3) of the 2016 proposed regulations. 

The Treasury Department and the IRS 

understand that the rules of the 2016 

proposed regulations relating to 

nonfunctional currency transactions of a 

section 987 QBU would increase the 

compliance burden on taxpayers in 

certain contexts (for example, where the 

section 987 QBU operates as a treasury 

center). This compliance burden could 

potentially be alleviated by treating all 

transactions (including specified owner 

functional currency transactions) 

denominated in a currency other than 

the functional currency of the section 

987 QBU as marked items, determining 

whether those transactions are section 

988 transactions by reference to the 

functional currency of the section 987 

QBU, and determining the section 988 

gain or loss with respect to those 

transactions in the functional currency 

of the section 987 QBU. However, the 

Treasury Department and the IRS are 

concerned that, under this approach, 

transactions denominated in the 

owner’s functional currency would be 

treated as section 988 transactions of a 

section 987 QBU. Therefore, these 

transactions would give rise to offsetting 

positions in that currency, enabling 

taxpayers to recognize losses while 

deferring the offsetting gains. For 

example, if a section 987 QBU held 

assets denominated in its owner’s 

functional currency, and the section 987 

QBU’s functional currency weakened 

against that of its owner, the section 987 

QBU would have section 988 gain and 

the owner would have an inverse 

amount of section 987 loss. 

The Treasury Department and the IRS 

request comments as to whether section 

988 gain or loss on nonfunctional 

currency transactions (including 

specified owner functional currency 

transactions) of a section 987 QBU 

should be determined in the functional 

currency of the section 987 QBU when 

a current rate election or annual 

recognition election is in effect and, if 

so, what limitations should be imposed 

to prevent abuse. Comments are also 

requested on whether the definition of 

qualified short-term section 988 

transactions should be expanded or 

modified, and whether other exceptions 

or special rules should be provided for 

section 987 QBUs engaged in certain 

activities (for example, treasury centers). 

XVI. Definition of a Qualified Business 

Unit and an Eligible QBU 

Under section 985(b), the functional 

currency of a qualified business unit is 

generally either the dollar or the 

currency of the economic environment 

in which a significant part of its 

activities are conducted and in which 

its books and records are kept. Section 

985(b); § 1.985–1(b) through (c). Under 

section 989, a ‘‘qualified business unit’’ 

means a ‘‘separate and clearly identified 

unit’’ of a trade or business of a 

taxpayer, provided that the unit 

maintains separate books and records. 

Section 989(a). The regulations describe 

two types of qualified business units. 

The activities of a person may be a 

qualified business unit if the activities 

constitute a trade or business and a 

separate set of books and records are 

maintained with respect to the 

activities. § 1.989(a)–1(b)(2)(ii). In 

addition, the so called ‘‘per se’’ 

qualified business units include any 

corporation, partnership (other than a 

section 987 aggregate partnership), trust, 

or estate. § 1.989(a)–1(b)(2)(i). 

A single qualified business unit may 

only have a single functional currency. 

Certain qualified business units, such as 

domestic corporations, are required to 

use the dollar as their functional 

currency unless otherwise provided by 

a ruling or administrative 

pronouncement. § 1.985–1(b)(1)(iii). No 

rulings or administrative 

pronouncements have been issued 

under this provision other than private 

letter rulings that can be relied on only 

by the specific taxpayer for whom they 

were issued. Accordingly, all domestic 

corporations are required to use the 

dollar as their functional currency 

unless they have obtained a private 

letter ruling specifically allowing that 

entity to use a different functional 

currency. 

The Treasury Department and the IRS 

have become aware of uncertainty 

regarding whether a per se qualified 

business unit, such as a corporation, 

that has only a single trade or business 

for which it keeps a single set of books 

and records is one qualified business 

unit (the corporation and its single trade 


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or business) or two qualified business 

units (the corporation itself being one 

and its single trade or business being the 

other). If a domestic corporation with a 

single trade or business for which it 

keeps a single set of books and records 

were a single qualified business unit, 

that would effectively mean that (absent 

a ruling) the functional currency of the 

trade or business would be required to 

be the dollar, even if the currency of the 

economic environment of the trade or 

business was the euro and books and 

records are maintained in euros; 

whereas another domestic corporation 

with an identical trade or business may 

be permitted to use the euro as the 

functional currency of the trade or 

business, as long as it had at least one 

other trade or business that uses the 

dollar. 

To clarify that a per se qualified 

business unit, such as a domestic 

corporation, is permitted to have a 

single trade or business that maintains 

a single set of books and records, and 

which uses a functional currency other 

than the dollar, the proposed 

regulations modify the definition of 

eligible QBU. The revised definition 

clarifies that, if a per se QBU has only 

a single trade or business for which only 

a single set of books and records are 

maintained, only the trade or business 

(and not the entity itself) would be an 

eligible QBU. Proposed § 1.987–1(b)(4). 

The entity itself would be the owner of 

the eligible QBU. Proposed § 1.987– 

1(b)(5). As a result, if the eligible QBU 

has a functional currency other than the 

functional currency of the owner, the 

eligible QBU would be a section 987 

QBU. 

The Treasury Department and the IRS 

request comments on whether a similar 

change should be made to § 1.989(a)– 

1(b). Comments should also consider 

whether additional changes are needed 

in the regulations under section 985 

regarding functional currency or in 

other provisions that reference the 

definition of a qualified business unit, 

such as § 1.904–4(f)(3)(vii). 

XVII. Other Changes and Revisions 

In addition to the provisions 

described in parts I through XVI of this 

Explanation of Provisions, the proposed 

regulations include other wording 

changes, additions, deletions, and 

organizational changes to the final 

regulations and the 2016 proposed 

regulations for purposes of clarifying, 

conforming, and making minor 

revisions. 

Applicability Dates 

I. Applicability Dates of the Proposed 

Regulations 

Once finalized, the regulations (and 

the parts of the final regulations that are 

not replaced or modified by the 

proposed regulations) would apply to 

taxable years beginning after December 

31, 2024. Proposed § 1.987–14(a)(1). 

A taxpayer may also choose to apply 

the final version of the proposed 

regulations and the parts of the final 

regulations that are not replaced or 

modified by the proposed regulations 

(the ‘‘new final regulations’’), once 

published in the Federal Register, for 

taxable years ending after the date these 

regulations are published as final in the 

Federal Register. Proposed § 1.987– 

14(b). To choose to apply the new final 

regulations, the taxpayer and each 

member of its consolidated group and 

section 987 electing group must 

consistently apply the new final 

regulations in their entirety to the 

taxable year and all subsequent taxable 

years beginning on or before December 

31, 2024. Id. 

The Treasury Department and the IRS 

are concerned that taxpayers may 

terminate certain QBUs before the 

general applicability date of the 

proposed regulations to avoid the 

application of these rules. Accordingly, 

the proposed regulations would also 

provide an earlier applicability date for 

terminating QBUs to prevent taxpayers 

from avoiding these rules. Specifically, 

the new final regulations are proposed 

to apply to a terminating QBU on the 

day the section 987 QBU terminates. 

Proposed § 1.987–14(a)(2). The 

proposed regulations would define a 

terminating QBU as a section 987 QBU 

if both (1) the section 987 QBU 

terminates on or after November 9, 

2023, or as a result of an entity 

classification election filed on or after 

November 9, 2023 and effective before 

November 9, 2023, and (2) neither the 

new final regulations nor the 2016 and 

2019 section 987 regulations would 

apply to the section 987 QBU when it 

terminates but for the anti-avoidance 

rule in proposed § 1.987–14(a)(2). 

Proposed § 1.987–1(h). 

In addition, if the section 987 

regulations apply to a taxable year of a 

partnership and would not otherwise 

apply to the taxable year of a partner in 

which or with which the partnership’s 

taxable year ends, then the section 987 

regulations apply to that taxable year of 

the partner solely with respect to the 

partner’s interest in the partnership and 

its section 987 gain or loss attributable 

to an eligible QBU held by the 

partnership. 

II. Applicability Dates of the 2016 and 

2019 Section 987 Regulations 

The proposed regulations also provide 

rules regarding the applicability dates of 

the final regulations and temporary 

regulations. Section 1.987–11(a) of the 

2016 final regulations generally 

provides that the 2016 final regulations 

apply to taxable years beginning on or 

after one year after the first day of the 

first taxable year following December 7, 

2016. However, taxpayers could choose 

to apply them to an earlier taxable year 

as provided in § 1.987–11(b). The 2019 

final regulations (other than § 1.987–12) 

have the same applicability date as the 

2016 final regulations. 

As described in part V of the 

Background section, following the 

publication of the 2016 final 

regulations, the Treasury Department 

and the IRS have issued several notices 

stating that future guidance would defer 

the applicability dates of most 

provisions of the final regulations and 

the temporary regulations. Because 

certain provisions that were originally 

deferred have since been revoked or 

expired, those provisions are no longer 

subject to deferral; other provisions 

were finalized in 2019 and deferral 

began at that time. The provisions 

deferred by the notices (and the 

respective periods for deferral) are as 

follows (collectively, the ‘‘2016 and 

2019 section 987 regulations’’): 

(i) Sections 1.861–9T(g)(2)(ii)(A)(1) 

and (g)(2)(vi); 1.985–5; 1.987–1 through 

1.987–10; 1.988–1(a)(4), (a)(10)(ii), and 

(i); 1.988–4(b)(2); and 1.989(a)–1(b)(2)(i), 

(b)(4), (d)(3), and (d)(4), as contained in 

26 CFR in part 1 in effect on April 1, 

2017. 

(ii) Sections 1.987–2T(c)(9), 1.987– 

4T(c)(2) and (f), and 1.987–7T, as 

contained in 26 CFR in part 1 in effect 

on April 1, 2017 (until they were 

revoked on May 13, 2019). 

(iii) Sections 1.987–2(c)(9) and 1.987– 

4(c)(2) and (f), as contained in 26 CFR 

in part 1 in effect on April 1, 2020 

(beginning on May 13, 2019). 

(iv) Sections 1.987–1T (other than 

§§ 1.987–1T(g)(2)(i)(B) and (g)(3)(i)(H)), 

1.987–3T, 1.987–6T, 1.988–1T, and 

1.988–2T(i), as contained in 26 CFR in 

part 1 in effect on April 1, 2017 (until 

they expired on December 6, 2019). 

Pursuant to the most recent notice, 

the 2016 and 2019 section 987 

regulations would first apply to taxable 

years beginning after December 7, 2023. 

Notice 2022–34, 2022–34 I.R.B. 150. The 

deferral notices also allow taxpayers to 

rely on the provisions of the notices 

before the section 987 regulations are 

amended. See id. 

Because the proposed regulations 

would replace or modify parts of the 


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final regulations, the final regulations 

are not expected to become applicable 

in their current form. However, some 

taxpayers have chosen to apply the 2016 

and 2019 section 987 regulations in 

accordance with § 1.987–11(b) and the 

deferral notices. The proposed 

regulations would provide rules for 

taxpayers who chose to apply the 2016 

and 2019 section 987 regulations before 

the applicability date of those 

regulations. 

Proposed § 1.987–14(c)(1) would 

provide that a taxpayer may choose to 

apply the 2016 and 2019 section 987 

regulations to a taxable year beginning 

after December 7, 2016, and beginning 

on or before December 31, 2024, in 

certain circumstances. Specifically, the 

taxpayer and each member of its 

consolidated group and section 987 

electing group would be required to first 

apply the 2016 and 2019 section 987 

regulations to a taxable year ending 

before November 9, 2023. Proposed 

§ 1.987–14(c)(1)(i). In addition, the 

taxpayer and each member of its 

consolidated group and section 987 

electing group would be required to 

consistently apply the 2016 and 2019 

section 987 regulations in their entirety 

to all section 987 QBUs directly or 

indirectly owned by the taxpayer and 

each member of its consolidated group 

and section 987 electing group on the 

transition date for the taxable year that 

includes the transition date and all 

subsequent taxable years before the 

taxable year in which the taxpayer and 

each member of its consolidated group 

and section 987 electing group rely on 

the proposed regulations or apply the 

new final regulations. Proposed § 1.987– 

14(c)(1)(ii). For purposes of proposed 

§ 1.987–14(c), the term section 987 

electing group does not include foreign 

partnerships, foreign non-grantor trusts, 

or foreign estates. Proposed § 1.987– 

14(c)(3)(ii). 

If a taxpayer and each member of its 

consolidated group and section 987 

electing group first apply the 2016 and 

2019 section 987 regulations on their 

returns filed on or after November 9, 

2023, they would be required to apply 

proposed § 1.987–10 in lieu of § 1.987– 

10 of the final regulations. Proposed 

§ 1.987–14(c)(1)(iii)(B). For these 

taxpayers, proposed § 1.987– 

14(c)(1)(iii)(B) would provide that a 

taxpayer and each member of its 

consolidated group and section 987 

electing group must transition from the 

previous method used to comply with 

section 987 using the transition rule in 

proposed § 1.987–10. In other words, 

these taxpayers would not be permitted 

to apply the fresh start method 

described in § 1.987–10 of the final 

regulations. 

The Treasury Department and the IRS 

are concerned that, if the new proposed 

transition rule applied solely with 

respect to taxable years ending on or 

after November 9, 2023, taxpayers 

would effectively have the option to 

choose between two alternative 

transition methods. Taxpayers with 

pretransition loss could apply the 

transition rule of proposed § 1.987–10 

(which preserves the pretransition loss), 

while taxpayers with pretransition gain 

could choose to apply the 2016 and 

2109 section 987 regulations before the 

applicability date of the proposed 

regulations to take advantage of the 

fresh start transition method (which 

could eliminate the pretransition gain). 

Therefore, the proposed transition rule 

would apply to taxpayers who choose to 

apply the 2016 and 2019 section 987 

regulations on their returns filed on or 

after November 9, 2023 with respect to 

a taxable year ending before November 

9, 2023. 

Proposed § 1.987–14(c)(2) describes 

the applicability of the 2016 and 2019 

section 987 regulations to section 987 

QBUs that were not directly or 

indirectly owned by the taxpayer on the 

taxpayer’s transition date. Specifically, a 

taxpayer that is applying the 2016 and 

2019 section 987 regulations to other 

section 987 QBUs may choose to apply 

the 2016 and 2019 section 987 

regulations to any section 987 QBU that 

it did not directly or indirectly own on 

the transition date, provided the 

taxpayer applies those regulations 

consistently to that QBU for that taxable 

year and all subsequent taxable years 

before the taxable year in which the 

taxpayer relies on the proposed 

regulations or applies the new final 

regulations. 

III. Applicability Dates of § 1.987–12 

Section 1.987–12T was issued as part 

of the temporary regulations and 

generally applied to any deferral event 

(as defined in § 1.987–12T(b)(2)) or 

outbound loss event (as defined in 

§ 1.987–12T(d)(2)) that occurred on or 

after January 6, 2017. The 2019 final 

regulations withdrew § 1.987–12T and 

finalized the proposed regulations 

under § 1.987–12 that cross-referenced 

§ 1.987–12T. See § 1.987–12. The 

deferral notices did not defer the 

applicability dates of § 1.987–12T or 

§ 1.987–12, nor would the proposed 

regulations. Accordingly, all taxpayers 

to whom section 987(3) applies are 

currently subject to § 1.987–12. 

The proposed regulations would 

replace § 1.987–12 with certain deferral 

provisions generally included in 

proposed §§ 1.987–11 through 1.987–13. 

Accordingly, the proposed regulations 

would provide that taxpayers continue 

to apply § 1.987–12 until the first 

taxable year to which they apply the 

new final regulations. 

IV. Reliance on the Proposed 

Regulations and 2016 Proposed 

Regulations 

Taxpayers may rely on the proposed 

regulations (and so much of the final 

regulations as would not be modified by 

the proposed regulations) for taxable 

years ending after November 9, 2023, 

provided the taxpayer and each member 

of its consolidated group and section 

987 electing group consistently follow 

the proposed regulations in their 

entirety and in a consistent manner. 

In addition, taxpayers may rely on the 

parts of the 2016 proposed regulations 

that remain outstanding for taxable 

years ending after November 9, 2023, 

provided that both (i) the taxpayer and 

each member of its consolidated group 

and section 987 electing group 

consistently follow these parts in their 

entirety and in a consistent manner; and 

(ii) in that taxable year, the taxpayer 

follows the proposed regulations. 

For the avoidance of doubt, any 

person relying on the proposed 

regulations is treated as applying them 

for purposes of any provision that refers 

to the application of the proposed 

regulations or any part thereof (for 

example, for purposes of proposed 

§ 1.987–10(b)). 

Special Analyses 

I. Regulatory Planning and Review— 

Economic Analysis 

Pursuant to the Memorandum of 

Agreement, Review of Treasury 

Regulations under Executive Order 

12866 (June 9, 2023), tax regulatory 

actions issued by the IRS are not subject 

to the requirements of section 6 of 

Executive Order 12866, as amended. 

Therefore, a regulatory impact 

assessment is not required. 

II. Paperwork Reduction Act 

The collections of information in the 

proposed regulations with respect to 

section 987 are in proposed §§ 1.987– 

1(g), 1.987–9, and 1.987–10(k). The 

likely respondents are individuals who 

file a Form 1040 and businesses that file 

a Form 1065, 1066, or 1120. 

Additionally, there is a possibility that 

a trust or estate that files a Form 1041 

could be affected by the requirements of 

the proposed regulations. The IRS 

anticipates that the total number of 


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8The estimated number of respondents is based 

on the number of taxpayers who filed a Form 8858 

in 2021 that showed that the filer: (1) owned at least 

one disregarded entity or branch with a functional 

currency different from the functional currency of 

the owner, and (2) indicated that the disregarded 

entity was a section 989 QBU. Although these 

estimates are likely to increase once these proposed 

regulations are effective, the Treasury Department 

and the IRS do not have data that would allow for 

an accurate estimate of these increases. 

respondents could be 500,8 and that less 

than 1% of the total respondents would 

be a trust or estate filer. 

The collection of information 

provided by proposed § 1.987–1(g) is 

required only when a taxpayer makes or 

revokes certain elections for purposes of 

calculating its section 987 taxable 

income or loss and section 987 gain or 

loss with respect to a section 987 QBU. 

In the first year to which the section 987 

regulations apply to the taxpayer, or the 

taxpayer or a member of its consolidated 

group or section 987 electing group is 

the owner of a section 987 QBU, the 

taxpayer may make any section 987 

election. Thereafter, the taxpayer may 

make or revoke a current rate election or 

annual recognition election only every 

five years and may make or revoke other 

elections only with the consent of the 

Commissioner, which may be granted 

with a private letter ruling. When a 

taxpayer makes or revokes an election, 

the collection of information is 

mandatory. The collection of 

information required by proposed 

§ 1.987–1(g) will be used by the IRS for 

tax compliance purposes. 

Proposed § 1.987–9 is intended to 

specify how a taxpayer satisfies its 

recordkeeping obligations under section 

6001 with respect to section 987. The 

recordkeeping requirements under 

proposed § 1.987–9 are considered 

general tax records under § 1.6001–1(e). 

For Paperwork Reduction Act of 1995 

(44 U.S.C. 3507(d)) (‘‘PRA’’) purposes, 

general tax records are already approved 

by OMB under 1545–0074 for 

individuals and under 1545–0123 for 

business entities, and will be approved 

under 1545–NEW for trust and estate 

filers. The IRS intends that the 

information collection requirements 

pursuant to proposed § 1.987–9 will be 

satisfied by the taxpayer maintaining 

permanent books and records that are 

adequate to verify its section 987 gain or 

loss and section 987 taxable income or 

loss with respect to its section 987 QBU. 

Specifically, with respect to each 

section 987 QBU, successor deferral 

QBU, and successor suspended loss 

QBU for a taxable year, as applicable, 

proposed § 1.987–9 requires taxpayers 

to maintain books and records related to 

the amount of the items of income, gain, 

deduction, or loss attributed to the 

section 987 QBU in the functional 

currency of the section 987 QBU and its 

owner; the adjusted balance sheet of the 

section 987 QBU in the functional 

currency of the section 987 QBU and its 

owner; the exchange rates used to 

translate items of income, gain, 

deduction, or loss of the section 987 

QBU into the owner’s functional 

currency and, if a spot rate convention 

is used, the manner in which the 

convention is determined; the exchange 

rates used to translate the assets and 

liabilities of the section 987 QBU into 

the owner’s functional currency and, if 

a spot rate convention is used, the 

manner in which the convention is 

determined; the amount of assets and 

liabilities transferred by the section 987 

QBU to the owner determined in the 

functional currency of the owner; the 

amount of the unrecognized section 987 

gain or loss for the taxable year; the 

amount of the net accumulated 

unrecognized section 987 gain or loss at 

the close of the taxable year; the amount 

of a remittance and the remittance 

proportion for the taxable year; the 

computations required under proposed 

§§ 1.861–9(g) and 1.861–9T(g) for 

purposes of sourcing and characterizing 

section 987 gain or loss, deferred section 

987 gain or loss, or suspended section 

987 loss under proposed § 1.987–6; the 

cumulative suspended section 987 loss 

in each recognition grouping; the 

outstanding deferred section 987 gain or 

loss in each recognition grouping; and 

the transition information required to be 

determined under proposed § 1.987– 

10(k). These records are required for the 

IRS to validate that section 987 gain or 

loss and section 987 taxable income or 

loss have been properly determined. 

The collection of information in 

proposed § 1.987–10(k) is mandatory. 

Specifically, proposed § 1.987–10(k) 

would require a taxpayer to file a 

‘‘Section 987 Transition Information’’ 

statement with its return for the taxable 

year beginning on the transition date (as 

defined in proposed § 1.987–10(c)). The 

statement would contain information 

that is necessary for a taxpayer to 

transition to the proposed section 987 

regulations. Specifically, the statement 

requires a taxpayer to provide 

information that is relevant to 

determining the taxpayer’s pretransition 

gain or loss with respect to its section 

987 QBUs. The collection of information 

required by proposed § 1.987–10(k) will 

be used by the IRS for tax compliance 

purposes. 

The IRS intends that the information 

described in proposed § 1.987–1(g) will 

be collected by attaching a statement to 

a taxpayer’s return (such as the 

appropriate Form 1040, Form 1120, 

Form 1065, or other appropriate form). 

With respect to proposed § 1.987–10(k), 

the IRS also intends that the collection 

of information will be conducted by 

attaching a ‘‘Section 987 Transition 

Information’’ statement to a return. For 

purposes of the PRA, the reporting 

burden associated with those collections 

of information with respect to proposed 

§§ 1.987–1(g) and 1.987–10(k) will be 

reflected in the Paperwork Reduction 

Act Submissions associated with those 

forms. The OMB Control Numbers for 

the forms will be approved under 1545– 

0074 for individuals, under 1545–0123 

for business entities, and under 1545– 

NEW for trust and estate filers. 

To the extent that a taxpayer makes or 

revokes an election by obtaining a 

private letter ruling, the reporting 

burden associated with those collections 

of information will be reflected in the 

Paperwork Reduction Act Submissions 

associated with Revenue Procedure 

2023–1, IRB 2023–1 (or future revenue 

procedures governing private letter 

rulings). The OMB Control Number for 

the collection of information for 

Revenue Procedure 2023–1 is control 

number 1545–1522. The proposed 

regulation would only require taxpayers 

to follow the procedures under Revenue 

Procedure 2023–1 (or future revenue 

procedure governing private letter 

rulings) and would not change the 

collection requirements of the Revenue 

Procedure. 

The attachment to a return used for 

making elections with respect to these 

proposed regulations will be used by 

those taxpayers making or revoking an 

election for the taxable year. The 

‘‘Section 987 Transition Information’’ 

statement attached to a return will be 

used by all taxpayers, but generally only 

with respect to the taxable year in 

which the taxpayer transitions to these 

proposed regulations. In certain cases, if 

the taxpayer owns a QBU that 

terminates after November 9, 2023 and 

before the taxable year in which the 

taxpayer transitions to the proposed 

regulations, the ‘‘Section 987 Transition 

Information’’ statement must be filed for 

that taxable year too, but the statement 

would only contain information with 

respect to the terminating QBU. The 

Treasury Department and the IRS 

request comments on all aspects of 

information collection burdens related 

to these proposed regulations. If the IRS 

releases a form for the purposes of 

collecting this information, drafts of IRS 

forms will be posted for comment at 

https://www.irs.gov/draftforms. 

The burden will be accounted for in 

1545–0074 for individuals and in 1545– 

0123 for businesses. The IRS is 

requesting a new OMB control number 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
78158 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

to account for trust and estate filers’ 

burden, as reflected below. 

A summary of paperwork burden 

estimates for the elections as provided 

in proposed § 1.987–1(g) is as follows: 

Estimated number of respondents: 5. 

Estimated burden per response: 1.95 

hours. 

Estimated frequency of response: 1 for 

the first year in which a taxpayer 

applies these regulations. After the first 

year, the current rate election and the 

annual recognition election can 

generally be changed only once every 

five years and other elections can be 

changed with the consent of the 

Commissioner. 

Estimated total burden hours: 9.75 

burden hours. 

A summary of paperwork burden 

estimates for the ‘‘section 987 transition 

information’’ statement as provided in 

proposed § 1.987–10(k) is as follows: 

Estimated number of respondents: 5. 

Estimated burden per response: 1.95 

hours. 

Estimated frequency of response: 1 for 

the initial transition year. 

Estimated total burden hours: 9.75 

burden hours. 

The collections of information 

contained in this notice of proposed 

rulemaking have been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act. Commenters 

are strongly encouraged to submit 

public comments electronically. Written 

comments and recommendations for the 

proposed information collection should 

be sent to www.reginfo.gov/public/do/ 

PRAMain, with copies to the Internal 

Revenue Service. Find this particular 

information collection by selecting 

‘‘Currently under Review—Open for 

Public Comments’’ then by using the 

search function. Submit electronic 

submissions for the proposed 

information collection to the IRS via 

email at pra.comments@irs.gov (indicate 

REG–132422–17 on the subject line). 

Comments on the collection of 

information should be received by 

February 12, 2024. 

Comments are specifically requested 

concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the duties of the IRS, 

including whether the information will 

have practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information (including underlying 

assumptions and methodology); 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchases of services to provide 

information. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

III. Regulatory Flexibility Act 

Generally, the proposed regulations 

affect U.S. corporations that have 

foreign operations. The number of small 

entities potentially affected by the 

proposed regulations is unknown; 

however, it is unlikely to be a 

substantial number because taxpayers 

with foreign operations are typically 

larger businesses. In accordance with 

the Regulatory Flexibility Act (5 U.S.C. 

601 et seq.) the Secretary hereby 

certifies that these proposed regulations 

will not have a significant economic 

impact on a substantial number of small 

entities. 

IV. Section 7805(f) 

Pursuant to section 7805(f), this 

proposed regulation will be submitted 

to the Chief Counsel for Advocacy of the 

Small Business Administration for 

comment on their impact on small 

business. 

V. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 requires 

that agencies assess anticipated costs 

and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a State, local, or Tribal government, 

in the aggregate, or by the private sector, 

of $100 million in 1995 dollars, updated 

annually for inflation. The proposed 

regulations do not include any Federal 

mandate that may result in expenditures 

by State, local, or Tribal governments, or 

by the private sector in excess of that 

threshold. 

VI. Executive Order 13132: Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial, direct compliance costs on 

State and local governments, and is not 

required by statute, or preempts State 

law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive order. The 

proposed regulations do not have 

federalism implications and do not 

impose substantial direct compliance 

costs on State and local governments or 

preempt State law within the meaning 

of the Executive order. 

Comments and Request for Public 

Hearing 

Before these proposed amendments to 

the final regulations are adopted as final 

regulations, consideration will be given 

to comments that are submitted timely 

to the IRS as prescribed in this preamble 

under the ADDRESSES heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed regulations. Any comments 

submitted will be made available at 

https://www.regulations.gov or upon 

request. 

A public hearing will be scheduled if 

requested in writing by any person who 

timely submits written comments. 

Requests for a public hearing are also 

encouraged to be made electronically. If 

a public hearing is scheduled, notice of 

the date and time for the public hearing 

will be published in the Federal 

Register. 

Drafting Information 

The principal authors of the proposed 

regulations are Raphael J. Cohen, D. 

Peter Merkel, Jack Zhou, and Azeka J. 

Abramoff of the Office of Associate 

Chief Counsel (International); and 

Jeremy Aron-Dine and Julie Wang of the 

Office of Associate Chief Counsel 

(Corporate). However, other personnel 

from the Treasury Department and the 

IRS participated in their development. 

Statement of Availability of IRS 

Documents 

IRS Revenue Procedures, Revenue 

Rulings, Notices, and other guidance 

cited in this document are published in 

the Internal Revenue Bulletin or 

Cumulative Bulletin and are available 

from the Superintendent of Documents, 

U.S. Government Publishing Office, 

Washington, DC 20402, or by visiting 

the IRS website at https://www.irs.gov. 

Partial Withdrawal of Proposed 

Regulations 

Under the authority of 26 U.S.C. 7805, 

proposed §§ 1.987–1(g)(2)(i)(B) and (C) 

and (g)(3)(i)(G) and (H), 1.987–3(d), 

1.987–7, and 1.987–8, contained in the 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 78159 

notice of proposed rulemaking that was 

published in the Federal Register on 

December 8, 2016 (81 FR 88882) is 

withdrawn. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, the Treasury Department 

and the IRS propose to amend 26 CFR 

part 1 as follows: 

PART 1—INCOME TAXES 

■ 1. The authority citation for part 1 is 

amended by: 

■ a. Removing the entry for §§ 1.861–9 

and 1.861–9T and §§ 1.861–8T through 

1.861–14T; 

■ b. Adding entries for §§ 1.861–8T, 

1.861–9, 1.861–9T, 1.861–10T, 1.861– 

11T, 1.861–12T, 1.861–13T, and 1.861– 

14T in numerical order; 

■ c. Removing the entry for §§ 1.985–0 

through 1.985–5; 

■ d. Adding entries for §§ 1.985–0 

through 1.985–5 in numerical order; 

■ e. Removing the entry for §§ 1.987–1 

through 1.987–5; 

■ f. Adding entries for §§ 1.987–1 

through 1.987–6, 1.987–7A, 1.987–7B, 

1.987–7C, and 1.987–8 through 1.987– 

11 in numerical order; 

■ g. Revising the entry for § 1.987–12; 

■ h. Adding entries for §§ 1.987–13 and 

1.987–14 in numerical order; 

■ i. Removing the entry for §§ 1.988–0 

through 1.988–5; 

■ j. Adding entries for §§ 1.988–0 

through 1.988–5 and 1.989(a)–1 in 

numerical order. 

■ k. Revising the entry for § 1.1502–13. 

The revisions and additions read as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

* * * * * 

Section 1.861–8T also issued under 26 

U.S.C. 863(a), 864(e), 865(i), and 7701(f). 

Section 1.861–9 also issued under 26 

U.S.C. 861, 863(a), 864(e), 864(e)(7), 865(i), 

987, and 989(c), and 7701(f). 

Section 1.861–9T also issued under 26 

U.S.C. 861, 863(a), 864(e), 864(e)(7), 865(i), 

and 7701(f). 

* * * * * 

Section 1.861–10T also issued under 26 

U.S.C. 863(a), 864(e), 865(i), and 7701(f). 

* * * * * 

Section 1.861–11T also issued under 26 

U.S.C. 863(a), 864(e), 865(i), and 7701(f). 

* * * * * 

Section 1.861–12T also issued under 26 

U.S.C. 863(a), 864(e), 865(i), and 7701(f). 

* * * * * 

Section 1.861–13T also issued under 26 

U.S.C. 863(a), 864(e), 865(i), and 7701(f). 

* * * * * 

Section 1.861–14T also issued under 26 

U.S.C. 863(a), 864(e), 865(i), and 7701(f). 

* * * * * 

Section 1.985–0 also issued under 26 

U.S.C. 985. 

Section 1.985–1 also issued under 26 

U.S.C. 985. 

Section 1.985–2 also issued under 26 

U.S.C. 985. 

Section 1.985–3 also issued under 26 

U.S.C. 985. 

Section 1.985–4 also issued under 26 

U.S.C. 985. 

Section 1.985–5 also issued under 26 

U.S.C. 985, 987, and 989(c). 

* * * * * 

Section 1.987–1 also issued under 26 

U.S.C. 987, 989(c), and 1502. 

Section 1.987–2 also issued under 26 

U.S.C. 987, 989(c), and 1502. 

Section 1.987–3 also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–4 also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–5 also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–6 also issued under 26 

U.S.C. 904, 987, and 989(c). 

Section 1.987–7A also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–7B also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–7C also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–8 also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–9 also issued under 26 

U.S.C. 987, 989(c), and 6001. 

Section 1.987–10 also issued under 26 

U.S.C. 987, 989(c), and 6001. 

Section 1.987–11 also issued under 26 

U.S.C. 987, 989(c), and 1502. 

Section 1.987–12 also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–13 also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.987–14 also issued under 26 

U.S.C. 987 and 989(c). 

Section 1.988–0 also issued under 26 

U.S.C. 988. 

Section 1.988–1 also issued under 26 

U.S.C. 988 and 989(c). 

Section 1.988–2 also issued under 26 

U.S.C. 988. 

Section 1.988–3 also issued under 26 

U.S.C. 988. 

Section 1.988–4 also issued under 26 

U.S.C. 988 and 989(c). 

Section 1.988–5 also issued under 26 

U.S.C. 988. 

* * * * * 

Section 1.989(a)–1 also issued under 26 

U.S.C. 989 and 989(c). 

* * * * * 

Section 1.1502–13 also issued under 26 

U.S.C. 250(c), 987, 989(c), and 1502. 

* * * * * 

■ 2. Section 1.861–9 is amended by: 

■ a. Revising paragraphs (g)(2)(ii)(A) 

introductory text, (g)(2)(ii)(A)(1), and 

(g)(2)(ii)(B). 

■ b. Adding paragraph (g)(2)(v). 

The revisions and addition read as 

follows: 

§ 1.861–9 Allocation and apportionment of 

interest expense and rules for asset-based 

apportionment. 

* * * * * 

(g) * * * 

(2) * * * 

(ii) * * * 

(A) Tax book value method. In the 

case of taxpayers using the tax book 

value method of apportionment, the 

following rules apply to determine the 

value of the assets of a qualified 

business unit (as defined in section 

989(a)) of a domestic corporation with a 

functional currency other than the 

dollar. 

(1) Section 987 QBU. In the case of a 

section 987 QBU (as defined in § 1.987– 

1(b)(3)), the tax book value is 

determined by applying the rules of 

paragraph (g)(2)(i) of this section and 

§ 1.861–9T(g)(3) to the beginning-of-year 

and end-of-year owner functional 

currency amount of assets. The 

beginning-of-year owner functional 

currency amount of assets is determined 

by reference to the owner functional 

currency amount of assets computed 

under § 1.987–4(d)(1)(i)(B) and (e) on 

the last day of the preceding taxable 

year. The end-of-year owner functional 

currency amount of assets is determined 

by reference to the owner functional 

currency amount of assets computed 

under § 1.987–4(d)(1)(i)(A) and (e) on 

the last day of the current taxable year. 

The beginning-of-year and end-of-year 

owner functional currency amount of 

assets, as so determined within each 

grouping, are then averaged as provided 

in paragraph (g)(2)(i) of this section. 

* * * * * 

(B) Fair market value method. In the 

case of taxpayers using the fair market 

value method of apportionment, the 

beginning-of-year and end-of-year fair 

market values of branch assets within 

each grouping is computed in dollars 

and averaged as provided in this 

paragraph (g)(2) and § 1.861–9T(g)(2). 

* * * * * 

(v) Applicability date. Generally, 

paragraph (g)(2)(ii)(A)(1) of this section 

applies to taxable years beginning after 

December 31, 2024. However, if 

pursuant to § 1.987–14(b), a taxpayer 

chooses to apply §§ 1.987–1 through 

1.987–14 to a taxable year before the 

first taxable year described in § 1.987– 

14(a)(1), then paragraph (g)(2)(ii)(A)(1) 

of this section applies to that taxable 

year and subsequent years. 

* * * * * 

§ 1.861–9T [Amended] 

■ 3. Section 1.861–9T is amended by 

removing and reserving paragraph 

(g)(2)(ii) and removing paragraph 

(g)(2)(vi). 


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78160 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

■ 4. Section 1.904–4 is amended by 

revising paragraph (c)(5)(iii)(B) to read 

as follows: 

§ 1.904–4 Separate application of section 

904 with respect to certain categories of 

income. 

* * * * * 

(c) * * * 

(5) * * * 

(iii) * * * 

(B) Section 987. For special rules 

relating to the allocation and 

apportionment of foreign income taxes 

to section 987 items, see § 1.987– 

6(b)(3)(iii). 

* * * * * 

■ 5. Section 1.985–5 is amended by: 

■ a. In paragraph (a) removing the 

language ‘‘§ 1.987–1(b)(2)’’ and adding 

the language ‘‘§ 1.987–1(b)(3)’’ in its 

place. 

■ b. In paragraph (d)(1)(i) removing the 

language ‘‘1.987–11’’ and adding the 

language ‘‘1.987–14’’ in its place. 

■ c. Revising the last sentence of 

paragraph (d)(2). 

■ d. Removing the second sentence of 

paragraph (e)(1). 

■ e. In paragraph (e)(4)(i) removing the 

language ‘‘1.987–11’’ and adding the 

language ‘‘1.987–14’’ in its place. 

■ f. In paragraph (e)(4)(i)(C) adding the 

language ‘‘, cumulative suspended 

section 987 loss determined under 

§ 1.987–11(b), and deferred section 987 

gain or loss determined under § 1.987– 

12’’ after ‘‘§ 1.987–4’’. 

■ g. In paragraph (e)(4)(ii) removing the 

language ‘‘subsequent years’’ and 

adding the language ‘‘subsequent 

taxable years’’ in its place. 

■ h. Revising the last sentence of 

paragraph (e)(4)(iii). 

■ i. Revising paragraphs (f) through (g). 

The revisions read as follows: 

§ 1.985–5 Adjustments required upon 

change in functional currency. 

* * * * * 

(d) * * * 

(2) * * * See §§ 1.987–5, 1.987–8, 

1.987–12, and 1.987–13 for the effect of 

a termination of a section 987 QBU that 

is subject to §§ 1.987–1 through 1.987– 

14. 

(e) * * * 

(4) * * * 

(iii) * * * See §§ 1.987–5, 1.987–8, 

1.987–12, and 1.987–13 for the 

consequences of a termination of a 

section 987 QBU that is subject to 

§§ 1.987–1 through 1.987–14. 

(f) Example. The provisions of this 

section are illustrated by the following 

example: 

(1) Facts. FC, a foreign corporation, is 

wholly owned by DC, a domestic 

corporation. The Commissioner granted 

permission to change FC’s functional 

currency from the British pound to the 

euro beginning January 1, year 2. The 

EUR/GBP exchange rate on December 

31, year 1, is Ö1:£0.50. 

(2) Analysis—(i) Determining new 

functional currency basis of property 

and liabilities. The following table 

shows how FC must convert the items 

on its balance sheet from the British 

pound to the euro on December 31, year 

1. 

TABLE 1 TO PARAGRAPH (f)(2)(i)—CONVERSION OF FC’S BALANCE SHEET ITEMS

GBP EUR 

Assets: 

Cash on hand ....................................................................................................................................... £40,000 Ö80,000 

Accounts Receivable ............................................................................................................................ £10,000 Ö20,000 

Inventory ............................................................................................................................................... £100,000 Ö200,000 

Ö100,000 Euro Bond (£100,000 historical basis) ................................................................................. £50,000 Ö100,000 

Fixed assets: 

Property ................................................................................................................................................ £200,000 Ö400,000 

Plant ...................................................................................................................................................... £500,000 Ö1,000,000 

Accumulated Depreciation ............................................................................................................ (£200,000) (Ö400,000) 

Equipment ............................................................................................................................................. £1,000,000 Ö2,000,000 

Accumulated Depreciation ............................................................................................................ (£400,000) (Ö800,000) 

Total Assets ........................................................................................................................... £1,300,000 Ö2,600,000 

Liabilities and Equity: 

Accounts Payable ................................................................................................................................. £50,000 Ö100,000 

Long-term Liabilities ............................................................................................................................. £400,000 Ö800,000 

Paid-in-Capital ...................................................................................................................................... £800,000 Ö1,600,000 

Retained Earnings ................................................................................................................................ £50,000 Ö100,000 

Total Liabilities and Equity ............................................................................................................ £1,300,000 Ö2,600,000 

(ii) Exchange gain or loss on section 

988 transactions. Under paragraph (b) of 

this section, FC will recognize a £50,000 

loss (£50,000 current value minus 

£100,000 historical basis) on the Euro 

Bond resulting from the change in 

functional currency because, after the 

change, the Euro Bond will no longer be 

an asset denominated in a nonfunctional currency. The amount of FC’s 

retained earnings on its December 31, 

year 1, balance sheet reflects the 

£50,000 loss on the Euro Bond. 

(g) Applicability date. Generally, this 

regulation applies to taxable years 

beginning after December 31, 2024. 

However, if pursuant to § 1.987–14(b), a 

taxpayer chooses to apply §§ 1.987–1 

through 1.987–14 to a taxable year 

before the first taxable year described in 

§ 1.987–14(a)(1), then this section 

applies to that taxable year and 

subsequent years. 

■ 6. Section 1.987–1, as proposed to be 

amended by 81 FR 88882 (December 8, 

2016), is further amended by: 

■ a. Revising paragraph (a); 

■ b. Revising the paragraph (b) heading, 

paragraph (b)(1) heading, paragraphs 

(b)(1)(i) and (ii), (2) through (5) and (7); 

■ c. Revising paragraphs (c) 

introductory text, (c)(1)(i) and 

(c)(1)(ii)(A) and removing paragraph 

(c)(1)(iii); 

■ d. Revising paragraphs (c)(2), (c)(3)(i) 

introductory text, (c)(3)(i)(A) through 

(D) and adding paragraph (c)(3)(i)(F); 

■ g. Revising paragraphs (c)(3)(ii) 

through (iv); 

■ h. Removing the introductory text in 

paragraph (d); 

■ i. Redesignating paragraphs (d)(1) 

through (3) as paragraphs (d)(1)(i) 

through (iii); 

■ j. Adding paragraph (d)(1) 

introductory text; 

■ k. Revising newly redesignated 

paragraphs (d)(1)(i) and (ii); 

■ l. Adding paragraph (d)(2); 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 78161 

■ m. Revising paragraph (e); 

■ n. Adding paragraph (g) introductory 

text; 

■ o. Revising paragraphs (g)(1) and (2); 

■ p. Revising paragraph (g)(3) heading 

and adding (g)(3) introductory text; 

■ q. Revising paragraph (g)(3)(i) heading 

and introductory text; 

■ r. Revising paragraphs (g)(3)(i)(A) 

through (D), (G), and (H); 

■ s. Adding paragraphs (g)(3)(i)(I) and 

(J); 

■ t. Revising paragraph (g)(3)(ii); 

■ u. Adding paragraph (g)(3)(iii); 

■ v. Revising paragraphs (g)(4) and (5); 

and 

■ w. Adding paragraph (h). 

The revisions and additions read as 

follows: 

§ 1.987–1 Scope, definitions, and special 

rules. 

(a) In general. Sections 1.987–1 

through 1.987–14 (the section 987 

regulations) provide rules for 

determining the taxable income or loss 

and earnings and profits of a taxpayer 

with respect to a section 987 QBU. 

Further, the section 987 regulations 

provide rules for determining the 

timing, amount, character, and source of 

section 987 gain or loss recognized with 

respect to a section 987 QBU. This 

section addresses the scope of the 

section 987 regulations and provides 

certain definitions, special rules, and 

procedures for making elections. 

Section 1.987–2 provides rules for 

attributing assets and liabilities and 

items of income, gain, deduction, and 

loss to an eligible QBU. It also provides 

rules regarding the translation of items 

transferred to a section 987 QBU. 

Section 1.987–3 provides rules for 

determining and translating the taxable 

income or loss of a taxpayer with 

respect to a section 987 QBU. Section 

1.987–4 provides rules for determining 

net unrecognized section 987 gain or 

loss. Section 1.987–5 provides rules 

regarding the recognition of section 987 

gain or loss. It also provides rules 

regarding the translation of items 

transferred from a section 987 QBU to 

its owner. Section 1.987–6 provides 

rules regarding the character and source 

of section 987 gain or loss. Section 

1.987–7A provides rules regarding 

partnerships (other than section 987 

aggregate partnerships) and S 

corporations that own section 987 QBUs 

and their partners and shareholders. 

Section 1.987–7B provides rules 

regarding section 987 aggregate 

partnerships. Section 1.987–7C provides 

transition rules that apply when a 

partnership becomes, or ceases to be, a 

section 987 aggregate partnership. 

Section 1.987–8 provides rules 

regarding the termination of a section 

987 QBU. Section 1.987–9 provides 

rules regarding the recordkeeping 

required under section 987. Section 

1.987–10 provides transition rules. 

Section 1.987–11 provides rules relating 

to suspended losses in connection with 

certain elections and the loss-to-theextent-of-gain rule. Section 1.987–12 

provides rules regarding when section 

987 gain or loss is deferred, as well as 

when such amounts are recognized. 

Section 1.987–13 provides rules relating 

to suspended section 987 loss of an 

owner with respect to a section 987 

QBU that terminates. Section 1.987–14 

provides the applicability date of the 

section 987 regulations. 

(b) Scope of section 987 and certain 

rules relating to QBUs—(1) Persons 

subject to section 987—(i) In general. 

Except as provided in paragraphs 

(b)(1)(ii) and (b)(6) of this section, any 

person (including an individual, 

corporation, partnership, S corporation, 

non-grantor trust, or estate) is subject to 

the section 987 regulations. 

(ii) Inapplicability to certain entities— 

(A) In general. Except as otherwise 

provided in paragraph (b)(1)(iii) of this 

section, section 987(3) and the section 

987 regulations do not apply to foreign 

corporations that either are not 

controlled foreign corporations or that 

are controlled foreign corporations in 

which no United States shareholders 

own (within the meaning of section 

958(a)) stock; foreign non-grantor trusts, 

foreign estates, or foreign partnerships 

(other than section 987 aggregate 

partnerships) if the aggregate beneficial 

interest or partnership interest of all 

U.S. persons that are beneficiaries or 

partners in the non-grantor trust, estate, 

or partnership is de minimis under 

paragraph (b)(1)(ii)(B) of this section; 

and individuals who are not United 

States persons. 

(B) De minimis interest in a foreign 

non-grantor trust, foreign estate, or 

foreign partnership—(1) General rules. 

The total partnership interests of all 

U.S. persons that own (within the 

meaning of section 958(a)) an interest in 

a partnership is de minimis if their 

aggregate partnership interests represent 

less than ten percent of the capital and 

less than ten percent of the profits of the 

partnership at all times during the 

partnership’s taxable year. The aggregate 

beneficial interests of all U.S. persons in 

a foreign non-grantor trust or foreign 

estate is de minimis if it constitutes less 

than ten percent of all of the beneficial 

interests. For purposes of this 

paragraph, a partner’s interest in a 

partnership or partnership item and a 

beneficiary’s interest in a non-grantor 

trust or estate is treated as including the 

interests of the partner or beneficiary 

and any related party (determined under 

section 267(b) or 707(b)). 

(2) Foreign partnerships. For purposes 

of this paragraph (b)(1)(ii)(B), a partner’s 

interest in the profits of a partnership is 

determined in accordance with the rules 

and principles of § 1.706–1(b)(4)(ii), and 

a partner’s interest in the capital of a 

partnership is determined in accordance 

with the rules and principles of § 1.706– 

1(b)(4)(iii). 

(3) Foreign trusts and estates. For 

purposes of this paragraph (b)(1)(ii)(B), 

a person holds a beneficial interest in a 

foreign trust or in a foreign estate if the 

person has the right to receive directly 

or indirectly (for example, through a 

nominee) a mandatory distribution from 

the foreign trust or estate, or may 

receive, directly or indirectly, a 

discretionary distribution from the 

foreign trust. For purposes of this 

section, a mandatory distribution means 

a distribution that is required to be 

made pursuant to the terms of the trust’s 

or estate’s governing documents. A 

discretionary distribution means a 

distribution that is made to a person at 

the discretion of the trustee or a person 

with a limited power of appointment of 

such trust. The aggregate beneficial 

interests of all U.S. persons in a foreign 

non-grantor trust or foreign estate will 

be treated as equaling 10 percent or 

more of the beneficial interest in a 

foreign trust or a foreign estate if— 

(i) The beneficiaries receive, directly 

or indirectly, only discretionary 

distributions from the trust and the fair 

market value of the currency or other 

property distributed, directly or 

indirectly, from the trust to such 

beneficiaries during the prior calendar 

year exceeds, in the aggregate, 10 

percent of the value of either all of the 

distributions made by the trust during 

that year or all of the assets held by the 

trust at the end of that year; 

(ii) The beneficiaries are entitled to 

receive, directly or indirectly, 

mandatory distributions from the trust 

or estate and the value of the 

beneficiaries’ aggregate interest in the 

trust or estate, as determined under 

section 7520, exceeds 10 percent of the 

value of all the assets held by the trust; 

or 

(iii) The beneficiaries are entitled to 

receive, directly or indirectly, 

mandatory distributions and may 

receive, directly or indirectly, 

discretionary distributions from the 

trust, and the value of the beneficiaries’ 

aggregate interest in the trust 

(determined as the sum of the fair 

market value of all of the currency or 

other property distributed from the trust 

at the discretion of the trustee during 


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the prior calendar year to the 

beneficiaries and the value of the 

beneficiaries’ interest in the trust as 

determined under section 7520 at the 

end of that year) exceeds either 10 

percent of the value of all distributions 

made by such trust during the prior 

calendar year or 10 percent of the value 

of all the assets held by the trust at the 

end of that year. 

* * * * * 

(2) Application of the section 987 

regulations to earnings and profits—(i) 

In general. The rules and principles of 

the section 987 regulations also apply to 

the determination of earnings and 

profits, and any elections that apply 

pursuant to the section 987 regulations 

also apply for purposes of determining 

earnings and profits. 

(ii) Timing. Earnings and profits are 

increased when section 987 gain is 

recognized and decreased when section 

987 loss is recognized. As a result, 

converting net unrecognized section 987 

gain or loss to deferred section 987 gain 

or loss or suspended section 987 loss 

does not affect earnings and profits 

because the amounts have not yet been 

recognized. 

(3) Definition of a section 987 QBU— 

(i) In general. For purposes of section 

987, a section 987 QBU is an eligible 

QBU that has a functional currency 

different from its owner. A section 987 

QBU also includes the assets and 

liabilities of an eligible QBU that are 

considered under paragraph (b)(5)(ii) of 

this section to be a section 987 QBU of 

a partner in a section 987 aggregate 

partnership. A section 987 QBU will 

continue to be treated as a section 987 

QBU of the owner until a sale or other 

termination of the section 987 QBU as 

described in § 1.987–8(b) and (c). See 

§ 1.985–1 for rules determining the 

functional currency of an eligible QBU. 

(ii) Section 987 QBU grouping 

election—(A) In general. Solely for 

purposes of section 987, an owner may 

elect to treat all section 987 QBUs with 

the same functional currency as a single 

section 987 QBU except to the extent 

provided in paragraph (b)(2)(ii)(B) of 

this section. 

(B) Special grouping rules for section 

987 QBUs owned indirectly through a 

section 987 aggregate partnership. An 

owner making the section 987 QBU 

grouping election treats all section 987 

QBUs with the same functional 

currency owned indirectly through a 

single section 987 aggregate partnership 

as a single section 987 QBU. However, 

an owner may not treat section 987 

QBUs as a single section 987 QBU if 

such QBUs are owned indirectly 

through different section 987 aggregate 

partnerships. Additionally, an owner 

may not treat section 987 QBUs that are 

owned both directly and indirectly 

through a section 987 aggregate 

partnership as a single section 987 QBU. 

(4) Definition of an eligible QBU—(i) 

In general. For purposes of section 987, 

an eligible QBU means a qualified 

business unit that is not subject to the 

United States dollar approximate 

separate transactions method rules of 

§ 1.985–3. 

(ii) Qualified business unit. For 

purposes of this paragraph (b)(4), a 

qualified business unit is defined in 

§ 1.989(a)–1(b), except that a 

corporation, partnership, section 987 

aggregate partnership, trust, estate, or 

DE is not itself a qualified business unit, 

but the activities of such entity may be 

a qualified business unit if they meet 

the requirements of § 1.989(a)–1(b)(1) 

and (b)(2)(ii). For example, if a 

corporation is solely engaged in 

activities that constitute a trade or 

business within the meaning of 

§ 1.989(a)–1(b)(2)(ii)(A), and the 

corporation maintains only one set of 

books and records, the activities (but not 

the corporation) are a qualified business 

unit. 

(5) Definition of an owner. For 

purposes of section 987, an owner is any 

person having direct or indirect 

ownership in an eligible QBU 

(including ownership through DEs). The 

term owner does not include an eligible 

QBU. For example, a section 987 QBU 

(QBU1) is not an owner of another 

section 987 QBU (QBU2) even if QBU1 

wholly owns the DE that owns QBU2. 

A person that is not subject to the 

section 987 regulations under paragraph 

(b)(1)(ii) of this section can meet the 

definition of an owner under this 

paragraph (b)(5) for purposes of 

applying the section 987 regulations to 

other persons. 

(i) Direct ownership. A person is a 

direct owner of an eligible QBU if the 

person is the owner for Federal income 

tax purposes of the assets and liabilities 

of the eligible QBU. 

(ii) Indirect ownership. A person that 

is a partner in a section 987 aggregate 

partnership and is allocated, under 

§ 1.987–7B, all or a portion of the assets 

and liabilities of an eligible QBU of such 

partnership is an indirect owner of the 

eligible QBU. 

* * * * * 

(7) Examples illustrating paragraph 

(b) of this section. The following 

examples illustrate the principles of this 

paragraph (b). The following facts are 

assumed for purposes of the examples. 

U.S. Corp is a domestic corporation, has 

the U.S. dollar as its functional 

currency, and uses the calendar year as 

its taxable year. Except as otherwise 

provided: Business A and Business B 

are eligible QBUs and have the euro and 

the Japanese yen, respectively, as their 

functional currencies; and DE1 and DE2 

are DEs, have no assets or liabilities, and 

conduct no activities. 

(i) Example 1—(A) Facts. U.S. Corp 

owns Business A and all of the interests 

in DE1. DE1 maintains a separate set of 

books and records that are kept in 

British pounds. DE1 owns pounds and 

all of the stock of a foreign corporation, 

FC. DE1 is liable to a lender on a pounddenominated obligation that was 

incurred to acquire the stock of FC. The 

FC stock, the pounds, and the liability 

incurred to acquire the FC stock are 

recorded on DE1’s separate books and 

records. DE1 has no other assets or 

liabilities and conducts no activities 

(other than holding the FC stock and 

pounds and servicing its liability). 

(B) Analysis—(1) Pursuant to 

paragraph (b)(5) of this section, U.S. 

Corp is the owner of Business A because 

it has direct ownership of Business A, 

an eligible QBU. Because Business A is 

an eligible QBU with a functional 

currency that is different from the 

functional currency of its owner, U.S. 

Corp, Business A is a section 987 QBU 

under paragraph (b)(3)(i) of this section. 

As a result, U.S. Corp and its section 

987 QBU, Business A, are subject to 

section 987. 

(2) Holding the stock of FC and 

pounds and servicing a liability does 

not constitute a trade or business within 

the meaning of § 1.989(a)–1(c). Because 

the activities of DE1 do not constitute a 

trade or business within the meaning of 

§ 1.989(a)–1(c), such activities are not an 

eligible QBU. In addition, pursuant to 

paragraph (b)(4)(ii) of this section, DE1 

itself is not an eligible QBU. As a result, 

neither DE1 nor its activities qualify as 

a section 987 QBU of U.S. Corp. 

Therefore, neither the activities of DE1 

nor DE1 itself is subject to section 987. 

For the foreign currency treatment of 

payments on DE1’s pound-denominated 

liability, see § 1.988–2(b). 

(ii) Example 2—(A) Facts. U.S. Corp 

owns all of the interests in DE1. DE1 

owns Business A and all of the interests 

in DE2. The only activities of DE1 are 

Business A activities and holding the 

interests in DE2. DE2 owns Business B 

and Business C. For purposes of this 

example, Business B does not maintain 

books and records that are separate from 

DE2. Instead, the activities of Business 

B are reflected on the books and records 

of DE2, which are maintained in 

Japanese yen. In addition, Business C 

has the U.S. dollar as its functional 

currency, maintains books and records 


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that are separate from the books and 

records of DE2, and is an eligible QBU. 

(B) Analysis—(1) Pursuant to 

paragraph (b)(4)(ii) of this section, DE1 

and DE2 are not eligible QBUs. 

Moreover, pursuant to paragraph (b)(5) 

of this section, DE1 is not the owner of 

the Business A, Business B, or Business 

C eligible QBUs, and DE2 is not the 

owner of the Business B or Business C 

eligible QBUs. Instead, pursuant to 

paragraph (b)(5) of this section, U.S. 

Corp is the owner of the Business A, 

Business B, and Business C eligible 

QBUs. 

(2) Because Business A and Business 

B are eligible QBUs with functional 

currencies that are different than the 

functional currency of U.S. Corp, 

Business A and Business B are section 

987 QBUs under paragraph (b)(3)(i) of 

this section. 

(3) The Business C eligible QBU has 

the same functional currency as U.S. 

Corp, the U.S. dollar. Therefore, the 

Business C eligible QBU is not a section 

987 QBU under paragraph (b)(3)(i) of 

this section. 

(iii) Example 3—(A) Facts. U.S. Corp 

owns all of the interests in DE1. DE1 

owns Business A and Business B. For 

purposes of this example, assume 

Business B has the euro as its functional 

currency. 

(B) Analysis—(1) Pursuant to 

paragraph (b)(4)(ii) of this section, DE1 

is not an eligible QBU. Moreover, 

pursuant to paragraph (b)(5) of this 

section, DE1 is not the owner of the 

Business A or Business B eligible QBUs. 

Instead, pursuant to paragraph (b)(5) of 

this section, U.S. Corp is the owner of 

the Business A and Business B eligible 

QBUs. 

(2) Business A and Business B 

constitute two separate eligible QBUs, 

each with the euro as its functional 

currency. Accordingly, Business A and 

Business B are section 987 QBUs of U.S. 

Corp under paragraph (b)(3)(i) of this 

section. U.S. Corp may elect to treat 

Business A and Business B as a single 

section 987 QBU pursuant to paragraph 

(b)(3)(ii) of this section. If such election 

is made, pursuant to paragraph (b)(5) of 

this section, U.S. Corp would be the 

owner of the Business AB section 987 

QBU that would include the activities of 

both the Business A section 987 QBU 

and the Business B section 987 QBU. In 

addition, pursuant to paragraph (b)(5) of 

this section, DE1 would not be treated 

as the owner of the Business AB section 

987 QBU. 

(iv) Example 4—(A) Facts. U.S. Corp 

and FC, an unrelated foreign 

corporation, are the only partners in P, 

a foreign partnership with the euro as its 

functional currency. P owns DE1 and 

Business A. DE1 owns Business B. 

(B) Analysis—(1) P is not a section 

987 aggregate partnership under 

paragraph (h) of this section because its 

partners are not related to each other 

within the meaning of sections 267(b) 

and 707(b). Therefore, pursuant to 

paragraph (b)(5) of this section and 

§ 1.987–7A(b), P is the owner of 

Business A because it is the owner of 

the assets and liabilities of Business A. 

Because Business A is an eligible QBU 

with the same functional currency as its 

owner, P (the euro), Business A is not 

a section 987 QBU under paragraph 

(b)(3)(i) of this section. 

(2) Pursuant to paragraph (b)(4)(ii) of 

this section, DE1 is not an eligible QBU. 

Moreover, pursuant to paragraph (b)(5) 

of this section and § 1.987–7A(b), P 

(rather than DE1) is the owner of the 

Business B eligible QBU. The Business 

B eligible QBU has a different functional 

currency than P. Therefore, the Business 

B eligible QBU is a section 987 QBU 

under paragraph (b)(3)(i) of this section. 

As a result, P and its section 987 QBU, 

Business B, are subject to section 987. 

(v) Example 5—(A) Facts. U.S. Corp 

owns all of the interests in DE1. DE1 

owns Business A and all of the interests 

in DE2. DE2 owns Business B and all of 

the interests in DE3, a DE. DE3 owns 

Business C, which is an eligible QBU 

with the Mexican peso as its functional 

currency. 

(B) Analysis. Pursuant to paragraph 

(b)(4)(ii) of this section, DE1, DE2, and 

DE3 are not eligible QBUs. Pursuant to 

paragraph (b)(5) of this section, an 

eligible QBU is not an owner of another 

eligible QBU. Accordingly, the Business 

A eligible QBU is not the owner of the 

Business B eligible QBU or the Business 

C eligible QBU, and the Business B 

eligible QBU is not the owner of the 

Business C eligible QBU. Instead, 

pursuant to paragraph (b)(5) of this 

section, U.S. Corp is the owner of the 

Business A, Business B, and Business C 

eligible QBUs. Because each of the 

Business A, Business B, and Business C 

eligible QBUs has a different functional 

currency than U.S. Corp, such eligible 

QBUs are section 987 QBUs of U.S. Corp 

under paragraph (b)(3)(i) of this section. 

(c) Exchange rates. Solely for 

purposes of section 987, the spot rate, 

the yearly average exchange rate, and 

the historic rate are determined as 

provided in paragraphs (c)(1) through 

(3) of this section. 

(1) Spot rate—(i) In general. Except as 

otherwise provided in this section, the 

spot rate means the rate determined 

under the rules of § 1.988–1(d)(1), (2), 

and (4) on the relevant date. 

(ii) Election to use a spot rate 

convention—(A) In general—spot rate 

convention. An owner may elect to use 

a spot rate convention that reasonably 

approximates the spot rate determined 

in paragraph (c)(1)(i) of this section. A 

spot rate convention may be based on 

the spot rate at the beginning of a 

reasonable period, the spot rate at the 

end of a reasonable period, the average 

of spot rates for a reasonable period, or 

spot and forward rates for a reasonable 

period. For this purpose, a reasonable 

period may not exceed three months. 

For example, in lieu of the spot rate 

determined in paragraph (c)(1)(i) of this 

section, the spot rate for all transactions 

during a monthly period may be 

determined pursuant to one of the 

following conventions: the spot rate at 

the beginning of the current month or at 

the end of the preceding month; the 

monthly average of daily spot rates for 

the current or preceding month; or an 

average of the beginning and ending 

spot rates for the current or preceding 

month. Similarly, in lieu of the spot rate 

determined in paragraph (c)(1)(i) of this 

section, the spot rate may be determined 

pursuant to an average of the spot rate 

and the 30-day forward rate on a day of 

the preceding month. Use of a spot rate 

convention that is consistent with the 

convention used for financial 

accounting purposes is generally 

presumed to reasonably approximate 

the rate in paragraph (c)(1)(i) of this 

section. However, the Commissioner 

may prescribe the spot rate as 

determined in paragraph (c)(1)(i) of this 

section or an appropriate spot rate 

pursuant to this paragraph (c)(1)(ii) if 

the Commissioner determines that the 

use of the convention would not clearly 

reflect income based on the facts and 

circumstances available at the time of 

the election. The election or revocation 

of a spot rate convention does not 

change the spot rate with respect to any 

day of a taxable year before the election 

or revocation becomes effective. See 

paragraph (g) of this section for rules 

relating to section 987 elections. 

* * * * * 

(2) Yearly average exchange rate. For 

purposes of section 987, the yearly 

average exchange rate is a rate that 

represents an average exchange rate for 

the taxable year (or, if the section 987 

QBU existed for less than the full 

taxable year, the portion of the year 

during which the 987 QBU existed) 

computed under any reasonable 

method. For example, an owner may 

determine the yearly average exchange 

rate based on a daily, monthly, or 

quarterly averaging convention, whether 

weighted or unweighted, and may take 


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into account forward rates for a period 

not to exceed three months. Use of an 

averaging convention that is consistent 

with the convention used for financial 

accounting purposes is generally 

presumed to be a reasonable method. 

However, the Commissioner may 

prescribe an appropriate yearly average 

exchange rate if the Commissioner 

determines that the use of the 

convention would not have been 

expected to clearly reflect income based 

on the facts and circumstances available 

at the time of the election. 

(3) Historic rate—(i) In general. 

Except as otherwise provided in the 

section 987 regulations, the historic rate 

is determined as described in 

paragraphs (c)(3)(i)(A) through (F) of 

this section. In a taxable year in which 

an annual recognition election is in 

effect (and a current rate election is not 

in effect), paragraphs (c)(3)(i)(B) and (C) 

of this section are applied as if § 1.987– 

3(c)(2)(iv)(A) and (B) were applicable. 

(A) Assets generally. In the case of an 

asset other than inventory that is 

acquired by a section 987 QBU 

(including through a transfer), the 

historic rate is the yearly average 

exchange rate applicable to the year of 

acquisition. 

(B) Inventory under the simplified 

inventory method. In the case of 

inventory with respect to which a 

taxpayer uses the simplified inventory 

method described in § 1.987– 

3(c)(2)(iv)(A), the historic rate for 

inventory accounted for under the lastin, first-out (LIFO) method of accounting 

is the yearly average exchange rate 

applicable to the year in which the 

inventory’s LIFO layer arose. The 

historic rate for all other inventory of 

such a taxpayer is the yearly average 

exchange rate for the taxable year for 

which the determination of the historic 

rate for such inventory is relevant. 

(C) Inventory under the historic 

inventory method. In the case of 

inventory with respect to which a 

taxpayer has elected under § 1.987– 

3(c)(2)(iv)(B) to use the historic 

inventory method, each inventoriable 

cost with respect to such inventory may 

have a different historic rate. The 

historic rate for each inventoriable cost 

is the exchange rate at which such item 

would be translated under § 1.987–3 if 

it were not an inventoriable cost. 

(D) Liabilities generally. In the case of 

a liability that is incurred or assumed by 

a section 987 QBU, the historic rate is 

the yearly average exchange rate 

applicable to the year the liability is 

incurred or assumed. 

* * * * * 

(F) Determination of historic rates 

after revocation of current rate election. 

Except as provided in paragraph 

(c)(3)(i)(B) of this section with respect to 

non-LIFO inventory subject to the 

simplified inventory method, if a 

current rate election is revoked or 

otherwise ceases to be in effect, the 

historic rate of all historic items that 

were properly reflected on the books 

and records of a section 987 QBU under 

§ 1.987–2(b) on the last day of the last 

taxable year to which the current rate 

election was in effect is the spot rate 

applicable to that day. 

(ii) [Reserved] 

(iii) Date placed in service for 

depreciable or amortizable property. In 

the case of depreciable or amortizable 

property, an owner may determine the 

historic rate by reference to the date 

such property is placed in service by the 

section 987 QBU rather than the date 

the property was acquired, provided 

that this convention is consistently 

applied for all such property 

attributable to that section 987 QBU. 

(iv) Changed functional currency. In 

the case of a section 987 QBU or an 

owner of a section 987 QBU that 

previously changed its functional 

currency, § 1.985–5(d)(1)(ii)(A) and 

(e)(4)(i)(A), respectively, are taken into 

account in determining the historic rate 

for an item reflected on the balance 

sheet of the section 987 QBU 

immediately before the year of change. 

(d) Marked item—(1) In general. 

Except as provided in paragraph (d)(2) 

of this section, a marked item is an asset 

(marked asset) or liability (marked 

liability) that is properly reflected on the 

books and records of a section 987 QBU 

under § 1.987–2(b) and that— 

(i) Is denominated in, or determined 

by reference to, the functional currency 

of the section 987 QBU, is not a section 

988 transaction of the section 987 QBU, 

and would be a section 988 transaction 

if such item were held or entered into 

directly by the owner of the section 987 

QBU; or 

(ii) Is a prepaid expense or a liability 

for an advance payment of unearned 

income, in either case having an original 

term of one year or less on the date the 

prepaid expense or liability for an 

advance payment of unearned income 

arises. 

* * * * * 

(2) Current rate election. A taxpayer 

may elect to treat all assets and 

liabilities that are properly reflected on 

the books and records of a section 987 

QBU under § 1.987–2(b) as marked 

items (a current rate election). See 

§ 1.987–11(c) for rules suspending 

section 987 loss if a current rate election 

is in effect. 

(e) Historic item. A historic item is an 

asset (historic asset) or liability (historic 

liability) that is properly reflected on the 

books and records of a section 987 QBU 

under § 1.987–2(b) and that is not a 

marked item. 

* * * * * 

(g) Elections. This paragraph (g) 

provides rules for making and revoking 

elections under the section 987 

regulations (the section 987 elections). A 

section 987 election is made for the 

owner and for a taxable year and applies 

to every section 987 QBU owned by the 

owner while the election is in effect. 

Once made, a section 987 election 

remains in effect until revoked. 

(1) Persons making the election. A 

section 987 election is made or revoked 

by the authorized person. The 

authorized person is described in 

paragraph (g)(1)(i), (ii), (iii), or (iv) of 

this section. If there are multiple 

controlling domestic shareholders, 

references to ‘‘the authorized person’’ 

refer to all authorized persons. 

(i) United States persons. Except as 

provided in paragraph (g)(1)(iii) or (iv) 

of this section, if the owner of a section 

987 QBU is a United States person, the 

election is made or revoked by the 

owner. 

(ii) CFCs and other foreign entities— 

(A) In general. Except as provided in 

paragraph (g)(1)(iv) of this section, if the 

owner of a section 987 QBU is a 

controlled foreign corporation or other 

foreign entity, the election is made or 

revoked by the controlling domestic 

shareholders of the controlled foreign 

corporation or other foreign entity. 

(B) Controlling domestic shareholders. 

For purposes of this paragraph (g), the 

controlling domestic shareholders of a 

controlled foreign corporation are 

determined under § 1.964–1(c)(5)(i) and 

the controlling domestic shareholders of 

a foreign entity other than a controlled 

foreign corporation are determined by 

applying the rules and principles of 

§ 1.964–1(c)(5)(i) as if the foreign entity 

were a controlled foreign corporation 

and, if the entity is a trust or estate, the 

beneficial interests in the entity were 

stock. 

(iii) Consolidated groups. If the owner 

is a member of a consolidated group, see 

§ 1.1502–77. 

(iv) Partnerships. If the owner of a 

section 987 QBU is a partnership, the 

election is made or revoked by the 

partnership. For a partnership that is 

not otherwise required to file a 

partnership return, see § 1.6031(a)– 

1(b)(5) for elections that can only be 

made by a partnership under section 

703. 

(2) Consistency rules—(i) 

Consolidated groups. A section 987 

election is made or revoked by a 


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consolidated group and applies to all 

members of the group. Therefore, the 

same section 987 elections will be in 

effect for all members of a consolidated 

group at all times. If a corporation 

becomes a member of a consolidated 

group, it is deemed to make or revoke 

any section 987 election as necessary to 

be consistent with the consolidated 

group. If a corporation ceases to be a 

member of a consolidated group and 

does not join another group, its section 

987 elections are unaffected by its 

departure from the group. 

(ii) United States shareholders, CFCs, 

foreign partnerships, foreign nongrantor trusts, and foreign estates. If the 

authorized person makes or revokes an 

election on behalf of any person 

(including the authorized person) 

described in paragraphs (g)(2)(ii)(A) 

through (D) of this section (the section 

987 electing group), then the election 

must be made or revoked on behalf of 

all members of the section 987 electing 

group for the first taxable year of each 

entity that ends with or within the 

taxable year of the United States person 

described in paragraph (g)(2)(ii)(A) of 

this section in which the election or 

revocation became effective. If an entity 

that was not previously a member of the 

section 987 electing group becomes a 

member (for example, upon formation 

or acquisition), it is deemed to make or 

revoke any section 987 election as 

necessary to be consistent with the other 

members (without regard to the 

requirements of paragraph (g)(3)(ii) of 

this section). The following persons are 

described in this paragraph (g)(2)(ii): 

(A) A United States person (the 

relevant United States person). 

(B) Each controlled foreign 

corporation in which the relevant 

United States person owns (within the 

meaning of section 958(a)) more than 

fifty percent (by vote or value). 

(C) Each foreign partnership in which 

the relevant United States person owns 

(directly or indirectly) more than fifty 

percent of the capital and profits 

interest. 

(D) Each foreign non-grantor trust or 

estate in which the relevant United 

States person’s beneficial interests in 

the trust or estate exceed fifty percent. 

(iii) Section 381(a) transactions. If a 

corporation (acquiring corporation) 

acquires the assets of another 

corporation in a transaction described in 

section 381(a), the acquiring 

corporation’s election status applies to 

all section 987 QBUs owned by the 

acquiring corporation after the 

transaction. 

(3) Manner of making or revoking 

elections. The section 987 elections 

must be made in accordance with this 

paragraph (g)(3), except as provided in 

forms and instructions or other 

guidance as provided by the Secretary. 

(i) Statement must be attached to a 

return. An authorized person that makes 

or revokes a section 987 election in 

accordance with this paragraph (g) must 

attach to its return the statement 

described in this paragraph (g)(3)(i). 

Each statement must include an 

identification of the election that is 

made or revoked; the name, address, 

and functional currency of each owner 

(or if the owner is a member of a 

consolidated group, the common parent 

of the consolidated group) for which the 

election is made or revoked; and the 

name, address, functional currency, and 

owner of each section 987 QBU owned 

by each owner. 

(A) Section 987 grouping election. 

The election provided in paragraph 

(b)(3)(ii) of this section is titled ‘‘Section 

987 Grouping Election Under § 1.987– 

1(b)(3)(ii)’’ and must provide the name, 

address, and functional currency of each 

section 987 QBU of each owner that is 

being grouped together. 

(B) Election to use a spot rate 

convention. An election under 

paragraph (c)(1)(ii) of this section to use 

a spot rate convention is titled ‘‘Section 

987 Election to Use a Spot Rate 

Convention Under § 1.987–1(c)(1)(ii)’’ 

and must describe the convention. 

(C) [Reserved] 

(D) Election to use the historic 

inventory method. An election under 

§ 1.987–3(c)(2)(iv)(B) to use the historic 

inventory method is titled ‘‘Section 987 

Election to Use the Historic Inventory 

Method Under § 1.987–3(c)(2)(iv)(B).’’ 

* * * * * 

(G) Annual recognition election. An 

annual recognition election under 

§ 1.987–5(b)(2) is titled ‘‘Section 987 

Election for Annual Recognition Under 

§ 1.987–5(b)(2).’’ 

(H) Current rate election. A current 

rate election under paragraph (d)(2) of 

this section is titled ‘‘Section 987 

Election to Use Current Rates Under 

§ 1.987–1(d)(2).’’ 

(I) [Reserved] 

(J) Elections related to the transition 

rules. The elections provided in 

§ 1.987–10 are made by reporting the 

election on the statement described in 

§ 1.987–10(k). 

(ii) Election requirements—(A) 

Consent required. Except as provided in 

paragraph (g)(3)(ii)(B) or (C) of this 

section, a section 987 election may not 

be made or revoked without the consent 

of the Commissioner. A copy of the 

consent must be attached to the 

statement described in paragraph 

(g)(3)(i) of this section. For purposes of 

this paragraph (g)(3)(ii), the 

Commissioner’s consent may be 

obtained only with a ruling or 

administrative pronouncement. See 

Revenue Procedure 2023–1, I.R.B. 2023– 

1 (or superseding guidance). 

(B) Current rate election and annual 

recognition election. Except as provided 

in paragraph (g)(3)(ii)(C) of this section, 

the authorized person may make a 

current rate election or an annual 

recognition election without the 

Commissioner’s consent by filing the 

statement prescribed in paragraph 

(g)(3)(i) of this section with the Internal 

Revenue Service in accordance with the 

prescribed form or its instructions (or 

other guidance) on or before the first 

day of the taxable year to which the 

election applies, and attaching a copy of 

the statement to its return. Once made, 

a current rate election or annual 

recognition election may not be revoked 

without the Commissioner’s consent for 

any taxable year beginning within 60 

months of the first day of the taxable 

year for which it was made. Once 

revoked, a new current rate election or 

annual recognition election may not be 

made without the Commissioner’s 

consent for any taxable year beginning 

within 60 months of the first day of the 

taxable year for which it was revoked. 

(C) First year to which the section 987 

regulations apply. The authorized 

person may make a section 987 election 

without the consent of the 

Commissioner on its original, timely 

filed (including extensions) return for 

the first taxable year of the owner in 

which both— 

(1) The section 987 regulations apply 

(other than by applying solely to one or 

more terminating QBUs pursuant to 

§ 1.987–14(a)(2)); and 

(2) Either the owner or any member of 

its consolidated group or section 987 

electing group is the owner of a section 

987 QBU. 

(iii) Elections made under the 2016 

and 2019 section 987 regulations. Each 

section 987 election must be made by 

the authorized person under the rules of 

this section without regard to whether 

the election was in effect under the 2016 

and 2019 final regulations or under 

prior § 1.987–8T. In the first taxable year 

in which the section 987 regulations 

apply, any elections made under the 

2016 and 2019 final regulations cease to 

be effective. 

(4) No change in method of 

accounting. An election under section 

987 is not governed by the general rules 

concerning changes in methods of 

accounting. 

(5) Principles of § 1.964–1(c)(3) 

applicable to section 987 elections. 

Except as otherwise provided in this 


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paragraph (g), if the authorized person 

makes or revokes a section 987 election 

on behalf of a controlled foreign 

corporation or other foreign entity, the 

authorized person must make or revoke 

the section 987 election in accordance 

with the rules and principles of § 1.964– 

1(c)(3) (determined by treating the 

foreign entity as a foreign corporation if 

it is not one). 

(h) Definitions. The definitions in this 

paragraph (h) apply for purposes of the 

section 987 regulations. 

1991 proposed regulations. The term 

1991 proposed regulations means 

proposed sections 1.987–1 through 

1.987–3 as contained in 56 FR 48457– 

01 (September 25, 1991). 

2006 proposed regulations. The term 

2006 proposed regulations means: 

proposed sections 1.861– 

9T(g)(2)(ii)(A)(1) and (g)(2)(vi); 1.985–5; 

1.987–1 through 1.987–11; 1.988– 

1(a)(3), (a)(4), (a)(10)(ii), and (i); 1.988– 

4(b)(2); and 1.989(a)–1(b)(2)(i), and 

(b)(4) as contained in 71 FR 52876–01 

(September 7, 2006). 

2016 and 2019 section 987 

regulations. The term 2016 and 2019 

section 987 regulations means the 

following regulations: 

(i) Sections 1.861–9T(g)(2)(ii)(A)(1) 

and (g)(2)(vi); 1.985–5; 1.987–1 through 

1.987–10; 1.988–1(a)(4), (a)(10)(ii), and 

(i); 1.988–4(b)(2); and 1.989(a)–1(b)(2)(i), 

(b)(4), (d)(3), and (d)(4), as contained in 

26 CFR in part 1 in effect on April 1, 

2017. 

(ii) Sections 1.987–2T(c)(9), 1.987– 

4T(c)(2) and (f), and 1.987–7T, as 

contained in 26 CFR in part 1 in effect 

on April 1, 2017 (until they were 

revoked on May 13, 2019). 

(iii) Sections 1.987–2(c)(9) and 1.987– 

4(c)(2) and (f), as contained in 26 CFR 

in part 1 in effect on April 1, 2020 

(beginning on May 13, 2019). 

(iv) Sections 1.987–1T (other than 

§§ 1.987–1T(g)(2)(i)(B) and (g)(3)(i)(H)), 

1.987–3T, 1.987–6T, 1.988–1T, and 

1.988–2T(i), as contained in 26 CFR in 

part 1 in effect on April 1, 2017 (until 

they expired on December 6, 2019). 

Adjusted balance sheet. The term 

adjusted balance sheet means a tax 

basis balance sheet in the functional 

currency of the eligible QBU, 

determined by— 

(i) Preparing a balance sheet for the 

relevant date from the eligible QBU’s 

books and records (within the meaning 

of § 1.989(a)–1(d)) recorded in the 

eligible QBU’s functional currency and 

showing all assets and liabilities 

attributable to the eligible QBU as 

provided in § 1.987–2(b) (the 

preliminary balance sheet); and 

(ii) Making adjustments necessary to 

conform the items reflected on the 

preliminary balance sheet to United 

States tax accounting principles. 

Annual recognition election. The term 

annual recognition election has the 

meaning provided in § 1.987–5(b)(2). 

Authorized person. The term 

authorized person has the meaning 

provided in paragraph (g)(1) of this 

section. 

Combination. The term combination 

has the meaning provided in § 1.987– 

2(c)(9)(i). 

Combined QBU. The term combined 

QBU has the meaning provided in 

§ 1.987–2(c)(9)(i). 

Combining QBU. The term combining 

QBU has the meaning provided in 

§ 1.987–2(c)(9)(i). 

Consolidated group. The term 

consolidated group has the meaning 

provided in § 1.1502–1(h). 

Controlled group. A controlled group 

means all persons with the relationships 

to each other specified in sections 

267(b) or 707(b). 

Controlled foreign corporation. The 

term controlled foreign corporation (or 

CFC) has the meaning provided in 

section 957. 

Cumulative suspended section 987 

loss. The term cumulative suspended 

section 987 loss has the meaning 

provided in § 1.987–11(b). 

Current rate election. The term 

current rate election has the meaning 

provided in § 1.987–1(d)(2). 

Deferral event. The term deferral 

event has the meaning provided in 

§ 1.987–12(g)(1). 

Deferred section 987 gain or loss. The 

term deferred section 987 gain or loss 

has the meaning provided in § 1.987– 

12(b)(2). 

Disregarded entity. The term 

disregarded entity (or DE) means an 

entity disregarded as an entity separate 

from its owner for Federal income tax 

purposes, including an entity described 

in § 301.7701–2(c)(2), a qualified 

subchapter S subsidiary under section 

1361(b)(3), a qualified REIT subsidiary 

within the meaning of section 856(i)(2), 

and a wholly-owned grantor trust. 

Disregarded transactions. The term 

disregarded transactions has the 

meaning provided in § 1.987–2(c)(2)(ii). 

ECI. The term ECI means income that 

is effectively connected with the 

conduct of a trade or business within 

the United States. 

Eligible pretransition method. The 

term eligible pretransition method has 

the meaning provided in § 1.987– 

10(e)(4). 

Eligible QBU. The term eligible QBU 

has the meaning provided in paragraph 

(b)(4) of this section. 

Historic asset. The term historic asset 

has the meaning provided in paragraph 

(e) of this section. 

Historic item. The term historic item 

has the meaning provided in paragraph 

(e) of this section. 

Historic liability. The term historic 

liability has the meaning provided in 

paragraph (e) of this section. 

Historic rate. The term historic rate 

has the meaning provided in paragraph 

(c)(3) of this section. 

Liability. The term liability means the 

amount of a liability on the adjusted 

balance sheet (or the amount that would 

be on the adjusted balance sheet if an 

adjusted balance sheet were prepared 

for that day). 

Loss-to-the-extent-of-gain rule. The 

term loss-to-the-extent-of-gain rule has 

the meaning provided in § 1.987– 

11(e)(1). 

Marked asset. The term marked asset 

has the meaning provided in paragraph 

(d) of this section. 

Marked item. The term marked item 

has the meaning provided in paragraph 

(d) of this section. 

Marked liability. The term marked 

liability has the meaning provided in 

paragraph (d) of this section. 

Net accumulated unrecognized 

section 987 gain or loss. The term net 

accumulated unrecognized section 987 

gain or loss has the meaning provided 

in § 1.987–4(c). 

Net unrecognized section 987 gain or 

loss. The term net unrecognized section 

987 gain or loss has the meaning 

provided in § 1.987–4(b). 

Non-grantor trust. The term nongrantor trust means a trust (or the 

portion of a trust) that is not a grantor 

trust. A grantor trust is a trust with 

respect to which one or more persons 

are treated as owners of all or a portion 

of the trust under sections 671 through 

679. If only a portion of a trust is treated 

as owned by a person, that portion is a 

grantor trust with respect to that person. 

Original deferral QBU. The term 

original deferral QBU has the meaning 

provided in § 1.987–12(b). 

Original deferral QBU owner. The 

term original deferral QBU owner has 

the meaning provided in § 1.987– 

12(g)(3). 

Original suspended loss QBU owner. 

The term original suspended loss QBU 

owner has the meaning provided in 

§ 1.987–13(l)(1). 

Outbound loss event. The term 

outbound loss event has the meaning 

provided in § 1.987–13(h)(2). 

Outbound loss QBU. The term 

outbound loss QBU has the meaning 

provided in § 1.987–13(h)(1). 

Outbound section 987 loss. The term 

outbound section 987 loss has the 

meaning provided in § 1.987–13(h)(4). 

Owner. The term owner has the 

meaning provided in paragraph (b)(5) of 

this section. 


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Prior § 1.987–1. The term prior 

§ 1.987–1 means § 1.987–1, as contained 

in 26 CFR in part 1 in effect on April 

1, 2017. 

Prior § 1.987–4. The term prior 

§ 1.987–4 means § 1.987–4, as contained 

in 26 CFR in part 1 in effect on April 

1, 2017. 

Prior § 1.987–5. The term prior 

§ 1.987–5 means § 1.987–5, as contained 

in 26 CFR in part 1 in effect on April 

1, 2017. 

Prior § 1.987–8T. The term prior 

§ 1.987–8T means § 1.987–8T, as 

contained in 26 CFR in part 1 in effect 

on April 1, 2017. 

Prior § 1.987–10. The term prior 

§ 1.987–10 means § 1.987–10, as 

contained in 26 CFR in part 1 in effect 

on April 1, 2017. 

Prior § 1.987–12. The term prior 

§ 1.987–12 means § 1.987–12, as 

contained in 26 CFR in part 1 in effect 

on April 1, 2020. 

Prior § 1.987–12T. The term prior 

§ 1.987–12T means § 1.987–12T, as 

contained in 26 CFR in part 1 in effect 

on April 1, 2017. 

Recognition grouping. The term 

recognition grouping has the meaning 

provided in § 1.987–11(f). 

Remittance. The term remittance has 

the meaning provided in § 1.987–5(c). 

S corporation. The term S corporation 

has the meaning provided in section 

1361(a)(1). 

Section 904 category. The term 

section 904 category means a separate 

category of income described in § 1.904– 

5(a)(4)(v). 

Section 987 aggregate partnership—(i) 

In general. The term section 987 

aggregate partnership means a 

partnership if both: 

(A) All of the interests in partnership 

capital and profits are owned, directly 

or indirectly, by persons related to each 

other within the meaning of sections 

267(b) or 707(b). For this purpose, 

ownership of an interest in partnership 

capital or profits is determined in 

accordance with the rules for 

constructive ownership provided in 

section 267(c), other than section 

267(c)(3). 

(B) The partnership has one or more 

eligible QBUs, at least one of which 

would be a section 987 QBU with 

respect to a partner if the partner owned 

the eligible QBU directly. 

(ii) Section 987 QBU of a partner. The 

assets and liabilities of an eligible QBU 

owned through a section 987 aggregate 

partnership and allocated to a partner 

under the principles of § 1.987–7B are 

considered to be a section 987 QBU of 

such partner if the partner has a 

functional currency different from that 

of the eligible QBU. 

(iii) Certain unrelated partners 

disregarded. In determining whether a 

partnership is a section 987 aggregate 

partnership, the interest of an unrelated 

partner is disregarded if the acquisition 

of such interest has as a principal 

purpose the avoidance of treatment as a 

section 987 aggregate partnership. 

(iv) Cross-reference. See § 1.987– 

7A(a)(2) for a rule providing that 

references to ‘‘partnerships’’ in the 

section 987 regulations are treated as 

references to partnerships that are not 

section 987 aggregate partnerships, 

except where the context otherwise 

requires. 

Section 987 electing group. The term 

section 987 electing group has the 

meaning provided in paragraph (g)(2)(ii) 

of this section. 

Section 987 elections. The term 

section 987 elections has the meaning 

provided in paragraph (g) of this 

section. 

Section 987 QBU. The term section 

987 QBU has the meaning provided in 

paragraph (b)(3) of this section. 

Section 987 regulations. The term 

section 987 regulations has the meaning 

provided in paragraph (a) of this 

section. 

Section 987 taxable income or loss. 

The term section 987 taxable income or 

loss has the meaning provided in 

§ 1.987–3(a). 

Separated QBU. The term separated 

QBU has the meaning provided in 

§ 1.987–2(c)(9)(iii). 

Separation. The term separation has 

the meaning provided in § 1.987– 

2(c)(9)(iii). 

Separation fraction. In the case of a 

separated QBU, the term separation 

fraction means a fraction, the numerator 

of which is the aggregate adjusted basis 

of the gross assets properly reflected on 

the books and records of the separated 

QBU immediately after the separation, 

and the denominator of which is the 

aggregate adjusted basis of the gross 

assets properly reflected on the books 

and records of all separated QBUs 

immediately after the separation. 

Separating QBU. The term separating 

QBU has the meaning provided in 

§ 1.987–2(c)(9)(iii). 

Spot rate. The term spot rate has the 

meaning provided in paragraph (c)(1) of 

this section. 

Successor deferral QBU. The term 

successor deferral QBU has the meaning 

provided in § 1.987–12(g)(2). 

Successor deferral QBU owner. The 

term successor deferral QBU owner has 

the meaning provided in § 1.987– 

12(c)(1). 

Successor suspended loss QBU. The 

term successor suspended loss QBU has 

the meaning provided in § 1.987– 

13(l)(2). 

Successor suspended loss QBU owner. 

The term successor suspended loss QBU 

owner has the meaning provided in 

§ 1.987–13(l)(3). 

Suspended section 987 loss. The term 

suspended section 987 loss means 

section 987 loss that is subject to the 

limitations on recognition described in 

§ 1.987–11(e). See §§ 1.987–10(e)(5), 

1.987–11(c) and (d), 1.987–12(c), and 

1.987–13(h) for rules regarding when 

net unrecognized section 987 loss or 

deferred section 987 loss becomes 

suspended section 987 loss. 

Tentative tested income group. The 

term tentative tested income group has 

the meaning provided in § 1.987– 

6(b)(2)(i)(D)(1). 

Terminating QBU. The term 

terminating QBU means a section 987 

QBU, if both—(i) The section 987 QBU 

terminates on any date on or after 

November 9, 2023, or the section 987 

QBU terminates as a result of an entity 

classification election made under 

§ 301.7701–3 that is filed on or after 

November 9, 2023, and that is effective 

before November 9, 2023; and 

(ii) When the section 987 QBU 

terminates, neither the section 987 

regulations nor the 2016 and 2019 

section 987 regulations would apply 

with respect to the section 987 QBU but 

for § 1.987–14(a)(2). 

Termination. With respect to a section 

987 QBU, the term termination has the 

meaning provided in § 1.987–8(b) and 

(c). With respect to a successor 

suspended loss QBU, the term 

termination has the meaning provided 

in § 1.987–13(j). 

Transfer. The term transfer has the 

meaning provided in § 1.987–2(c). 

Transition date. The term transition 

date has the meaning provided in 

§ 1.987–10(b). 

United States person. The term 

United States person (or U.S. person) 

has the meaning provided in section 

7701(a)(30). 

United States shareholder. The term 

United States shareholder (or U.S. 

shareholder) has the meaning provided 

in section 951(b) (or, if applicable, 

section 953(c)(1)(A)). 

Yearly average exchange rate. The 

term yearly average exchange rate has 

the meaning provided in paragraph 

(c)(2) of this section. 

■ 7. Section 1.987–2 is revised to read 

as follows: 

§ 1.987–2 Attribution of items to eligible 

QBUs; definition of a transfer and related 

rules. 

(a) Scope. This section provides rules 

regarding when items are attributed to 


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eligible QBUs and when they are treated 

as transferred to or from section 987 

QBUs. Paragraph (b) of this section 

provides rules for attributing assets and 

liabilities, and items of income, gain, 

deduction, and loss, to an eligible QBU. 

Paragraph (c) of this section defines a 

transfer to or from a section 987 QBU. 

Paragraph (d) of this section provides 

translation rules for transfers to a 

section 987 QBU. Paragraph (e) of this 

section provides a cross-reference 

relating to the treatment of section 987 

QBUs owned by consolidated groups. 

(b) Attribution of items to an eligible 

QBU—(1) General rules. Except as 

provided in paragraphs (b)(2) and (3) of 

this section, items are attributable to an 

eligible QBU to the extent they are 

reflected on the separate set of books 

and records, as defined in § 1.989(a)– 

1(d)(1) and (2), of the eligible QBU. In 

the case of a section 987 aggregate 

partnership, items reflected on the 

books and records of the partnership 

and deemed allocated to an eligible 

QBU of such partnership are considered 

to be reflected on the books and records 

of such eligible QBU. For purposes of 

this section, the term item refers to any 

asset or liability, and any item of 

income, gain, deduction, or loss. Items 

that are attributed to an eligible QBU 

pursuant to this section must be 

adjusted to conform to Federal income 

tax principles. Except as provided in 

§ 1.989(a)–1(d)(3), these attribution rules 

apply solely for purposes of section 987. 

For example, the allocation and 

apportionment of interest expense 

under section 864(e) is independent of 

these rules. 

(2) Exceptions for non-portfolio stock, 

interests in partnerships, and certain 

acquisition indebtedness. The following 

items are not considered to be on the 

books and records of an eligible QBU: 

(i) Stock of a corporation (whether 

domestic or foreign), other than stock of 

a corporation if the owner of the eligible 

QBU owns less than 10 percent of the 

total combined voting power of all 

classes of stock entitled to vote and less 

than 10 percent of the total value of all 

classes of stock of such corporation. For 

this purpose, section 958 (other than 

section 958(b)(1)) applies in 

determining ownership of a controlled 

foreign corporation and section 318(a) 

applies in determining ownership of 

other corporations, except that in 

applying section 318(a)(2)(C), the phrase 

‘‘10 percent’’ is used instead of the 

phrase ‘‘50 percent.’’ 

(ii) An interest in a partnership 

(whether domestic or foreign). 

(iii) A liability that was incurred to 

acquire stock described in paragraph 

(b)(2)(i) of this section or that was 

incurred to acquire a partnership 

interest described in paragraph (b)(2)(ii) 

of this section. 

(iv) Income, gain, deduction, or loss 

arising from the items described in 

paragraphs (b)(2)(i) through (iii) of this 

section. For example, if a dividend is 

received with respect to stock of a 

corporation described in paragraph 

(b)(2)(i) of this section, the dividend is 

excluded from the income of the eligible 

QBU. See also paragraph (c)(2)(ii) of this 

section, treating the payment as 

received by the owner and contributed 

to the eligible QBU. 

(3) Adjustments to items reflected on 

the books and records—(i) General rule. 

If a principal purpose of recording (or 

not recording) an item on the books and 

records of an eligible QBU is the 

avoidance of Federal income tax under, 

or through the use of, section 987, the 

item must be allocated between or 

among the eligible QBU, the owner of 

such eligible QBU, and any other 

persons, entities (including DEs), or 

other QBUs within the meaning of 

§ 1.989(a)–1(b) (including eligible 

QBUs) in a manner that reflects the 

substance of the transaction. For 

purposes of this paragraph (b)(3)(i), 

relevant factors for determining whether 

such Federal income tax avoidance is a 

principal purpose of recording (or not 

recording) an item on the books and 

records of an eligible QBU include the 

factors set forth in paragraphs (b)(3)(ii) 

and (iii) of this section. The presence or 

absence of any factor or factors is not 

determinative. The weight given to any 

factor (whether or not set forth in 

paragraphs (b)(3)(ii) and (iii) of this 

section) depends on the facts and 

circumstances. 

(ii) Factors indicating no tax 

avoidance. For purposes of paragraph 

(b)(3)(i) of this section, factors that may 

indicate that recording (or not 

recording) an item on the books and 

records of an eligible QBU did not have 

as a principal purpose the avoidance of 

Federal income tax under, or through 

the use of, section 987 include the 

recording (or not recording) of an item: 

(A) For a significant and bona fide 

business purpose; 

(B) In a manner that is consistent with 

the economics of the underlying 

transaction; 

(C) In accordance with generally 

accepted accounting principles (or 

similar comprehensive accounting 

standard); 

(D) In a manner that is consistent with 

the treatment of similar items from year 

to year; 

(E) In accordance with accepted 

conditions or practices in the particular 

trade or business of the eligible QBU; 

(F) In a manner that is consistent with 

an explanation of existing internal 

accounting policies that is evidenced by 

documentation contemporaneous with 

the timely filing of a return for the 

taxable year; and 

(G) As a result of a transaction 

between legal entities (for example, the 

transfer of an asset or the assumption of 

a liability), even if such transaction is 

not regarded for Federal income tax 

purposes (for example, a transaction 

between a DE and its owner). 

(iii) Factors indicating tax avoidance. 

For purposes of paragraph (b)(3)(i) of 

this section, factors that may indicate 

that a principal purpose of recording (or 

not recording) an item on the books and 

records of an eligible QBU is the 

avoidance of Federal income tax under, 

or through the use of, section 987 

include: 

(A) The presence or absence of an 

item on the books and records that is the 

result of one or more transactions that 

are transitory, for example, due to a 

circular flow of cash or other property; 

(B) The presence or absence of an 

item on the books and records that is the 

result of one or more transactions that 

do not have substance; and 

(C) The presence or absence of an 

item on the books and records that 

results in the taxpayer (or a person 

related to the taxpayer within the 

meaning of section 267(b) or section 

707(b)) having offsetting positions with 

respect to the functional currency of a 

section 987 QBU. 

(4) Assets and liabilities of a section 

987 aggregate partnership or DE that are 

not attributed to an eligible QBU. 

Neither a section 987 aggregate 

partnership nor a DE is an eligible QBU 

and, thus, neither entity can be a section 

987 QBU. See § 1.987–1(b)(4). As a 

result, a section 987 aggregate 

partnership or DE may have assets and 

liabilities that are not attributed to an 

eligible QBU as provided under this 

paragraph (b) and, therefore, are not 

subject to section 987. For the foreign 

currency treatment of such assets or 

liabilities, see § 1.988–1(a)(4). 

(5) Special types of basis. Any type of 

basis that does not affect the income or 

loss of the section 987 QBU is not 

considered to be on the books and 

records of the section 987 QBU. Thus, 

for example, section 743(b) basis is not 

considered to be on the books and 

records of the section 987 QBU. 

(c) Transfers to and from section 987 

QBUs—(1) In general. The following 

rules apply for purposes of determining 

whether there is a transfer of an asset or 

a liability from an owner to a section 

987 QBU, or from a section 987 QBU to 


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an owner. These rules apply solely for 

purposes of section 987. 

(2) Disregarded transactions—(i) 

General rule. An asset or liability is 

treated as transferred to a section 987 

QBU from its owner if, as a result of a 

disregarded transaction, such asset or 

liability is reflected on the books and 

records of (or attributed to) the section 

987 QBU within the meaning of 

paragraph (b) of this section. Similarly, 

an asset or liability is treated as 

transferred from a section 987 QBU to 

its owner if, as a result of a disregarded 

transaction, such asset or liability is no 

longer reflected on the books and 

records of (or attributed to) the section 

987 QBU within the meaning of 

paragraph (b) of this section. 

(ii) Definition of a disregarded 

transaction. For purposes of this 

section, a disregarded transaction means 

a transaction that is not regarded for 

Federal income tax purposes (for 

example, any transaction between 

separate section 987 QBUs of the same 

owner). For purposes of this paragraph 

(c), a disregarded transaction is treated 

as including events described in 

paragraphs (c)(2)(ii)(A) through (E) of 

this section. 

(A) If the recording (or not recording) 

of an asset or liability on the books and 

records of a section 987 QBU of an 

owner is the result of such asset or 

liability being removed from (or 

included on) the books and records of 

the owner or another eligible QBU of the 

owner, the asset or liability is treated as 

transferred from (or to) the owner or 

other eligible QBU to (or from) the 

section 987 QBU in a disregarded 

transaction (including through a DE or 

a section 987 aggregate partnership). 

(B) If an asset or liability that was 

previously treated as being on the books 

and records of a section 987 QBU of an 

owner begins to be treated as being on 

the books and records of the owner or 

a separate eligible QBU of the owner as 

a result of the application of paragraph 

(b)(2) or (3) of this section, the asset or 

liability is treated as having been 

transferred from the section 987 QBU to 

the owner or separate eligible QBU in a 

disregarded transaction. If an asset or 

liability that was previously treated as 

being on the books and records of the 

owner or a separate eligible QBU of the 

same owner begins to be treated as being 

on the books and records of the section 

987 QBU as a result of the application 

of paragraph (b)(2) or (3) of this section, 

the asset or liability is treated as 

transferred from the owner or separate 

eligible QBU to the section 987 QBU in 

a disregarded transaction. 

(C) If an asset or liability that is 

attributable to a section 987 QBU within 

the meaning of paragraph (b) of this 

section is sold or exchanged (including 

in a nonrecognition transaction, such as 

an exchange under section 351) for an 

asset or liability that is not attributable 

to the section 987 QBU immediately 

after the sale or exchange, the sold or 

exchanged asset or liability that was 

attributable to the section 987 QBU 

immediately before the transaction is 

treated as transferred from the section 

987 QBU to its owner in a disregarded 

transaction immediately before the sale 

or exchange for purposes of section 987 

(including for purposes of recognizing 

section 987 gain or loss under § 1.987– 

5) and subsequently sold or exchanged 

by the owner. 

(D) If an asset or liability of an owner 

of a section 987 QBU that is not 

attributable to a section 987 QBU within 

the meaning of paragraph (b) of this 

section is sold or exchanged (including 

in a nonrecognition transaction, such as 

an exchange under section 351) for an 

asset or liability that is attributable to 

the section 987 QBU immediately after 

the sale or exchange, the asset or 

liability that is attributable to the 

section 987 QBU immediately after the 

transaction is treated as received or 

assumed by the owner and transferred 

from the owner to the section 987 QBU 

in a disregarded transaction 

immediately after the sale or exchange 

for purposes of section 987 (including 

for purposes of recognizing section 987 

gain or loss under § 1.987–5). 

(E) If an asset or liability that is 

properly attributable to a section 987 

QBU was received, assumed, or accrued 

in a regarded transaction (including the 

making or receiving of a payment) in 

which the related item of income, gain, 

deduction, or loss is not attributable to 

the section 987 QBU, the asset or 

liability is treated as though it was 

received, assumed, or accrued by the 

owner or another eligible QBU and 

transferred to the section 987 QBU in a 

disregarded transaction. Similarly, if an 

asset or liability that is not properly 

attributable to a section 987 QBU was 

received, assumed, or accrued in a 

regarded transaction (including the 

making or receiving of a payment) in 

which the related item of income, gain, 

deduction, or loss is attributable to the 

section 987 QBU, the asset or liability is 

treated as though it was received, 

assumed, or accrued by the section 987 

QBU and transferred to the owner or 

another eligible QBU in a disregarded 

transaction. For example, if a section 

987 QBU receives a dividend on an 

interest in stock that would be 

attributable to the section 987 QBU but 

for paragraph (b)(2)(i) of this section, or 

pays interest on a liability that would be 

attributable to the section 987 QBU but 

for paragraph (b)(2)(iii) of this section, 

the owner would be treated as receiving 

the dividend and transferring to the 

section 987 QBU the amount of the 

dividend, or the section 987 QBU would 

be treated as transferring to the owner 

the amount of the interest expense and 

the owner would be treated as paying 

the interest expense. See also paragraph 

(c)(7) of this section (application of 

general tax law principles). 

(iii) Items derived from disregarded 

transactions ignored. For purposes of 

section 987, disregarded transactions do 

not give rise to items of income, gain, 

deduction, or loss that are taken into 

account in determining section 987 

taxable income or loss under § 1.987–3. 

(3) Transfers of assets to and from 

section 987 QBUs owned through 

section 987 aggregate partnerships—(i) 

Contributions to section 987 aggregate 

partnerships. Solely for purposes of 

section 987, an asset is treated as 

transferred by an indirect owner to a 

section 987 QBU of a partner to the 

extent the indirect owner contributes 

the asset to the section 987 aggregate 

partnership that carries on the activities 

of the section 987 QBU, provided that, 

immediately before the contribution, the 

asset is not reflected on the books and 

records of the section 987 QBU within 

the meaning of paragraph (b) of this 

section and the asset is reflected on the 

books and records of the section 987 

QBU immediately after the contribution. 

For purposes of this paragraph (c)(3)(i), 

deemed contributions of money 

described under section 752 are 

disregarded. See paragraph (c)(4)(ii) of 

this section for rules governing the 

assumption by a partner of liabilities of 

a section 987 aggregate partnership. 

(ii) Distributions from section 987 

aggregate partnerships. Solely for 

purposes of section 987, an asset is 

treated as transferred from a section 987 

QBU of a partner to its indirect owner 

to the extent the section 987 aggregate 

partnership that carries on the activities 

of the section 987 QBU distributes the 

asset to the indirect owner, provided 

that, immediately before the 

distribution, the asset is reflected on the 

books and records of the section 987 

QBU within the meaning of paragraph 

(b) of this section, and the asset is not 

reflected on the books and records of the 

section 987 QBU immediately after the 

distribution. For purposes of this 

paragraph (c)(3)(ii), deemed 

distributions of money described under 

section 752 are disregarded. See 

paragraph (c)(4)(i) of this section for 

rules governing the assumption by a 

section 987 aggregate partnership of 

liabilities of a partner. 


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(4) Transfers of liabilities to and from 

section 987 QBUs owned through 

section 987 aggregate partnerships—(i) 

Assumptions of partner liabilities. 

Solely for purposes of section 987, a 

liability of the owner of a section 987 

aggregate partnership is treated as 

transferred to a section 987 QBU of a 

partner if, and to the extent, the section 

987 aggregate partnership assumes the 

liability, provided that, immediately 

before the transfer, the liability is not 

reflected on the books and records of the 

section 987 QBU within the meaning of 

paragraph (b) of this section, and the 

liability is reflected on the books and 

records of the section 987 QBU 

immediately after the transfer. 

(ii) Assumptions of section 987 

aggregate partnership liabilities. Solely 

for purposes of section 987, a liability of 

a section 987 aggregate partnership is 

treated as transferred from a section 987 

QBU of a partner to its indirect owner 

if, and to the extent, the indirect owner 

assumes the liability of the section 987 

aggregate partnership, provided that, 

immediately before the assumption, the 

liability is reflected on the books and 

records of the section 987 QBU within 

the meaning of paragraph (b) of this 

section, and the liability is not reflected 

on the books and records of the section 

987 QBU immediately after the transfer. 

(5) Acquisitions and dispositions of 

interests in DEs and section 987 

aggregate partnerships. Solely for 

purposes of section 987, an asset or 

liability is treated as transferred to a 

section 987 QBU from its owner if, as 

a result of an acquisition (including by 

contribution) or disposition of an 

interest in a section 987 aggregate 

partnership or DE, the asset or liability 

is reflected on the books and records of 

the section 987 QBU. Similarly, an asset 

or liability is treated as transferred from 

a section 987 QBU to its owner if, as a 

result of an acquisition or disposition of 

an interest in a section 987 aggregate 

partnership or DE, the asset or liability 

is not reflected on the books and records 

of the section 987 QBU. See paragraph 

(c)(10)(xviii) of this section (Example 

18) for an illustration of this rule. 

(6) Changes in form of ownership 

treated as terminations. See §§ 1.987– 

8(b)(6) (treating a change in the form of 

ownership of an eligible QBU from 

direct ownership to indirect ownership 

or from indirect ownership to direct 

ownership as a termination) and 1.987– 

12(g)(1)(i)(A) (subjecting the termination 

to the deferral rules). 

(7) Application of general tax law 

principles. General tax law principles, 

including the circular cash flow, steptransaction, economic substance, and 

substance-over-form doctrines, apply for 

purposes of determining whether there 

is a transfer of an asset or liability under 

this paragraph (c), including a transfer 

of an asset or liability pursuant to a 

disregarded transaction. 

(8) Interaction with § 1.988–1(a)(10). 

See § 1.988–1(a)(10) for rules regarding 

the treatment of an intra-taxpayer 

transfer of a section 988 transaction. 

(9) Certain disregarded transactions 

not treated as transfers—(i) 

Combinations of section 987 QBUs. The 

combination (a combination) of two or 

more separate section 987 QBUs 

(combining QBUs) that are directly 

owned by the same owner, or that are 

indirectly owned by the same partner 

through a single section 987 aggregate 

partnership, into one section 987 QBU 

(combined QBU) does not give rise to a 

transfer of any combining QBU’s assets 

or liabilities to the owner under § 1.987– 

2(c). In addition, transactions between 

the combining QBUs occurring in the 

taxable year of the combination do not 

result in a transfer of the combining 

QBUs’ assets or liabilities to the owner 

under § 1.987–2(c). For this purpose, a 

combination occurs when the assets and 

liabilities that are properly reflected on 

the books and records of two or more 

combining QBUs begin to be properly 

reflected on the books and records of a 

combined QBU and the separate 

existence of the combining QBUs 

ceases. A combination may result from 

any transaction or series of transactions 

in which the combining QBUs become 

a combined QBU. A combination may 

also result when an owner of two or 

more section 987 QBUs with the same 

functional currency becomes subject to 

a grouping election under § 1.987– 

1(b)(3)(ii) or when a section 987 QBU of 

an owner subject to a grouping election 

changes its functional currency to that 

of another section 987 QBU of the same 

owner. For purposes of determining net 

unrecognized section 987 gain or loss, 

deferred section 987 gain or loss, and 

cumulative suspended section 987 loss 

of a combined QBU, the combining 

QBUs are treated as having combined 

immediately before the beginning of the 

taxable year of combination. See 

§§ 1.987–4(f)(1), 1.987–11(b)(2), and 

1.987–12(f)(1). 

(ii) Change in functional currency 

from a combination. If, following a 

combination of section 987 QBUs 

described in paragraph (c)(9)(i) of this 

section, the combined section 987 QBU 

has a different functional currency than 

one or more of the combining section 

987 QBUs, any such combining section 

987 QBU is treated as changing its 

functional currency and the owner of 

the combined section 987 QBU must 

comply with the regulations under 

section 985 regarding the change in 

functional currency. See §§ 1.985– 

1(c)(6) and 1.985–5. 

(iii) Separation of section 987 QBUs. 

The separation (a separation) of a 

section 987 QBU (separating QBU) into 

two or more section 987 QBUs 

(separated QBUs) that, after the 

separation, are directly owned by the 

same owner, or that are indirectly 

owned by the same partner through a 

single section 987 aggregate partnership, 

does not result in a transfer of the 

separating QBU’s assets or liabilities to 

the owner under § 1.987–2(c). 

Additionally, transactions that occurred 

between the separating QBUs in the 

taxable year of the separation before the 

completion of the separation do not 

result in transfers for purposes of 

section 987. For this purpose, a 

separation occurs when the assets and 

liabilities that are properly reflected on 

the books and records of a separating 

QBU begin to be properly reflected on 

the books and records of two or more 

separated QBUs and each of the 

separated QBUs continues to perform a 

significant portion of the separating 

QBU’s activities immediately after the 

separation. A separation may result 

from any transaction or series of 

transactions in which a separating QBU 

becomes two or more separated QBUs 

described in the preceding sentence. A 

separation may also result when a 

section 987 QBU that is subject to a 

grouping election under § 1.987– 

1(b)(3)(ii) changes its functional 

currency or when the grouping election 

is revoked. For purposes of determining 

net unrecognized section 987 gain or 

loss, deferred section 987 gain or loss, 

or cumulative suspended section 987 

loss of a separated QBU, the separating 

QBU is treated as having separated 

immediately before the beginning of the 

taxable year of separation. See §§ 1.987– 

4(f)(2), 1.987–11(b)(3), and 1.987– 

12(f)(2). 

(iv) Special rules for successor 

suspended loss QBUs. For purposes of 

determining whether a combination or 

separation has occurred with respect to 

a successor suspended loss QBU, the 

rules of paragraphs (c)(9)(i) and (iii) of 

this section are applied without regard 

to whether any of the combining QBUs, 

the combined QBU, the separating QBU, 

or the separated QBUs are section 987 

QBUs. A combined QBU is a successor 

suspended loss QBU if either combining 

QBU was a successor suspended loss 

QBU, and a separated QBU is a 

successor suspended loss QBU if the 

separating QBU was a successor 

suspended loss QBU. 

(10) Examples. The following 

examples illustrate the principles of this 


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paragraph (c). For purposes of the 

examples, X and Y are domestic 

corporations, have the U.S. dollar as 

their functional currencies, and use the 

calendar year as their taxable years. 

Furthermore, except as otherwise 

provided, Business A and Business B 

are eligible QBUs that have the euro and 

the Japanese yen, respectively, as their 

functional currencies, and DE1 and DE2 

are DEs. For purposes of determining 

whether any of the transfers in these 

examples result in remittances, see 

§ 1.987–5. 

(i) Example 1. Transfer to a directly 

owned section 987 QBU—(A) Facts. X 

owns all of the interests in DE1. DE1 

owns Business A, which is a section 987 

QBU of X. X owns Ö100 that are not 

reflected on the books and records of 

Business A. Business A is in need of 

additional capital and, as a result, X 

lends the Ö100 to DE1 for use in 

Business A in exchange for a note. 

(B) Analysis—(1) The loan from X to 

DE1 is not regarded for Federal income 

tax purposes (because it is an 

interbranch transaction) and therefore is 

a disregarded transaction (as defined in 

paragraph (c)(2)(ii) of this section). 

Because DE1 is a DE, the DE1 note held 

by X and the liability of DE1 under the 

note are not taken into account under 

this section. 

(2) As a result of the disregarded 

transaction, the Ö100 is reflected on the 

books and records of Business A. 

Therefore, X is treated as transferring 

Ö100 to its Business A section 987 QBU 

for purposes of section 987. This 

transfer is taken into account in 

determining the amount of any 

remittance for the taxable year under 

§ 1.987–5(c). See § 1.988–1(a)(10)(ii) for 

the application of section 988 to X as a 

result of the transfer of nonfunctional 

currency to its section 987 QBU. 

(ii) Example 2. Transfer to a directly 

owned section 987 QBU—(A) Facts. X 

owns Business A and Business B, both 

of which are section 987 QBUs of X. X 

owns equipment that is used in 

Business A and is reflected on the books 

and records of Business A. Because 

Business A has excess manufacturing 

capacity and X intends to expand the 

manufacturing capacity of Business B, 

the equipment formerly used in 

Business A is transferred to Business B 

for use by Business B. As a result of the 

transfer, the equipment is removed from 

the books and records of Business A and 

is recorded on the books and records of 

Business B. 

(B) Analysis. The transfer of the 

equipment from the books and records 

of Business A to the books and records 

of Business B is not regarded for Federal 

income tax purposes (because it is an 

interbranch transaction) and therefore is 

a disregarded transaction (as defined in 

paragraph (c)(2)(ii) of this section). 

Therefore, for purposes of section 987, 

the Business A section 987 QBU is 

treated as transferring the equipment to 

X, and X is subsequently treated as 

transferring the equipment to the 

Business B section 987 QBU. These 

transfers are taken into account in 

determining the amount of any 

remittance for the taxable year under 

§ 1.987–5(c). 

(iii) Example 3. Intracompany sale of 

property between two section 987 

QBUs— (A) Facts. X owns all of the 

interests in DE1 and DE2. DE1 and DE2 

own Business A and Business B, 

respectively, both of which are section 

987 QBUs of X. DE1 owns equipment 

that is used in Business A and is 

reflected on the books and records of 

Business A. For business reasons, DE1 

sells a portion of the equipment used in 

Business A to DE2 in exchange for a fair 

market value amount of Japanese yen. 

The yen used by DE2 to acquire the 

equipment was generated by Business B 

and was reflected on Business B’s books 

and records. Following the sale, the yen 

and the equipment will be used in 

Business A and Business B, 

respectively. As a result of such sale, the 

equipment is removed from the books 

and records of Business A and is 

recorded on the books and records of 

Business B. Similarly, as a result of the 

sale, the yen is removed from the books 

and records of Business B and is 

recorded on the books and records of 

Business A. 

(B) Analysis—(1) The sale of 

equipment between DE1 and DE2 is a 

transaction that is not regarded for 

Federal income tax purposes (because it 

is an interbranch transaction) and 

therefore the transaction is a 

disregarded transaction (as defined in 

paragraph (c)(2)(ii) of this section). 

Pursuant to paragraph (c)(2)(iii) of this 

section, the sale does not give rise to an 

item of income, gain, deduction, or loss 

for purposes of determining section 987 

taxable income or loss under § 1.987–3. 

However, the yen and equipment 

exchanged by DE1 and DE2 in 

connection with the sale must be taken 

into account as a transfer under 

paragraph (c)(2)(i) of this section. 

(2) As a result of the disregarded 

transaction, the equipment ceases to be 

reflected on the books and records of 

Business A and becomes reflected on 

the books and records of Business B. 

Therefore, the Business A section 987 

QBU is treated as transferring the 

equipment to X, and X is subsequently 

treated as transferring the equipment to 

the Business B section 987 QBU. 

(3) Additionally, as a result of the 

disregarded transaction, the yen 

currency ceases to be reflected on the 

books and records of Business B and 

becomes reflected on the books and 

records of Business A. Therefore, the 

Business B section 987 QBU is treated 

as transferring the yen to X, and X is 

subsequently treated as transferring the 

yen from X to the Business A section 

987 QBU. The transfers among Business 

A, Business B and X are taken into 

account in determining the amount of 

any remittance for the taxable year 

under § 1.987–5(c). 

(iv) through (ix) [Reserved] 

(x) Example 10. Contribution of assets 

to a corporation—(A) Facts. X owns 

Business A. X forms Z, a domestic 

corporation, contributing 50 percent of 

its Business A assets and liabilities to Z 

in exchange for all of the stock of Z. X 

and Z do not file a consolidated tax 

return. 

(B) Analysis. Pursuant to paragraph 

(b)(2) of this section, the Z stock 

received in exchange for 50 percent of 

Business A’s assets and liabilities is not 

reflected on the books and records of, 

and therefore is not attributable to, 

Business A for purposes of section 987 

immediately after the exchange. As a 

result, pursuant to paragraphs (c)(2)(i) 

and (ii) of this section, 50 percent of the 

assets and liabilities of Business A are 

treated as transferred from Business A to 

X in a disregarded transaction 

immediately before the exchange. See 

§ 1.1502–13(j)(9) if X and Z file a 

consolidated return. 

(xi) Example 11. Circular transfers— 

(A) Facts. X owns Business A. On 

December 30, year 1, Business A 

purports to transfer Ö100 to X. On 

January 2, year 2, X purports to transfer 

Ö50 to Business A. On January 4, year 

2, X purports to transfer another Ö50 to 

Business A. As of the end of year 1, X 

has an unrecognized section 987 loss 

with respect to Business A, such that a 

remittance, if respected, would result in 

recognition of a foreign currency loss 

under section 987. 

(B) Analysis. Because the transfer by 

Business A to X is offset by the transfers 

from X to Business A that occurred in 

close temporal proximity, the Internal 

Revenue Service may disregard the 

purported transfers to and from 

Business A for purposes of section 987 

pursuant to general tax principles under 

paragraph (c)(7) of this section. 

(xii) Example 12. Transfers without 

substance—(A) Facts. X owns Business 

A and Business B. On January 1, year 1, 

Business A purports to transfer Ö100 to 

X. On January 4, year 1, X purports to 

transfer Ö100 to Business B. The 

account in which Business B deposited 


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the Ö100 is used to pay the operating 

expenses and other costs of Business A. 

As of the end of year 1, X has an 

unrecognized section 987 loss with 

respect to Business A, such that a 

remittance, if respected, would result in 

recognition of a foreign currency loss 

under section 987. 

(B) Analysis. Because Business A 

continues to have use of the transferred 

property, the IRS may disregard the 

Ö100 purported transfer from Business 

A to X for purposes of section 987 

pursuant to general tax principles under 

paragraph (c)(7) of this section. 

(xiii) Example 13. Offsetting positions 

in section 987 QBUs—(A) Facts. X owns 

Business A and Business B. Business A 

and Business B each have the euro as its 

functional currency. X has not made a 

grouping election under § 1.987– 

1(b)(3)(ii). On January 1, year 1, X 

borrows Ö1,000 from a third-party 

lender, records the liability with respect 

to the borrowing on the books and 

records of Business A, and records the 

borrowed Ö1,000 on the books and 

records of Business B. On December 31, 

year 2, when Business A has $100 of net 

unrecognized section 987 loss and 

Business B has $100 of net 

unrecognized section 987 gain resulting 

from the change in exchange rates with 

respect to the liability and the Ö1,000, 

X terminates the Business A section 987 

QBU. 

(B) Analysis. Because Business A and 

Business B have offsetting positions in 

the euro, the IRS will scrutinize the 

transaction under paragraph (b)(3) of 

this section to determine if a principal 

purpose of recording the eurodenominated liability on the books and 

records of Business A and the borrowed 

euros on the books and records of 

Business B was the avoidance of tax 

under section 987. If such a principal 

purpose is present, the items must be 

reallocated (that is, the euros and the 

euro-denominated liability) between 

Business A, Business B, and X, under 

paragraph (b)(3) of this section to reflect 

the substance of the transaction. 

(xiv) Example 14. Offsetting positions 

with respect to a section 987 QBU and 

a section 988 transaction—(A) Facts. X 

owns all of the interests in DE1, and 

DE1 owns Business A. On January 1, 

year 1, X borrows Ö1,000 from a thirdparty lender and records the liability 

with respect to the borrowing on its 

books and records. X contributes the 

Ö1,000 loan proceeds to DE1 and the 

Ö1,000 are reflected on the books and 

records of Business A. On December 31, 

year 2, when Business A has $100 of net 

unrecognized section 987 loss resulting 

from the change in exchange rates with 

respect to the Ö1,000 received from the 

borrowing, and when the eurodenominated borrowing, if repaid, 

would result in $100 of gain under 

section 988, X terminates the Business 

A section 987 QBU. 

(B) Analysis. Because X and Business 

A have offsetting positions in the euro, 

the IRS will scrutinize the transaction 

under paragraph (b)(3) of this section to 

determine whether a principal purpose 

of recording the borrowed euros on the 

books and records of Business A, or not 

recording the corresponding eurodenominated liability on the books and 

records of Business A, was the 

avoidance of tax under section 987. If 

such a principal purpose is present, the 

items (that is, the euros and the eurodenominated liability) must be 

reallocated between Business A and X 

under paragraph (b)(3) of this section to 

reflect the substance of the transaction. 

(xv) Example 15. Offsetting positions 

with respect to a section 987 QBU and 

a section 988 transaction—(A) Facts. X 

owns all of the stock of Y and all of the 

interests in DE1. DE1 owns Business A. 

X and Y do not file a consolidated 

return. On January 1, year 1, DE1 lends 

Ö1,000 to Y. X records the receivable 

with respect to the loan on Business A’s 

books and records. On December 31, 

year 2, when Business A has $100 of net 

unrecognized section 987 gain resulting 

from the loan, Y repays the Ö1,000 

liability. The repayment of the eurodenominated borrowing results in $100 

of loss to Y under section 988. X claims 

a $100 loss on its consolidated return 

under section 988. Business A does not 

make any remittances to X in year 2, so 

the offsetting gain with respect to the 

loan receivable has not been recognized 

by X. 

(B) Analysis. Y, a related party to X, 

and Business A have offsetting positions 

in the euro. The IRS will scrutinize the 

transaction under paragraph (b)(3) of 

this section to determine whether a 

principal purpose of recording the eurodenominated receivable on the books 

and records of Business A, rather than 

on the books and records of X, was to 

avoid Federal income tax under, or 

through the use of, section 987. If such 

a principal purpose is present, the eurodenominated receivable must be 

reallocated between Business A and X 

under paragraph (b)(3) of this section to 

reflect the substance of the transaction. 

Other provisions may also apply to 

defer or disallow the loss. See e.g., 

§ 1.1502–13(j)(9) if X and Y file a 

consolidated return. 

(xvi) Example 16. Loan by section 987 

QBU followed by immediate distribution 

to owner—(A) Facts. X owns all of the 

interests in DE1. DE1 owns Business A. 

On January 1, year 1, Business A 

borrows Ö1,000 from a bank. On January 

2, year 1, Business A distributes the 

Ö1,000 it received from the bank to X. 

There are no other transfers between X 

and Business A during the year. At the 

end of the year, X has net unrecognized 

section 987 loss with respect to 

Business A such that a remittance 

would result in the recognition of 

foreign currency loss under section 987. 

(B) Analysis. Because the proceeds 

from the loan to Business A are 

immediately transferred to X and the 

distribution from Business A to X could 

result in the recognition of section 987 

loss, the IRS will scrutinize the 

transaction under paragraph (b)(3) of 

this section to determine whether a 

principal purpose of recording of the 

loan on the books and records of 

Business A, rather than on the books 

and records of X, was to avoid Federal 

income tax under, or through the use of, 

section 987. If such a principal purpose 

is present, the items must be reallocated 

to reflect the substance of the 

transaction, potentially including by 

moving the loan onto the books of X, 

resulting in the transfer not being taken 

into account for purposes of section 987 

under paragraph (b)(3) of this section. 

(xvii) Example 17. Payment of interest 

by section 987 QBU on obligation of 

owner—(A) Facts. X owns all of the 

interests in DE1. DE1 owns Business A. 

On January 1, X borrows Ö1,000 from a 

bank. On July 1, DE1 pays Ö20 in 

interest on X’s Ö1,000 obligation to the 

bank, which is treated as a payment by 

Business A. 

(B) Analysis. Under general tax law 

principles as provided in paragraph 

(c)(7) of this section, on July 1, year 1, 

Business A is treated for purposes of 

section 987 as making a transfer of Ö20 

to X, and X is treated as making a Ö20 

interest payment to the bank. See also 

paragraph (c)(2)(ii)(E) for interest 

payments on loans that are not 

attributable to a section 987 QBU 

pursuant to paragraph (b)(2) or (3) of 

this section. 

(xviii) Example 18. Sale of the 

interests in a DE—(A) Facts. X owns all 

of the interests in DE1, a disregarded 

entity. DE1 owns Business A, which is 

a section 987 QBU of X. X has made a 

current rate election under § 1.987– 

1(d)(2) but not an annual recognition 

election under § 1.987–5(b)(2). On 

December 31, year 1, X sells all of the 

interests in DE1 to FC, an unrelated 

foreign corporation, for $150,000, when 

the exchange rate is Ö1=$1.2. At the 

time of the sale, all of DE1’s assets are 

used in Business A and are reflected on 

the books and records of Business A. 

The assets have a basis of Ö100,000 and 

Business A has no liabilities. In year 1, 


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X has net unrecognized section 987 gain 

with respect to Business A of $20,000. 

(B) Analysis—(1) Under paragraph 

(c)(5) of this section, solely for purposes 

of section 987, an asset or liability is 

treated as transferred from a section 987 

QBU to its owner if, as a result of a 

disposition of an interest in a DE, the 

asset or liability is not reflected on the 

books and records of the section 987 

QBU. As a result of the sale of DE1, the 

assets of Business A are no longer 

reflected on the books and records of the 

Business A section 987 QBU. Therefore, 

the assets of Business A are treated as 

transferred from the Business A section 

987 QBU to X in connection with the 

sale of X’s interests in DE1. 

(2) The transfer of all of Business A’s 

assets to X under paragraph (c)(5) of this 

section results in a termination of the 

Business A section 987 QBU under 

§ 1.987–8(b)(2) (substantially all assets 

transferred). Under § 1.987–5(c)(3) and 

§ 1.987–8(e), a termination of a section 

987 QBU is treated as a remittance of all 

the gross assets of the section 987 QBU 

to the owner on the date of the 

termination. Therefore, the owner’s 

remittance proportion is one, and X 

recognizes all of its net unrecognized 

section 987 gain with respect to 

Business A, or $20,000. 

(3) Because a current rate election was 

in effect, all of the assets of Business A 

are marked items. Therefore, under 

§ 1.987–5(f)(2), X’s basis in the assets 

transferred from Business A is 

determined by translating Business A’s 

functional currency basis in the assets 

into X’s functional currency at the spot 

rate applicable to the date of the 

transfer, Ö1=$1.2. Consequently, 

immediately before the sale of the 

interests in DE1, X’s functional currency 

basis in Business A’s assets (which 

Business A held with a basis of 

Ö100,000) is $120,000. X recognizes 

$30,000 of gain under section 1001(a) on 

the sale of DE1. 

(d) Translation of items transferred to 

a section 987 QBU—(1) Marked items. 

The adjusted basis of a marked asset, or 

the amount of a marked liability, 

transferred to a section 987 QBU is 

translated into the section 987 QBU’s 

functional currency at the spot rate 

applicable to the date of transfer. If, and 

to the extent that, exchange gain or loss 

is recognized on the asset or liability 

transferred under § 1.988–1(a)(10)(ii), 

the adjusted basis of the marked asset, 

or the amount of the marked liability, is 

adjusted to take into account the 

exchange gain or loss recognized. 

(2) Historic items. The adjusted basis 

of a historic asset, or the amount of a 

historic liability, transferred to a section 

987 QBU is translated into the section 

987 QBU’s functional currency at the 

rate provided in § 1.987–1(c)(3). If, and 

to the extent that, exchange gain or loss 

is recognized on the asset or liability 

transferred under § 1.988–1(a)(10)(ii), 

the adjusted basis of the historic asset, 

or the amount of the historic liability, is 

adjusted to take into account the 

exchange gain or loss recognized. 

(e) Cross-reference. See also § 1.1502– 

13(j)(9) regarding the treatment of 

intercompany transactions involving 

section 987 QBUs owned by a member 

of a consolidated group. 

■ 8. Section 1.987–3, as proposed to be 

amended by 81 FR 88882 (December 8, 

2016), is further amended by: 

■ a. Revising paragraphs (a), (b)(1), 

(b)(2)(i), (b)(3) and (c)(1); 

■ b. Adding paragraph (c)(2) 

introductory text. 

■ c. Revising paragraphs (c)(2)(i), 

(c)(2)(iii) and (iv), (c)(3), (d) and (e). 

The revisions and addition read as 

follows: 

§ 1.987–3 Determination of section 987 

taxable income or loss of an owner of a 

section 987 QBU. 

(a) In general. This section provides 

rules for determining the taxable income 

or loss of an owner of a section 987 QBU 

(section 987 taxable income or loss). 

Paragraph (b) of this section provides 

rules for determining items of income, 

gain, deduction, and loss, which 

generally are determined in the section 

987 QBU’s functional currency. 

Paragraph (c) of this section provides 

rules for translating each item 

determined under paragraph (b) of this 

section into the functional currency of 

the owner of the section 987 QBU, if 

necessary. Paragraph (d) of this section 

is reserved. Paragraph (e) of this section 

provides examples illustrating the 

application of the rules of this section. 

(b) * * * 

(1) In general. Except as otherwise 

provided in this paragraph (b), a section 

987 QBU must determine each item of 

income, gain, deduction, or loss of such 

section 987 QBU in its functional 

currency under Federal income tax 

principles. 

(2) * * * 

(i) In general. Except as otherwise 

provided in paragraphs (b)(2)(ii) and 

(b)(4) of this section, an item of income, 

gain, deduction, or loss (or the item’s 

components and related items, such as 

gross receipts and amount realized) that 

is denominated in (or determined by 

reference to) a nonfunctional currency 

(including the functional currency of 

the owner) is translated into the section 

987 QBU’s functional currency at the 

spot rate on the date such item is 

properly taken into account, subject to 

the limitation under § 1.987– 

1(c)(1)(ii)(B) regarding the use of a spot 

rate convention. Paragraphs (e)(1) and 

(2) of this section (Examples 1 and 2) 

illustrate the application of this 

paragraph (b)(2)(i). 

* * * * * 

(3) Determination in the case of a 

section 987 QBU owned through a 

section 987 aggregate partnership—(i) In 

general. Except as otherwise provided 

in this paragraph (b)(3), the taxable 

income or loss of a section 987 aggregate 

partnership, and the distributive share 

of any owner that is a partner in such 

partnership, are determined in 

accordance with the provisions of 

subchapter K of the Internal Revenue 

Code. 

(ii) Determination of each item of 

income, gain, deduction, or loss in the 

eligible QBU’s functional currency. A 

section 987 aggregate partnership 

generally must determine each item of 

income, gain, deduction, or loss 

reflected on the books and records of 

each of its eligible QBUs under § 1.987– 

2(b) in the functional currency of each 

such QBU. 

(iii) Allocation of items of income, 

gain, deduction, or loss of an eligible 

QBU. A section 987 aggregate 

partnership must allocate the items of 

income, gain, deduction, or loss of each 

eligible QBU among its partners in 

accordance with each partner’s 

distributive share of such income, gain, 

deduction, or loss as determined under 

subchapter K of the Internal Revenue 

Code. 

(iv) Translation of items into the 

owner’s functional currency. To the 

extent the items referred to in paragraph 

(b)(3)(iii) of this section are allocated to 

a partner, the partner must adjust the 

items to conform to Federal income tax 

principles and translate the items into 

the partner’s functional currency, if 

necessary, as provided in paragraph (c) 

of this section. 

* * * * * 

(c) * * * 

(1) In general. Except as otherwise 

provided in this section, the exchange 

rate to be used by an owner in 

translating an item of income, gain, 

deduction, or loss attributable to a 

section 987 QBU (or the item’s 

components and related items, such as 

gross receipts, amount realized, basis, 

and cost of goods sold) into the owner’s 

functional currency, if necessary, is the 

yearly average exchange rate for the 

taxable year. 

(2) Exceptions. This paragraph (c)(2) 

applies to taxable years for which 

neither the annual recognition election 

nor the current rate election is in effect. 


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(i) Recovery of basis with respect to 

historic assets. Except as otherwise 

provided in this paragraph (c)(2), the 

exchange rate to be used by the owner 

in translating any recovery of basis 

(whether through a sale or exchange; 

deemed sale or exchange; cost recovery 

deduction such as depreciation, 

depletion or amortization; or otherwise) 

with respect to a historic asset is the 

historic rate for the property to which 

such recovery of basis is attributable. 

* * * * * 

(iii) [Reserved] 

(iv) Cost of goods sold computation— 

(A) General rule—simplified inventory 

method. Except as otherwise provided 

in paragraph (c)(2)(iv)(B) of this section, 

cost of goods sold (COGS) for a taxable 

year is translated into the functional 

currency of the owner at the yearly 

average exchange rate for the taxable 

year in which the sale occurred (or the 

COGS was otherwise taken into account 

in computing taxable income) and 

adjusted as provided in paragraph (c)(3) 

of this section. 

(B) Election to use the historic 

inventory method. In lieu of using the 

simplified inventory method described 

in paragraph (c)(2)(iv)(A) of this section, 

the owner of a section 987 QBU may 

elect under this paragraph (c)(2)(iv)(B) 

to translate inventoriable costs 

(including current-year inventoriable 

costs and costs that were capitalized 

into inventory in prior years) that are 

included in COGS at the historic rate for 

each such cost. 

* * * * * 

(3) Adjustments to COGS required 

under the simplified inventory method. 

This paragraph (c)(3) applies to taxable 

years for which neither the annual 

recognition election nor the current rate 

election is in effect. 

(i) In general. An owner of a section 

987 QBU that uses the simplified 

inventory method described in 

paragraph (c)(2)(iv)(A) of this section 

must make the adjustment described in 

paragraph (c)(3)(ii) of this section. In 

addition, the owner must make the 

adjustment described in paragraph 

(c)(3)(iii) of this section with respect to 

any inventory for which the section 987 

QBU does not use the LIFO inventory 

method (as described in section 472) 

and must make the adjustment 

described in paragraph (c)(3)(iv) of this 

section with respect to any inventory for 

which the section 987 QBU uses the 

LIFO inventory method. An owner of a 

section 987 QBU that uses the 

simplified inventory method must make 

all of the applicable adjustments 

described in paragraphs (c)(3)(ii) 

through (iv) of this section with respect 

to the section 987 QBU even in taxable 

years in which the amount of COGS is 

zero. 

(ii) Adjustment for cost recovery 

deductions included in inventoriable 

costs. The translated COGS amount 

computed under paragraph (c)(2)(iv)(A) 

of this section is increased or decreased 

(as appropriate) to reflect the difference 

between the historic rates appropriate 

for translating cost recovery deductions 

attributable to other historic assets and 

the exchange rate used to translate 

COGS under paragraph (c)(2)(iv)(A) of 

this section, to the extent any such cost 

recovery deductions are included in 

inventoriable costs for the taxable year. 

The adjustment is included as an 

adjustment to translated COGS 

computed under paragraph (c)(2)(iv)(A) 

of this section in full in the year to 

which the adjustment relates and is not 

allocated between COGS and ending 

inventory. The adjustment for each cost 

recovery deduction is computed as the 

product of: 

(A) The cost recovery deduction, 

expressed in the functional currency of 

the section 987 QBU; and 

(B) The exchange rate specified in 

paragraph (c)(2)(i) of this section for 

translating the cost recovery deduction 

(that is, the historic rate for the property 

to which such deduction is attributable) 

less the exchange rate used to translate 

COGS under the simplified inventory 

method described in paragraph 

(c)(2)(iv)(A) of this section (that is, the 

yearly average exchange rate for the 

taxable year). 

(iii) Adjustment to beginning 

inventory for non-LIFO inventory. In the 

case of inventory with respect to which 

a section 987 QBU does not use the 

LIFO inventory method (non-LIFO 

inventory), the translated COGS amount 

computed under paragraph (c)(2)(iv)(A) 

of this section is increased or decreased 

(as appropriate) by the product of: 

(A) The ending non-LIFO inventory 

included on the closing balance sheet 

for the preceding year, expressed in the 

functional currency of the section 987 

QBU; and 

(B) The exchange rate described in 

§§ 1.987–4(e)(2)(ii) and 1.987– 

1(c)(3)(i)(B) that is used for translating 

ending inventory on the closing balance 

sheet for the preceding year (which is 

generally the yearly average exchange 

rate for the preceding year) less the 

exchange rate used to translate COGS 

under paragraph (c)(2)(iv)(A) of this 

section (that is, the yearly average 

exchange rate for the taxable year). For 

purposes of this paragraph (c)(3)(iii)(B), 

in the first taxable year in which a 

current rate election is revoked or 

otherwise ceases to be in effect, the 

exchange rate that is used for translating 

ending inventory on the closing balance 

sheet for the preceding year is deemed 

to be equal to the spot rate applicable 

to the last day of the preceding taxable 

year. 

(iv) Adjustment for year of LIFO 

liquidation. In the case of inventory 

with respect to which a section 987 

QBU uses the LIFO inventory method, 

for each LIFO layer liquidated in whole 

or in part during the taxable year, the 

translated COGS amount computed 

under paragraph (c)(2)(iv)(A) of this 

section is increased or decreased (as 

appropriate) by the product of: 

(A) The amount of the LIFO layer 

liquidated during the taxable year, 

expressed in the functional currency of 

the section 987 QBU; and 

(B) The exchange rate described in 

§§ 1.987–4(e)(2)(ii) and 1.987– 

1(c)(3)(i)(B) or (F) that is used for 

translating such LIFO layer (which is 

generally the yearly average exchange 

rate for the year such LIFO layer arose) 

less the exchange rate used to translate 

COGS under paragraph (c)(2)(iv)(A) of 

this section (that is, the yearly average 

exchange rate for the taxable year). 

(d) [Reserved] 

(e) Examples. The following examples 

illustrate the application of this section. 

For purposes of the examples, U.S. Corp 

is a domestic corporation that uses the 

calendar year as its taxable year and has 

the U.S. dollar as its functional 

currency. Except as otherwise indicated, 

U.S. Corp is the owner of Business A, 

a section 987 QBU with the euro as its 

functional currency, and elects under 

paragraph (c)(2)(iv)(B) of this section to 

use the historic inventory method with 

respect to Business A but does not make 

any other elections under section 987. 

Exchange rates used in these examples 

are selected for the purpose of 

illustrating the principles of this 

section. No inference (for example, 

whether a currency is hyperinflationary 

or not) is intended by their use. 

(1) Example 1. Business A accrues 

£100 of income from the provision of 

services. Under paragraph (b)(2)(i) of 

this section, the £100 is translated into 

Ö90 at the spot rate on the date of 

accrual, without the use of a spot rate 

convention. In determining U.S. Corp’s 

taxable income, the Ö90 of income is 

translated into dollars at the rate 

provided in paragraph (c)(1) of this 

section. 

(2) Example 2. Business A sells a 

historic asset consisting of noninventory property for £100. Under 

paragraph (b)(2)(i) of this section, the 

£100 amount realized is translated into 

Ö85 at the spot rate on the sale date 

without the use of a spot rate 


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convention. In determining U.S. Corp’s 

taxable income, the Ö85 is translated 

into dollars at the rate provided in 

paragraph (c)(1) of this section. The euro 

basis of the property is translated into 

dollars at the rate provided in paragraph 

(c)(2)(i) of this section (that is, the 

historic rate). 

(3) Example 3—(i) Facts. Business A 

uses a first-in, first-out (FIFO) method of 

accounting for inventory. Business A 

sells 1,200 units of inventory in year 2 

for Ö3 per unit. Business A’s gross sales 

are translated under paragraph (c)(1) of 

this section at the yearly average 

exchange rate for the year of the sale. 

The yearly average exchange rate is Ö1 

= $1.02 for year 1 and Ö1 = $1.05 for 

year 2. 

(ii) Analysis—(A) Business A’s dollar 

gross sales will be computed as follows: 

TABLE 1 TO PARAGRAPH (e)(3)(ii)(A)—GROSS SALES

[Year 2] 

Month Number of 

units Amount in Ö Ö/$ yearly average rate Amount in $ 

Jan .................................................................. 100 300 Ö1 = $1.05 ...................................................... 315.00 

Feb .................................................................. 200 600 Ö1 = $1.05 ...................................................... 630.00 

March .............................................................. 0 0 Ö1 = $1.05 ...................................................... 0.00 

April ................................................................. 200 600 Ö1 = $1.05 ...................................................... 630.00 

May ................................................................. 100 300 Ö1 = $1.05 ...................................................... 315.00 

June ................................................................ 0 0 Ö1 = $1.05 ...................................................... 0.00 

July .................................................................. 100 300 Ö1 = $1.05 ...................................................... 315.00 

Aug .................................................................. 100 300 Ö1 = $1.05 ...................................................... 315.00 

Sept ................................................................. 0 0 Ö1 = $1.05 ...................................................... 0.00 

Oct ................................................................... 0 0 Ö1 = $1.05 ...................................................... 0.00 

Nov .................................................................. 100 300 Ö1 = $1.05 ...................................................... 315.00 

Dec .................................................................. 300 900 Ö1 = $1.05 ...................................................... 945.00 

1,200 ........................ ......................................................................... $3,780.00 

(B) The purchase price for each 

inventory unit was Ö1.50. Under 

§ 1.987–1(c)(3)(i) and paragraph 

(c)(2)(iv)(B) of this section, the basis of 

each item of inventory is translated into 

dollars at the yearly average exchange 

rate for the year the inventory was 

acquired. 

TABLE 2 TO PARAGRAPH (e)(3)(ii)(B)—OPENING INVENTORY AND PURCHASES

[Year 2] 

Month Number of 

units Amount in Ö Ö/$ yearly average rate Amount in $ 

Opening inventory (purchased in Dec. year 1) 100 150 Ö1 = $1.02 ...................................................... 153.00 

Purchases in year 2 

Jan ........................................................... 300 450 Ö1 = $1.05 ...................................................... 472.50 

Feb ........................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

March ....................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

April .......................................................... 300 450 Ö1 = $1.05 ...................................................... 472.50 

May .......................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

June ......................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

July ........................................................... 300 450 Ö1 = $1.05 ...................................................... 472.50 

Aug ........................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

Sept .......................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

Oct ........................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

Nov ........................................................... 300 450 Ö1 = $1.05 ...................................................... 472.50 

Dec ........................................................... 0 0 Ö1 = $1.05 ...................................................... 0 

1,200 ........................ ......................................................................... 1,890.00 

(C) Because Business A uses a FIFO 

method for inventory, Business A is 

considered to have sold in year 2 the 

100 units of opening inventory 

purchased in year 1 ($153.00), the 300 

units purchased in January year 2 

($472.50), the 300 units purchased in 

April year 2 ($472.50), the 300 units 

purchased in July year 2 ($472.50), and 

200 of the 300 units purchased in 

November year 2 ($315.00). 

Accordingly, Business A’s translated 

dollar COGS for year 2 is $1,885.50. 

Business A’s opening inventory for year 

3 is 100 units of inventory with a 

translated dollar basis of $157.50. 

(D) Accordingly, for purposes of 

section 987, Business A has gross 

income in dollars of $1,894.50 

($3,780.00—$1,885.50) for year 2. 

(4) [Reserved] 

(5) Example 5. The facts are the same 

as in paragraph (e)(3) of this section 

(Example 3) except that during year 2, 

Business A incurred Ö100 of 

depreciation expense with respect to a 

truck. No portion of the depreciation 

expense is an inventoriable cost. The 

truck was purchased on January 15, year 

1. The yearly average exchange rate for 

year 1 was Ö1 = $1.02. Under paragraph 

(c)(2)(i) of this section, the Ö100 of 

depreciation is translated into dollars at 

the historic rate. The historic rate is the 

yearly average exchange rate for year 1. 

Accordingly, U.S. Corp takes into 

account depreciation of $102 with 

respect to Business A in year 2. 

(6) Example 6. The facts are the same 

as in paragraph (e)(5) of this section 


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(Example 5) except that the Ö100 of 

depreciation expense incurred during 

year 2 with respect to the truck is an 

inventoriable cost. As a result, the 

depreciation expense is capitalized into 

the 1,200 units of inventory purchased 

by Business A in year 2. Of those 1,200 

units, 1,100 units are sold during the 

year, and 100 units become ending 

inventory. The portion of depreciation 

expense capitalized into inventory that 

is sold during year 2 is reflected in 

Business A’s euro COGS and is 

translated at the Ö1 = $1.02 yearly 

average exchange rate for year 1, the 

year in which the truck was purchased. 

The portion of the depreciation expense 

capitalized into the 100 units of ending 

inventory is not taken into account in 

year 2 but rather, will be taken into 

account in the year the ending inventory 

is sold, translated at the Ö1 = $1.02 

yearly average exchange rate for year 1. 

(7) Example 7. Business A purchased 

raw land on October 16, year 1, for 

Ö8,000 and sold the land on November 

1, year 2, for Ö10,000. The yearly 

average exchange rate was Ö1 = $1.02 

for year 1 and Ö1 = $1.05 for year 2. 

Under paragraph (c)(1) of this section, 

the amount realized is translated into 

dollars at the yearly average exchange 

rate for year 2 (Ö10,000 × $1.05 = 

$10,500). Under paragraph (c)(2)(i) of 

this section, the basis is determined at 

the historic rate for year 1, which is the 

yearly average exchange rate under 

section § 1.987–1(c)(3)(i) for such year 

(Ö8,000 × $1.02 = $8,160). Accordingly, 

the amount of gain reported by U.S. 

Corp on the sale of the land is $2,340 

($10,500—$8,160). 

(8) Example 8. The facts are the same 

as in paragraph (e)(7) of this section 

(Example 7), except that U.S. Corp 

makes a current rate election under 

§ 1.987–1(d)(2). Under paragraph (c)(2) 

of this section, none of the exceptions 

to paragraph (c)(1) of this section apply 

in a taxable year for which an annual 

recognition election or a current rate 

election is in effect. As a result, all items 

of income, gain, deduction, and loss 

with respect to Business A are 

translated into U.S Corp’s functional 

currency at the yearly average exchange 

rate under paragraph (c)(1) of this 

section. Business A’s gain on the sale of 

the land is determined in its functional 

currency and is equal to Ö2,000 (amount 

realized of Ö10,000 less basis of Ö8,000). 

This gain is translated at the yearly 

average exchange rate for year 2 of Ö1 

= $1.05, and the amount of gain 

reported by U.S. Corp on the sale of the 

land is $2,100. The result would be the 

same if U.S. Corp made an annual 

recognition election under § 1.987– 

5(b)(2). 

■ 9. Section 1.987–4 is revised to read 

as follows: 

§ 1.987–4 Determination of net 

unrecognized section 987 gain or loss of a 

section 987 QBU. 

(a) In general. The net unrecognized 

section 987 gain or loss of a section 987 

QBU is determined by the owner 

annually as provided in paragraph (b) of 

this section in the owner’s functional 

currency. Only assets and liabilities 

reflected on the books and records of the 

section 987 QBU under § 1.987–2(b) are 

taken into account. 

(b) Calculation of net unrecognized 

section 987 gain or loss. Net 

unrecognized section 987 gain or loss of 

a section 987 QBU for a taxable year 

equals the sum of: 

(1) The section 987 QBU’s net 

accumulated unrecognized section 987 

gain or loss for all prior taxable years as 

determined in paragraph (c) of this 

section; and 

(2) The section 987 QBU’s 

unrecognized section 987 gain or loss 

for the current taxable year as 

determined in paragraph (d) of this 

section. 

(c) Net accumulated unrecognized 

section 987 gain or loss for all prior 

taxable years—(1) In general. A section 

987 QBU’s net accumulated 

unrecognized section 987 gain or loss 

for all prior taxable years is the 

aggregate of the amounts determined 

under § 1.987–4(d) for all prior taxable 

years to which this section applies, 

reduced (without duplication) by 

amounts recognized under § 1.987–5(a), 

amounts treated as deferred section 987 

gain or loss, and amounts treated as 

suspended section 987 loss for all prior 

taxable years to which this section 

applies. 

(2) Additional adjustments for certain 

taxable years beginning on or before 

December 31, 2024. For any section 987 

QBU in existence before the transition 

date, see § 1.987–10(e)(5) and (f)(2) for 

additional adjustments to the section 

987 QBU’s net accumulated 

unrecognized section 987 gain or loss. 

(d) Calculation of unrecognized 

section 987 gain or loss for a taxable 

year. The unrecognized section 987 gain 

or loss of a section 987 QBU for a 

taxable year is generally determined 

under paragraphs (d)(1) through (10) of 

this section. However, for taxable years 

in which a current rate election or an 

annual recognition election is in effect, 

the unrecognized section 987 gain or 

loss of a section 987 QBU for a taxable 

year is determined by only applying 

paragraphs (d)(1) through (5) and (10) of 

this section. 

(1) Step 1: Determine the change in 

the owner functional currency net value 

of the section 987 QBU for the taxable 

year—(i) In general. The change in the 

owner functional currency net value of 

the section 987 QBU for the taxable year 

equals— 

(A) The owner functional currency 

net value of the section 987 QBU, 

determined in the functional currency 

of the owner under paragraph (e) of this 

section, on the last day of the taxable 

year; less 

(B) The owner functional currency net 

value of the section 987 QBU, 

determined in the functional currency 

of the owner under paragraph (e) of this 

section, on the last day of the preceding 

taxable year. 

(ii) Year section 987 QBU is 

terminated. If a section 987 QBU is 

terminated within the meaning of 

§ 1.987–8 during an owner’s taxable 

year, the owner functional currency net 

value of the section 987 QBU described 

in paragraph (d)(1)(i)(A) of this section 

is determined on the date the section 

987 QBU is terminated. 

(iii) First taxable year of a section 987 

QBU. If the owner’s taxable year is the 

first taxable year of a section 987 QBU, 

the owner functional currency net value 

of the section 987 QBU described in 

paragraph (d)(1)(i)(B) of this section is 

zero. 

(iv) First year in which an election is 

in effect or ceases to be in effect. Except 

as otherwise provided, the owner 

functional currency net value of the 

section 987 QBU described in paragraph 

(d)(1)(i)(B) of this section is determined 

based on the elections that were (or 

were not) in effect on the last day of the 

preceding taxable year. 

(2) Step 2: Increase the amount 

determined in step 1 by the amount of 

assets transferred from the section 987 

QBU to the owner—(i) In general. The 

amount determined in paragraph (d)(1) 

of this section is increased by the total 

amount of assets transferred from the 

section 987 QBU to the owner during 

the taxable year translated into the 

functional currency of the owner as 

provided in paragraph (d)(2)(ii) of this 

section. 

(ii) Assets transferred from the section 

987 QBU to the owner during the 

taxable year. The total amount of assets 

transferred from the section 987 QBU to 

the owner for the taxable year translated 

into the functional currency of the 

owner equals the sum of: 

(A) The amount of the functional 

currency of the section 987 QBU and the 

aggregate adjusted basis of all marked 

assets, after taking into account § 1.988– 

1(a)(10), transferred to the owner during 

the taxable year determined in the 


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functional currency of the section 987 

QBU and translated into the functional 

currency of the owner at the spot rate 

applicable to the date of transfer; and 

(B) The aggregate adjusted basis of all 

historic assets, after taking into account 

§ 1.988–1(a)(10), transferred to the 

owner during the taxable year 

determined in the functional currency 

of the section 987 QBU and translated 

into the functional currency of the 

owner at the historic rate for each such 

asset. 

(3) Step 3: Decrease the amount 

determined in steps 1 and 2 by the 

amount of assets transferred from the 

owner to the section 987 QBU—(i) In 

general. The aggregate amount 

determined in paragraphs (d)(1) and (2) 

of this section is decreased by the total 

amount of assets transferred from the 

owner to the section 987 QBU during 

the taxable year determined in the 

functional currency of the owner as 

provided in paragraph (d)(3)(ii) of this 

section. 

(ii) Assets transferred from the owner 

to the section 987 QBU during the 

taxable year. The total amount of assets 

transferred from the owner to the 

section 987 QBU for the taxable year 

equals the sum of: 

(A) The amount of functional 

currency of the owner transferred to the 

section 987 QBU during the taxable 

year; and 

(B) The aggregate adjusted basis of all 

assets, after taking into account § 1.988– 

1(a)(10), transferred to the section 987 

QBU during the taxable year determined 

in the functional currency of the owner 

immediately before the transfer. 

(4) Step 4: Decrease the amount 

determined in steps 1 through 3 by the 

amount of liabilities transferred from 

the section 987 QBU to the owner—(i) 

In general. The aggregate amount 

determined in paragraphs (d)(1) through 

(3) of this section is decreased by the 

total amount of liabilities transferred 

from the section 987 QBU to the owner 

during the taxable year translated into 

the functional currency of the owner as 

provided in paragraph (d)(4)(ii) of this 

section. 

(ii) Liabilities transferred from the 

section 987 QBU to the owner during the 

taxable year. The total amount of 

liabilities transferred from the section 

987 QBU to the owner for the taxable 

year equals the sum of: 

(A) The amount of marked liabilities 

transferred to the owner during the 

taxable year determined in the 

functional currency of the section 987 

QBU and translated into the functional 

currency of the owner at the spot rate 

applicable to the date of transfer; and 

(B) The amount of historic liabilities, 

after taking into account § 1.988– 

1(a)(10), transferred to the owner during 

the taxable year determined in the 

functional currency of the section 987 

QBU and translated into the functional 

currency of the owner at the historic 

rate for each such liability. 

(5) Step 5: Increase the amount 

determined in steps 1 through 4 by the 

amount of liabilities transferred from 

the owner to the section 987 QBU. The 

aggregate amount determined in 

paragraphs (d)(1) through (4) of this 

section is increased by the total amount 

of liabilities, after taking into account 

§ 1.988–1(a)(10), transferred from the 

owner to the section 987 QBU during 

the taxable year determined in the 

functional currency of the owner 

immediately before the transfer. 

(6) Step 6: Decrease or increase the 

amount determined in steps 1 through 

5 by the section 987 taxable income or 

loss, respectively, of the section 987 

QBU for the taxable year. The aggregate 

amount determined in paragraphs (d)(1) 

through (5) of this section is decreased 

or increased by the section 987 taxable 

income or loss, respectively, computed 

under § 1.987–3 for the taxable year. 

(7) Step 7: Increase the amount 

determined in steps 1 through 6 by any 

expenses or losses that are not 

deductible in computing the section 987 

taxable income or loss of the section 987 

QBU for the taxable year. The aggregate 

amount determined under paragraphs 

(d)(1) through (6) of this section is 

increased by the amount of any expense 

or loss that reduces the basis of assets 

or increases the amount of liabilities on 

the adjusted balance sheet of the section 

987 QBU for the taxable year but is not 

deductible in computing the section 987 

QBU’s taxable income or loss for the 

taxable year (such as business interest 

expense that is not deductible under 

section 163(j)). Items of expense or loss 

described in the preceding sentence are 

translated into the functional currency 

of the owner using the exchange rate 

that would apply under § 1.987–3(c) if 

they were deductible in computing the 

section 987 QBU’s taxable income or 

loss for the taxable year. However, any 

foreign income taxes incurred by the 

section 987 QBU with respect to which 

the owner claims a credit are translated 

at the same rate at which such taxes 

were translated under section 986(a). 

(8) Step 8: Decrease the amount 

determined in steps 1 through 7 by the 

amount of any income or gain that is 

not included in taxable income in 

computing the section 987 taxable 

income or loss of the section 987 QBU 

for the taxable year. The aggregate 

amount determined under paragraphs 

(d)(1) through (7) of this section is 

decreased by the amount of any income 

or gain that increases the basis of assets 

or reduces the amount of liabilities on 

the adjusted balance sheet of the section 

987 QBU for the taxable year but is not 

included in taxable income in 

computing the section 987 QBU’s 

taxable income or loss for the taxable 

year. Items of income or gain described 

in the preceding sentence are translated 

into the functional currency of the 

owner using the exchange rate that 

would apply under § 1.987–3(c) if they 

were included in taxable income in 

computing the section 987 QBU’s 

taxable income or loss for the taxable 

year. 

(9) Step 9: Increase or decrease the 

amount determined in steps 1 through 

8 by any income or gain, or any 

deduction or loss, respectively, that does 

not impact the adjusted balance sheet. 

The aggregate amount determined under 

paragraphs (d)(1) through (8) of this 

section is increased by any items of 

income or gain taken into account in 

step 6 that do not increase the basis of 

assets or reduce the amount of liabilities 

on the adjusted balance sheet of the 

section 987 QBU for the taxable year, 

and decreased by any items of 

deduction or loss taken into account in 

step 6 that do not reduce the basis of 

assets or increase the amount of 

liabilities on the adjusted balance sheet 

of the section 987 QBU for the taxable 

year. Items of income, gain, deduction, 

or loss described in the preceding 

sentence are translated into the 

functional currency of the owner using 

the exchange rate that applied under 

§ 1.987–3(c) in computing the section 

987 QBU’s taxable income or loss for the 

taxable year. 

(10) Step 10: Decrease or increase the 

amount determined in steps 1 through 

9 by any increase or decrease, 

respectively, to the adjusted balance 

sheet that is not previously taken into 

account under steps 2 through 9—(i) In 

general. Except as provided in 

paragraph (d)(10)(iii) of this section, the 

aggregate amount determined under 

paragraphs (d)(1) through (9) of this 

section is— 

(A) Decreased by the residual increase 

to the adjusted balance sheet (as defined 

in paragraph (d)(10)(ii) of this section), 

translated into the owner’s functional 

currency at the yearly average exchange 

rate for the taxable year; or 

(B) Increased by the residual decrease 

to the adjusted balance sheet (as defined 

in paragraph (d)(10)(ii) of this section), 

translated into the owner’s functional 

currency at the yearly average exchange 

rate for the taxable year. 


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78178 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

(ii) Determining the residual increase 

or decrease to the adjusted balance 

sheet. The residual increase to the 

adjusted balance sheet is the positive 

amount, if any, that would be 

determined under paragraphs (d)(1) 

through (9) of this section in the 

functional currency of the section 987 

QBU if such amounts were determined 

in the functional currency of the section 

987 QBU. The residual decrease to the 

adjusted balance sheet is the negative 

amount, if any, that would be 

determined under paragraphs (d)(1) 

through (9) of this section in the 

functional currency of the section 987 

QBU if such amounts were determined 

in the functional currency of the section 

987 QBU. 

(iii) Modifications for taxable years to 

which a current rate election or an 

annual recognition election applies. For 

any taxable year to which a current rate 

election or an annual recognition 

election applies, paragraphs (d)(10)(i) 

and (ii) of this section are applied by 

replacing ‘‘paragraphs (d)(1) through 

(9)’’ with ‘‘paragraphs (d)(1) through 

(5).’’ 

(e) Determination of the owner 

functional currency net value of a 

section 987 QBU—(1) In general. The 

owner functional currency net value of 

a section 987 QBU on the last day of a 

taxable year is equal to the aggregate 

amount of functional currency and the 

adjusted basis of each other asset on the 

section 987 QBU’s adjusted balance 

sheet on that day, less the aggregate 

amount of each liability on the section 

987 QBU’s adjusted balance sheet on 

that day, in each case translated into the 

owner’s functional currency as provided 

in paragraph (e)(2) of this section. 

(2) Translation of adjusted balance 

sheet items into the owner’s functional 

currency. The amount of the section 987 

QBU’s functional currency, the basis of 

an asset, or the amount of a liability is 

translated as follows: 

(i) Marked item. A marked item is 

translated into the owner’s functional 

currency at the spot rate applicable to 

the last day of the relevant taxable year. 

(ii) Historic item. A historic item is 

translated into the owner’s functional 

currency at the historic rate. 

(f) Combinations and separations—(1) 

Combinations. The net accumulated 

unrecognized section 987 gain or loss of 

a combined QBU for a taxable year is 

equal to the sum of the combining 

QBUs’ net accumulated unrecognized 

section 987 gain or loss. See paragraph 

(f)(3)(i) of this section (Example 1) for an 

illustration of this rule. 

(2) Separations. The net accumulated 

unrecognized section 987 gain or loss of 

a separated QBU for a taxable year is 

equal to the separating QBU’s net 

accumulated unrecognized section 987 

gain or loss multiplied by the separation 

fraction. For purposes of determining 

the owner functional currency net value 

of the separated QBUs on the last day 

of the taxable year preceding the taxable 

year of separation under paragraphs 

(d)(1)(i)(B) and (e) of this section, the 

balance sheets of the separated QBUs on 

that day will be deemed to reflect the 

assets and liabilities reflected on the 

balance sheet of the separating QBU on 

that day, apportioned between the 

separated QBUs in a reasonable manner 

that takes into account the assets and 

liabilities reflected on the balance sheets 

of the separated QBUs immediately after 

the separation. See paragraph (f)(3)(ii) of 

this section (Example 2) for an 

illustration of this rule. 

(3) Examples. The following examples 

illustrate the rules of paragraphs (f)(1) 

and (2) of this section. For purposes of 

these examples, assume that no section 

987 elections are in effect. 

(i) Example 1. Combination of two 

section 987 QBUs that have the same 

owner—(A) Facts. DC1, a domestic 

corporation, owns Entity A, a DE. Entity 

A conducts a manufacturing business 

that constitutes a section 987 QBU 

(Manufacturing QBU) that has the euro 

as its functional currency. 

Manufacturing QBU has a net 

accumulated unrecognized section 987 

loss of $100. DC1 also owns Entity B, a 

DE. Entity B conducts a sales business 

that constitutes a section 987 QBU 

(Sales QBU) that has the euro as its 

functional currency. Sales QBU has a 

net accumulated unrecognized section 

987 gain of $110. During the taxable 

year, Entity A merges into Entity B 

under local law pursuant to which 

Entity A ceases to exist, Entity B 

survives, and Entity B acquires all the 

assets and liabilities of Entity A. As a 

result, the books and records of 

Manufacturing QBU and Sales QBU are 

combined into a new single set of books 

and records. The combined entity has 

the euro as its functional currency. 

(B) Analysis. Pursuant to § 1.987– 

2(c)(9)(i), Manufacturing QBU and Sales 

QBU are combining QBUs, and their 

combination does not give rise to a 

transfer that is taken into account in 

determining the amount of a remittance 

(as defined in § 1.987–5(c)). For 

purposes of computing net 

unrecognized section 987 gain or loss 

under this section for the year of the 

combination, the combination is 

deemed to have occurred on the last day 

of the owner’s prior taxable year, such 

that the owner functional currency net 

value of the combined section 987 QBU 

at the end of that taxable year described 

under paragraph (d)(1)(i)(B) of this 

section takes into account items 

reflected on the balance sheets of both 

Manufacturing QBU and Sales QBU at 

that time. Additionally, any transactions 

between Manufacturing QBU and Sales 

QBU occurring during the year of the 

merger will not result in transfers to or 

from a section 987 QBU. Pursuant to 

paragraph (f)(1) of this section, the 

combined QBU will have a net 

accumulated unrecognized section 987 

gain of $10 (the $100 loss from 

Manufacturing QBU plus the $110 gain 

from Sales QBU). 

(ii) Example 2. Separation of two 

section 987 QBUs that have the same 

owner—(A) Facts. DC1, a domestic 

corporation, owns Entity A, a DE. Entity 

A conducts a business in the 

Netherlands that constitutes a section 

987 QBU (Dutch QBU) that has the euro 

as its functional currency. The business 

of Dutch QBU consists of manufacturing 

and selling bicycles and scooters and is 

recorded on a single set of books and 

records. On the last day of year 1, the 

adjusted basis of the gross assets of 

Dutch QBU is Ö1,000. In year 2, the net 

accumulated unrecognized section 987 

loss of Dutch QBU from all prior taxable 

years is $200. During year 2, Entity A 

separates the bicycle and scooter 

business such that each business begins 

to have its own books and records and 

to meet the definition of a section 987 

QBU under § 1.987–1(b)(3) (hereafter, 

‘‘bicycle QBU’’ and ‘‘scooter QBU’’). 

There are no transfers between DC1 and 

Dutch QBU before the separation. After 

the separation, the aggregate adjusted 

basis of bicycle QBU’s assets is Ö600 

and the aggregate adjusted basis of 

scooter QBU’s assets is Ö400. Each 

section 987 QBU continues to have the 

euro as its functional currency. 

(B) Analysis. Pursuant to § 1.987– 

2(c)(9)(iii), bicycle QBU and scooter 

QBU are separated QBUs, and the 

separation of Dutch QBU, a separating 

QBU, does not give rise to a transfer 

taken into account in determining the 

amount of a remittance. For purposes of 

computing net unrecognized section 987 

gain or loss under this section for year 

2, the separation will be deemed to have 

occurred on the last day of the owner’s 

prior taxable year, year 1. Pursuant to 

paragraph (f)(2) of this section and 

§ 1.987–1(h), bicycle QBU will have a 

separation fraction of Ö600/Ö1,000 and 

net accumulated unrecognized section 

987 loss of $120 (Ö600/Ö1,000 × $200), 

and scooter QBU will have a separation 

fraction of Ö400/Ö1,000 and net 

accumulated unrecognized section 987 

loss of $80 (Ö400/Ö1,000 × $200). 

(g) Examples. The following examples 

illustrate the provisions of this section. 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 78179 

For purposes of the examples, U.S. Corp 

is a domestic corporation that uses the 

calendar year as its taxable year and has 

the dollar as its functional currency. 

Except as otherwise indicated, no 

section 987 elections are in effect. 

Exchange rate assumptions used in 

these examples are selected for the 

purpose of illustrating the principles of 

this section, and no inference is 

intended by their use. Additionally, the 

examples are not intended to 

demonstrate when activities constitute a 

trade or business within the meaning of 

§§ 1.989(a)–1(b)(2)(ii)(A) and 1.989(a)– 

1(c) and therefore whether a section 987 

QBU is considered to exist. 

(1) Example 1—(i) Facts. On July 1, 

year 1, U.S. Corp establishes Japan 

Branch, a section 987 QBU that has the 

yen as its functional currency, and U.S. 

Corp transfers to Japan Branch ¥100,000 

with a basis of $1,000 and raw land with 

a basis of $500. On the same day, Japan 

Branch borrows ¥10,000 from a bank. In 

year 1, Japan Branch earns ¥12,000 for 

providing services and incurs ¥2,000 of 

related expenses. Japan Branch thus 

earns ¥10,000 of net income in year 1. 

The spot rate on July 1, year 1, is $1 = 

¥100; the spot rate on December 31, year 

1, is $1 = ¥120; and the average rate for 

the period of July 1, year 1, to December 

31, year 1, is $1 = ¥110. Thus, the 

¥12,000 of services revenue when 

translated under § 1.987–3(c)(1) at the 

yearly average exchange rate equals 

$109.09 (¥12,000 × ($1/¥110)) = 

$109.09). The ¥2,000 of expenses 

translated at the same yearly average 

exchange rate equals $18.18 (¥2,000 × 

($1/¥110) = $18.18). Thus, Japan 

Branch’s net income translated into 

dollars equals $90.91 ($109.09—$18.18 

= $90.91). 

(ii) Analysis. Under paragraph (a) of 

this section, U.S. Corp must compute 

the net unrecognized section 987 gain or 

loss of Japan Branch for year 1. Because 

this is Japan Branch’s first taxable year, 

the net unrecognized section 987 gain or 

loss (as defined under paragraph (b) of 

this section) is the branch’s 

unrecognized section 987 gain or loss 

for year 1 as determined in paragraph 

(d) of this section. The calculations 

under paragraph (d) of this section are 

made as follows: 

(A) Step 1. Under paragraph (d)(1) of 

this section (Step 1), U.S. Corp must 

determine the change in the owner 

functional currency net value (OFCNV) 

of Japan Branch for year 1 in dollars. 

The change in the OFCNV of Japan 

Branch for year 1 is equal to the OFCNV 

of Japan Branch determined in dollars 

on the last day of year 1, less the 

OFCNV of Japan Branch determined in 

dollars on the last day of the preceding 

taxable year. 

(1) The OFCNV of Japan Branch on 

December 31, year 1 is determined 

under paragraph (e) of this section as 

the sum of the basis of each asset on 

Japan Branch’s adjusted balance sheet 

on December 31, year 1, less the sum of 

each liability on Japan Branch’s 

adjusted balance sheet on that date, 

translated into dollars as provided in 

paragraph (e)(2) of this section. 

(2) For this purpose, Japan Branch 

will show the following assets and 

liabilities on its adjusted balance sheet 

for December 31, year 1: cash of 

¥120,000; raw land with a basis of 

¥55,000 ($500 translated under § 1.987– 

2(d)(2) at the historic rate of $1 = ¥110); 

and liabilities of ¥10,000. 

(3) Under paragraph (e)(2) of this 

section, U.S. Corp will translate these 

items as follows. The ¥120,000 is a 

marked asset and the ¥10,000 liability is 

a marked liability. These items are 

translated into dollars on December 31, 

year 1, using the spot rate on December 

31, year 1, of $1 = ¥120. The raw land 

is a historic asset and is translated into 

dollars under paragraph (e)(2)(ii) of this 

section at the historic rate, which under 

§ 1.987–1(c)(3)(i)(A) is the yearly 

average exchange rate of $1 = ¥110 

applicable to the year the land was 

transferred to the QBU. 

(4) The OFCNV of Japan Branch on 

December 31, year 1, in dollars is 

$1,416.67, determined below. The 

OFCNV of Japan Branch on December 

31, year 1, is shown below in dollars 

(together with the corresponding 

amounts in yen). 

TABLE 1 TO PARAGRAPH (g)(1)(ii)(A)(4)—OFCNV—END OF YEAR 1 

Amount in ¥ Translation rate Amount in $ 

Assets 

Yen ........................................................................ 120,000 $1 = ¥120 (spot rate-12/31/year 1) ..............................

$1 = ¥110 (historic rate-yearly average rate-year 1) ...

1,000.00 

Land ....................................................................... 55,000 ....................................................................................... 500.00 

Total assets ........................................................... 175,000 ....................................................................................... 1,500.00 

Liabilities 

Bank loan .............................................................. 10,000 $1 = ¥120 (spot rate-12/31/year 1) .............................. 83.33 

Total liabilities ............................................................... 10,000 ....................................................................................... 83.33 

Year 1 ending net value ............................................... 165,000 ....................................................................................... 1,416.67 

(5) Under paragraph (d)(1) of this 

section, the change in OFCNV of Japan 

Branch for year 1 is equal to the OFCNV 

of the branch determined in dollars on 

December 31, year 1, (which is 

$1,416.67) less the OFCNV of the branch 

determined in dollars on the last day of 

the preceding taxable year. Because this 

is the first taxable year of Japan Branch, 

the OFCNV of Japan Branch determined 

in dollars on the last day of the 

preceding taxable year is zero under 

paragraph (d)(1)(iii) of this section. 

Accordingly, the change in OFCNV of 

Japan Branch for year 1 is $1,416.67. 

(B) Step 2 (no adjustment). No 

adjustment is made under paragraph 

(d)(2) of this section (Step 2) because no 

assets were transferred by Japan Branch 

to U.S. Corp during the taxable year. 

(C) Step 3. On July 1, year 1, U.S. 

Corp transferred to Japan Branch 

¥100,000 with a basis of $1,000.00 and 

raw land with a basis of $500.00 (equal 

to ¥55,000, translated under § 1.987– 

2(d)(2) at the historic rate of $1 = ¥110). 

The total amount of assets transferred 

from U.S. Corp to Japan Branch in 

dollars is $1,500, and the total amount 

of the transfer in yen is ¥155,000. 

Therefore, under paragraph (d)(3) of this 

section (Step 3), the amount determined 

in previous steps is reduced by 

$1,500.00, from $1,416.67 to negative 

$83.33. 

(D) Steps 4 and 5 (no adjustment). No 

adjustment is made under paragraphs 

(d)(4) and (5) of this section (Steps 4 and 

5) because no liabilities were transferred 

by U.S. Corp to Japan Branch or by 

Japan Branch to U.S. Corp during the 

taxable year. 

(E) Step 6. Under paragraph (d)(6) of 

this section (Step 6), the amount 

determined in previous steps is 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
78180 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

decreased by the section 987 taxable 

income of Japan Branch of $90.91, from 

negative $83.33 to negative $174.24. 

(F) Steps 7 through 9 (no adjustment). 

No adjustment is made under 

paragraphs (d)(7) through (9) of this 

section (Steps 7 through 9) because all 

of Japan Branch’s items of income or 

deduction for the taxable year impact 

the adjusted balance sheet and are taken 

into account in computing taxable 

income. 

(G) Step 10 (no adjustment)—(1) 

Calculation of residual increase or 

decrease to the adjusted balance sheet. 

Under paragraph (d)(10)(ii) of this 

section, the residual increase (or 

decrease) to the adjusted balance sheet 

is the positive (or negative) amount, if 

any, that would be determined under 

paragraphs (d)(1) through (9) of this 

section (Steps 1 through 9) in the 

functional currency of the section 987 

QBU if such amounts were determined 

in the functional currency of the section 

987 QBU. In year 1, the relevant steps 

that must be applied in the functional 

currency of Japan Branch (the yen) are 

paragraphs (d)(1), (3), and (6) of this 

section (Steps 1, 3, and 6). For purposes 

of applying paragraph (d)(1) of this 

section (Step 1) in yen, the change in 

the net value of Japan Branch is 

¥165,000. See paragraph (g)(1)(ii)(A)(4) 

of this section. For purposes of applying 

paragraph (d)(3) of this section (Step 3) 

in yen, the amount of assets transferred 

from U.S. Corp to Japan Branch is 

¥155,000. See paragraph (g)(1)(ii)(C) of 

this section. For purposes of applying 

paragraph (d)(6) of this section (Step 6) 

in yen, Japan Branch earned ¥10,000 of 

net income in year 1. The application of 

these steps results in no residual 

increase or decrease to the adjusted 

balance sheet, as shown below: 

TABLE 2 TO PARAGRAPH (g)(1)(ii)(G)(1)—APPLICATION OF RELEVANT STEPS IN YEN

Change in net value in yen (Step 1) ............................................................................................................................................. ¥165,000 

Subtract amount determined in yen under Step 3 (transfers from owner to section 987 QBU) .................................................. (¥155,000) 

Subtract amount determined in yen under Step 6 (section 987 taxable income or loss) ............................................................ (¥10,000) 

Residual increase or decrease to the adjusted balance sheet .............................................................................................. ¥0 

(2) No residual increase or decrease to 

the adjusted balance sheet. As 

explained in paragraph (g)(1)(ii)(G)(1) of 

this section, there is no residual 

increase or decrease to the adjusted 

balance sheet of Japan Branch in year 1. 

Therefore, no adjustment is made under 

paragraph (d)(10) of this section (Step 

10). Accordingly, the unrecognized 

section 987 loss of Japan Branch for year 

1 is $174.24. 

(2) Example 2—(i) Facts. The facts are 

the same as in paragraph (g)(1) of this 

section (Example 1), except that U.S. 

Corp makes a current rate election 

under § 1.987–1(d)(2) for year 1. 

(ii) Analysis. Because a current rate 

election is in effect for year 1, the 

unrecognized section 987 gain or loss 

for year 1 is determined by applying 

only paragraphs (d)(1) through (5) and 

(10) of this section (Steps 1 through 5 

and Step 10). The calculations under 

paragraph (d) of this section are made as 

follows: 

(A) Step 1. The change in the OFCNV 

of Japan Branch for year 1 is equal to the 

OFCNV of Japan Branch determined in 

dollars on the last day of year 1, less the 

OFCNV of Japan Branch determined in 

dollars on the last day of the preceding 

taxable year. 

(1) For this purpose, Japan Branch 

will show the same assets and liabilities 

on its adjusted balance sheet for 

December 31, year 1 as are described in 

paragraph (g)(1)(ii)(A)(2) of this section 

(Example 1), but the land is treated as 

a marked asset as a result of the current 

rate election. The adjusted balance sheet 

reflects cash of ¥120,000, raw land with 

a basis of ¥50,000 ($500 translated 

under § 1.987–2(d)(1) at the July 1, year 

1 spot rate of $1 = ¥100), and liabilities 

of ¥10,000. 

(2) Because of the current rate 

election, all of Japan Branch’s assets and 

liabilities are treated as marked items. 

Therefore, under paragraph (e)(2) of this 

section, these items are translated into 

dollars on December 31, year 1, using 

the spot rate on December 31, year 1, of 

$1 = ¥120. 

(3) The OFCNV of Japan Branch on 

December 31, year 1, and the change in 

OFCNV of Japan Branch for year 1, is 

$1,333.33, determined below. The 

OFCNV (and change in OFCNV) of 

Japan Branch is shown below (together 

with the corresponding amounts in 

yen). 

TABLE 3 TO PARAGRAPH (g)(2)(ii)(A)(3)—OFCNV AND CHANGE IN OFCNV—YEAR 1 

Amount in ¥ Translation rate Amount in $ 

Assets 

Yen ........................................................................ 120,000 $1 = ¥120 (spot rate-12/31/year 1) .............................. 1,000.00 

Land ....................................................................... 50,000 $1 = ¥120 (spot rate-12/31/year 1) .............................. 416.67 

Total assets .................................................... 170,000 ....................................................................................... 1,416.67 

Liabilities 

Bank loan .............................................................. 10,000 $1 = ¥120 (spot rate-12/31/year 1) .............................. 83.33 

Total liabilities ................................................. 10,000 ....................................................................................... 83.33 

Year 1 ending net value ............................................... 160,000 ....................................................................................... 1,333.33 

Net value on the last day of the preceding taxable 

year.

0 ....................................................................................... 0 

Change in net value .............................................. 160,000 ....................................................................................... 1,333.33 

(B) Step 2 (no adjustment). No 

adjustment is made under paragraph 

(d)(2) of this section (Step 2) because no assets were transferred by Japan Branch 

to U.S. Corp during the taxable year. 


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(C) Step 3. On July 1, year 1, U.S. 

Corp transferred to Japan Branch 

¥100,000 with a basis of $1,000.00 and 

raw land with a basis of $500.00 (equal 

to ¥50,000, translated under § 1.987– 

2(d)(1) at the spot rate on July 31, year 

1 of $1 = ¥100). The total amount of 

assets transferred in dollars is $1,500.00, 

and the amount of assets transferred in 

yen is ¥150,000. Therefore, under 

paragraph (d)(3) of this section (Step 3), 

the amount determined in previous 

steps is reduced by $1,500, from 

$1,333.33 to negative $166.67. 

(D) Steps 4 and 5 (no adjustment). No 

adjustment is made under paragraphs 

(d)(4) and (5) of this section (Steps 4 and 

5) because no liabilities were transferred 

by U.S. Corp to Japan Branch or by 

Japan Branch to U.S. Corp during the 

taxable year. 

(E) Steps 6 through 9 do not apply. 

Under paragraph (d) of this section, 

paragraphs (d)(6) through (9) of this 

section (Steps 6 through 9) do not apply 

because a current rate election is in 

effect. 

(F) Step 10—(1) Application of 

relevant steps in Japan Branch’s 

functional currency. Under paragraph 

(d)(10)(iii) of this section, because a 

current rate election is in effect, the 

residual increase or decrease to the 

adjusted balance sheet is determined by 

applying paragraphs (d)(1) through (5) 

of this section (Steps 1 through 5) in the 

functional currency of the section 987 

QBU. The relevant steps that must be 

applied under paragraph (d)(10) of this 

section in the functional currency of 

Japan Branch are paragraphs (d)(1) and 

(3) of this section (Steps 1 and 3). See 

paragraphs (g)(2)(ii)(A) and (C) of this 

section for amounts determined in yen. 

The residual increase to the adjusted 

balance sheet is determined as follows: 

TABLE 4 TO PARAGRAPH (g)(2)(ii)(F)(1)—APPLICATION OF RELEVANT STEPS IN YEN

Step 1: Change in net value .......................................................................................................................................................... ¥160,000 

Step 3: Subtract amount of transfers from owner to section 987 QBU ........................................................................................ (¥150,000) 

Residual increase or decrease to the adjusted balance sheet .............................................................................................. ¥10,000 

(2) Residual increase or decrease to 

the adjusted balance sheet. As 

explained in paragraph (g)(2)(ii)(F)(1) of 

this section, the residual increase to 

Japan Branch’s adjusted balance sheet in 

year 1 is ¥10,000. This amount, 

translated at the yearly average 

exchange rate of $1 = ¥110, equals 

$90.91. Therefore, the amount 

determined in previous steps is reduced 

by $90.91, from negative $166.67 to 

negative $257.58. Accordingly, the 

unrecognized section 987 loss of Japan 

Branch for year 1 is $257.58. 

(3) Example 3—(i) Facts—(A) 

Background. The facts in year 1 are the 

same as in paragraph (g)(2) of this 

section (Example 2). In year 9, a current 

rate election remains in effect, U.S. Corp 

has net unrecognized section 987 loss of 

$1,000 with respect to Japan Branch, 

and Japan Branch does not make a 

remittance. On December 31, year 9, the 

adjusted balance sheet of Japan Branch 

shows the following assets and 

liabilities: cash of ¥120,000; raw land 

with a basis of ¥50,000; and liabilities 

of ¥10,000. Effective for year 10, U.S. 

Corp revokes the current rate election. 

(B) Operations in year 10. In year 10, 

Japan Branch earns ¥12,000 for 

providing services and incurs ¥2,000 of 

related expenses. Japan Branch thus 

earns ¥10,000 of net income in year 10. 

On December 31, year 10, the adjusted 

balance sheet of Japan Branch shows the 

following assets and liabilities: cash of 

¥130,000; raw land with a basis of 

¥50,000; and liabilities of ¥10,000. 

Assume that the spot rate on December 

31, year 9, is $1 = ¥120; the spot rate 

on December 31, year 10, is $1 = ¥130; 

and the yearly average exchange rate for 

year 10 is $1 = ¥125. Thus, the ¥12,000 

of services revenue when properly 

translated under § 1.987–3(c)(1) at the 

yearly average exchange rate equals 

$96.00 (¥12,000 × ($1/¥125)) = $96.00). 

The ¥2,000 of expenses translated at the 

same yearly average exchange rate 

equals $16.00 (¥2,000 × ($1/¥125) = 

$16.00). Thus, Japan Branch’s net 

income translated into dollars equals 

$80. There are no transfers of assets or 

liabilities between U.S. Corp and Japan 

Branch in year 10. 

(ii) Analysis—(A) Determination of 

OFCNV for year 9. Under paragraph 

(d)(1)(iv) of this section, the OFCNV of 

a section 987 QBU on the last day of the 

preceding taxable year is determined 

based on the elections that were (or 

were not) in effect on the last day of that 

taxable year. In year 9, a current rate 

election was in effect. Therefore, in 

determining the OFCNV of Japan 

Branch for year 9, all assets and 

liabilities of Japan Branch (including the 

land) are treated as marked items. The 

OFCNV of Japan Branch for year 9, is 

$1,333.33, determined under paragraph 

(e) of this section as follows (together 

with the corresponding amounts in 

yen): 

TABLE 5 TO PARAGRAPH (g)(3)(ii)(A)—OFCNV—END OF YEAR 9 

Amount in ¥ Translation rate Amount in $ 

Assets 

Yen ........................................................................ 120,000 $1 = ¥120 (spot rate-12/31/year 9) .............................. 1,000.00 

Land ....................................................................... 50,000 $1 = ¥120 (spot rate-12/31/year 9) .............................. 416.67 

Total assets .................................................... 170,000 ....................................................................................... 1,416.67 

Liabilities 

Bank loan .............................................................. 10,000 $1 = ¥120 (spot rate-12/31/year 9) .............................. 83.33 

Total liabilities ................................................. 10,000 ....................................................................................... 83.33 

Year 9 ending net value ............................................... 160,000 ....................................................................................... 1,333.33 

(B) Determination of OFCNV for year 

10. In year 10, a current rate election is 

not in effect. Therefore, in determining 

the OFCNV of Japan Branch for year 10, 

the land owned by Japan Branch is 

treated as a historic item. Under 

§ 1.987–1(c)(3)(i)(F), the historic rate 

applicable to historic items that were 

properly reflected on the books and 


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78182 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

records of Japan Branch on the last day 

of the last taxable year in which a 

current rate election was in effect 

(December 31, year 9) generally is equal 

to the spot rate applicable to that day. 

Therefore, the historic rate applicable to 

the land is the spot rate on December 

31, year 9. The OFCNV of Japan Branch 

for year 10 is $1,339.74, determined 

under paragraph (e) of this section as 

follows (together with the 

corresponding amounts in yen): 

TABLE 6 TO PARAGRAPH (g)(3)(ii)(B)—OFCNV—END OF YEAR 10 

Amount in ¥ Translation rate Amount in $ 

Assets 

Yen ........................................................................ 130,000 $1 = ¥130 (spot rate-12/31/year 10) ............................ 1,000.00 

Land ....................................................................... 50,000 $1 = ¥120 (historic rate-spot rate-12/31/year 9) .......... 416.67 

Total assets .................................................... 180,000 ....................................................................................... 1,416.67 

Liabilities 

Bank loan .............................................................. 10,000 $1 = ¥130 (spot rate-12/31/year 10) ............................ 76.92 

Total liabilities ................................................. 10,000 ....................................................................................... 76.92 

Year 10 ending net value ............................................. 170,000 ....................................................................................... 1,339.74 

(C) Determination of unrecognized 

section 987 gain or loss for year 10. The 

unrecognized section 987 gain or loss of 

Japan Branch for year 10 is determined 

under paragraph (d) of this section as 

follows: 

(1) Step 1. The change in the OFCNV 

of Japan Branch for year 10 is equal to 

the OFCNV of Japan Branch determined 

in dollars on the last day of year 10, less 

the OFCNV of Japan Branch determined 

in dollars on the last day of year 9. 

Therefore, the change in OFCNV is 

equal to $6.41 ($1,339.74 ¥ $1,333.33). 

(2) Steps 2 through 5 (no adjustment). 

No adjustment is made under 

paragraphs (d)(2) through (5) of this 

section (Steps 2 through 5) because no 

assets or liabilities were transferred by 

U.S. Corp to Japan Branch or by Japan 

Branch to U.S. Corp during the taxable 

year. 

(3) Step 6. Under paragraph (d)(6) of 

this section (Step 6), the amount 

determined in previous steps is 

decreased by the section 987 taxable 

income of Japan Branch of $80.00, from 

$6.41 to negative $73.59. 

(4) Steps 7 through 10 (no 

adjustment). No adjustment is made 

under paragraphs (d)(7) through (10) of 

this section (Steps 7 through 10) 

because all of Japan Branch’s items of 

income or deduction for the taxable year 

impact the adjusted balance sheet and 

are taken into account in computing 

taxable income. In addition, Japan 

Branch does not have a residual 

increase or decrease to the adjusted 

balance sheet (because the change in net 

value of ¥10,000 is equal to the amount 

of Japan Branch’s net income in year 

10). Accordingly, the unrecognized 

section 987 loss of Japan Branch for year 

10 is negative $73.59. 

(D) Determination of net unrecognized 

section 987 gain or loss. In year 10, 

Japan Branch has net accumulated 

section 987 loss of $1,000. Because U.S. 

Corp revoked the current rate election 

for year 10, the net accumulated section 

987 loss of $1,000 becomes suspended 

section 987 loss under § 1.987–11(d)(2) 

and Japan Branch’s net accumulated 

section 987 loss is reduced to zero. 

Therefore, in year 10, Japan Branch’s net 

unrecognized section 987 loss is equal 

to $73.59, its unrecognized section 987 

loss for year 10. 

■ 10. Section 1.987–5 is revised to read 

as follows: 

§ 1.987–5 Recognition of section 987 gain 

or loss. 

(a) Recognition of section 987 gain or 

loss by the owner of a section 987 QBU. 

The taxable income of an owner of a 

section 987 QBU includes the owner’s 

section 987 gain or loss recognized with 

respect to the section 987 QBU for the 

taxable year. Except as otherwise 

provided in § 1.987–7A(c)(4)(ii), 1.987– 

11(c), 1.987–12(b) or (e), or 1.987–13(h) 

or (k), for any taxable year the owner’s 

section 987 gain or loss recognized with 

respect to a section 987 QBU is equal to: 

(1) The owner’s net unrecognized 

section 987 gain or loss with respect to 

the section 987 QBU determined under 

§ 1.987–4 on the last day of such taxable 

year (or, if earlier, on the day the section 

987 QBU is terminated under § 1.987– 

8); multiplied by 

(2) The owner’s remittance proportion 

for the taxable year, as determined 

under paragraph (b) of this section. 

(b) Remittance proportion—(1) In 

general. Except as provided in 

paragraph (b)(2) of this section, the 

owner’s remittance proportion with 

respect to a section 987 QBU for a 

taxable year is equal to: 

(i) The amount of the remittance, as 

determined under paragraph (c) of this 

section, to the owner from the section 

987 QBU for such taxable year; divided 

by 

(ii) The sum of: 

(A) The aggregate adjusted basis of the 

gross assets of the section 987 QBU as 

of the end of the taxable year that are 

reflected on its year-end balance sheet 

translated into the owner’s functional 

currency as provided in § 1.987–4(e)(2); 

and 

(B) The amount of the remittance, as 

determined under paragraph (c) of this 

section. 

(2) Annual recognition election. A 

taxpayer may elect to recognize its net 

unrecognized section 987 gain or loss 

with respect to the section 987 QBU on 

an annual basis (annual recognition 

election). For any taxable year in which 

the annual recognition election is in 

effect, the owner’s remittance 

proportion with respect to a section 987 

QBU is one. See paragraph (g) of this 

section for an example illustrating this 

rule. Additionally, for any taxable year 

of an original deferral QBU owner in 

which an annual recognition election is 

in effect, the remittance proportion with 

respect to any successor deferral QBU is 

one. 

(c) Remittance—(1) Definition. A 

remittance is determined in the owner’s 

functional currency and equals the 

excess, if any, of: 

(i) The aggregate of all amounts 

transferred from the section 987 QBU to 

the owner during the taxable year, as 

determined in paragraph (d) of this 

section; over 

(ii) The aggregate of all amounts 

transferred from the owner to the 

section 987 QBU during the taxable 

year, as determined in paragraph (e) of 

this section. 

(2) Day when a remittance is 

determined. An owner’s remittance 

from a section 987 QBU is determined 

on the last day of the owner’s taxable 

year (or, if earlier, on the day the section 

987 QBU is terminated under § 1.987– 

8). 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 78183 

(3) Termination. A termination of a 

section 987 QBU as determined under 

§ 1.987–8 is treated as a remittance of all 

the gross assets of the section 987 QBU 

to the owner on the date of such 

termination. See § 1.987–8(e). 

Accordingly, the remittance proportion 

in the case of a termination is one. 

(d) Aggregate of all amounts 

transferred from the section 987 QBU to 

the owner for the taxable year. For 

purposes of paragraph (c)(1)(i) of this 

section, the aggregate of all amounts 

transferred from the section 987 QBU to 

the owner for the taxable year is the 

aggregate amount of functional currency 

and the aggregate adjusted basis of the 

other assets transferred, as determined 

in the owner’s functional currency 

under § 1.987–4(d)(2). Solely for this 

purpose, the amount of liabilities 

transferred from the owner to the 

section 987 QBU, as determined in the 

owner’s functional currency under 

§ 1.987–4(d)(5), is treated as a transfer of 

assets from the section 987 QBU to the 

owner with an adjusted basis equal to 

the amount of such liabilities. 

(e) Aggregate of all amounts 

transferred from the owner to the 

section 987 QBU for the taxable year. 

For purposes of paragraph (c)(1)(ii) of 

this section, the aggregate of all amounts 

transferred from the owner to the 

section 987 QBU for the taxable year is 

the aggregate amount of functional 

currency and the aggregate adjusted 

basis of the assets transferred, as 

determined in the owner’s functional 

currency under § 1.987–4(d)(3). Solely 

for this purpose, the amount of 

liabilities transferred from the section 

987 QBU to the owner determined 

under § 1.987–4(d)(4) is treated as a 

transfer of assets from the owner to the 

section 987 QBU with an adjusted basis 

equal to the amount of such liabilities. 

(f) Determination of owner’s adjusted 

basis in transferred assets and amount 

of transferred liabilities—(1) In general. 

The owner’s adjusted basis in an asset 

or the amount of a liability received in 

a transfer from a section 987 QBU 

(whether or not such transfer is made in 

connection with a remittance) is 

determined in the owner’s functional 

currency under the rules prescribed in 

paragraphs (f)(2) and (3) of this section. 

(2) Marked items. The basis of a 

marked asset or amount of a marked 

liability is the amount determined by 

translating the section 987 QBU’s 

functional currency basis of the asset or 

amount of the liability, after taking into 

account § 1.988–1(a)(10), into the 

owner’s functional currency at the spot 

rate applicable to the date of transfer. 

(3) Historic items. The basis of a 

historic asset or amount of a historic 

liability is the amount determined by 

translating the section 987 QBU’s 

functional currency basis of the asset or 

amount of the liability, after taking into 

account § 1.988–1(a)(10), into the 

owner’s functional currency at the 

historic rate for the asset or liability. 

(g) Example. The following example 

illustrates the calculation of section 987 

gain or loss under this section. For 

purposes of this example, except as 

otherwise indicated, assume that no 

section 987 elections are in effect. 

(1) Facts—(i) U.S. Corp, a domestic 

corporation with the dollar as its 

functional currency, operates in the 

United Kingdom through Business A, a 

section 987 QBU with the pound as its 

functional currency. During year 2, the 

following transfers took place between 

U.S. Corp and Business A. On January 

5, year 2, U.S. Corp transferred to 

Business A $300, which Business A 

used during the year to purchase 

services. On March 5, year 2, Business 

A transferred a machine to U.S. Corp. 

The pound adjusted basis of the 

machine when properly translated into 

dollars as described under § 1.987– 

4(d)(2)(ii)(B) and paragraph (d) of this 

section is $500. On November 1, year 2, 

Business A transferred pounds to U.S. 

Corp. The dollar amount of the pounds 

when properly translated as described 

under § 1.987–4(d)(2)(ii)(A) and 

paragraph (d) of this section is $2,300. 

On December 7, year 2, U.S Corp 

transferred a truck to Business A with 

an adjusted basis of $2,000. 

(ii) At the end of year 2, Business A 

holds assets, properly translated into the 

owner’s functional currency pursuant to 

§ 1.987–4(e)(2), consisting of a computer 

with a pound adjusted basis equivalent 

to $500, a truck with a pound adjusted 

basis equivalent to $2,000, and pounds 

equivalent to $2,850. In addition, 

Business A has a pound liability entered 

into in year 1 with Bank A. All such 

assets and liabilities are reflected on the 

books and records of Business A. 

Assume that the net unrecognized 

section 987 gain for Business A as 

determined under § 1.987–4 as of the 

last day of year 2 is $80. 

(2) Analysis. U.S. Corp’s section 987 

gain with respect to Business A is 

determined as follows: 

(i) Computation of amount of 

remittance. Under paragraphs (c)(1) and 

(2) of this section, U.S. Corp must 

determine the amount of the remittance 

for year 2 in the owner’s functional 

currency (dollars) on the last day of year 

2. The amount of the remittance for year 

2 is $500, determined as follows: 

TABLE 1 TO PARAGRAPH (g)(2)(i) 

Transfers from Business A to U.S. Corp in 

dollars 

Machine ................................ $500 

Pounds .................................. 2,300 

Aggregate transfers from 

Business A to U.S. 

Corp ........................... $2,800 

Transfers from U.S. Corp to Business A in 

dollars 

U.S. dollars ........................... $300 

Truck ..................................... 2,000 

Aggregate transfers from 

U.S. Corp to Business 

A ................................. $2,300 

Computation of amount of remittance 

Aggregate transfers from 

Business A to U.S. Corp ... $2,800 

Less: aggregate transfers 

from U.S. Corp to Business A ............................... (2,300) 

Total remittance ............. $500 

(ii) Computation of section 987 QBU 

gross assets plus remittance. Under 

paragraph (b)(1)(ii) of this section, 

Business A must determine the 

aggregate basis of its gross assets that are 

reflected on its year-end balance sheet 

translated into the owner’s functional 

currency and must increase this amount 

by the amount of the remittance. 

TABLE 2 TO PARAGRAPH (g)(2)(ii) 

Computer ......................................... $500 

Pounds ............................................ 2,850 

Truck ............................................... 2,000 

Aggregate gross assets ............... $5,350 

Remittance ...................................... $500 

Aggregate basis of Business A’s 

gross assets at end of year 2, increased by amount of remittance $5,850 

(iii) Computation of remittance 

proportion. Under paragraph (b) of this 

section, Business A must compute the 

remittance proportion by dividing the 

$500 remittance amount by the $5,850 

sum of the aggregate basis of Business 

A’s gross assets and the amount of the 

remittance. The resulting remittance 

proportion is 0.085. 

(iv) Computation of section 987 gain 

or loss. The amount of U.S. Corp’s 

section 987 gain or loss that is 

recognized with respect to Business A is 

determined under paragraph (a) of this 

section by multiplying the 0.085 

remittance proportion by the $80 of net 

unrecognized section 987 gain. U.S. 

Corp’s resulting recognized section 987 

gain for year 2 is $6.80. 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
78184 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

(3) Annual recognition election. If an 

annual recognition election under 

paragraph (b)(2) of this section were in 

effect for year 2, U.S. Corp’s remittance 

proportion would be one. Accordingly, 

U.S. Corp would recognize all $80 of the 

net unrecognized section 987 gain with 

respect to Business A. 

■ 11. Section 1.987–6, as proposed to be 

amended by 81 FR 88882 (December 8, 

2016), is further amended by: 

■ a. Revising paragraph (a). 

■ b. Adding paragraph (b) introductory 

text. 

■ c. Revising paragraphs (b)(1) through 

(3), and (c). 

The revisions and addition read as 

follows: 

§ 1.987–6 Character and source of section 

987 gain or loss. 

(a) Ordinary income or loss. Section 

987 gain or loss is ordinary income or 

loss for Federal income tax purposes. 

(b) Character and source of section 

987 gain or loss. With respect to each 

section 987 QBU, the character and 

source of section 987 gain or loss is 

determined under this paragraph (b) for 

all purposes of the Internal Revenue 

Code, including sections 904(d), 907, 

and 954. References to an owner in this 

paragraph (b) include a partner of a 

partnership (other than a section 987 

aggregate partnership) or shareholder of 

an S corporation that has section 987 

gain or loss attributable to a section 987 

QBU owned by the partnership or S 

corporation. 

(1) Timing of character and source 

determination. The character and source 

of section 987 gain or loss is determined 

based on the initial assignment pursuant 

to paragraph (b)(2)(i) of this section and 

may be reassigned in the year in which 

the section 987 gain or loss is 

recognized pursuant to paragraph 

(b)(2)(ii) of this section. The initial 

assignment is made in the earliest of the 

taxable years described in paragraphs 

(b)(1)(i) through (iv) of this section. 

(i) The taxable year in which the net 

unrecognized section 987 gain or loss is 

recognized. 

(ii) The taxable year in which the net 

unrecognized section 987 loss becomes 

suspended section 987 loss. 

(iii) The taxable year in which the net 

unrecognized section 987 gain or loss 

becomes deferred section 987 gain or 

loss. 

(iv) In the case of pretransition gain or 

loss that is recognized ratably over the 

transition period pursuant to the 

election under § 1.987–10(e)(5)(ii), the 

taxable year that includes the transition 

date. 

(2) Method for determining the 

character and source of section 987 gain 

or loss—(i) Initial assignment—(A) In 

general. In a taxable year of the initial 

assignment, determined under 

paragraph (b)(1) of this section, the 

owner assigns gross section 987 gain or 

loss to the statutory and residual 

groupings in the same proportions as 

the proportions in which the tax book 

value of the assets of the section 987 

QBU are assigned to the groupings 

under the asset method in §§ 1.861–9(g) 

and 1.861–9T(g), as modified by this 

paragraph (b)(2)(i). For purposes of 

applying the asset method, the owner 

takes into account only the assets that 

are attributed to the section 987 QBU 

under § 1.987–2(b). 

(B) Special rules for applying the 

asset method to assign section 987 gain 

or loss. For purposes of assigning gross 

section 987 gain or loss to the statutory 

and residual groupings under paragraph 

(b)(2)(i)(A) of this section, the 

proportions in which the tax book value 

of the assets of the section 987 QBU are 

assigned to the groupings described in 

paragraph (b)(2)(i)(A) of this section are 

determined without regard to section 

987 gain or loss. Further, the section 987 

gain or loss is assigned after any 

reattribution of gross income required 

under § 1.904–4(f)(2)(vi) or 1.951A– 

2(c)(7)(ii)(B)(2) (or the principles 

thereof, as applicable), but before the 

allocation and apportionment of 

expenses or the application of 

provisions that are based on a net 

income computation, such as the hightax exception to passive category 

income in § 1.904–4(c), the high-tax 

exception to foreign base company 

income in § 1.954–1(d), and the high-tax 

exclusion from tested income in 

§ 1.951A–2(c)(7). 

(C) Section 987 gain or loss that is 

assigned to subpart F income groups 

treated as attributable to section 988 

transactions. Section 987 gain or loss 

assigned under paragraphs (b)(2)(i)(A) 

and (B) of this section to a grouping 

described in § 1.960–1(d)(2)(ii)(B)(2)(i) 

through (v) (subpart F income groups) is 

treated as foreign currency gain or 

foreign currency loss attributable to 

section 988 transactions not directly 

related to the business needs of the 

controlled foreign corporation and is 

taken into account for purposes of 

determining the excess of foreign 

currency gains over foreign currency 

losses characterized as foreign personal 

holding company income under section 

954(c)(1)(D). 

(D) Section 987 gain or loss assigned 

to tentative tested income rather than 

tested income—(1) In general. In the 

case of a controlled foreign corporation, 

the initial assignment of section 987 

gain or loss under paragraphs 

(b)(2)(i)(A) and (B) of this section is 

made as though the election described 

in § 1.951A–2(c)(7)(viii) is in effect for 

the taxable year. As a result, section 987 

gain or loss that would have initially 

been characterized as tested income in 

a section 904 category if no election 

under § 1.951A–2(c)(7) was in effect is 

initially characterized as tentative tested 

income in the section 904 category (a 

tentative tested income group). 

(2) For purposes of the GILTI high-tax 

exclusion, section 987 gain or loss is not 

attributable to any tested unit. In the 

case of a controlled foreign corporation, 

the initial assignment of section 987 

gain or loss is made as though the 

section 987 gain or loss was not 

attributable to any tested unit for 

purposes of applying § 1.951A–2(c)(7) 

(GILTI high-tax exclusion). See 

paragraph (b)(2)(iii) of this section 

(applying the GILTI high-tax exclusion 

by treating all section 987 gain or loss 

in the same tentative tested income 

group as composing a single tentative 

tested income item). 

(E) Initial assignment applies for 

purposes of the loss-to-the-extent-ofgain rule. See § 1.987–11(e) and (f) 

(grouping of section 987 gain and loss 

and applying the loss-to-the-extent-ofgain rule on basis of the initial 

assignment of section 987 gain and loss 

under this paragraph (b)(2)(i)). 

(ii) Reassignment of section 987 gain 

or loss. In the taxable year in which 

section 987 gain or loss is recognized 

(determined by taking into account 

§§ 1.987–5, 1.987–11(e), 1.987–12(c), 

and 1.987–13(b) through (d), if 

applicable), the section 987 gain or loss 

is sourced and characterized based on 

the initial determination in paragraph 

(b)(2)(i)(B) of this section, but with 

appropriate changes to account for the 

application of provisions that are based 

on a net income computation such as 

the high-tax exception to passive 

category income in § 1.904–4(c), the 

high-tax exception to foreign base 

company income in § 1.954–1(d), and 

the high-tax exclusion to tested income 

in § 1.951A–2(c)(7). Thus, for example, 

if an election under § 1.951A– 

2(c)(7)(viii) (GILTI high-tax exclusion) is 

in effect for the taxable year, section 987 

gain or loss initially assigned to a 

tentative tested income group will be 

reassigned to a tested income group (as 

defined in § 1.960–1(d)(2)(ii)(C)) or to 

the residual income group (as defined in 

§ 1.960–1(d)(2)(ii)(D)). If no election is 

made under § 1.951A–2(c)(7)(viii) for a 

taxable year, all of the section 987 gain 

or loss that is recognized in the taxable 

year that was initially assigned to 

tentative tested income under paragraph 

(b)(2)(i) of this section, is reassigned to 


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the appropriate tested income group (as 

defined in § 1.960–1(d)(2)(ii)(C)). 

(iii) Special rule for the application of 

the GILTI high-tax exclusion to section 

987 gain or loss. Section 987 gain in a 

tentative tested income group that is 

recognized by a controlled foreign 

corporation in a taxable year comprises 

a single tentative gross tested income 

item (as if it were allocable to its own 

tested unit) within the meaning of 

§ 1.951A–2(c)(7)(ii), and section 987 loss 

in a tentative tested income group that 

is recognized by a controlled foreign 

corporation in the taxable year is 

allocated and apportioned to the 

corresponding tentative gross tested 

income item for purposes of calculating 

the tentative tested income item within 

the meaning of § 1.951A–2(c)(7)(iii). 

Thus, for purposes of applying the hightax exclusion in § 1.951A–2(c)(7), all of 

the section 987 gain and loss in a 

tentative tested income group that is 

recognized by the controlled foreign 

corporation in a taxable year is a single 

tentative tested income item. 

(3) Allocation and apportionment of 

foreign income tax to section 987 items 

under section 861. For purposes of 

applying the definition of a 

corresponding U.S. item in § 1.861– 

20(b), an item of foreign gross income 

and an item of section 987 gain or loss 

are treated as arising from the same 

transaction or other realization event 

only if the requirements in both 

paragraphs (b)(3)(i) and (ii) of this 

section are satisfied. 

(i) The foreign gross income is an item 

of foreign currency gain or loss. The 

owner of the section 987 QBU, original 

deferral QBU owner, or original 

suspended loss QBU owner includes the 

foreign gross income under the laws of 

the foreign country in which it is a tax 

resident because under that foreign law 

it is required to recognize foreign 

currency gain or loss with respect to its 

interest in the section 987 QBU or with 

respect to a successor deferral QBU or 

successor suspended loss QBU. 

(ii) The same event or events give rise 

to both the foreign gross income and the 

section 987 gain or loss. The remittance 

under § 1.987–5(c) that gave rise to the 

item of section 987 gain or loss 

comprises one or more of the events that 

gave rise to the item of foreign gross 

income described in paragraph (b)(3)(i) 

of this section. 

* * * * * 

(c) Examples. The following examples 

illustrate the application of this section. 

For purposes of the examples, assume 

that no section 987 elections are in 

effect. 

(1) Example 1. CFC is a controlled 

foreign corporation with the Swiss franc 

(Sf) as its functional currency. CFC is 

the owner of Business A, a section 987 

QBU that has the euro as its functional 

currency. For year 1, CFC does not have 

an election described in § 1.951A– 

2(c)(7)(viii) in effect, and CFC 

recognizes section 987 gain of Sf10,000 

under § 1.987–5. Business A has average 

total assets of Sf1,000,000 in year 1, 

which generate income (other than 

section 987 gain) as follows: Sf750,000 

of assets that produce gross income in 

the statutory grouping for general 

category tested income under sections 

904(d)(1)(A) and 951A; and Sf250,000 of 

assets that produce foreign source 

passive gross income in one of the 

groupings described in § 1.960– 

1(d)(2)(ii)(B)(2)(i) through (v) (subpart F 

income groups). Under paragraphs 

(b)(2)(i)(A), (B), and (D) of this section, 

Sf7,500 (Sf750,000/Sf1,000,000 × 

Sf10,000) of the section 987 gain is 

initially assigned to the statutory 

grouping of foreign source general 

category tentative tested income. 

Because an election under § 1.951A– 

2(c)(7)(viii) is not in effect for the 

taxable year in which the section 987 

gain is recognized, the section 987 gain 

is reassigned under paragraph (b)(2)(ii) 

of this section to foreign source general 

category tested income. The remaining 

Sf2,500 (Sf250,000/Sf1,000,000 × 

Sf10,000) is characterized under 

paragraphs (b)(2)(i)(A) and (B) of this 

section by reference to assets that give 

rise to foreign source passive gross 

income in one of the groupings 

described in § 1.960–1(d)(2)(ii)(B)(2)(i) 

through (v) (subpart F income groups) 

and is therefore treated under paragraph 

(b)(2)(i)(C) of this section as foreign 

source foreign currency gain taken into 

account for purpose of determining 

foreign personal holding company 

income under section 954(c)(1)(D). All 

of the section 987 gain is treated as 

ordinary income. 

(2) Example 2. The facts are the same 

as in paragraph (c)(1) of this section 

(Example 1) except that: CFC recognizes 

section 987 loss of Sf40,000, Sf10,000 of 

which is characterized under 

paragraphs (b)(2)(i)(A) and (B) of this 

section by reference to assets that give 

rise to foreign source passive gross 

income in one of the groupings 

described in § 1.960–1(d)(2)(ii)(B)(2)(i) 

through (v) (subpart F income groups); 

and CFC otherwise has Sf12,000 of net 

foreign currency gain determined under 

§ 1.954–2(g) that is taken into account in 

determining the excess of foreign 

currency gain over foreign currency 

losses characterized as foreign personal 

holding company income under section 

954(c)(1)(D). Under paragraph 

(b)(2)(i)(C) of this section, the Sf10,000 

section 987 loss characterized by 

reference to assets that give rise to 

foreign source passive gross income in 

one of the groupings described in 

§ 1.960–1(d)(2)(ii)(B)(2)(i) through (v) 

(subpart F income groups) is treated as 

foreign currency loss taken into account 

under section 954(c)(1)(D) for purposes 

of computing foreign personal holding 

company income. Accordingly, CFC 

will aggregate the Sf10,000 section 987 

loss with the Sf12,000 net foreign 

currency gain and will have Sf2,000 of 

net foreign currency gain characterized 

as passive foreign personal holding 

company income under section 

954(c)(1)(D). 

§ 1.987–7 [Redesignated as § 1.987–7B] 

■ 12. Section 1.987–7 is redesignated as 

§ 1.987–7B. 

■ 13. Section 1.987–7A is added to read 

as follows: 

§ 1.987–7A Partnerships and S 

corporations that own section 987 QBUs. 

(a) Scope and special rule—(1) In 

general. This section provides rules 

applicable to partnerships (other than 

section 987 aggregate partnerships) and 

S corporations that own section 987 

QBUs and their partners and 

shareholders. Paragraph (b) of this 

section provides the general rule that 

partnerships are treated as owners of 

section 987 QBUs. Paragraph (c) of this 

section provides special rules that apply 

to section 987 QBUs owned by 

partnerships and their partners. 

Paragraph (d) of this section provides 

rules for adjusting the partner’s basis in 

its partnership interest for its section 

987 gain or loss allocated from the 

partnership. Paragraph (e) of this section 

is reserved for rules regarding the 

treatment of section 987 gain or loss 

when a partner transfers or otherwise 

reduces its interest in a partnership. 

Paragraph (f) of this section is reserved 

for special rules regarding the source 

and character of section 987 gain and 

loss of a partner with respect to a 

section 987 QBU owned by a 

partnership that would apply in 

addition to § 1.987–6. Paragraph (g) of 

this section provides that S corporations 

are treated in the same manner as 

partnerships for purposes of the section 

987 regulations. Paragraph (h) of this 

section provides examples. 

(2) References to partnerships are to 

non-section 987 aggregate partnerships. 

For purposes of the section 987 

regulations, references to ‘‘partnerships’’ 

are treated as references to partnerships 

that are not section 987 aggregate 

partnerships, except where the context 

otherwise requires. 


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(b) Partnerships treated as owners of 

section 987 QBUs. Except as otherwise 

provided, the section 987 regulations 

apply to a partnership that is the owner 

of a section 987 QBU in the same 

manner as they apply to other owners of 

section 987 QBUs. See paragraph (c) of 

this section and § 1.987–1(b)(1)(ii) (de 

minimis rule), providing special rules 

for partnerships that are owners of a 

section 987 QBU. Thus, for example, if 

a partnership owns an eligible QBU 

with a functional currency that is 

different from the functional currency of 

the partnership, the eligible QBU is a 

section 987 QBU, the partnership is its 

owner, and the unrecognized section 

987 gain or loss of the section 987 QBU 

for a taxable year is determined under 

§ 1.987–4(d) by reference to the 

functional currency of the partnership 

and the section 987 QBU. 

(c) Section 987 QBUs owned by 

partnerships—(1) Annual allocation of a 

partnership’s unrecognized section 987 

gain or loss to its partners—(i) In 

general. This paragraph (c)(1) applies to 

each taxable year of a partnership and 

with respect to each section 987 QBU of 

the partnership. A partnership 

determines its unrecognized section 987 

gain or loss for a taxable year under 

§ 1.987–4(d) with respect to each section 

987 QBU. The partnership allocates to 

each partner the partner’s share of the 

unrecognized section 987 gain or loss 

for a taxable year with respect to each 

section 987 QBU. The partnership 

determines each partner’s share of 

unrecognized section 987 gain or loss 

for a taxable year under paragraph 

(c)(1)(ii) of this section. Each partner 

translates its share of unrecognized 

section 987 gain or loss for a taxable 

year into the partner’s functional 

currency, if necessary, at the yearly 

average exchange rate for the 

partnership’s taxable year. 

(ii) Determination of partner’s share 

of unrecognized section 987 gain or loss. 

A partnership determines a partner’s 

share of any unrecognized section 987 

gain or loss for the taxable year with 

respect to a section 987 QBU based on 

the partner’s distributive share of profits 

or losses with respect to the section 987 

QBU for the taxable year, as determined 

by the partnership agreement. The 

principles of section 706(d) apply to this 

determination. 

(iii) Partner-level attribute. Net 

unrecognized section 987 gain or loss, 

deferred section 987 gain or loss, and 

suspended section 987 loss of a partner 

that are attributable to a partnership are 

attributes of the partner (not the 

partnership). As a result, the section 987 

gain or loss cannot be used by the 

partnership or any other partner, 

including any person that acquires the 

partner’s partnership interest (other 

than in a transaction described in 

section 381(a)). 

(2) Net unrecognized section 987 gain 

or loss with respect to a section 987 

QBU is determined at the partner level. 

A partner determines its net 

unrecognized section 987 gain or loss 

with respect to a section 987 QBU 

owned by a partnership under § 1.987– 

4(b) and (c) at the partner level by taking 

into account the partner’s share of 

unrecognized section 987 gain or loss 

with respect to the section 987 QBU 

owned by a partnership. 

(3) Recognition (or suspension) of net 

unrecognized section 987 gain or loss 

upon remittance. With respect to a 

section 987 QBU owned by a 

partnership, a person that is a partner 

on the last day of the partnership’s 

taxable year determines the amount of 

its net unrecognized section 987 gain or 

loss that is recognized under § 1.987– 

5(a) by reference to its net unrecognized 

section 987 gain or loss with respect to 

the section 987 QBU (after taking into 

account the adjustments under 

paragraphs (c)(1) and (4) of this section) 

and the partnership’s remittance 

proportion, as determined under 

§ 1.987–5(a)(2). 

(4) Deferred section 987 gain or loss 

and suspended section 987 loss—(i) 

Loss to the extent of gain rule applied 

at the partner level. The amount of 

suspended section 987 loss recognized 

and taken into account by a partner 

under § 1.987–11(e) (loss to the extent of 

gain rule) is determined by reference to 

section 987 gain recognized by the 

partner, without regard to whether the 

section 987 gain is attributable to a 

section 987 QBU owned by a 

partnership. 

(ii) Partner- and partnership-level 

application of §§ 1.987–11 through 

1.987–13—(A) Partner owns an interest 

in the partnership. During the time in 

which a partner or its controlled group 

owns an interest in a partnership from 

which it was allocated unrecognized 

section 987 gain or loss, §§ 1.987–11 

through 1.987–13 are applied by treating 

the partnership as the owner, original 

deferral QBU owner, or original 

suspended loss QBU owner, as 

appropriate, and treating the partner’s 

net unrecognized section 987 gain or 

loss as deferred section 987 gain or loss 

or suspended section 987 loss, as 

appropriate. 

(B) Termination of partner’s interest 

in the partnership. If the partner ceases 

to own an interest in a partnership from 

which it was allocated unrecognized 

section 987 gain or loss, then each 

successor deferral QBU or successor 

suspended loss QBU of the partnership 

is retested under § 1.987–12(b) or 1.987– 

13(c) and treated as if the partner had 

transferred the eligible QBU to its actual 

owner immediately after the partner 

ceased to own an interest in the 

partnership. Accordingly, if the owner 

of the eligible QBU is not a member of 

the partner’s controlled group, the 

partner may recognize its deferred 

section 987 gain or loss or suspended 

section 987 loss to the extent provided 

in § 1.987–12(b) or 1.987–13(c). 

(5) Section 987 elections—(i) Elections 

made by the partnership. Except as 

provided in paragraph (c)(6)(ii) of this 

section, section 987 elections are made 

by the partnership and apply to the 

partnership and section 987 gain or loss 

attributable to the partnership. See 

section 703(b); see also § 1.987–1(g) 

(additional rules regarding section 987 

elections). 

(ii) Elections made by partner—(A) 

Annual recognition election in certain 

cases. If a person ceases to be a partner 

in a partnership and becomes an 

original deferral QBU owner or original 

suspended loss QBU owner, that person 

(and not the partnership) may make the 

annual recognition election under 

§ 1.987–5(b)(2) with respect to its 

deferred section 987 gain or loss or 

suspended section 987 loss that was 

originally attributable to a section 987 

QBU of the partnership. 

(B) Election to recognize pretransition 

section 987 gain or loss ratably. The 

election to recognize pretransition 

section 987 gain or loss ratably over the 

transition period under § 1.987– 

10(e)(5)(ii) is made by a partner, and not 

the partnership. 

(d) Basis adjustments—(1) In general. 

When, and to the extent that, a partner 

recognizes section 987 gain or loss, 

defers section 987 gain or loss, or 

suspends section 987 loss attributable to 

the partnership, the partner’s adjusted 

basis in the partnership is adjusted 

under the principles of section 705 as if 

the item of income or loss was part of 

the partner’s distributive share of 

partnership items. 

(2) Tiered-partnership structures. If a 

partner (upper-tier partner) that adjusts 

its basis in a partnership under 

paragraph (d)(1) of this section owns the 

partnership indirectly through one or 

more other partnerships, the partner 

adjusts its basis in the partnership in 

which it owns a direct interest, and that 

partnership adjusts its basis in the 

partnership in which it owns a direct 

interest, with similar rules applying to 

each successive partnership through 

which the upper-tier partner owns its 

interest in the lower-tier partnership to 

which the section 987 gain or loss was 


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attributable. The adjustment with 

respect to an interest in a lower-tier 

partnership constitutes a basis 

adjustment solely with respect to the 

partner that adjusts its basis in the 

upper-tier partnership under paragraph 

(d)(1) of this section. 

(e) through (f) [Reserved] 

(g) S corporations treated as 

partnerships. For purposes of the 

section 987 regulations, S corporations 

are treated in the same manner as 

partnerships and shareholders of S 

corporations are treated in the same 

manner as partners of partnerships. 

Thus, for example, if an S corporation 

is the owner of a section 987 QBU, the 

unrecognized section 987 gain or loss of 

the section 987 QBU would be allocated 

annually to its shareholders. 

(h) Examples. The following examples 

illustrate the principles of this section. 

For purposes of these examples, DC1 

and DC2 are domestic corporations, FC1 

and FC2 are controlled foreign 

corporations that use the euro as their 

functional currency, DE1 and DE2 are 

disregarded entities, Business A is an 

eligible QBU that has the euro as its 

functional currency, and Business B is 

an eligible QBU that has the pound as 

its functional currency. Each person is 

a calendar year taxpayer. Except as 

otherwise indicated, no section 987 

elections are in effect during any of the 

periods described in the examples. 

Exchange rates used in these examples 

are selected for the purpose of 

illustrating the principles of this section 

and no inference is intended by their 

use. 

(1) Example 1—(i) Facts. DC1 wholly 

owns FC1 and DC2 wholly owns FC2. 

FC1 and FC2 are not related within the 

meaning of section 267(b) or 707(b). FC1 

and FC2 each own a 50 percent interest 

in P, a foreign partnership. P owns 100 

percent of DE1, which owns Business A. 

P also owns 100 percent of DE2, which 

owns Business B. The partnership 

agreement provides that FC1 and FC2 

will each be allocated 50 percent of the 

profits and losses from both Business A 

and Business B. P’s functional currency 

is the euro. 

(ii) Analysis. Because P’s two 

partners, FC1 and FC2, are not related 

within the meaning of section 267(b) or 

707(b), P is not treated as a section 987 

aggregate partnership under § 1.987– 

1(h). As a result, pursuant to § 1.987– 

1(b)(5), P is the owner of Business A and 

Business B because it has direct 

ownership of Business A and Business 

B, each of which is an eligible QBU. 

Because Business A is an eligible QBU 

with the same functional currency as its 

owner, P, Business A is not a section 

987 QBU § 1.987–1(b)(3)(i). However, 

Business B is an eligible QBU with a 

functional currency that is different 

from the functional currency of its 

owner, P. As a result, Business B is a 

section 987 QBU under § 1.987– 

1(b)(3)(i), and P is its owner under 

§ 1.987–1(b)(5) and paragraph (b) of this 

section. 

(2) Example 2—(i) Facts. The facts are 

the same as in paragraph (h)(1) of this 

section (Example 1). In year 1, P has 

unrecognized section 987 gain 

(determined under § 1.987–4(d)) with 

respect to Business B of Ö100. In year 2, 

P has unrecognized section 987 loss 

with respect to Business B of Ö60. In 

year 3, P has unrecognized section 987 

loss with respect to Business B of Ö120. 

In year 3, Business B transfers Ö50 to P 

on December 31. Following the transfer, 

its gross assets are Ö450. There are no 

other transfers between Business B and 

P in year 3. 

(ii) Analysis—(A) Partner’s net 

unrecognized section 987 gain or loss. 

Pursuant to paragraph (c)(1) of this 

section, in each of years 1, 2, and 3, P 

allocates to FC1 and FC2 their 

respective shares of the unrecognized 

section 987 gain or loss for the P taxable 

year with respect to its section 987 

QBU, Business B. FC1 and FC2’s share 

of the unrecognized section 987 gain or 

loss in each taxable year is based on 

their distributive share of the profits or 

losses with respect to Business B. 

Accordingly, in year 1, P allocates 

unrecognized section 987 gain of Ö50 to 

each of FC1 and FC2; in year 2, P 

allocates unrecognized section 987 loss 

of Ö30 to each of FC1 and FC2; and in 

year 3, P allocates unrecognized section 

987 loss of Ö60 to each of FC1 and FC2. 

As a result, in year 3, before taking into 

account any amount recognized under 

§ 1.987–5, FC1 and FC2 each have net 

unrecognized section 987 loss with 

respect to Business B of Ö40 

(Ö50¥Ö30¥Ö60) under § 1.987–4(b) and 

paragraphs (c)(1) and (2) of this section. 

(B) Recognition of section 987 loss. 

Because Business A distributed Ö50 to 

P in year 3, P’s remittance proportion is 

10 percent (Ö50 over the sum of Ö450 

and Ö50) under § 1.987–5(b). As a result, 

each partner, FC1 and FC2, recognizes 

10 percent of its net unrecognized 

section 987 loss with respect to 

Business B under § 1.987–5(a) and 

paragraph (c)(3) of this section. 

Accordingly, FC1 and FC2 each 

recognize Ö4 (Ö40 × 10 percent) section 

987 loss in year 3 and have net 

accumulated unrecognized section 987 

loss of Ö36 (Ö40¥Ö4) in year 4. FC1’s 

adjusted basis in its partnership interest 

is reduced by Ö4 and FC2’s adjusted 

basis in its partnership interest is 

reduced by Ö4 under the principles of 

section 705, under paragraph (d)(1) of 

this section. 

(3) Example 3—(i) The facts are the 

same as in paragraph (h)(2) of this 

section (Example 2), except that in years 

1 through 3, FC1 has a current rate 

election in effect and FC2 has an annual 

recognition election in effect. 

(ii) Analysis. The analysis is the same 

as in paragraph (h)(2) of this section 

(Example 2). Because P does not have a 

current rate election in effect, FC1 can 

recognize the section 987 loss of Ö4 in 

year 3 without limitation under § 1.987– 

11(e) pursuant to paragraph (c)(5)(i) of 

this section. Similarly, because P does 

not have an annual recognition election 

in effect, while FC2 is a partner in P, 

FC2 does not recognize its section 987 

gain or loss with respect to Business B 

on an annual basis pursuant to 

paragraphs (c)(5)(i) and (c)(5)(ii)(A) of 

this section. 

(4) Example 4—(i) Facts. The facts are 

the same as in paragraph (h)(2) of this 

section (Example 2), except that FC2 has 

the Japanese yen as its functional 

currency during all relevant time 

periods. The yearly average exchange 

rate is Ö1 = ¥150 in year 1; Ö1 = ¥175 

in year 2; and Ö1 = ¥125 in year 3. 

(ii) Analysis. Each year, FC2 converts 

its share of P’s unrecognized section 987 

gain or loss into yen at the yearly 

average exchange rate pursuant to 

paragraph (c)(1)(i) of this section. As a 

result, in year 1, FC2’s share of the 

unrecognized section 987 gain with 

respect to Business B is ¥7,500 (Ö50 

section 987 gain converted to yen at the 

yearly average exchange rate of Ö1 = 

¥150); in year 2, FC2’s share of the 

unrecognized section 987 loss with 

respect to Business B is ¥5,250 (Ö30 

section 987 loss converted to yen at the 

yearly average exchange rate of Ö1 = 

¥175); and in year 3, FC2’s share of the 

unrecognized section 987 loss with 

respect to Business B is ¥7,500 (Ö60 

section 987 loss converted to yen at the 

yearly average exchange rate of Ö1 = 

¥125). In year 3, FC2’s net unrecognized 

section 987 loss with respect to 

Business B is ¥5,250 

(¥7,500¥¥5,250¥¥7,500). As explained 

in paragraph (h)(2)(i)(B) of this section 

(Example 2), P’s remittance proportion 

with respect to Business B is 10 percent. 

Therefore, FC2 recognizes section 987 

loss of ¥525 under § 1.987–5(a) and 

paragraph (c)(3) of this section. FC2’s 

net accumulated unrecognized section 

987 loss with respect to Business B in 

year 4 is ¥4,725 (¥5250¥¥525). FC2’s 

adjusted basis in its partnership interest 

is reduced by ¥525 under the principles 

of section 705, under paragraph (d)(1) of 

this section. 


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78188 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

§ 1.987–7B [Amended] 

■ 14. In newly redesignated § 1.987–7B 

amend paragraph (a) by removing the 

language ‘‘§ 1.987–1(b)(4)(ii)’’ and 

adding the language ‘‘§ 1.987– 

1(b)(5)(ii)’’ in its place. 

■ 15. Section 1.987–7C is added to read 

as follows: 

§ 1.987–7C Transitioning between 

partnership and section 987 aggregate 

partnership treatment. 

(a) In general. This section provides 

rules for when a partnership becomes or 

ceases to be a section 987 aggregate 

partnership. Paragraph (b) of this 

section provides transition rules 

regarding partnerships that cease to be 

section 987 aggregate partnerships but 

continue to be partnerships. Paragraph 

(c) of this section provides transition 

rules regarding partnerships that were 

not section 987 aggregate partnerships 

but become section 987 aggregate 

partnerships. See § 1.987–1(h) for the 

definition of a section 987 aggregate 

partnership. 

(b) Partnership ceases to be a section 

987 aggregate partnership—(1) In 

general. Solely for purposes of section 

987, when a partnership ceases to be a 

section 987 aggregate partnership but 

continues to be a partnership, each 

eligible QBU (pre-termination QBU) of a 

partner owned indirectly through the 

section 987 aggregate partnership is 

deemed to terminate and transfer all its 

assets and liabilities to the partnership 

(the deemed termination) and the 

partnership is then treated as forming 

each of its eligible QBUs (each, a posttermination QBU) and transferring to 

each post-termination QBU the assets 

and liabilities of the post-termination 

QBU (including those assets and 

liabilities that were assets and liabilities 

of a pre-termination QBU). 

(2) Section 987 gain or loss with 

respect to pre-termination QBU. 

Notwithstanding the deemed 

termination described in paragraph 

(b)(1) of this section, if, immediately 

before the deemed termination, a 

partner had any net unrecognized 

section 987 gain or loss or suspended 

section 987 loss with respect to a pretermination QBU that was a section 987 

QBU, and after the deemed termination, 

the assets and liabilities of the pretermination QBU are assets and 

liabilities of a post-termination QBU, 

then either paragraph (b)(2)(i) or (ii) of 

this section applies. 

(i) Post-termination QBU is a section 

987 QBU. If the post-termination QBU is 

a section 987 QBU, then— 

(A) Section 1.987–12 (deferral of 

section 987 gain and loss) does not 

apply to the deemed termination; and 

(B) The partner’s net unrecognized 

section 987 gain or loss or suspended 

section 987 loss with respect to the pretermination QBU is not recognized and 

instead becomes net unrecognized 

section 987 gain or loss or suspended 

section 987 loss with respect to the posttermination QBU that is treated as 

having been allocated to the partner by 

the partnership. 

(ii) Post-termination QBU is not a 

section 987 QBU. If paragraph (b)(2)(i) of 

this section does not apply, then 

§ 1.987–13 (rules relating to suspended 

section 987 loss upon termination) is 

applied to the transactions described in 

paragraph (b)(1) of this section as if the 

partner had transferred the assets and 

liabilities of the pre-termination QBU to 

the partnership. Thus, if the partner had 

suspended section 987 loss with respect 

to the pre-termination QBU, § 1.987– 

13(b) may apply to the deemed transfer 

and the post-termination QBU may be a 

successor suspended loss QBU. See 

§§ 1.987–5, 1.987–8, 1.987–11, and 

1.987–13 for rules regarding when 

section 987 gain or loss is recognized on 

terminations. 

(3) Successor deferral QBUs and 

successor suspended loss QBUs. If a 

section 987 aggregate partnership ceases 

to be a section 987 aggregate partnership 

(the transition)— 

(i) If any pre-termination QBU was a 

successor deferral QBU before the 

transition, the successor deferral QBU is 

treated as transferring its assets and 

liabilities to the post-termination QBU 

that holds the assets and liabilities after 

the transition for purposes of §§ 1.987– 

12 and 1.987–13. See § 1.987–12(c)(2). 

(ii) If any pre-termination QBU was a 

successor suspended loss QBU before 

the transition, the successor suspended 

loss QBU is treated as transferring its 

assets and liabilities to the posttermination QBU that hold the assets 

and liabilities after the transition for 

purposes of § 1.987–13. See § 1.987– 

13(c). 

(4) Timing. If a partnership ceases to 

be a section 987 aggregate partnership 

within the meaning of § 1.987–1(h), the 

partnership continues to be treated as a 

section 987 aggregate partnership until 

this paragraph (b) is applied. This 

paragraph (b) is applied immediately 

after the transaction (or series of 

transactions) or event (or series of 

events) that causes the partnership to 

cease to be a section 987 aggregate 

partnership (the transition). Thus, for 

example, if person acquires an interest 

in a section 987 aggregate partnership 

from a partner, and the person is not 

related to the other partners within the 

meaning of section 267(b) or 707(b), first 

the section 987 regulations (such as 

§ 1.987–2(c)(5)) are applied to the 

transition as if the partnership 

continued to be a section 987 aggregate 

partnership; then this paragraph (b) 

applies to the partnership and its 

partners (including the acquiring 

partner) and the partnership ceases to be 

a section 987 aggregate partnership. 

(c) Partnership becomes a section 987 

aggregate partnership—(1) In general. 

Solely for purposes of section 987, when 

a partnership that was not a section 987 

aggregate partnership becomes a section 

987 aggregate partnership, each eligible 

QBU (pre-termination QBU) of the 

partnership is deemed to terminate and 

transfer all of its assets and liabilities to 

the partnership (the deemed 

termination) and the partnership is 

treated as forming each eligible QBU 

(post-termination QBU) that is 

indirectly owned by a partner (the 

partner-owner) and transferring to each 

post-termination QBU the partnerowner’s share of the assets and 

liabilities of the partnership’s eligible 

QBU . 

(2) Section 987 gain or loss with 

respect to pre-termination QBU. 

Notwithstanding the deemed 

termination described in paragraph 

(c)(1) of this section, if a partner-owner 

had any net unrecognized section 987 

gain or loss or suspended section 987 

loss with respect to a pre-termination 

QBU that was a section 987 QBU, then 

either paragraph (c)(2)(i) or (ii) of this 

section applies. 

(i) Post-termination QBU is a section 

987 QBU. If, after the deemed 

termination, the partner-owner’s 

indirectly owned post-termination QBU 

that relates to its share of the assets and 

liabilities of the pre-termination QBU is 

a section 987 QBU of the partner-owner, 

then— 

(A) Section 1.987–12 does not apply 

to the deemed termination of the pretermination QBU; and 

(B) The partner-owner’s net 

unrecognized section 987 gain or loss or 

suspended section 987 loss with respect 

to the pre-termination QBU is not 

recognized and instead becomes net 

unrecognized section 987 gain or loss or 

suspended section 987 loss with respect 

to the post-termination QBU. 

(ii) Post-termination QBU is not a 

section 987 QBU. If paragraph (c)(2)(i) of 

this section does not apply, then 

paragraphs (c)(2)(ii)(A) and (B) of this 

section are applied sequentially. 

(A) First, paragraph (c)(2)(i) of this 

section is applied as if the posttermination QBU was a section 987 

QBU (the deemed section 987 QBU) 

after the deemed termination. 

(B) Second, the section 987 

regulations are applied as if the deemed 


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section 987 QBU had transferred its 

assets and liabilities to the posttermination QBU. Thus, if the partnerowner had suspended section 987 loss 

with respect to the pre-termination 

QBU, § 1.987–13(b) may apply to the 

deemed transfer and the posttermination QBU may be a successor 

suspended loss QBU. See §§ 1.987–5, 

1.987–8, 1.987–11, and 1.987–13 for 

rules regarding when section 987 gain or 

loss is recognized on terminations. 

(3) Successor deferral QBUs and 

successor suspended loss QBUs. If a 

partnership that was not a section 987 

aggregate partnership becomes a section 

987 aggregate partnership (the 

transition)— 

(i) If the partnership owned any 

successor deferral QBUs before the 

transition, each successor deferral QBU 

is treated as transferring its assets and 

liabilities to the indirectly owned QBUs 

that hold the assets and liabilities after 

the transition for purposes of §§ 1.987– 

12 and 1.987–13. See § 1.987–12(c)(2). 

(ii) If the partnership owned any 

successor suspended loss QBUs before 

the transition, each successor 

suspended loss QBU is treated as 

transferring its assets and liabilities to 

the indirectly owned QBUs that hold 

the assets and liabilities after the 

transition for purposes of § 1.987–13. 

See § 1.987–13(c). 

(iii) If the partnership was an original 

deferral QBU owner with respect to a 

successor deferral QBU before the 

transition, each partner that has 

deferred section 987 gain or loss with 

respect to the successor deferral QBU 

becomes an original deferral QBU owner 

with respect to the successor deferral 

QBU for purposes of § 1.987–12. 

(iv) If the partnership was an original 

suspended loss QBU owner with respect 

to a successor suspended loss QBU 

before the transition, each partner that 

has suspended section 987 loss with 

respect to the successor suspended loss 

QBU becomes an original suspended 

loss QBU owner with respect to the 

successor suspended loss QBU. 

(4) Timing. If a partnership that was 

not a section 987 aggregate partnership 

becomes a section 987 aggregate 

partnership within the meaning of 

§ 1.987–1(h), the partnership is not 

treated as a section 987 aggregate 

partnership until this paragraph (c) is 

applied. This paragraph (c) is applied 

immediately after the transaction (or 

series of transactions) or event (or series 

of events) that causes the partnership to 

become a section 987 aggregate 

partnership (the transition). Thus, for 

example, if a person acquires an interest 

in a partnership that is not a section 987 

aggregate partnership from a partner, 

and as a result of the acquisition, all of 

the partners are related within the 

meaning of section 267(b) or 707(b), first 

the section 987 regulations (such as 

§ 1.987–7A(e)) are applied to the 

transition as if the partnership was not 

a section 987 aggregate partnership; 

then this paragraph (c) applies to the 

partnership and its partners (including 

the acquiring partner) and the 

partnership becomes a section 987 

aggregate partnership. 

■ 16. Section 1.987–8 is amended by: 

■ a. Adding a fourth sentence after the 

third sentence in paragraph (a); 

■ b. Revising paragraph (b) introductory 

text; 

■ c. In paragraph (b)(2) in the second 

sentence removing the language ‘‘shall 

be’’ and adding the language ‘‘is’’ in its 

place and revising the last sentence; 

■ d. In paragraph (b)(3) in the first 

sentence removing the language ‘‘(as 

defined in section 957)’’; 

■ e. Adding paragraphs (b)(5) and (6); 

■ f. Revising paragraph (c); 

■ g. In paragraph (d) removing the text 

‘‘For further guidance, see § 1.987– 

8T(d)’’; 

h. Revising the second and third 

sentences in paragraph (e); 

■ i. Designating Examples 1 through 7 of 

paragraph (f) as paragraphs (f)(1) 

through (7). 

■ j. In newly designated paragraph 

(f)(1): 

■ i. Removing the language ‘‘2021’’ 

wherever it appears and adding the 

language ‘‘year 1’’ in its place; and 

■ ii. Removing the language ‘‘2022’’ 

wherever it appears and adding the 

language ‘‘year 2’’ in its place; 

■ k. Adding the language ‘‘the’’ before 

‘‘Business A section 987 QBU’’ in the 

last sentence of newly designated 

paragraph (f)(1)(ii); 

■ l. Revising newly designated 

paragraph (f)(3); 

■ m. In newly designated paragraph 

(f)(4)(i), removing the language 

‘‘transfers’’ and adding the language 

‘‘distributes’’ in its place; 

■ n. Removing and reserving newly 

designated paragraph (f)(5); 

■ o. In newly designated paragraph 

(f)(6): 

■ i. Removing the language ‘‘2021’’ 

wherever it appears and adding the 

language ‘‘year 1’’ in its place; and 

■ ii. Removing the language ‘‘2026’’ 

wherever it appears and adding the 

language ‘‘year 6’’ in its place; 

■ p. In newly designated paragraph 

(f)(6)(ii)(A), removing the language 

‘‘§ 1.987–1(b)(4)(i)’’ and adding the 

language ‘‘§ 1.987–1(b)(5)’’ in its place. 

The revisions and additions read as 

follows: 

§ 1.987–8 Termination of a section 987 

QBU. 

(a) * * * Paragraph (d) of this section 

is reserved. * * *. 

(b) In general. Except as provided in 

paragraph (c) of this section, a section 

987 QBU terminates if the conditions 

described in any one of paragraphs 

(b)(1) through (6) of this section are 

satisfied. 

* * * * * 

(2) * * * See paragraphs (f)(2), (5), 

and (6) of this section (Examples 2, 5, 

and 6). 

* * * * * 

(5) Section 987 QBU ceases to be an 

eligible QBU with a functional currency 

different from its owner. The section 987 

QBU ceases to be an eligible QBU that 

has a functional currency different from 

its owner. See also § 1.985–5(d)(2) 

(section 987 QBU changes its functional 

currency to that of its owner) and 

(e)(4)(iii) (owner changes its functional 

currency to that of its section 987 QBU). 

(6) Change in form of ownership. The 

owner of the section 987 QBU changes 

its form of ownership of the section 987 

QBU from direct ownership to indirect 

ownership, or from indirect ownership 

to direct ownership. 

(c) Transactions described in section 

381(a)—(1) Liquidations. 

Notwithstanding paragraph (b) of this 

section, a termination does not occur 

when the owner (distributor) of a 

section 987 QBU ceases to exist in a 

liquidation described in section 332 

pursuant to which it transfers the 

section 987 QBU to another corporation 

(distributee), except in the following 

cases: 

(i) The distributor is a domestic 

corporation and the distributee is a 

foreign corporation. 

(ii) The distributor is a foreign 

corporation and the distributee is a 

domestic corporation. 

(iii) The distributor and the 

distributee are both foreign corporations 

and the functional currency of the 

distributee is the same as the functional 

currency of the distributor’s section 987 

QBU. 

(2) Reorganizations. Notwithstanding 

paragraph (b) of this section, a 

termination does not occur when the 

owner (transferor) of the section 987 

QBU ceases to exist in a reorganization 

described in section 381(a)(2) pursuant 

to which it transfers the section 987 

QBU to another corporation (acquiring 

corporation), except in the following 

cases: 

(i) The transferor is a domestic 

corporation and the acquiring 

corporation is a foreign corporation. 


khammond on DSKJM1Z7X2PROD with PROPOSALS3
78190 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

(ii) The transferor is a foreign 

corporation and the acquiring 

corporation is a domestic corporation. 

(iii) The transferor is a controlled 

foreign corporation immediately before 

the transfer, the acquiring corporation is 

a foreign corporation that is not a 

controlled foreign corporation 

immediately after the transfer, and the 

acquiring corporation was related to the 

transferor within the meaning of section 

267(b) immediately before the transfer. 

(iv) The transferor and the acquiring 

corporation are foreign corporations and 

the functional currency of the acquiring 

corporation is the same as the functional 

currency of the transferor’s section 987 

QBU. 

* * * * * 

(e) * * * Thus, except as otherwise 

provided in the section 987 regulations, 

a termination generally results in the 

recognition of any net unrecognized 

section 987 gain or loss of the section 

987 QBU (unless it is treated as deferred 

section 987 gain or loss or suspended 

section 987 loss). See §§ 1.987–5(c)(3) 

(generally recognizing section 987 gain 

or loss on a termination) and 1.987–11 

through 1.987–13 (suspending section 

987 gain or loss and deferring section 

987 loss in certain instances). 

(f) * * * 

(3) Example 3. Cessation of controlled 

foreign corporation status—(i) Facts. 

Foreign parent (FP) is a foreign 

corporation that owns all the stock of 

U.S. Corp, a domestic corporation. U.S. 

Corp owns all of the stock of FC, a 

controlled foreign corporation as 

defined in section 957. FC is the owner 

of Business A. U.S. Corp liquidates into 

FP. FC no longer constitutes a 

controlled foreign corporation after the 

liquidation. 

(ii) Analysis. Because FC ceases to 

qualify as a controlled foreign 

corporation as a result of a transaction 

after which persons that were related to 

FC within the meaning of section 267(b) 

immediately before the transaction 

collectively own sufficient interests in 

FC such that FC would continue to be 

considered a controlled foreign 

corporation if such persons were United 

States shareholders within the meaning 

of section 951(b), the Business A section 

987 QBU terminates pursuant to 

paragraph (b)(3) of this section. 

* * * * * 

■ 17. Section 1.987–9 is revised to read 

as follows: 

§ 1.987–9 Recordkeeping requirements. 

(a) In general. An owner (or the 

authorized person on behalf of an 

owner) must keep a copy of each section 

987 election made by or on behalf of an 

owner (if not required to be made on a 

form published by the Commissioner) 

and reasonable records sufficient to 

establish a section 987 QBU’s taxable 

income or loss and section 987 gain or 

loss. 

(b) Supplemental information. A 

person’s obligation to maintain records 

under section 6001 and paragraph (a) of 

this section is not satisfied unless the 

following information is maintained in 

those records with respect to each 

section 987 QBU, successor deferral 

QBU, and successor suspended loss 

QBU for each taxable year: 

(1) The amount of the items of 

income, gain, deduction, or loss 

attributed to the section 987 QBU in the 

functional currency of the section 987 

QBU and its owner. 

(2) The adjusted balance sheet of the 

section 987 QBU in the functional 

currency of the section 987 QBU and its 

owner. 

(3) The exchange rates used to 

translate items of income, gain, 

deduction, or loss of the section 987 

QBU into the owner’s functional 

currency and, if a spot rate convention 

is used, the manner in which the 

convention is determined. 

(4) The exchange rates used to 

translate the assets and liabilities of the 

section 987 QBU into the owner’s 

functional currency and, if a spot rate 

convention is used, the manner in 

which the convention is determined. 

(5) The amount of assets and 

liabilities transferred by the owner to 

the section 987 QBU determined in the 

functional currency of the owner. 

(6) The amount of assets and 

liabilities transferred by the section 987 

QBU to the owner determined in the 

functional currency of the owner. 

(7) The amount of the unrecognized 

section 987 gain or loss for the taxable 

year. 

(8) The amount of the net 

accumulated unrecognized section 987 

gain or loss at the close of the taxable 

year. 

(9) The amount of a remittance and 

the remittance proportion for the taxable 

year. 

(10) The computations required under 

§§ 1.861–9(g) and 1.861–9T(g) for 

purposes of sourcing and characterizing 

section 987 gain or loss, deferred section 

987 gain or loss, or suspended section 

987 loss under § 1.987–6. 

(11) The cumulative suspended 

section 987 loss in each recognition 

grouping. 

(12) The outstanding deferred section 

987 gain or loss in each recognition 

grouping. 

(13) The transition information 

required to be determined under 

§ 1.987–10(k). 

(c) Retention of records. The records 

required by this section, or records that 

support the information required on a 

form published by the Commissioner 

regarding section 987, must be 

maintained and kept available for 

inspection by the Internal Revenue 

Service for so long as the contents 

thereof may become relevant in the 

administration of the Internal Revenue 

Code. 

(d) Information on a dedicated section 

987 form. Information necessary to 

determine section 987 gain or loss and 

section 987 taxable income or loss must 

be reported on a form prescribed for that 

purpose in accordance with the 

instructions accompanying that form. A 

taxpayer satisfies its obligation 

described in paragraphs (a) and (b) of 

this section to the extent that the 

taxpayer provides the specific 

information required on Form 8858 (or 

its successor) or other form prescribed 

for this purpose (including the 

information required by the instructions 

accompanying those forms). 

■ 18. Section 1.987–10 is revised to read 

as follows: 

§ 1.987–10 Transition rules. 

(a) Overview—(1) In general. This 

section provides transition rules for the 

first taxable year in which the section 

987 regulations apply. This paragraph 

(a) provides an overview of this section. 

Paragraph (b) of this section describes 

the scope of this section’s application. 

Paragraph (c) of this section provides 

rules for determining the transition date. 

Paragraph (d) of this section provides 

rules relating to the application of the 

section 987 regulations after the 

transition date. Paragraph (e) of this 

section provides rules relating to the 

determination and recognition of 

pretransition gain or loss. Paragraph (f) 

of this section provides special rules for 

section 987 QBUs to which the fresh 

start transition method was applied. 

Paragraph (g) of this section provides 

transition rules relating to partnerships. 

Paragraph (h) of this section provides 

rules relating to the source and 

character of pretransition gain or loss. 

Paragraph (i) of this section is reserved. 

Paragraph (j) of this section provides 

adjustments to avoid double counting or 

omissions. Paragraph (k) of this section 

provides reporting requirements that 

apply in the taxable year beginning on 

the transition date. Paragraph (l) of this 

section provides examples illustrating 

the rules of this section. 

(2) Terms defined under prior § 1.987– 

12. For purposes of this section, the 


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terms deferral QBU, deferral QBU 

owner, successor QBU, outbound loss 

QBU, outbound section 987 loss, and 

qualified successor have the meaning 

provided in prior § 1.987–12. 

(b) Scope—(1) Owner of a section 987 

QBU. Except as provided in paragraph 

(f) of this section, any person that is an 

owner of a section 987 QBU on the 

applicable transition date must apply 

the rules of this section with respect to 

the section 987 QBU. 

(2) Deferral QBU owner and owner of 

outbound loss QBU. Except as provided 

in paragraph (f) of this section, a 

deferral QBU owner or the owner of an 

outbound loss QBU must apply the 

rules of this section with respect to the 

deferral QBU or outbound loss QBU if 

the deferral event or outbound loss 

event occurred before the applicable 

transition date. 

(c) Transition date—(1) In general. 

Except as provided in paragraph (c)(2) 

of this section, the transition date for a 

section 987 QBU, deferral QBU, or 

outbound loss QBU is the first day of 

the first taxable year described in 

§ 1.987–14(a)(1), (b), or (c) to which this 

section applies. 

(2) Terminating QBU. With respect to 

a terminating QBU, the transition date is 

the termination date, and this section is 

applied immediately before the 

termination. Until the transition date 

described in paragraph (c)(1) of this 

section, the owner of the terminating 

QBU must apply the section 987 

regulations with respect to the 

terminating QBU, and any section 987 

gain or loss attributable thereto, without 

regard to any section 987 elections. 

(d) Application of the section 987 

regulations after the transition date—(1) 

Owner functional currency net value on 

the last day of the preceding taxable 

year. Except as provided in paragraph (f) 

of this section, for purposes of applying 

§ 1.987–4 in the taxable year beginning 

on the transition date, the owner 

functional currency net value of a 

section 987 QBU on the last day of the 

preceding taxable year under § 1.987– 

4(d)(1)(B) is determined by translating 

the assets and liabilities that are 

attributable to the section 987 QBU on 

the day before the transition date into 

the owner’s functional currency at the 

spot rate applicable to the day before the 

transition date. 

(2) Determination of historic rate and 

adjustments required under the 

simplified inventory method. If a current 

rate election is not in effect for the 

taxable year beginning on the transition 

date, the historic rate for historic items 

that are attributable to a section 987 

QBU on the day before the transition 

date (other than non-LIFO inventory 

subject to the simplified inventory 

method under § 1.987–3(c)(2)(iv)(A)) is 

the spot rate applicable to the day before 

the transition date. The exchange rates 

used to apply § 1.987–3(c)(3) 

(adjustments required under the 

simplified inventory method) are 

determined as though a current rate 

election was in effect for the previous 

taxable year and was revoked for the 

taxable year beginning on the transition 

date. 

(e) Pretransition gain or loss--(1) In 

general. Except as provided in 

paragraph (f) of this section, 

pretransition gain or loss is determined 

and recognized under this paragraph (e). 

(2) Amount of pretransition gain or 

loss for an owner that applied an 

eligible pretransition method—(i) Owner 

of a section 987 QBU. If an owner of a 

section 987 QBU applied an eligible 

pretransition method with respect to the 

section 987 QBU, the amount of 

pretransition gain or loss with respect to 

the section 987 QBU is equal to the sum 

of the deemed termination amount 

described in paragraph (e)(2)(i)(A) of 

this section and the owner functional 

currency net value adjustment described 

in paragraph (e)(2)(i)(B) of this section. 

See paragraphs (l)(1) through (3) of this 

section (Examples 1 through 3) for an 

illustration of this rule. 

(A) Deemed termination amount. The 

deemed termination amount is the 

amount of section 987 gain or loss that 

would have been recognized by the 

owner under the eligible pretransition 

method if the section 987 QBU 

terminated and transferred all of its 

assets and liabilities to the owner on the 

day before the transition date and prior 

§ 1.987–12 did not apply. 

(B) Owner functional currency net 

value adjustment. The owner functional 

currency net value adjustment may be 

either positive or negative and is equal 

to the amount described in paragraph 

(e)(2)(i)(B)(1) of this section reduced by 

the amount described in paragraph 

(e)(2)(i)(B)(2) of this section. 

(1) The basis of the assets, reduced by 

the amount of liabilities, that are 

attributable to the section 987 QBU on 

the day before the transition date, 

translated into the owner’s functional 

currency at the spot rate applicable to 

the day before the transition date. 

(2) The basis of the assets, reduced by 

the amount of liabilities, that are 

attributable to the section 987 QBU on 

the day before the transition date, 

translated into the owner’s functional 

currency at the pretransition translation 

rate on the day before the transition 

date. 

(C) Pretransition translation rate. The 

pretransition translation rate is the rate 

that would be used under the eligible 

pretransition method to determine the 

basis of an asset or the amount of a 

liability in the hands of the owner of a 

section 987 QBU if the section 987 QBU 

transferred all of its assets and liabilities 

to the owner. 

(ii) Deferral QBU owner. If a deferral 

QBU owner applied an eligible 

pretransition method with respect to the 

deferral QBU, the amount of 

pretransition gain or loss with respect to 

the deferral QBU is equal to the deferred 

section 987 gain or loss (determined 

under prior § 1.987–12) that was not 

recognized before the transition date 

with respect to the deferral QBU. 

(iii) Owner of an outbound loss QBU. 

If the owner of an outbound loss QBU 

applied an eligible pretransition method 

with respect to the outbound loss QBU, 

the pretransition loss with respect to the 

outbound loss QBU is equal to the 

outbound section 987 loss that was not 

added to the basis of stock or recognized 

under prior § 1.987–12 before the 

transition date with respect to the 

outbound loss QBU. 

(3) Amount of pretransition gain or 

loss for an owner that did not apply an 

eligible pretransition method—(i) In 

general. If the owner of a section 987 

QBU did not apply an eligible 

pretransition method with respect to a 

section 987 QBU, the amount of 

pretransition gain or loss with respect to 

the section 987 QBU is determined 

under paragraph (e)(3)(ii) of this section. 

See paragraph (l)(4) of this section 

(Example 4) for an illustration of this 

rule. 

(ii) Computation of pretransition gain 

or loss. With respect to a section 987 

QBU described in paragraph (e)(3)(i) of 

this section, pretransition gain or loss is 

equal to the amount described in 

paragraph (e)(3)(ii)(A) of this section 

reduced by the amount described in 

paragraph (e)(3)(ii)(B) of this section. 

(A) The sum of the owner’s annual 

unrecognized section 987 gain or loss 

determined under paragraph (e)(3)(iii) of 

this section with respect to the section 

987 QBU for all taxable years ending 

before the transition date in which it 

was the owner of the section 987 QBU. 

(B) The total net amount of section 

987 gain or loss recognized by the 

owner with respect to the section 987 

QBU in all taxable years ending before 

the transition date. 

(iii) Annual unrecognized section 987 

gain or loss. An owner of a section 987 

QBU described in paragraph (e)(3)(i) of 

this section determines annual 

unrecognized section 987 gain or loss 

with respect to a section 987 QBU under 

the rules of § 1.987–4(d), applied as 

though a current rate election was in 


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78192 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

effect for all relevant taxable years, and 

subject to the following modifications— 

(A) Only § 1.987–4(d)(1) and (10) 

(steps 1 and 10) are applied; 

(B) Section 1.987–4(d)(10) is applied 

by replacing ‘‘paragraphs (d)(1) through 

(9)’’ with ‘‘paragraph (d)(1).’’ 

(iv) Deferral QBU owner. If a deferral 

QBU owner did not apply an eligible 

pretransition method with respect to the 

deferral QBU, the pretransition gain or 

loss with respect to the deferral QBU is 

equal to the amount that would be 

determined under paragraph (e)(3)(ii) of 

this section with respect to the deferral 

QBU if the transition date was the day 

of the deferral event, reduced by the 

amount of deferred section 987 gain or 

loss (determined under prior § 1.987– 

12) recognized before the actual 

transition date. 

(v) Owner of an outbound loss QBU. 

If the owner of an outbound loss QBU 

did not apply an eligible pretransition 

method with respect to the outbound 

loss QBU, the pretransition loss with 

respect to the outbound loss QBU is 

equal to the amount that would be 

determined under paragraph (e)(3)(ii) of 

this section with respect to the 

outbound loss QBU if the transition date 

was the day of the outbound loss event, 

reduced by any outbound section 987 

loss recognized or added to the basis of 

stock under prior § 1.987–12 before the 

actual transition date. 

(4) Eligible pretransition method. An 

eligible pretransition method means a 

method of applying section 987 before 

the transition date that is described in 

paragraphs (e)(4)(i) through (iii) of this 

section. An owner is treated as applying 

an eligible pretransition method with 

respect to a section 987 QBU only if it 

applied an eligible pretransition method 

with respect to each taxable year 

beginning before the transition date in 

which it was the owner of the section 

987 QBU and any permissible change in 

pretransition method was applied in a 

reasonable manner that would not result 

in income, gain, deduction, or loss 

(including section 987 gain or loss) 

being taken into account more than once 

or not being taken into account. 

(i) Earnings and capital method. An 

earnings and capital method is an 

eligible pretransition method if it is 

applied in a reasonable manner. For 

purposes of this paragraph (e)(4)(i), an 

earnings and capital method means a 

method of applying section 987 that 

requires section 987 gain or loss to be 

determined and recognized with respect 

to both the earnings of the section 987 

QBU and capital contributed to the 

section 987 QBU (for example, the 

method prescribed in the 1991 proposed 

regulations under section 987). See 

paragraph (l)(1) of this section (Example 

1) for an illustration of this rule. 

(ii) Other reasonable methods. Any 

reasonable method of applying section 

987 is an eligible pretransition method 

if it produces the same total amount of 

income over the life of the owner of a 

section 987 QBU as the method 

described in paragraph (e)(4)(i) of this 

section (taking into account the 

aggregate of section 987 gain or loss, 

section 987 taxable income or loss, and 

income or loss recognized by the owner 

of the section 987 QBU with respect to 

property transferred between the section 

987 QBU and the owner or any QBU of 

the owner). See paragraph (l)(2) of this 

section (Example 2) for an illustration of 

this rule. 

(iii) Other earnings only methods. An 

earnings only method (which 

determines section 987 gain or loss only 

with respect to the earnings of a section 

987 QBU) that does not meet the 

requirements of paragraph (e)(4)(ii) of 

this section is an eligible pretransition 

method, provided that— 

(A) The earnings only method was 

first applied by the owner on a return 

filed before November 9, 2023; 

(B) The earnings only method was 

applied consistently to all section 987 

QBUs of the owner; and 

(C) The owner of the section 987 QBU 

otherwise applies section 987 in a 

reasonable manner. See paragraph (l)(3) 

of this section (Example 3) for an 

illustration of this rule. 

(iv) Reasonable method must require 

recognition of section 987 gain or loss 

upon a transfer of property from the 

section 987 QBU. For purposes of this 

paragraph (e)(4), a method of applying 

section 987 is not reasonable unless the 

owner of the section 987 QBU 

recognizes section 987 gain or loss upon 

a transfer of property from the section 

987 QBU to the owner (or recognizes 

section 987 gain or loss on an annual 

basis). Therefore, a method under which 

the owner of a section 987 QBU defers 

the recognition of section 987 gain or 

loss until the section 987 QBU is 

terminated, sold, or liquidated is not a 

reasonable method. 

(v) Anti-abuse rule. If an owner 

changes its pretransition method of 

applying section 987 with a principal 

purpose of reducing its pretransition 

gain or increasing its pretransition loss, 

the Commissioner may redetermine 

pretransition gain or loss based on the 

owner’s original method of applying 

section 987 or by treating the owner as 

not applying an eligible pretransition 

method. 

(5) Recognition of pretransition gain 

or loss—(i) In general. Except as 

provided in paragraph (e)(5)(ii) of this 

section— 

(A) Pretransition gain with respect to 

a section 987 QBU is treated as net 

accumulated unrecognized section 987 

gain (within the meaning of § 1.987– 

4(c)). Pretransition gain with respect to 

a deferral QBU is treated as deferred 

section 987 gain and is attributed to one 

or more successor deferral QBUs under 

the principles of § 1.987–12(b)(2) and 

(c)(2). 

(B) Pretransition loss with respect to 

a section 987 QBU, a deferral QBU, or 

an outbound loss QBU is treated as 

suspended section 987 loss with respect 

to the section 987 QBU, the deferral 

QBU, or the outbound loss QBU. In the 

case of a deferral QBU or outbound loss 

QBU, suspended section 987 loss is 

attributed to one or more successor 

suspended loss QBUs under the 

principles of § 1.987–13(b)(1) and (c)(1). 

(ii) Election to recognize pretransition 

section 987 gain or loss ratably over the 

transition period—(A) In general. A 

taxpayer may elect to recognize 

pretransition gain or loss ratably over 

the transition period. If an election is 

made to recognize pretransition gain or 

loss ratably over the transition period, 

then paragraph (e)(5)(i) of this section 

does not apply, and each owner to 

which the election applies recognizes 

one tenth of its pretransition gain or loss 

with respect to each section 987 QBU, 

original deferral QBU, and outbound 

loss QBU in each taxable year for ten 

taxable years beginning with the taxable 

year that begins on the transition date. 

See § 1.987–1(g) for rules relating to 

section 987 elections (including 

consistency rules). 

(B) Special rules for inbound or 

outbound section 381(a) transactions— 

(1) Scope. This paragraph (e)(5)(ii)(B) 

applies if a corporation (acquiring 

corporation) acquires the assets of an 

owner that is subject to an election 

under paragraph (e)(5)(ii)(A) of this 

section in a transaction described in 

section 381(a), and either the owner is 

a foreign corporation and the acquiring 

corporation is a domestic corporation or 

the owner is a domestic corporation and 

the acquiring corporation is a foreign 

corporation. 

(2) Recognition of pretransition gain 

or loss. In the case of a transaction 

described in paragraph (e)(5)(ii)(B)(1) of 

this section, pretransition gain or loss 

that has not been recognized under 

paragraph (e)(5)(ii)(A) of this section 

ceases to be subject to the election to be 

recognized ratably over the transition 

period. Any unrecognized pretransition 

gain is recognized immediately before 

the transaction, and any unrecognized 

pretransition loss becomes suspended 


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section 987 loss immediately before the 

transaction. As a result, the suspended 

section 987 loss may be recognized to 

the extent of section 987 gain 

recognized in the same recognition 

grouping pursuant to § 1.987–11(e). See 

also § 1.987–13(g) (providing that any 

remaining suspended section 987 loss 

does not carry over to the acquiring 

corporation upon an inbound 

transaction to which section 381(a) 

applies). 

(6) Predecessor of an owner—(i) In 

general. For purposes of this paragraph 

(e), references to an owner of a section 

987 QBU, an original deferral QBU 

owner, and the owner of an outbound 

loss QBU include a predecessor 

described in paragraph (e)(6)(ii) of this 

section. 

(ii) Predecessor. If a corporation 

(acquiring corporation) becomes the 

owner of a section 987 QBU in a 

transaction described in section 381(a) 

in which the section 987 QBU does not 

terminate, the corporation that was the 

owner of the section 987 QBU 

immediately before the transaction is a 

predecessor of the acquiring 

corporation. If a corporation (acquiring 

corporation) becomes a qualified 

successor of a deferral QBU owner or 

the owner of an outbound loss QBU 

(each, a transferor corporation), the 

transferor corporation is a predecessor 

of the acquiring corporation. A 

predecessor of a corporation includes 

the predecessor of a predecessor of the 

corporation. 

(f) QBUs to which the fresh start 

transition method was applied—(1) In 

general. Paragraphs (d) and (e) of this 

section do not apply with respect to any 

section 987 QBU, deferral QBU, or 

outbound loss QBU with respect to 

which the taxpayer applied the rules of 

prior § 1.987–10 (or applied § 1.987–10 

of the 2006 proposed regulations in a 

reasonable manner) on a return filed 

before November 9, 2023 or pursuant to 

paragraph (f)(3) of this section. 

(2) Application of the section 987 

regulations after the transition date—(i) 

Owner functional currency net value on 

the last day of the preceding taxable 

year. For purposes of applying § 1.987– 

4 with respect to a section 987 QBU 

described in paragraph (f)(1) of this 

section for the taxable year beginning on 

the transition date, the owner functional 

currency net value of the section 987 

QBU on the last day of the preceding 

taxable year under § 1.987–4(d)(1)(B) is 

the amount that was determined for the 

preceding taxable year under § 1.987– 

4(d)(1)(A) of the 2016 and 2019 section 

987 regulations or the 2006 proposed 

section 987 regulations, as applicable. 

(ii) Determination of historic rate. For 

purposes of applying the section 987 

regulations with respect to historic 

items (other than inventory subject to 

the simplified inventory method under 

§ 1.987–3(c)(2)(iv)(A)) that are 

attributable to the section 987 QBU on 

the day before the transition date, a 

taxpayer must use the same historic 

rates as were used under the taxpayer’s 

application of the 2016 and 2019 section 

987 regulations or the 2006 proposed 

section 987 regulations, as applicable, in 

place of the historic rates that otherwise 

would be determined under § 1.987– 

1(c)(3). 

(iii) Unrecognized section 987 gain or 

loss—(A) Net accumulated 

unrecognized section 987 gain or loss of 

a section 987 QBU. In taxable years 

beginning on or after the transition date, 

for purposes of calculating the net 

accumulated unrecognized section 987 

gain or loss of a section 987 QBU 

described in paragraph (f)(1) of this 

section under § 1.987–4(c)— 

(1) Amounts determined under prior 

§ 1.987–4(d) or under § 1.987–4(d) or 

1.987–10 of the 2006 proposed section 

987 regulations, as applicable, are 

included in amounts determined under 

§ 1.987–4(d) for all prior taxable years; 

and 

(2) Amounts taken into account under 

prior § 1.987–5(a) or under § 1.987–5(a) 

of the 2006 proposed section 987 

regulations, as applicable, are included 

in amounts recognized under § 1.987– 

5(a) for all prior taxable years. For this 

purpose, amounts taken into account 

under prior § 1.987–5(a) or under 

§ 1.987–5(a) of the 2006 proposed 

section 987 regulations, as applicable, 

are determined without regard to prior 

§ 1.987–12 or prior § 1.987–12T. 

(B) Deferred section 987 gain or loss 

attributable to a successor deferral QBU. 

In the taxable year beginning on the 

transition date, the outstanding deferred 

section 987 gain or loss (as determined 

under prior § 1.987–12) of a deferral 

QBU described in paragraph (f)(1) of 

this section becomes deferred section 

987 gain or loss (within the meaning of 

§ 1.987–12). The deferred section 987 

gain or loss is attributed to one or more 

successor deferral QBUs under the 

principles of § 1.987–12(b)(2) and (c)(2). 

(C) Suspended section 987 loss 

attributable to a successor suspended 

loss QBU. In the taxable year beginning 

on the transition date, outbound section 

987 loss of an outbound loss QBU 

described in paragraph (f)(1) of this 

section that has not been recognized or 

added to the basis of stock under prior 

§ 1.987–12 becomes suspended section 

987 loss. The suspended section 987 

loss is attributed to one or more 

successor suspended loss QBUs under 

the principles of § 1.987–13(b)(1) and 

(c)(1). 

(3) Taxpayers that are required to 

transition using the fresh start transition 

method. If a taxpayer is subject to a 

consent agreement under which it is 

required to apply the fresh start 

transition method with respect to a 

section 987 QBU, then the taxpayer 

must apply the transition rules of prior 

§ 1.987–10 to that section 987 QBU for 

the taxable year beginning on the 

transition date and immediately before 

the taxpayer applies this section. In 

applying this section, the taxpayer is 

treated as having applied prior § 1.987– 

10 to the section 987 QBU. 

(g) Partnerships—(1) Aggregate to 

entity. If, for section 987 purposes, an 

aggregate approach to partnerships was 

applied to a partnership that owns an 

eligible QBU before the transition date 

and the partnership is not a section 987 

aggregate partnership on the transition 

date, then the partnership is treated as 

a section 987 aggregate partnership at 

the beginning of the transition date for 

purposes of applying paragraphs (d) 

through (f) of this section and then as 

ceasing to be a section 987 aggregate 

partnership in a transition to which 

§ 1.987–7C(b) applies. 

(2) Entity to aggregate. If, for section 

987 purposes, an entity approach to 

partnerships was applied to a 

partnership that owns an eligible QBU 

before the transition date and the 

partnership is a section 987 aggregate 

partnership on the transition date, then 

the partnership is treated as not being a 

section 987 aggregate partnership at the 

beginning of the transition date for 

purposes of applying paragraphs (d) 

through (f) of this section and then as 

becoming a section 987 aggregate 

partnership in a transition to which 

§ 1.987–7C(c) applies. 

(h) Determination of source and 

character—(1) In general. Except as 

provided in paragraph (h)(2) of this 

section, the source and character of 

pretransition gain or loss is determined 

under the rules of § 1.987–6. See 

§ 1.987–6(b)(1) (timing of source and 

character determination). 

(2) Deferral QBU or outbound loss 

QBU. Notwithstanding paragraph (h)(1) 

of this section and § 1.987–6, the source 

and character of pretransition gain or 

loss with respect to a deferral QBU or 

an outbound loss QBU is the same as 

the source and character of the 

outstanding deferred section 987 gain or 

loss (determined under prior § 1.987– 

12) of the deferral QBU or the outbound 

section 987 loss of the outbound loss 

QBU (determined under § 1.987–12(e) of 


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78194 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

the 2016 and 2019 section 987 

regulations). (i) [Reserved] 

(j) Adjustments to avoid double 

counting or omissions. If a difference 

between the treatment of any item under 

the section 987 regulations and the 

treatment of the item under the 

taxpayer’s prior section 987 method 

would result in income, gain, 

deduction, or loss being taken into 

account more than once or not being 

taken into account, then the 

pretransition gain or loss of the section 

987 QBU, as determined under 

paragraphs (e)(2) and (3) of this section, 

is adjusted to account for the difference. (k) Reporting—(1) In general. Except 

as otherwise provided in this paragraph 

(k), a statement titled ‘‘Section 987 

Transition Information’’ must be 

attached to an owner’s timely filed 

return for the taxable year beginning on 

the transition date providing the 

following information for each QBU 

described in paragraph (k)(2) of this 

section: 

(i) A description of each QBU, the 

QBU’s principal place of business, and 

a description of the prior method used 

by the taxpayer to determine its section 

987 gain or loss, deferred section 987 

gain or loss (under prior § 1.987–12), or 

outbound section 987 loss with respect 

to the QBU, including an explanation as 

to whether such method was an eligible 

pretransition method. (ii) The pretransition gain or loss with 

respect to each QBU and the 

computations used to determine 

pretransition gain or loss. (iii) Whether the authorized person 

has elected to recognize pretransition 

gain or loss ratably over the transition 

period pursuant to paragraph (e)(5)(ii) of 

this section. 

(iv) In the case of a statement filed by 

or on behalf of a partnership, a 

description of how section 987 was 

applied to the partnership, including 

whether an entity theory or aggregate 

theory of partnerships applied, and if an 

aggregate theory of partnerships 

applied, the owners of any QBUs 

consisting of assets and liabilities held 

by the partnership. (v) With respect to each QBU for 

which any adjustment is made under 

paragraph (j) of this section, a 

description of each adjustment and the 

basis for computing the adjustment. (vi) A list of the QBUs described in 

paragraph (f)(1) of this section, or a 

statement that no QBUs are described in 

paragraph (f)(1) of this section. (2) QBUs for which reporting is 

required—(i) In general. Except as 

provided in paragraph (k)(2)(ii) of this 

section, the information described in 

paragraph (k)(1) of this section must be 

provided with respect to— (A) Each section 987 QBU described 

in paragraph (b)(1) of this section; (B) Each deferral QBU described in 

paragraph (b)(2) of this section and each 

of its successor deferral QBUs; and 

(C) Each outbound loss QBU and each 

of the successor suspended loss QBUs to 

which suspended section 987 loss with 

respect to the outbound loss QBU is 

attributed. 

(ii) QBUs to which the fresh start 

transition method was applied. A 

taxpayer is not required to provide the 

information described in paragraphs 

(k)(1)(i) through (iv) of this section with 

respect to a QBU described in paragraph 

(f)(1) of this section. 

(3) Attachments not required where 

information is reported on a form. This 

paragraph (k) does not apply to the 

extent provided on a form or 

instructions published by the 

Commissioner. 

(4) Form 3115 not required. Taxpayers 

that properly comply with the reporting 

requirements in this paragraph (k) are 

not required to file a Form 3115 in 

connection with the transition onto the 

section 987 regulations. (l) Examples. The following examples 

illustrate the application of this section. 

For purposes of the examples, DC is a 

domestic corporation with the U.S. 

dollar as its functional currency and 

Branch is a section 987 QBU with the 

euro as its functional currency. DC has 

a taxable year ending December 31, and 

the transition date is January 1, year 4. 

For purposes of the examples, except as 

otherwise indicated, assume that no 

section 987 elections are in effect. 

(1) Example 1—(i) Facts—(A) 

Formation of Branch and Branch’s 

operations. DC formed Branch on 

November 30, year 1, with a 

contribution of Ö150. In year 1, Branch 

purchased a parcel of unimproved land 

for Ö100. In year 2, Branch earned Ö25. 

In year 3, Branch again earned Ö25. On 

June 30, year 3, Branch distributed Ö100 

cash to DC, and DC immediately 

exchanged the Ö100 for $135. 

(B) Exchange rates. The relevant 

exchange rates are shown below. 

TABLE 1 TO PARAGRAPH (l)(1)(i)(B)— 

EXCHANGE RATES

Spot rate 

Yearly 

average 

exchange 

rate 

November 30, Year 1 Ö1 = $1.

December 31, Year 1 Ö1 = $1.10.

December 31, Year 2 Ö1 = $1.20.

June 30, Year 3 .......... Ö1 = $1.35.

December 31, Year 3 Ö1 = $1.40.

Year 1 ......................... .................... Ö1 = $1.05. 

Year 2 ......................... .................... Ö1 = $1.15. 

Year 3 ......................... .................... Ö1 = $1.25. 

(C) Pretransition method. DC used the 

method prescribed in the 1991 proposed 

regulations under section 987 with 

respect to Branch before the transition 

date. Under this method, DC maintains 

an equity pool in euros (Branch’s 

functional currency) and a basis pool in 

U.S. dollars (DC’s functional currency). 

When Branch makes a remittance 

(whether out of earnings or capital), DC 

recognizes section 987 gain or loss equal 

to the difference between the amount of 

the remittance (translated into U.S. 

dollars at the spot rate on the date of the 

remittance) and the portion of the basis 

pool attributable to the remittance. DC’s 

basis in assets distributed from Branch 

is equal to Branch’s basis in the assets, 

translated into U.S. dollars at the spot 

rate on the date of the remittance. 

Branch’s earnings are translated into 

U.S. dollars at the average exchange rate 

for the taxable year. DC otherwise 

applies section 987 in a reasonable 

manner. 

(D) Application of the pretransition 

method before the transition date. For 

purposes of determining section 987 

gain or loss recognized as a result of the 

June 30, year 3, remittance, DC was 

required to determine the amount in 

Branch’s equity and basis pools. 

Branch’s equity pool was equal to Ö200, 

and its basis pool was equal to $210, as 

shown below: 

TABLE 2 TO PARAGRAPH (l)(1)(i)(D)—YEAR 3 EQUITY AND BASIS POOLS

Equity pool Translation rate Basis pool 

Contribution (9/30/Year 1) ............................................................................................... Ö150 Ö1 = $1 ....................................................... $150 

Year 2 Earnings ............................................................................................................... Ö25 Ö1 = $1.15 .................................................. 28.75 

Year 3 Earnings ............................................................................................................... Ö25 Ö1 = $1.25 .................................................. 31.25 

Total .......................................................................................................................... Ö200 ..................................................................... 210 


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Because the remittance was equal to 

50% of the equity pool (Ö100), 50% of 

the basis pool, or $105, was attributable 

to the remittance. The amount of the 

remittance was $135 (Ö100 translated at 

the spot rate on June 30, year 3, of Ö1 

= $1.35). Therefore, in year 3, DC 

recognized section 987 gain of $30, 

equal to the difference between the 

amount of the remittance ($135) and the 

portion of the basis pool attributable to 

the remittance ($105). As a result of the 

remittance, the equity pool was reduced 

by the amount distributed (Ö100), and 

the basis pool was reduced by the 

portion of the basis pool attributable to 

the remittance ($105). Therefore, after 

the remittance, the equity pool was 

equal to Ö100, and the basis pool was 

equal to $105. In the hands of DC, the 

euros distributed had a basis of $135 

(equal to the Ö100 distribution 

translated at the spot rate on June 30, 

year 3, of Ö1 = $1.35). DC did not 

recognize section 988 gain or loss when 

it exchanged the euros for $135. 

(ii) Analysis—(A) DC’s method is an 

eligible pretransition method. Before the 

transition date, DC followed the method 

prescribed in the 1991 proposed 

regulations under section 987 with 

respect to Branch. This method is an 

eligible pretransition method under 

paragraph (e)(4)(i) of this section. 

Therefore, DC determines its 

pretransition gain or loss with respect to 

Branch under paragraph (e)(2) of this 

section. 

(B) Pretransition gain or loss. Under 

paragraph (e)(2) of this section, DC’s 

pretransition gain or loss with respect to 

Branch is equal to the sum of the 

deemed termination amount described 

in paragraph (e)(2)(i)(A) of this section 

and the owner functional currency net 

value adjustment described in 

paragraph (e)(2)(i)(B) of this section. As 

explained in paragraphs (l)(1)(ii)(B)(1) 

and (2) of this section, DC’s deemed 

termination amount is $35 and its 

owner functional currency net value 

adjustment is zero. Therefore, DC has 

$35 of pretransition gain with respect to 

Branch. Under paragraph (e)(5)(i)(A) of 

this section, the pretransition gain is 

treated as Branch’s net accumulated 

unrecognized section 987 gain. 

However, if DC elects to recognize its 

pretransition gain ratably over the 

transition period under paragraph 

(e)(5)(ii) of this section, the pretransition 

gain is not treated as net accumulated 

unrecognized section 987 gain. Instead, 

DC recognizes $3.50 (one tenth of its 

pretransition gain) for each of the ten 

taxable years from year 4 through year 

13. 

(1) Deemed termination amount. 

Under paragraph (e)(2)(i)(A) of this 

section, the deemed termination amount 

is the amount of section 987 gain or loss 

that would have been recognized by DC 

under the eligible pretransition method 

if Branch terminated and transferred all 

its assets and liabilities to DC (the land 

with a basis of Ö100) on December 31, 

year 3, and prior § 1.987–12 did not 

apply. Under DC’s eligible pretransition 

method, DC would have recognized 

section 987 gain of $35, determined by 

subtracting the remaining basis pool of 

$105 from the amount of the remittance 

of $140 (Ö100 translated at the spot rate 

on December 31, year 3, of Ö1 = $1.40). 

Therefore, the deemed termination 

amount is $35. 

(2) Owner functional currency net 

value adjustment. On December 31, year 

3, Branch had no liabilities and only 

one asset: land with a basis of Ö100. 

Under paragraph (e)(2)(i)(B) of this 

section, the owner functional currency 

net value adjustment is equal to the 

basis of the land, translated into U.S. 

dollars at the spot rate on December 31, 

year 3, reduced by the basis of the land, 

translated into U.S. dollars at the 

pretransition translation rate on 

December 31, year 3. Under paragraph 

(e)(2)(i)(C) of this section, the 

pretransition translation rate is the rate 

that would be used under DC’s eligible 

pretransition method to determine the 

basis of the land in the hands of DC if 

Branch transferred the land to DC on 

December 31, year 3. Under DC’s 

eligible pretransition method, if Branch 

transferred the land to DC, DC’s basis in 

the land would be equal to Branch’s 

basis (Ö100) translated at the spot rate 

on the date of the remittance. Therefore, 

the pretransition translation rate on 

December 31, year 3, is equal to the spot 

rate on December 31, year 3. 

Consequently, the owner functional 

currency net value adjustment is zero. 

(C) Determination of unrecognized 

section 987 gain or loss in year 4. For 

purposes of determining unrecognized 

section 987 gain or loss in year 4 under 

§ 1.987–4(d), the owner functional 

currency net value of Branch on the last 

day of year 3 is determined by 

translating the Ö100 basis of the land at 

the spot rate on December 31, year 3 (Ö1 

= $1.40). Therefore, the owner 

functional currency net value of Branch 

on the last day of year 3 is $140. 

(2) Example 2—(i) Facts—(A) In 

general. The facts and exchange rates 

are the same as in paragraph (l)(1) of 

this section (Example 1), except that DC 

uses an earnings only method with 

respect to Branch before the transition 

date, as described in paragraph 

(l)(2)(i)(B) of this section. 

(B) Pretransition method. Under the 

earnings only method, DC maintains an 

equity pool in euros (Branch’s 

functional currency) and a basis pool in 

U.S. dollars (DC’s functional currency) 

with respect to Branch’s earnings. DC 

also maintains separate equity and basis 

pools with respect to Branch’s capital. 

Distributions are treated as being made 

first out of earnings and then out of 

capital. When Branch makes a 

remittance out of earnings, DC 

recognizes section 987 gain or loss equal 

to the difference between the amount of 

the remittance (translated into U.S. 

dollars at the spot rate on the date of the 

remittance) and the portion of the 

earnings basis pool attributable to the 

remittance. No section 987 gain or loss 

is recognized on a distribution out of 

capital. DC’s basis in assets distributed 

out of Branch’s earnings is equal to 

Branch’s basis in the assets translated at 

the spot rate on the date of the 

remittance. DC’s basis in assets 

distributed out of Branch’s capital is 

equal to the portion of the capital basis 

pool attributable to the distribution. 

Branch’s earnings are translated into 

U.S. dollars at the average exchange rate 

for the taxable year. DC otherwise 

applies section 987 in a reasonable 

manner. 

(C) Application of the pretransition 

method before the transition date. On 

June 30, year 3, Branch distributed Ö100 

cash to DC. Of this amount, Ö50 

represented a remittance out of 

earnings, and Ö50 represented a 

distribution out of capital. 

(1) Remittance out of earnings. For 

purposes of determining section 987 

gain or loss recognized on the 

remittance, Branch’s earnings equity 

pool was equal to Ö50, and its earnings 

basis pool was equal to $60, as shown 

below: 

TABLE 3 TO PARAGRAPH (l)(2)(i)(C)(1)—EARNINGS EQUITY AND BASIS POOLS

Equity pool Translation rate Basis pool 

Year 2 Earnings ......................................................................................... Ö25 Ö1 = $1.15 ....................................... $28.75 

Year 3 Earnings ......................................................................................... Ö25 Ö1 = $1.25 ....................................... 31.25 


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TABLE 3 TO PARAGRAPH (l)(2)(i)(C)(1)—EARNINGS EQUITY AND BASIS POOLS—Continued 

Equity pool Translation rate Basis pool 

Total .................................................................................................... Ö50 .......................................................... 60 

Because Branch remitted 100% of the 

earnings equity pool (Ö50), the entire 

earnings basis pool, or $60, was 

attributable to the remittance. The value 

of the remittance was $67.50 (Ö50 

translated at the spot rate on June 30, 

year 3, of Ö1 = $1.35). Therefore, in year 

3, DC recognized section 987 gain of 

$7.50, equal to the difference between 

the value of the remittance ($67.50) and 

the portion of the basis pool attributable 

to the remittance ($60). As a result of 

the remittance, the earnings equity pool 

and the earnings basis pool were each 

reduced to zero. In the hands of DC, the 

Ö50 distributed out of earnings had a 

basis of $67.50 (Ö50 translated at the 

spot rate on June 30, year 3, of Ö1 = 

$1.35). 

(2) Distribution out of capital. The 

basis of the Ö50 distributed out of 

capital was equal to the portion of the 

capital basis pool attributable to the 

distribution. For this purpose, the 

capital equity pool was equal to Ö150, 

and the capital basis pool was equal to 

$150, as shown below: 

TABLE 4 TO PARAGRAPH (l)(2)(i)(C)(2)—CAPITAL EQUITY AND BASIS POOLS

Equity pool Translation rate Basis pool 

Contribution (6/30/Year 1) ......................................................................... Ö150 Ö1 = $1 ............................................ $150 

Total .................................................................................................... Ö150 .......................................................... 150 

Because Branch distributed 33% of 

the capital equity pool, or Ö50, 33% of 

the capital basis pool, or $50, was 

attributable to the distribution. In the 

hands of DC, the Ö50 distributed out of 

capital had a basis of $50. As a result 

of the capital distribution, the capital 

equity pool was reduced to Ö100 and 

the capital basis pool was reduced to 

$100. 

(3) Section 988 gain recognized. On 

June 30, year 3, DC exchanged Ö100 

with an aggregate basis of $117.50 

(equal to the sum of the $67.50 basis of 

the remittance out of earnings and the 

$50 basis of the distribution out of 

capital) for $135. Therefore, DC 

recognized $17.50 of gain under section 

988. 

(ii) Analysis—(A) DC’s method is an 

eligible pretransition method. Before the 

transition date, DC followed a 

reasonable method of applying section 

987 that would result in the same total 

amount of income over the life of DC 

($125) as an earnings and capital 

method, as explained in paragraphs 

(l)(2)(ii)(A)(1) and (2) of this section. 

Therefore, this method is an eligible 

pretransition method under paragraph 

(e)(4)(ii) of this section. Consequently, 

DC determines its pretransition gain or 

loss with respect to Branch under 

paragraph (e)(2) of this section. 

(1) DC’s total amount of income under 

its pretransition method. Under DC’s 

pretransition method, DC recognized 

$7.50 of section 987 gain and $17.50 of 

section 988 gain in year 3. In addition, 

on December 31, year 3, DC had $40 of 

embedded gain in its capital equity and 

basis pools (equal to the difference 

between its capital equity pool of Ö100, 

translated at the spot rate on December 

31, year 3, of Ö1 = $1.40, and its capital 

basis pool of $100) which will be taken 

into account in the future (when Branch 

distributes property out of capital and 

the property is sold). DC also recognized 

$60 of earnings with respect to Branch 

($28.75 in year 2 and $31.25 in year 3). 

Thus, DC’s total income (recognized and 

unrecognized) with respect to Branch is 

$125. 

(2) DC’s total amount of income under 

an earnings and capital method. If DC 

had instead applied an earnings and 

capital method, as described in 

paragraph (l)(1)(i)(C) of this section 

(Example 1), DC would have recognized 

section 987 gain of $30 in year 3 and 

would not have recognized section 988 

gain in year 3, as explained in paragraph 

(l)(1)(i)(D) of this section. On December 

31, year 3, DC would have unrecognized 

section 987 gain in its equity and basis 

pools of $35 (see paragraph 

(l)(1)(ii)(B)(1) of this section (Example 

1)). DC would also have recognized $60 

of earnings with respect to Branch 

($28.75 in year 2 and $31.25 in year 3). 

Thus, DC’s total income (recognized and 

unrecognized) with respect to Branch is 

$125. 

(B) Pretransition gain or loss. Under 

paragraph (e)(2) of this section, DC’s 

pretransition gain or loss with respect to 

Branch is equal to sum of the deemed 

termination amount described in 

paragraph (e)(2)(i)(A) of this section and 

the owner functional currency net value 

adjustment described in paragraph 

(e)(2)(i)(B) of this section. As explained 

in paragraphs (l)(2)(ii)(B)(1) and (2) of 

this section, the deemed termination 

amount is zero and the owner functional 

currency net value adjustment is $40. 

Therefore, DC has $40 of pretransition 

gain with respect to Branch. Under 

paragraph (e)(5)(i)(A) of this section, the 

pretransition gain is treated as Branch’s 

net accumulated unrecognized section 

987 gain. However, if DC elects to 

recognize its pretransition gain ratably 

over the transition period under 

paragraph (e)(5)(ii) of this section, the 

pretransition gain is not treated as net 

accumulated unrecognized section 987 

gain. Instead, DC recognizes $4 (one 

tenth of its pretransition gain) for each 

of the ten taxable years from year 4 

through year 13. 

(1) Deemed termination amount. 

Under paragraph (e)(2)(i)(A) of this 

section, the deemed termination amount 

is the amount of section 987 gain or loss 

that would have been recognized by DC 

under the eligible pretransition method 

if Branch terminated and transferred all 

of its assets and liabilities to DC on 

December 31, year 3, and prior § 1.987– 

12 did not apply. Under DC’s eligible 

pretransition method, if Branch had 

transferred all of its assets and liabilities 

to DC, this would have been treated as 

a distribution out of capital. Under its 

eligible pretransition method, DC would 

not have recognized section 987 gain or 

loss on a distribution out of capital. 

Therefore, the deemed termination 

amount is zero. 

(2) Owner functional currency net 

value adjustment. On December 31, year 

3, Branch had no liabilities and only 

one asset: land with a basis of Ö100. 

Under paragraph (e)(2)(i)(B) of this 


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section, the owner functional currency 

net value adjustment is equal to the 

basis of Branch’s land, translated into 

U.S. dollars at the spot rate on 

December 31, year 3, reduced by the 

basis of Branch’s land, translated into 

U.S. dollars at the pretransition 

translation rate on December 31, year 3. 

Under paragraph (e)(2)(i)(C) of this 

section, the pretransition translation 

rate is the rate that would be used under 

the eligible pretransition method to 

determine the basis of the land in the 

hands of DC if Branch transferred the 

land to DC. Under DC’s eligible 

pretransition method, DC’s basis in 

assets distributed from Branch is equal 

to the portion of the capital basis pool 

attributable to the distribution. If Branch 

transferred the land with a basis of Ö100 

to DC on December 31, year 3, its 

remaining capital basis pool of $100 

would be attributable to the 

distribution, and the land would have a 

basis of $100 in the hands of DC. 

Because the land had a basis of Ö100 in 

the hands of Branch, and would have a 

basis of $100 in the hands of DC if it 

were distributed on December 31, year 

3, the pretransition translation rate is Ö1 

= $1. The Ö100 basis of Branch’s land, 

translated at the spot rate on December 

31, year 3 of Ö1 = $1.40 is equal to $140. 

The Ö100 basis of Branch’s land, 

translated at the pretransition 

translation rate on December 31, year 3 

of Ö1 = $1 is equal to $100. Therefore, 

the owner functional currency net value 

adjustment is equal to $40 ($140 ¥ 

$100). 

(C) Determination of unrecognized 

section 987 gain or loss in year 4. For 

purposes of determining unrecognized 

section 987 gain or loss in year 4 under 

§ 1.987–4(d), the owner functional 

currency net value of Branch on the last 

day of year 3 is determined by 

translating the Ö100 basis of the land at 

the spot rate on December 31, year 3 (Ö1 

= $1.40). Therefore, the owner 

functional currency net value of Branch 

on the last day of year 3 is $140. 

(3) Example 3—(i) Facts—(A) In 

general. The facts and exchange rates 

are the same as in paragraph (l)(1) of 

this section (Example 1), except that DC 

used an earnings only method with 

respect to Branch before the transition 

date, as described in paragraph 

(l)(3)(i)(B) of this section. 

(B) Pretransition method. Under the 

earnings only method, DC maintains an 

equity pool in euros (Branch’s 

functional currency) and a basis pool in 

U.S. dollars (DC’s functional currency) 

with respect to Branch’s earnings. 

However, DC does not maintain separate 

equity and basis pools with respect to 

Branch’s capital. Distributions are 

treated as being made first out of 

earnings and then out of capital. When 

Branch makes a remittance out of 

earnings, DC recognizes section 987 gain 

or loss equal to the difference between 

the amount of the remittance (translated 

into U.S. dollars at the spot rate on the 

date of the remittance) and the portion 

of the earnings basis pool attributable to 

the remittance. No section 987 gain or 

loss is recognized on a distribution out 

of capital. Under DC’s pretransition 

method, DC’s basis in assets distributed 

by Branch (whether out of earnings or 

capital) is equal to Branch’s basis in the 

assets translated at the spot rate on the 

date of the distribution. Branch’s 

earnings are translated into U.S. dollars 

at the average exchange rate for the 

taxable year. DC first applied its 

earnings only method on a return filed 

before November 9, 2023. In addition, 

DC applied its earnings only method 

consistently to all of its section 987 

QBUs and otherwise applied section 

987 in a reasonable manner. 

(C) Application of the pretransition 

method before the transition date. On 

June 30, year 3, Branch distributed Ö100 

cash to DC. Of this amount, Ö50 

represented a remittance out of 

earnings, and Ö50 represented a 

distribution out of capital. 

(1) Remittance out of earnings. For 

purposes of determining section 987 

gain or loss recognized on the 

remittance, Branch’s earnings equity 

pool was equal to Ö50, and its earnings 

basis pool was equal to $60, as shown 

below: 

TABLE 5 TO PARAGRAPH (l)(3)(i)(C)(1)—EARNINGS EQUITY AND BASIS POOLS

Equity pool Translation rate Basis pool 

Year 2 Earnings ......................................................................................... Ö25 Ö1 = $1.15 ....................................... $28.75 

Year 3 Earnings ......................................................................................... Ö25 Ö1 = $1.25 ....................................... 31.25 

Total .................................................................................................... Ö50 .......................................................... 60 

Because Branch remitted 100% of the 

earnings equity pool (Ö50), the entire 

earnings basis pool, or $60, was 

attributable to the remittance. The value 

of the remittance was $67.50 (Ö50 

translated at the spot rate on June 30, 

year 3, of Ö1 = $1.35). Therefore, in year 

3, DC recognized section 987 gain of 

$7.50, equal to the difference between 

the value of the remittance ($67.50) and 

the portion of the basis pool attributable 

to the remittance ($60). As a result of 

the remittance, the earnings equity pool 

and the earnings basis pool were each 

reduced to zero. 

(2) Basis of euros distributed. In the 

hands of DC, the Ö100 distributed had 

a basis of $135 (Ö100 translated at the 

spot rate on June 30, year 3, of Ö1 = 

$1.35). DC did not recognize gain or loss 

under section 988 when it exchanged 

the Ö100 for $135. 

(ii) Analysis—(A) DC’s method is an 

eligible pretransition method. Unlike in 

paragraph (l)(2) of this section (Example 

2), DC’s earnings only method would 

not result in the same total amount of 

income over the life of DC as an 

earnings and capital method described 

in paragraph (e)(4)(i) of this section 

because DC does not maintain capital 

basis and equity pools and DC translates 

the basis of all property distributed from 

Branch at the spot rate on the 

distribution date. However, this method 

is an eligible pretransition method 

under paragraph (e)(4)(iii) of this section 

because DC first applied its earnings 

only method on a return filed before 

November 9, 2023, DC applied its 

earnings only method consistently to all 

of its section 987 QBUs, and otherwise 

applied section 987 in a reasonable 

manner. Consequently, DC determines 

its pretransition gain or loss with 

respect to Branch under paragraph (e)(2) 

of this section. 

(B) Pretransition gain or loss. Under 

paragraph (e)(2) of this section, DC’s 

pretransition gain or loss with respect to 

Branch is equal to sum of the deemed 

termination amount described in 

paragraph (e)(2)(i)(A) of this section and 

the owner functional currency net value 

adjustment described in paragraph 

(e)(2)(i)(B) of this section. As explained 

in paragraphs (l)(2)(ii)(B)(1) and (2) of 

this section, the deemed termination 

amount is zero and the owner functional 

currency net value adjustment is zero. 

Therefore, DC has no pretransition gain 

or loss with respect to Branch. 


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(1) Deemed termination amount. 

Under paragraph (e)(2)(i)(A) of this 

section, the deemed termination amount 

is the amount of section 987 gain or loss 

that would have been recognized by DC 

under the eligible pretransition method 

if Branch terminated and transferred all 

of its assets and liabilities to DC on 

December 31, year 3, and prior § 1.987– 

12 did not apply. Under DC’s eligible 

pretransition method, if Branch had 

transferred all of its assets and liabilities 

to DC, it would have been treated as a 

distribution out of capital. Under its 

eligible pretransition method, DC would 

not have recognized section 987 gain or 

loss on a distribution out of capital. 

Therefore, the deemed termination 

amount is zero. 

(2) Owner functional currency net 

value adjustment. On December 31, year 

3, Branch has no liabilities and only one 

asset: land with a basis of Ö100. Under 

paragraph (e)(2)(i)(B) of this section, the 

owner functional currency net value 

adjustment is equal to the basis of the 

land, translated into U.S. dollars at the 

spot rate on December 31, year 3, 

reduced by the basis of the land, 

translated into U.S. dollars at the 

pretransition translation rate on 

December 31, year 3. Under paragraph 

(e)(2)(i)(C) of this section, the 

pretransition translation rate is the rate 

that would be used under DC’s eligible 

pretransition method to determine the 

basis of the land in the hands of DC if 

Branch transferred the land to DC on 

December 31, year 3. Under DC’s 

eligible pretransition method, if Branch 

transferred the land to DC, DC’s basis in 

the land would be equal to Branch’s 

basis (Ö100) translated at the spot rate 

on the date of the distribution. 

Therefore, the pretransition translation 

rate on December 31, year 3, is equal to 

the spot rate on December 31, year 3. 

Consequently, the owner functional 

currency net value adjustment is zero. 

(C) Determination of unrecognized 

section 987 gain or loss in year 4. For 

purposes of determining unrecognized 

section 987 gain or loss in year 4 under 

§ 1.987–4(d), the owner functional 

currency net value of Branch on the last 

day of year 3 is determined by 

translating the Ö100 basis of the land at 

the spot rate on December 31, year 3 (Ö1 

= $1.40). Therefore, the owner 

functional currency net value of Branch 

on the last day of year 3 is $140. 

(4) Example 4—(i) Facts. The facts 

and exchange rates are the same as in 

paragraph (l)(1) of this section (Example 

1), except that DC did not apply section 

987(3) with respect to Branch and did 

not recognize section 987 gain or loss 

with respect to Branch before the 

transition date. 

(ii) Analysis—(A) DC’s method is not 

an eligible pretransition method. 

Because DC did not apply section 987(3) 

with respect to Branch before the 

transition date, DC did not apply an 

eligible pretransition method under 

paragraph (e)(4) of this section. 

Therefore, DC determines pretransition 

gain or loss under paragraph (e)(3) of 

this section. 

(B) Pretransition gain or loss. Under 

paragraph (e)(3) of this section, DC’s 

pretransition gain or loss with respect to 

Branch is equal to the annual 

unrecognized section 987 gain or loss 

with respect to Branch for all taxable 

years ending before the transition date 

in which DC was the owner of Branch 

(that is, years 1 through 3), reduced by 

section 987 gain or loss recognized by 

DC before the transition date. As 

explained in paragraphs (l)(4)(ii)(C) 

through (E) of this section, DC’s annual 

unrecognized section 987 gain for year 

1 is $7.50, DC’s annual unrecognized 

section 987 gain for year 2 is $16.25, 

and DC’s annual unrecognized section 

987 gain for year 3 is $23.75. DC did not 

recognize any section 987 gain or loss 

with respect to Branch before the 

transition date. Therefore, DC has 

$47.50 of pretransition gain with respect 

to Branch. Under paragraph (e)(5)(i)(A) 

of this section, the pretransition gain is 

treated as Branch’s net accumulated 

unrecognized section 987 gain. 

However, if DC elects to recognize its 

pretransition gain ratably over the 

transition period under paragraph 

(e)(5)(ii) of this section, the pretransition 

gain is not treated as net accumulated 

unrecognized section 987 gain. Instead, 

DC recognizes $4.75 (one tenth of its 

pretransition gain) for each of the ten 

taxable years from year 4 through year 

13. 

(C) Annual unrecognized section 987 

gain or loss for year 1. Under paragraph 

(e)(3)(iii) of this section, annual 

unrecognized section 987 gain or loss 

with respect to a section 987 QBU is 

determined under the rules of § 1.987– 

4(d), applied as though a current rate 

election was in effect for all relevant 

taxable years (such that all items are 

treated as marked items), but modified 

so that only §§ 1.987–4(d)(1) (change in 

owner functional currency net value) 

and 1.987–4(d)(10) (adjustment for 

residual increase or decrease to the 

balance sheet) are applied. As explained 

in paragraphs (l)(4)(ii)(C)(1) and (2) of 

this section, in year 1, the change in 

owner functional currency net value 

under § 1.987–4(d)(1) is an increase of 

$165, and there is a negative adjustment 

of $157.50 under § 1.987–4(d)(10). 

Therefore, DC’s annual unrecognized 

section 987 gain for year 1 is $7.50. 

(1) Change in owner functional 

currency net value for year 1. On 

December 31, year 1, Branch held land 

with a basis of Ö100 and Ö50 cash. 

Therefore, on the last day of year 1, 

Branch’s owner functional currency net 

value is $165 (150 euros translated at 

the spot rate on December 31, year 1, of 

Ö1 = $1.10). Because Branch was formed 

in year 1, its owner functional currency 

net value on the last day of the 

preceding taxable year is zero. See 

§ 1.987–4(d)(1)(iii). Therefore, the 

change in owner functional currency net 

value is an increase of $165. 

(2) Residual increase to the balance 

sheet for year 1. Under § 1.987–4(d)(10), 

unrecognized section 987 gain or loss 

for a taxable year is decreased by any 

residual increase to the balance sheet 

(and increased by any residual decrease 

to the balance sheet), translated into the 

owner’s functional currency at the 

yearly average exchange rate for the 

taxable year. For this purpose, the 

residual increase (or decrease) to the 

balance sheet is equal to the change in 

net value of the section 987 QBU, 

determined in the section 987 QBU’s 

functional currency. On December 31, 

year 1, Branch held land with a basis of 

Ö100 euros and Ö50 cash. Therefore, on 

the last day of year 1, Branch has a net 

value (in its own functional currency) of 

Ö150. Because Branch was formed in 

year 1, its functional currency net value 

on the last day of the preceding taxable 

year is zero. See § 1.987–4(d)(1)(iii). 

Therefore, the residual increase to the 

balance sheet is Ö150. This results in a 

negative adjustment to annual 

unrecognized section 987 gain or loss of 

$157.50 for year 1 (equal to Ö150 

translated at the yearly average 

exchange rate for year 1 of Ö1 = $1.05). 

(D) Annual unrecognized section 987 

gain or loss for year 2. As explained in 

paragraphs (l)(4)(ii)(D)(1) and (2) of this 

section, in year 2, the change in owner 

functional currency net value under 

§ 1.987–4(d)(1) is an increase of $45, 

and there is a negative adjustment of 

$28.75 under § 1.987–4(d)(10). 

Therefore, DC’s annual unrecognized 

section 987 gain for year 2 is $16.25. 

(1) Change in owner functional 

currency net value for year 2. On 

December 31, year 2, Branch held land 

with a basis of Ö100 euros and Ö75 cash. 

Therefore, on the last day of year 2, 

Branch’s owner functional currency net 

value is $210 (175 euros translated at 

the spot rate on December 31, year 2, of 

Ö1 = $1.20). As explained in paragraph 

(l)(4)(ii)(C)(1) of this section, Branch’s 

owner functional currency net value on 

the last day of year 1 was $165. 

Therefore, the change in owner 


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functional currency net value is an 

increase of $45. 

(2) Residual increase to the balance 

sheet for year 2. On December 31, year 

2, Branch held land with a basis of Ö100 

euros and Ö75 cash. Therefore, on the 

last day of year 2, Branch has a net 

value (in its own functional currency) of 

Ö175. As explained in paragraph 

(l)(4)(ii)(C)(2) of this section, Branch had 

a net value of Ö150 on December 31, 

year 1. Therefore, the residual increase 

to the balance sheet is Ö25. This results 

in a negative adjustment to annual 

unrecognized section 987 gain or loss of 

$28.75 for year 2 (equal to a reduction 

of Ö25, translated at the yearly average 

exchange rate for year 2 of Ö1 = $1.15). 

(E) Annual unrecognized section 987 

gain or loss for year 3. As explained in 

paragraphs (l)(4)(ii)(E)(1) and (2) of this 

section, in year 3, the change in owner 

functional currency net value under 

§ 1.987–4(d)(1) is a decrease of $70, and 

there is a positive adjustment of $93.75 

under § 1.987–4(d)(10). Therefore, DC’s 

annual unrecognized section 987 gain 

for year 3 is $23.75. 

(1) Change in owner functional 

currency net value for year 3. On 

December 31, year 3, Branch held land 

with a basis of Ö100. Therefore, on the 

last day of year 3, Branch’s owner 

functional currency net value is $140 

(100 euros translated at the spot rate on 

December 31, year 3, of Ö1 = $1.40). As 

explained in paragraph (l)(4)(ii)(D)(1) of 

this section, Branch’s owner functional 

currency net value on the last day of 

year 2 was $210. Therefore, the change 

in owner functional currency net value 

is a decrease of $70. 

(2) Residual decrease to the balance 

sheet for year 3. On December 31, year 

3, Branch held land with a basis of 

Ö100. Therefore, on the last day of year 

3, Branch has a net value (in its own 

functional currency) of Ö100. As 

explained in paragraph (l)(4)(ii)(D)(2) of 

this section, Branch had a net value of 

Ö175 on December 31, year 2. Therefore, 

the residual decrease to the balance 

sheet is Ö75. This results in a positive 

adjustment to annual unrecognized 

section 987 gain or loss of $93.75 for 

year 3 (equal to Ö75, translated at the 

yearly average exchange rate for year 3 

of Ö1 = $1.25). 

(F) Determination of unrecognized 

section 987 gain or loss in year 4. For 

purposes of determining unrecognized 

section 987 gain or loss in year 4 under 

§ 1.987–4(d), the owner functional 

currency net value of Branch on the last 

day of year 3 is determined by 

translating the Ö100 basis of the land at 

the spot rate on December 31, year 3 (Ö1 

= $1.40). Therefore, the owner 

functional currency net value of Branch 

on the last day of year 3 is $140. 

■ 19. Section 1.987–11 is revised to read 

as follows: 

§ 1.987–11 Suspended section 987 loss 

relating to certain elections; loss-to-theextent-of-gain rule. 

(a) In general. This section provides 

rules relating to suspended section 987 

loss. This paragraph (a) provides an 

overview of this section. Paragraph (b) 

of this section provides rules for 

computing the cumulative suspended 

section 987 loss with respect to a 

section 987 QBU or successor 

suspended loss QBU. Paragraph (c) of 

this section provides rules that suspend 

section 987 loss that would otherwise be 

recognized when a current rate election 

is in effect. Paragraph (d) of this section 

provides rules that treat net 

unrecognized section 987 loss and 

deferred section 987 loss as suspended 

section 987 loss when an annual 

recognition election is made or a current 

rate election is revoked. Paragraph (e) of 

this section describes the extent to 

which suspended section 987 loss is 

recognized under a loss-to-the-extent-ofgain rule. Paragraph (f) of this section 

provides rules for determining 

recognition groupings based on the 

source and character of section 987 gain 

or loss. Paragraph (g) of this section 

provides examples illustrating the rules 

of this section. 

(b) Cumulative suspended section 987 

loss in a recognition grouping—(1) In 

general. The cumulative suspended 

section 987 loss in a recognition 

grouping with respect to a section 987 

QBU or a successor suspended loss QBU 

for the current taxable year is equal to 

the cumulative suspended section 987 

loss in the recognition grouping for the 

prior taxable year decreased by the 

amount of suspended section 987 loss in 

the recognition grouping that was 

recognized with respect to the QBU 

under paragraph (e) of this section or 

under § 1.987–13(b) through (d) in the 

prior taxable year, and increased by the 

amount that becomes suspended section 

987 loss in the recognition grouping 

with respect to the QBU in the current 

taxable year. If the taxable year is the 

first taxable year of the section 987 QBU 

(or the first taxable year in which the 

section 987 regulations apply), the 

cumulative suspended section 987 loss 

for the prior taxable year is zero. An 

owner or original suspended loss QBU 

owner’s total cumulative suspended 

section 987 loss in a recognition 

grouping is equal to the sum of its 

cumulative suspended section 987 gain 

or loss with respect to each section 987 

QBU and successor suspended loss 

QBU. See § 1.987–13(g) for rules 

preventing the carryover of suspended 

section 987 loss in connection with 

certain inbound transactions. 

(2) Combined QBU. For purposes of 

paragraph (b)(1) of this section, in the 

taxable year of a combination, the 

cumulative suspended section 987 loss 

in a recognition grouping with respect 

to a combined QBU for the prior taxable 

year is equal to the sum of the 

cumulative suspended section 987 loss 

in the recognition grouping with respect 

to each combining QBU for the prior 

taxable year; the suspended section 987 

loss in a recognition grouping with 

respect to a combined QBU that was 

recognized in the prior taxable year is 

equal to sum of the suspended section 

987 loss in the recognition grouping 

with respect to each combining QBU 

that was recognized in the prior taxable 

year. 

(3) Separated QBU. For purposes of 

paragraph (b)(1) of this section, in the 

taxable year of a separation, the 

cumulative suspended section 987 loss 

in a recognition grouping with respect 

to a separated QBU for the prior taxable 

year is equal to the cumulative 

suspended section 987 loss in the 

recognition grouping with respect to the 

separating QBU for the prior taxable 

year multiplied by the separation 

fraction; the suspended section 987 loss 

in a recognition grouping with respect 

to a separated QBU that was recognized 

in the prior taxable year is equal to the 

suspended section 987 loss in the 

recognition grouping with respect to the 

separating QBU that was recognized in 

the prior taxable year multiplied by the 

separation fraction. 

(c) Suspension of section 987 loss for 

taxable years in which a current rate 

election is in effect and an annual 

recognition election is not in effect. In 

a taxable year in which a current rate 

election is in effect and an annual 

recognition election is not in effect, to 

the extent that an owner’s net 

unrecognized section 987 loss with 

respect to a section 987 QBU would 

otherwise be recognized under § 1.987– 

5 (including pursuant to § 1.987–12(b)), 

or its deferred section 987 loss would 

otherwise be recognized under § 1.987– 

12(c), the net unrecognized section 987 

loss or deferred section 987 loss is not 

recognized by the owner and instead 

becomes suspended section 987 loss. 

See paragraph (g)(1) of this section 

(Example 1) for an illustration of this 

rule. 

(d) Suspension of net unrecognized 

section 987 loss upon making or 

revoking certain elections—(1) Making 

an annual recognition election. At the 

beginning of the first taxable year for 


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which an annual recognition election is 

in effect, net accumulated unrecognized 

section 987 loss and deferred section 

987 loss are converted into suspended 

section 987 loss if either— 

(i) A current rate election was in effect 

for the immediately preceding taxable 

year; or 

(ii) A current rate election was not in 

effect for the immediately preceding 

taxable year and, as of the beginning of 

the taxable year, the sum of the owner’s 

net accumulated unrecognized section 

987 loss and deferred section 987 loss 

exceeds the sum of the owner’s net 

accumulated unrecognized section 987 

gain and deferred section 987 gain by 

more than $5 million. 

(2) Revoking a current rate election. In 

the first taxable year in which a current 

rate election ceases to be in effect, net 

accumulated unrecognized section 987 

loss and deferred section 987 loss are 

converted into suspended section 987 

loss. See paragraph (g)(2) of this section 

(Example 2) for an illustration of this 

rule. 

(e) Recognition of suspended section 

987 loss to the extent of recognition of 

section 987 gain—(1) In general. Subject 

to paragraph (e)(2) of this section, in a 

taxable year of an owner of a section 987 

QBU or an original suspended loss QBU 

owner, the owner recognizes a portion 

of its total cumulative suspended 

section 987 loss in a single recognition 

grouping to the extent of the amount of 

section 987 gain in that recognition 

grouping that the owner recognizes in 

that taxable year (the loss-to-the-extentof-gain rule). Because the recognition 

groupings are determined on the basis of 

the initial assignment of section 987 

gain or loss under § 1.987–6(b)(2)(i), the 

loss-to-the-extent-of-gain rule is applied 

on the basis of the initial assignment of 

section 987 gain or loss. The amount of 

cumulative suspended section 987 loss 

in a single recognition grouping that the 

owner or original suspended loss QBU 

owner recognizes in the taxable year is 

treated as attributable to each section 

987 QBU or successor suspended loss 

QBU in proportion to its suspended 

section 987 loss in that recognition 

grouping. See paragraph (g)(1) of this 

section (Example 1) for an illustration of 

this rule. 

(2) Special rule for taxable years in 

which both an annual recognition 

election and a current rate election are 

in effect. This paragraph (e)(2) only 

applies to suspended section 987 loss in 

taxable years in which both a current 

rate election and an annual recognition 

election are in effect. 

(i) Loss to the extent of gain rule 

limited to net gain, not gross gain. For 

purposes of applying paragraph (e)(1) of 

this section, references to section 987 

gain in a recognition grouping are 

treated as references to net section 987 

gain in that recognition grouping. 

(ii) Net section 987 gain in a 

recognition grouping. For purposes of 

this paragraph (e), net section 987 gain 

in a recognition grouping is equal to the 

total section 987 gain recognized and 

taken into account by the owner in that 

recognition grouping during the testing 

period, reduced by the total section 987 

loss recognized and taken into account 

by the owner in that recognition 

grouping during the testing period 

(other than suspended section 987 loss 

recognized in the current taxable year). 

(iii) Testing period. For purposes of 

this paragraph (e), the testing period 

with respect to any suspended section 

987 loss means the current taxable year 

and all prior taxable years during which 

both— 

(A) The section 987 loss was a 

suspended section 987 loss of the owner 

(including the taxable year in which it 

became a suspended section 987 loss of 

the owner); and 

(B) A current rate election and annual 

recognition election were in effect. 

(iv) Ordering rule. If an owner has any 

suspended section 987 loss that has a 

different testing period than other 

suspended section 987 loss (for 

example, because the owner succeeded 

to and took into account additional 

suspended section 987 loss in a section 

381(a) transaction), all suspended 

section 987 loss that has the same 

testing period is aggregated in a single 

group and this paragraph (e) is applied 

separately to each suspended section 

987 loss group, in chronological order 

based on the earliest date included in 

the testing period of the group. 

(3) Consolidated group members. All 

members of a consolidated group are 

treated as a single owner for purposes of 

applying this paragraph (e). 

(f) Recognition groupings. The term 

recognition grouping means the section 

987 gain or loss (including section 987 

gain or loss that is recognized, deferred 

section 987 gain or loss, or suspended 

section 987 loss) that is initially 

assigned to the statutory and residual 

groupings described in paragraph (f)(1) 

of this section and to the statutory and 

residual groupings described in 

paragraph (f)(2) of this section, if 

applicable, under § 1.987–6(b)(2)(i). 

(1) Sourcing and section 904 category. 

Section 987 gain or loss that is initially 

assigned to the following subcategories: 

(i) U.S. source income; and 

(ii) Foreign source income in a single 

section 904 category. 

(2) Statutory and residual groupings 

for CFC owners. Solely with respect to 

owners that are controlled foreign 

corporations, section 987 gain or loss 

that is initially assigned to the following 

statutory and residual groupings: 

(i) Tentative tested income; 

(ii) Foreign currency gain or loss 

taken into account under section 

954(c)(1)(D) pursuant to § 1.987– 

6(b)(2)(i)(C); 

(iii) Income described in section 

952(b) (ECI that is excluded from 

subpart F income); and 

(iv) Income not described in 

paragraphs (f)(2)(i) through (iii) of this 

section. 

(g) Examples. The following examples 

illustrate the application of this section. 

(1) Example 1: Suspension of section 

987 loss and recognition of suspended 

section 987 loss—(i) Facts. CFC is a 

controlled foreign corporation that has 

the U.S. dollar as its functional 

currency. CFC owns three section 987 

QBUs, QBU1, QBU2, and QBU3. QBU1 

has the euro as its functional currency, 

QBU2 has the pound as its functional 

currency, and QBU3 has the yen as its 

functional currency. CFC is subject to a 

current rate election but not an annual 

recognition election. An election has not 

been made under § 1.951A–2(c)(7) with 

respect to CFC. In year 1, CFC did not 

have cumulative suspended section 987 

loss with respect to any of its QBUs and 

did not have outstanding deferred 

section 987 gain or loss. In year 2, CFC 

has net unrecognized section 987 loss of 

$200 with respect to QBU1, net 

unrecognized section 987 loss of $1,000 

with respect to QBU2, and net 

unrecognized section 987 gain of $1,000 

with respect to QBU3. In year 2, each 

QBU makes a remittance, and CFC’s 

remittance proportion (determined 

under § 1.987–5(b)(1)) is 25% with 

respect to QBU1, 15% with respect to 

QBU2, and 10% with respect to QBU3. 

For purposes of § 1.987–6(b)(2)(i), all of 

QBU1’s assets generate foreign source 

passive category income that 

corresponds to one or more subpart F 

income groups described in § 1.960– 

1(d)(2)(ii)(B)(2)(i) through (v) and all of 

QBU2’s and QBU3’s assets generate 

foreign source general category tested 

income. 

(ii) Analysis—(A) Application of 

§§ 1.987–5 and 1.987–6 and paragraph 

(c) of this section. In year 2, CFC 

recognizes $100 of section 987 gain with 

respect to QBU3 (10% of $1,000) under 

§ 1.987–5(a). Under § 1.987– 

6(b)(2)(i)(A), (B), and (D), the section 

987 gain is initially characterized as 

foreign source general category tentative 

tested income. If a current rate election 

was not in effect, CFC would recognize 

$50 of section 987 loss with respect to 

QBU1 (25% of $200) and $150 of 


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section 987 loss with respect to QBU2 

(15% of $1,000). However, under 

paragraph (c) of this section, these 

amounts instead become suspended 

section 987 loss. Under § 1.987– 

6(b)(2)(i)(A) and (B), the $50 of 

suspended section 987 loss with respect 

to QBU1 is initially characterized as 

foreign source passive category income 

assigned to a subpart F income group 

described in § 1.960–1(d)(2)(ii)(B)(2)(i) 

through (v), and under § 1.987– 

6(b)(2)(i)(C) is treated as foreign 

currency loss taken into account under 

section 954(c)(1)(D). Under § 1.987– 

6(b)(2)(i)(A), (B), and (D), the $150 of 

suspended section 987 loss with respect 

to QBU2 is initially characterized as 

foreign source general category tentative 

tested income. 

(B) Cumulative suspended section 987 

loss. Under paragraph (b) of this section, 

in year 2, CFC’s cumulative suspended 

section 987 loss in the recognition 

grouping of foreign source passive 

category foreign currency gain or loss 

taken into account under section 

954(c)(1)(D) with respect to QBU1 is 

$50, the amount that became suspended 

section 987 loss in the recognition 

grouping in year 2. In addition, CFC’s 

total cumulative suspended section 987 

loss in that recognition grouping is $50. 

Similarly, CFC’s cumulative suspended 

section 987 loss in the recognition 

grouping of foreign source general 

category tentative tested income with 

respect to QBU2 is $150, the amount 

that became suspended section 987 loss 

in the recognition grouping in year 2. In 

addition, CFC’s total cumulative 

suspended section 987 loss in that 

recognition grouping is $150. 

(C) Recognition of suspended section 

987 loss. Under paragraph (e)(1) of this 

section, in year 2, CFC recognizes a 

portion of its total cumulative 

suspended section 987 loss in a single 

recognition grouping to the extent that 

it recognizes section 987 gain in the 

same recognition grouping with respect 

to any section 987 QBU. In year 2, CFC 

has $50 of total cumulative suspended 

section 987 loss in the recognition 

grouping of foreign source passive 

category foreign currency gain or loss 

taken into account under section 

954(c)(1)(D) and $150 of total 

cumulative suspended section 987 loss 

in the recognition grouping of foreign 

source general category tentative tested 

income. CFC recognized $100 of section 

987 gain in year 2 with respect to QBU3 

in the recognition grouping of foreign 

source general category tentative tested 

income. Therefore, CFC also recognizes 

$100 of its total cumulative suspended 

section 987 loss in the same recognition 

grouping. The cumulative suspended 

section 987 loss that is recognized by 

CFC is attributable to QBU2, because 

QBU2 is CFC’s only QBU with 

cumulative suspended section 987 loss 

in the recognition grouping of foreign 

source general category tentative tested 

income. Because no election under 

§ 1.951A–2(c)(7) applies in year 2, both 

the $100 of recognized section 987 gain 

and the $100 of recognized section 987 

loss are allocated to foreign source 

general category tested income. See 

§ 1.987–6(b)(2)(ii). The amounts of 

suspended section 987 loss not 

recognized (that is, $50 of suspended 

section 987 loss characterized as foreign 

source passive category foreign currency 

gain or loss taken into account under 

section 954(c)(1)(D) with respect to 

QBU1 and $50 of suspended section 987 

loss characterized as foreign source 

general category tentative tested income 

with respect to QBU2) remain 

suspended. Paragraph (e)(2) of this 

section does not apply because an 

annual recognition election is not in 

effect. The result would be the same if 

CFC had recognized section 987 gain in 

year 1, because section 987 gain from 

prior years is not taken into account 

under paragraph (e)(1) of this section. 

(2) Example 2: Suspension of section 

987 loss when a current rate election is 

revoked—(i) Facts. U.S. Corp is a 

domestic corporation that owns all of 

the interests in DE1. DE1 owns Business 

A, which is a section 987 QBU of U.S. 

Corp. In year 1, U.S. Corp made a 

current rate election but not an annual 

recognition election. In year 9, U.S. 

Corp has net unrecognized section 987 

loss of $2 million with respect to 

Business A, which is not recognized or 

suspended in year 9. U.S. Corp revokes 

its current rate election effective for year 

10. In year 10, before the application of 

this section, U.S. Corp has net 

accumulated unrecognized section 987 

loss of $2 million. 

(ii) Analysis. Under paragraph (d)(2) 

of this section, U.S. Corp’s net 

accumulated unrecognized section 987 

loss of $2 million with respect to 

Business A is converted into suspended 

section 987 loss at the beginning of year 

10, the first taxable year in which the 

current rate election ceases to be in 

effect. 

■ 20. Section 1.987–12 is revised to read 

as follows: 

§ 1.987–12 Deferral of section 987 gain or 

loss. 

(a) Overview—(1) Scope. This section 

provides rules that defer the recognition 

of section 987 gain or loss and rules for 

recognizing (or suspending) deferred 

section 987 gain or loss. This paragraph 

(a) provides an overview of this section 

and certain instances when this section 

does not apply. Paragraph (b) of this 

section describes the extent to which 

net unrecognized section 987 gain or 

loss is recognized under § 1.987–5 (or in 

certain cases, suspended) or becomes 

deferred section 987 gain or loss in 

connection with a deferral event. 

Paragraph (c) of this section describes 

the extent to which deferred section 987 

gain or loss is recognized (or in certain 

cases, suspended) upon the occurrence 

of subsequent events. Paragraph (d) of 

this section provides a rule relating to 

the treatment of a successor deferral 

QBU when deferred section 987 loss 

becomes suspended section 987 loss. 

Paragraph (e) of this section provides an 

anti-abuse rule. Paragraph (f) of this 

section provides rules for determining 

the deferred section 987 gain or loss of 

combined and separated QBUs. 

Paragraph (g) of this section provides 

definitions. Paragraph (h) of this section 

provides examples illustrating the rules 

described in this section. 

(2) Exceptions—(i) Annual 

recognition election. This section does 

not apply to a termination of a section 

987 QBU in a taxable year in which an 

annual recognition election is in effect. 

(ii) De minimis rule. This section does 

not apply in a taxable year if the 

aggregate amount of net unrecognized 

section 987 gain or loss of the owner 

with respect to all of its section 987 

QBUs that would become deferred 

section 987 gain or loss under this 

section does not exceed $5 million. 

(b) Treatment of section 987 gain and 

loss in connection with a deferral event. 

Notwithstanding § 1.987–5 (general rule 

requiring recognition of section 987 gain 

or loss in the taxable year of a 

remittance), the owner of a section 987 

QBU with respect to which a deferral 

event occurs (an original deferral QBU) 

includes in taxable income section 987 

gain or loss in connection with the 

deferral event only to the extent 

provided in this paragraph (b). 

(1) Gain or loss recognized (or 

suspended) in the taxable year of a 

deferral event. In the taxable year of a 

deferral event with respect to an original 

deferral QBU, the owner of the original 

deferral QBU recognizes section 987 

gain or loss under § 1.987–5, except 

that, solely for purposes of applying 

§ 1.987–5, all assets and liabilities of the 

original deferral QBU that, immediately 

after the deferral event, are reflected on 

the books and records of a successor 

deferral QBU are treated as not having 

been transferred and therefore as 

remaining on the books and records of 

the original deferral QBU 

notwithstanding the deferral event. 

Notwithstanding the prior sentence, any 


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section 987 loss that would otherwise be 

recognized under this paragraph (b)(1) 

and § 1.987–5 may instead become 

suspended loss under § 1.987–11(c) if a 

current rate election is in effect, or 

under § 1.987–13(h) if the deferral event 

also constitutes an outbound loss event. 

(2) Deferred section 987 gain or loss 

attributable to a successor deferral QBU. 

In the taxable year of a deferral event 

with respect to an original deferral QBU, 

any net unrecognized section 987 gain 

or loss that is not recognized (under 

§ 1.987–5 including pursuant to 

paragraph (b)(1) of this section) or 

suspended (under § 1.987–11(c) or (d) or 

1.987–13(h)) in the taxable year of the 

deferral event becomes deferred section 

987 gain or loss of the original deferral 

QBU owner. A portion of the deferred 

section 987 gain or loss becomes 

deferred section 987 gain or loss with 

respect to each successor deferral QBU. 

Such portion is equal to the deferred 

section 987 gain or loss multiplied by a 

fraction, the numerator of which is the 

aggregate adjusted basis of the gross 

assets transferred to the successor 

deferral QBU in connection with the 

deferral event and the denominator of 

which is the aggregate adjusted basis of 

the gross assets transferred to all 

successor deferral QBUs in connection 

with the deferral event. 

(c) Recognition (or suspension) of 

deferred section 987 gain or loss 

following a deferral event. An original 

deferral QBU owner recognizes deferred 

section 987 gain or loss with respect to 

a successor deferral QBU in the taxable 

year of the deferral event and in 

subsequent taxable years as provided in 

this paragraph (c). 

(1) Recognition upon a subsequent 

remittance—(i) In general. Except as 

provided in paragraph (c)(2) of this 

section, an original deferral QBU owner 

recognizes deferred section 987 gain or 

loss in the taxable year of the deferral 

event, and in subsequent taxable years, 

upon a remittance from a successor 

deferral QBU to the owner of the 

successor deferral QBU (successor 

deferral QBU owner) in the amount 

described in paragraph (c)(1)(ii) of this 

section. Notwithstanding the prior 

sentence, any deferred section 987 loss 

that would otherwise be recognized 

under this paragraph (c)(1) may instead 

become suspended section 987 loss 

under § 1.987–11(c) if a current rate 

election is in effect with respect to the 

original deferral QBU owner. 

(ii) Amount. The amount of deferred 

section 987 gain or loss that is 

recognized (or suspended) pursuant to 

this paragraph (c)(1) in a taxable year of 

the original deferral QBU owner is the 

original deferral QBU owner’s 

outstanding deferred section 987 gain or 

loss (that is, the amount of deferred 

section 987 gain or loss not previously 

recognized or suspended) with respect 

to the successor deferral QBU 

multiplied by the remittance proportion 

of the successor deferral QBU owner 

with respect to the successor deferral 

QBU for the taxable year ending with or 

within the taxable year of the original 

deferral QBU owner, as determined 

under § 1.987–5(b) without regard to 

any annual recognition election of the 

successor deferral QBU owner. See 

paragraph (h)(4) of this section 

(Example 4) for an illustration of this 

rule. 

(iii) Deemed remittance by a 

successor deferral QBU. For purposes of 

this paragraph (c)(1), in a taxable year of 

the original deferral QBU owner in 

which a successor deferral QBU ceases 

to be owned by a member of the 

controlled group that includes the 

original deferral QBU owner, the 

successor deferral QBU is treated as 

having a remittance proportion of one. 

Accordingly, if a successor deferral QBU 

ceases to be owned by a member of the 

controlled group that includes the 

original deferral QBU owner, the 

original deferral QBU owner’s 

outstanding deferred section 987 gain or 

loss with respect to that successor 

deferral QBU will be recognized (or 

suspended). For purposes of this 

paragraph (c)(1), if the original deferral 

QBU owner goes out of existence and 

there is no qualified successor, in the 

last taxable year of the original deferral 

QBU owner, each successor deferral 

QBU is treated as having a remittance 

proportion of one. This paragraph 

(c)(1)(iii) does not affect the application 

of the section 987 regulations to the 

successor deferral QBU owner with 

respect to its ownership of the successor 

deferral QBU. 

(2) Deferral events and outbound loss 

events with respect to a successor 

deferral QBU. Notwithstanding 

paragraph (c)(1) of this section, if assets 

of the successor deferral QBU 

(transferred assets) are transferred (or 

deemed transferred) in a transaction (the 

deemed transaction) that would 

constitute a deferral event or an 

outbound loss event if the original 

deferral QBU owner owned the 

successor deferral QBU directly and the 

original deferral QBU owner had net 

unrecognized section 987 gain or loss 

with respect to the successor deferral 

QBU equal to its outstanding deferred 

section 987 gain or loss with respect to 

the successor deferral QBU, then, in 

accordance with § 1.987–13(h)— 

(i) The original deferral QBU owner 

recognizes outstanding deferred section 

987 gain or loss, or suspends 

outstanding deferred section 987 loss, to 

the extent it would have recognized or 

suspended net unrecognized section 987 

gain or loss under the deemed 

transaction; 

(ii) Each section 987 QBU is a 

successor deferral QBU to the extent it 

would have been under the deemed 

transaction and the original deferral 

QBU owner has deferred section 987 

gain or loss with respect to the 

successor deferral QBU to the extent it 

would have under the deemed 

transaction; 

(iii) Each eligible QBU is a successor 

suspended loss QBU to the extent it 

would have been under the deemed 

transaction and the original deferral 

QBU owner has suspended section 987 

loss with respect to the suspended loss 

QBU to the extent it would have under 

the deemed transaction. 

(d) Successor deferral QBU becomes a 

successor suspended loss QBU. A 

successor deferral QBU becomes a 

successor suspended loss QBU, and an 

original deferral QBU owner becomes an 

original suspended loss QBU owner, if 

any of the original deferral QBU owner’s 

deferred section 987 loss with respect to 

the successor deferral QBU becomes 

suspended section 987 loss. An eligible 

QBU may be both a successor deferral 

QBU and a successor suspended loss 

QBU and the original deferral QBU 

owner may also be an original 

suspended loss QBU owner. 

(e) Anti-abuse. No section 987 loss is 

recognized under this section, § 1.987– 

5, or § 1.987–13 in connection with a 

transaction or series of transactions that 

are undertaken with a principal purpose 

of avoiding the purposes of this section. 

(f) Combinations and separations of 

successor deferral QBUs. A combined 

QBU is a successor deferral QBU if 

either combining QBU was a successor 

deferral QBU. A separated QBU is a 

successor deferral QBU if the separating 

QBU was a successor deferral QBU. 

(1) Combined QBU. The deferred 

section 987 gain or loss of a combined 

QBU in each recognition grouping for a 

taxable year is equal to the sum of the 

combining QBUs’ deferred section 987 

gain or loss in that recognition grouping. 

(2) Separated QBU. The deferred 

section 987 gain or loss of a separated 

QBU in each recognition grouping for a 

taxable year is equal to the sum of the 

separating QBU’s deferred section 987 

gain or loss in each recognition 

grouping multiplied by the separation 

fraction. 

(g) Definitions. The following 

definitions apply for purposes of this 

section. 


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(1) Deferral event. A deferral event 

with respect to a section 987 QBU 

means any transaction or series of 

transactions that satisfy the conditions 

described in both paragraphs (g)(1)(i) 

and (ii) of this section. 

(i) Events. The transaction or series of 

transactions constitutes either: 

(A) A termination of the section 987 

QBU under § 1.987–8(b)(2) 

(substantially all the assets transferred 

to the owner), § 1.987–8(b)(5) (section 

987 QBU ceases to be a section 987 

QBU), or § 1.987–8(b)(6) (ownership of 

section 987 QBU changes between 

direct and indirect ownership); or 

(B) A disposition of part of an interest 

in a section 987 aggregate partnership or 

DE through which the section 987 QBU 

is owned, a disposition of part of a 

directly held section 987 QBU, or any 

contribution by another person to a 

section 987 aggregate partnership, DE, 

or section 987 QBU of assets that, 

immediately after the contribution, are 

not considered to be included on the 

books and records of an eligible QBU, 

provided that the contribution gives rise 

to a deemed transfer from the section 

987 QBU to the owner. 

(ii) Assets on books of successor 

deferral QBU. Immediately after the 

transaction or series of transactions, 

assets of the section 987 QBU are 

reflected on the books and records of a 

successor deferral QBU. 

(2) Successor deferral QBU. A section 

987 QBU (potential successor deferral 

QBU) is a successor deferral QBU with 

respect to a section 987 QBU referred to 

in paragraph (g)(1)(i) of this section if, 

immediately after the transaction or 

series of transactions described in that 

paragraph, the potential successor 

deferral QBU satisfies all of the 

conditions described in paragraphs 

(g)(2)(i) through (iii) of this section. 

(i) The books and records of the 

potential successor deferral QBU reflect 

assets that, immediately before the 

transaction or series of transactions 

described in paragraph (g)(1)(i) of this 

section, were reflected on the books and 

records of the section 987 QBU referred 

to in that paragraph. 

(ii) The owner of the potential 

successor deferral QBU and the owner 

of the section 987 QBU referred to in 

paragraph (g)(1)(i) of this section 

immediately before the transaction or 

series of transactions described in that 

paragraph are members of the same 

controlled group. 

(iii) If the owner of the section 987 

QBU referred to in paragraph (g)(1)(i) of 

this section immediately before the 

transaction or series of transactions 

described in that paragraph was a U.S. 

person, the potential successor deferral 

QBU is owned by a U.S. person. 

(3) Original deferral QBU owner. An 

original deferral QBU owner means, 

with respect to an original deferral QBU, 

the owner of the original deferral QBU 

immediately before the deferral event, 

or the owner’s qualified successor. 

(4) Qualified successor. A qualified 

successor with respect to a corporation 

(transferor corporation) means another 

corporation that acquires the assets of 

the transferor corporation in a 

transaction described in section 381(a) 

(acquiring corporation), provided that 

the acquiring corporation is a domestic 

corporation and the transferor 

corporation was a domestic corporation, 

or the acquiring corporation is a 

controlled foreign corporation and the 

transferor corporation was a controlled 

foreign corporation. A qualified 

successor with respect to a partnership 

(transferor partnership) means another 

partnership (acquiring partnership) that 

acquires the assets of the transferor 

partnership in a merger or consolidation 

described in section 708(b)(2)(A). A 

qualified successor with respect to an 

individual decedent means the estate of 

the decedent. A qualified successor of a 

person includes the qualified successor 

of a qualified successor. 

(h) Examples. The following examples 

illustrate the application of this section. 

For purposes of the examples, DC1 is a 

domestic corporation that owns all of 

the stock of DC2, which is also a 

domestic corporation, and CFC1, a 

controlled foreign corporation. In 

addition, DC1, DC2, and CFC1 are 

members of a controlled group, and the 

de minimis rule of paragraph (a)(2)(ii) of 

this section is not applicable. Finally, 

except as otherwise provided, Business 

A is a section 987 QBU with the euro 

as its functional currency, there are no 

transfers between Business A and its 

owner, and Business A’s assets are not 

depreciable or amortizable. 

(1) Example 1: Contribution of a 

section 987 QBU with net unrecognized 

section 987 gain to a member of the 

controlled group—(i) Facts. DC1 owns 

Business A. The adjusted balance sheet 

of Business A reflects assets with an 

aggregate adjusted basis of Ö1,000x and 

no liabilities. DC1 contributes Ö900x of 

Business A’s assets to DC2 in exchange 

for DC2 stock in a transaction to which 

section 351 applies. Immediately after 

the contribution, the remaining Ö100x of 

Business A’s assets are no longer 

reflected on the books and records of a 

section 987 QBU (but are instead 

reflected on the books and records of 

DC1’s home office). DC2, which has the 

U.S. dollar as its functional currency, 

uses the Business A assets in a business 

(Business B) that constitutes a section 

987 QBU. At the time of the 

contribution, Business A has net 

unrecognized section 987 gain of $100x. 

(ii) Analysis—(A) Under § 1.987– 

2(c)(2)(ii), DC1’s contribution of Ö900x 

of Business A’s assets to DC2 is treated 

as a transfer of all of the assets of 

Business A to DC1, immediately 

followed by DC1’s contribution of Ö900x 

of Business A’s assets to DC2. The 

contribution of Business A’s assets is a 

deferral event within the meaning of 

paragraph (g)(1) of this section because: 

(1) The transfer from Business A to 

DC1 is a transfer of substantially all of 

Business A’s assets to DC1, resulting in 

a termination of the Business A QBU 

under § 1.987–8(b)(2); and 

(2) Immediately after the transaction, 

assets of Business A are reflected on the 

books and records of Business B, a 

section 987 QBU owned by a member of 

DC1’s controlled group and a successor 

deferral QBU within the meaning of 

paragraph (g)(2) of this section. 

Accordingly, Business A is an original 

deferral QBU within the meaning of 

paragraph (b) of this section, and DC1 is 

an original deferral QBU owner of 

Business A within the meaning of 

paragraph (g)(3) of this section. 

(B) Under paragraph (b)(1) of this 

section, DC1’s taxable income in the 

taxable year of the deferral event 

includes DC1’s section 987 gain or loss 

determined with respect to Business A 

under § 1.987–5, except that, for 

purposes of applying § 1.987–5, all 

assets of Business A that are reflected on 

the books and records of Business B 

immediately after Business A’s 

termination are treated as not having 

been transferred and therefore as though 

they remained on Business A’s books 

and records (notwithstanding the 

deemed transfer of those assets under 

§ 1.987–8(e)). Accordingly, in the 

taxable year of the deferral event, 

Business A is treated as making a 

remittance of Ö100x, corresponding to 

the assets of Business A that are no 

longer reflected on the books and 

records of a section 987 QBU, and is 

treated as having a remittance 

proportion with respect to Business A of 

0.1, determined by dividing the Ö100x 

remittance by the sum of the remittance 

and the Ö900x aggregate adjusted basis 

of the gross assets deemed to remain on 

Business A’s books and records at the 

end of the taxable year. Thus, DC1 

recognizes $10x of section 987 gain in 

the taxable year of the deferral event. 

DC1’s deferred section 987 gain equals 

$90x, which is the amount of section 

987 gain that, but for the application of 

paragraph (b) of this section, DC1 would 

have recognized under § 1.987–5 (which 


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is $100x), less the amount of section 987 

gain recognized by DC1 under § 1.987– 

5 and this section (which is $10x). 

(2) Example 2: Contribution of a 

section 987 QBU to a member of the 

controlled group when a current rate 

election is in effect—(i) Facts. DC1 owns 

Business A, which is engaged in the 

business of manufacturing Product X. In 

a taxable year in which a current rate 

election is in effect (and an annual 

recognition election is not in effect), the 

adjusted balance sheet of Business A 

reflects assets with an aggregate 

adjusted basis of Ö1,000x and no 

liabilities. DC1 contributes Ö900x of 

Business A’s assets to DC2 in exchange 

for DC2 stock in a transaction to which 

section 351 applies. Immediately after 

the contribution, the remaining Ö100x of 

Business A’s assets are no longer 

reflected on the books and records of an 

eligible QBU that is engaged in the 

business of manufacturing Product X 

(but are instead reflected on the books 

and records of DC1’s home office). DC2, 

which has the U.S. dollar as its 

functional currency, uses the Business 

A assets in a Product X manufacturing 

business (Business B) that constitutes a 

section 987 QBU. At the time of the 

contribution, Business A has net 

unrecognized section 987 loss of $100x. 

(ii) Analysis—(A) For the reasons 

described in paragraph (h)(1) of this 

section (Example 1), the contribution 

results in a termination of the Business 

A QBU and a deferral event with respect 

to the Business A QBU, an original 

deferral QBU; DC1 is an original deferral 

QBU owner within the meaning of 

paragraph (g)(3) of this section; Business 

B is a successor deferral QBU with 

respect to Business A; and DC2 is a 

successor deferral QBU owner. 

(B) Under paragraph (b)(1) of this 

section, for purposes of applying 

§ 1.987–5, all the assets of Business A 

that are reflected on the books and 

records of Business B immediately after 

Business A’s termination are treated as 

not having been transferred and 

therefore as though they remained on 

Business A’s books and records 

(notwithstanding the deemed transfer of 

those assets under § 1.987–8(e)). 

Accordingly, in the taxable year of the 

deferral event, Business A is treated as 

making a remittance of Ö100x, 

corresponding to the assets of Business 

A that are no longer reflected on the 

books and records of a section 987 QBU, 

and DC1 is treated as having a 

remittance proportion with respect to 

Business A of 0.1, determined by 

dividing the Ö100x remittance by the 

sum of the remittance and the Ö900x 

aggregate adjusted basis of the gross 

assets deemed to remain on Business 

A’s books and records at the end of the 

taxable year. Thus, but for the 

application of § 1.987–11(c), DC1 would 

recognize $10x of section 987 loss in the 

taxable year of the deferral event. Under 

§ 1.987–11(c), because a current rate 

election is in effect (and an annual 

recognition election is not in effect), the 

loss is instead treated as suspended 

section 987 loss. DC1’s deferred section 

987 loss equals $90x, which is the 

amount of section 987 loss that, but for 

the application of paragraph (b) of this 

section, would have been suspended 

under § 1.987–11(c) (which is $100x), 

less the amount of section 987 loss 

suspended under § 1.987–11(c) (which 

is $10x). 

(C) Under § 1.987–13(b)(1)(i), 

Business B is a successor suspended 

loss QBU because, immediately after the 

termination of the Business A section 

987 QBU, a significant portion of the 

assets of Business A was reflected on 

the books and records of Business B (an 

eligible QBU), Business B continued to 

carry on the trade or business of 

Business A, and Business B was owned 

by DC2, a member of the same 

controlled group as DC1 (which is the 

original suspended loss QBU owner 

under § 1.987–13(l)(1)). Therefore, 

under § 1.987–13(b)(1)(ii), all of 

Business A’s suspended section 987 loss 

(including the suspended section 987 

loss resulting from the termination of 

Business A) becomes suspended section 

987 loss with respect to Business B. 

(3) Example 3: Election to be 

classified as a corporation—(i) Facts. 

DC1 owns all of the interests in Entity 

A, a DE. Entity A conducts Business A, 

which has net unrecognized section 987 

gain of $500x. Entity A elects to be 

classified as a corporation under 

§ 301.7701–3(c). As a result of the 

election and pursuant to § 301.7701– 

3(g)(1)(iv), DC1 is treated as contributing 

all of the assets and liabilities of 

Business A to newly-formed CFC1, 

which has the euro as its functional 

currency. Immediately after the 

contribution, the assets and liabilities of 

Business A are reflected on CFC1’s 

books and records. 

(ii) Analysis. Under § 1.987–2(c)(2)(ii), 

DC1’s deemed contribution of all of the 

assets and liabilities of Business A to 

CFC1 is treated as a transfer of all of the 

assets and liabilities of Business A to 

DC1, followed immediately by DC1’s 

contribution of those assets and 

liabilities to CFC1. Because the deemed 

transfer from Business A to DC1 is a 

transfer of substantially all of Business 

A’s assets to DC1, the Business A QBU 

terminates under § 1.987–8(b)(2). The 

contribution of Business A’s assets is 

not a deferral event within the meaning 

of paragraph (b) of this section because, 

immediately after the transaction, no 

assets of Business A are reflected on the 

books and records of a successor 

deferral QBU within the meaning of 

paragraph (g)(2) of this section due to 

the fact that the assets of Business A are 

not reflected on the books and records 

of a section 987 QBU immediately after 

the termination. In addition, the 

requirement of paragraph (g)(2)(iii) of 

this section is not met because Business 

A was owned by a U.S. person and the 

potential successor deferral QBU, which 

is owned by CFC1, is not owned by a 

U.S. person. Accordingly, DC1 

recognizes section 987 gain of $500x 

with respect to Business A under 

§ 1.987–5 without regard to this section. 

Because the requirement of paragraph 

(g)(2)(iii) of this section is not met, the 

result would be the same even if the 

assets of Business A were transferred in 

a section 351 exchange to an existing 

foreign corporation that had a different 

functional currency than Business A. 

(4) Example 4: Partial recognition of 

deferred gain or loss—(i) Facts. DC1 

owns all of the interests in Entity A, a 

DE that conducts Business A in Country 

X. During year 1, DC1 contributes all of 

its interests in Entity A to DC2 in an 

exchange to which section 351 applies. 

At the time of the contribution, Business 

A has net unrecognized section 987 gain 

of $100x. After the contribution, Entity 

A continues to conduct business in 

Country X (Business B). In year 3, as a 

result of a net transfer of property from 

Business B to DC2, DC2’s remittance 

proportion with respect to Business B, 

as determined under § 1.987–5, is 0.25. 

(ii) Analysis—(A) For the reasons 

described in paragraph (h)(1) of this 

section (Example 1), the contribution of 

all the interests in Entity A by DC1 to 

DC2 results in a termination of the 

Business A QBU and a deferral event 

with respect to the Business A QBU, an 

original deferral QBU; DC1 is an original 

deferral QBU owner within the meaning 

of paragraph (g)(3) of this section; 

Business B is a successor deferral QBU 

with respect to Business A; DC2 is a 

successor deferral QBU owner; and the 

$100x of net unrecognized section 987 

gain with respect to Business A becomes 

deferred section 987 gain as a result of 

the deferral event. 

(B) Under paragraph (c)(1)(i) of this 

section, DC1 recognizes deferred section 

987 gain in year 3 as a result of the 

remittance from Business B to DC2. 

Under paragraph (c)(1)(ii) of this 

section, the amount of deferred section 

987 gain that DC1 recognizes is $25x, 

which is DC1’s outstanding deferred 

section 987 gain of $100x with respect 

to Business A multiplied by the 


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remittance proportion of 0.25 of DC2 

with respect to Business B for the 

taxable year as determined under 

§ 1.987–5(b). 

■ 21. Section 1.987–13 is added to read 

as follows: 

§ 1.987–13 Suspended section 987 loss 

upon terminations. 

(a) Overview—(1) In general. This 

section provides rules relating to 

suspended section 987 loss of an owner 

with respect to a section 987 QBU or 

successor suspended loss QBU that 

terminates. Paragraph (b) of this section 

provides rules treating suspended 

section 987 loss as recognized or 

attributable to a successor when a 

section 987 QBU terminates. Paragraph 

(c) of this section provides rules treating 

suspended section 987 loss as 

recognized or attributable to a 

subsequent successor when a successor 

suspended loss QBU terminates. 

Paragraph (d) of this section provides 

rules regarding the recognition of 

suspended section 987 loss when 

interests in a successor suspended loss 

QBU owner are transferred. Paragraph 

(e) of this section provides rules that 

apply when interests in an original 

suspended loss QBU owner are 

transferred. Paragraph (f) of this section 

provides rules that apply when an 

original suspended loss QBU owner 

ceases to exist. Paragraph (g) of this 

section provides rules preventing the 

carryover of suspended section 987 loss 

in connection with certain inbound 

transactions. Paragraph (h) of this 

section provides rules that suspend 

section 987 loss in connection with 

certain outbound transactions. 

Paragraph (i) of this section is reserved. 

Paragraph (j) of this section provides 

rules relating to the termination of a 

successor suspended loss QBU. 

Paragraph (k) of this section provides an 

anti-abuse rule. Paragraph (l) of this 

section provides definitions that apply 

for purposes of this section. Paragraph 

(m) of this section provides examples 

illustrating the rules of this section. 

(2) Ordering rule. Paragraphs (b) 

through (d) of this section are applied 

after the application of § 1.987–11(e) 

(loss-to-the-extent-of-gain rule). 

(b) Termination of a section 987 QBU 

with suspended loss. If a section 987 

QBU terminates, and at the time of 

termination, the owner has suspended 

section 987 loss with respect to the 

section 987 QBU (including because the 

termination was an outbound loss event 

or because net unrecognized section 987 

loss became suspended section 987 loss 

upon termination as a result of a current 

rate election), then either paragraph 

(b)(1) or (2) of this section applies. 

(1) Suspended section 987 loss 

becomes suspended section 987 loss 

with respect to a successor suspended 

loss QBU—(i) Successor suspended loss 

QBU. If, immediately after the 

termination, a significant portion of the 

assets of the terminating section 987 

QBU are reflected on the books and 

records of an eligible QBU that carries 

on a trade or business of the section 987 

QBU and is owned by the owner of the 

section 987 QBU or a member of its 

controlled group, then the eligible QBU 

is a successor suspended loss QBU and 

the rules described in paragraph 

(b)(1)(ii) of this section apply. 

(ii) Attribution of suspended section 

987 loss to successor suspended loss 

QBU. A portion of the cumulative 

suspended section 987 loss with respect 

to the terminating section 987 QBU that 

is not recognized in the taxable year of 

the termination under § 1.987–11(e) 

becomes suspended section 987 loss 

with respect to each successor 

suspended loss QBU. Such portion is 

equal to the suspended section 987 loss 

described in the preceding sentence, 

multiplied by a fraction, the numerator 

of which is the aggregate adjusted basis 

of the gross assets transferred to the 

successor suspended loss QBU in 

connection with the termination, and 

the denominator of which is the 

aggregate adjusted basis of the gross 

assets transferred to all successor 

suspended loss QBUs in connection 

with the termination. 

(2) Recognition of suspended loss. If, 

immediately after the termination of the 

section 987 QBU, there is no successor 

suspended loss QBU under paragraph 

(b)(1) of this section, then the owner 

recognizes the cumulative suspended 

section 987 loss with respect to the 

section 987 QBU that is not recognized 

in the taxable year of the termination 

under § 1.987–11(e). 

(c) Termination of a successor 

suspended loss QBU. If a successor 

suspended loss QBU terminates (as 

described in paragraph (j) of this 

section), then either paragraph (c)(1) or 

(2) of this section applies. 

(1) Successor to the successor 

suspended loss QBU—(i) Successor 

suspended loss QBU. If, immediately 

after the termination, a significant 

portion of the assets of the terminating 

successor suspended loss QBU (initial 

successor) are reflected on the books 

and records of an eligible QBU 

(subsequent successor) that carries on a 

trade or business of the initial successor 

and is owned by the original suspended 

loss QBU owner or a member of its 

controlled group, then the subsequent 

successor is a successor suspended loss 

QBU and the rules described in 

paragraph (c)(1)(ii) of this section apply. 

(ii) Attribution of suspended section 

987 loss to successor suspended loss 

QBU. A portion of the cumulative 

suspended section 987 loss with respect 

to the initial successor that is not 

recognized in the taxable year of the 

termination under § 1.987–11(e) 

becomes suspended section 987 loss 

with respect to each subsequent 

successor. Such portion is equal to the 

suspended section 987 loss described in 

the preceding sentence, multiplied by a 

fraction, the numerator of which is the 

aggregate adjusted basis of the gross 

assets transferred to the subsequent 

successor in connection with the 

termination, and the denominator of 

which is the aggregate adjusted basis of 

the gross assets transferred to all 

subsequent successors in connection 

with the termination. 

(2) Recognition of suspended loss. If, 

immediately after the termination of the 

initial successor, there is no subsequent 

successor that is a successor suspended 

loss QBU under paragraph (c)(1) of this 

section, then the original suspended 

loss QBU owner recognizes the 

cumulative suspended section 987 loss 

with respect to the initial successor that 

is not recognized in the taxable year of 

the termination under § 1.987–11(e). 

(d) Transfer of successor suspended 

loss QBU owner. If a successor 

suspended loss QBU ceases to be owned 

by a member of the original suspended 

loss QBU owner’s controlled group as a 

result of a direct or indirect transfer, or 

an issuance or redemption, of an 

ownership interest in the successor 

suspended loss QBU owner, then the 

original suspended loss QBU owner 

recognizes the cumulative suspended 

section 987 loss with respect to the 

successor suspended loss QBU that is 

not recognized in the taxable year under 

§ 1.987–11(e). 

(e) Transfer of original suspended loss 

QBU owner. If an original suspended 

loss QBU owner ceases to be a member 

of the successor suspended loss QBU 

owner’s controlled group as a result of 

a direct or indirect transfer, or an 

issuance or redemption, of an 

ownership interest in the original 

suspended loss QBU owner, the original 

suspended loss QBU owner’s suspended 

section 987 loss ceases to be suspended 

section 987 loss with respect to any 

section 987 QBU or successor 

suspended loss QBU. As a result, the 

suspended section 987 loss can be 

recognized under § 1.987–11(e) but 

cannot be recognized under paragraph 

(b)(2), (c)(2), or (d) of this section. 

(f) Original suspended loss QBU 

owner ceases to exist. If an original 


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suspended loss QBU owner ceases to 

exist and there is no successor under 

paragraph (l)(1)(ii) of this section (for 

example, as a result of a section 331 

liquidation), then any suspended 

section 987 loss that is not recognized 

after application of the loss-to-theextent-of-gain rule in § 1.987–11(e) 

cannot be recognized and is eliminated. 

(g) Inbound nonrecognition 

transactions—no carryover of 

suspended section 987 loss. If an owner 

of a section 987 QBU with suspended 

section 987 loss, or an original 

suspended loss QBU owner, ceases to 

exist in a transaction described in 

§ 1.987–8(c)(1)(ii) (inbound section 332 

liquidation) or (c)(2)(ii) (inbound 

reorganization), then any suspended 

section 987 loss of the owner or original 

suspended loss QBU owner that is not 

recognized after application of the lossto-the-extent-of-gain rule in § 1.987– 

11(e) is eliminated. As a result, the 

distributee or acquiring corporation 

does not succeed to or take into account 

any suspended section 987 loss of the 

owner or original suspended loss QBU 

owner under section 381. 

(h) Outbound transactions— 

recognition or suspension of net 

unrecognized section 987 loss. This 

paragraph (h) applies to taxable years in 

which neither a current rate election nor 

an annual recognition election is in 

effect. 

(1) In general. Notwithstanding 

§ 1.987–5, if an outbound loss event 

occurs with respect to a section 987 

QBU (an outbound loss QBU), the 

original owner of the section 987 QBU 

includes in taxable income in the 

taxable year of the outbound loss event 

section 987 loss with respect to the 

outbound loss QBU only to the extent 

provided in paragraph (h)(3) of this 

section. 

(2) Outbound loss event. An outbound 

loss event means, with respect to a 

section 987 QBU: 

(i) Any termination of the section 987 

QBU as a result of a transfer by a U.S. 

person of assets of the section 987 QBU 

to a foreign person that is a member of 

the same controlled group as the U.S. 

person immediately before the 

transaction or, if the transferee did not 

exist immediately before the 

transaction, immediately after the 

transaction (related foreign person), 

provided that the termination would 

result in the recognition of section 987 

loss with respect to the section 987 QBU 

under § 1.987–5 but for this paragraph 

(h); or 

(ii) Any transfer by a U.S. person of 

part of an interest in a section 987 

aggregate partnership, or part of an 

interest in a DE, through which the U.S. 

person owns the section 987 QBU to a 

related foreign person that has the same 

functional currency as the section 987 

QBU, or any contribution by such a 

related foreign person to such a 

partnership or DE of assets that, 

immediately after the contribution, are 

not considered to be included on the 

books and records of an eligible QBU, 

provided that the transfer would result 

in the recognition of section 987 loss 

with respect to the section 987 QBU 

under § 1.987–5 but for this paragraph 

(h). 

(3) Loss recognition upon an 

outbound loss event. In the taxable year 

of an outbound loss event with respect 

to an outbound loss QBU, the owner of 

the outbound loss QBU recognizes 

section 987 loss as determined under 

§§ 1.987–5 and 1.987–12(b), except that, 

solely for purposes of applying § 1.987– 

5, assets and liabilities of the outbound 

loss QBU that, immediately after the 

outbound loss event, are reflected on the 

books and records of an eligible QBU 

owned by the related foreign person 

described in paragraph (h)(2) of this 

section are treated as not having been 

transferred and therefore as remaining 

on the books and records of the 

outbound loss QBU notwithstanding the 

outbound loss event. 

(4) Loss suspension upon outbound 

loss event. Net unrecognized section 987 

loss or deferred section 987 loss that, as 

a result of this paragraph (h), is not 

recognized in the taxable year of the 

outbound loss event (outbound section 

987 loss) under § 1.987–5 becomes 

suspended section 987 loss. 

(i) [Reserved] 

(j) Termination of a successor 

suspended loss QBU. For purposes of 

applying paragraph (c) of this section, a 

successor suspended loss QBU 

terminates if it ceases to be an eligible 

QBU of its owner. 

(k) Anti-abuse. No section 987 loss is 

recognized under this section, § 1.987– 

5, or § 1.987–12 in connection with a 

transaction or series of transactions that 

are undertaken with a principal purpose 

of avoiding the purposes of this section. 

(l) Definitions. The following 

definitions apply for purposes of this 

section. 

(1) Original suspended loss QBU 

owner—(i) In general. An original 

suspended loss QBU owner is the 

person that was the owner of a section 

987 QBU before its termination in a 

transaction to which paragraph (b)(1) of 

this section applies. 

(ii) Successors. If an original 

suspended loss QBU owner is a 

corporation (transferor corporation) and 

another corporation acquires the assets 

of the transferor corporation in a 

transaction described in section 381(a), 

then the acquiring corporation becomes 

the original suspended loss QBU owner. 

(2) Successor suspended loss QBU. A 

successor suspended loss QBU is an 

eligible QBU (which may or may not be 

a section 987 QBU) with respect to 

which the original suspended loss QBU 

owner has suspended section 987 loss 

after the termination of its section 987 

QBU. See paragraphs (b)(1) and (c)(1) of 

this section and § 1.987–12(d) for rules 

regarding when an eligible QBU is a 

successor suspended loss QBU. 

(3) Successor suspended loss QBU 

owner. A successor suspended loss QBU 

owner is the owner of the assets and 

liabilities of a successor suspended loss 

QBU. 

(4) Ownership interests. The term 

ownership interests means stock in a 

corporation, partnership interests in a 

partnership, and beneficiary interests in 

a non-grantor trust or an estate. 

(5) Significant portion. With respect 

to the assets of an eligible QBU, the term 

significant portion means a significant 

portion of the operating assets, 

determined based on all the facts and 

circumstances, provided that more than 

30 percent of the operating assets will 

constitute a significant portion in all 

cases and less than 10 percent of the 

operating assets will not constitute a 

significant portion in all cases. 

(m) Examples. The following 

examples illustrate the application of 

this section. For purposes of the 

examples, DC1 is a domestic 

corporation that owns all of the interests 

in Entity A, a DE. Entity A conducts 

Business A, a section 987 QBU that is 

engaged in the business of selling 

Product X. Business A has the euro as 

its functional currency and has 

cumulative suspended section 987 loss 

under § 1.987–11(b) of $500x. 

(1) Example 1: Trade or business of a 

section 987 QBU ceases—(i) Facts. 

Entity A’s trade or business of selling 

Product X ceases, resulting in a 

termination of the Business A section 

987 QBU under § 1.987–8(b)(1). After 

the trade or business is wound up, the 

remaining assets are transferred to DC1 

and are not used in the trade or business 

of selling Product X immediately 

following the termination. 

(ii) Analysis. Immediately after the 

termination of the Business A section 

987 QBU, a significant portion of 

Business A’s assets is not reflected on 

the books and records of an eligible 

QBU that carries on a trade or business 

of Business A and is owned by DC1 or 

a member of its controlled group. 

Therefore, Business A has no successor 

suspended loss QBU under paragraph 

(b)(1) of this section. Consequently, DC1 


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recognizes the cumulative suspended 

section 987 loss with respect to the 

Business A section 987 QBU under 

paragraph (b)(2) of this section. 

(2) Example 2: Trade or business of a 

section 987 QBU is sold to a third 

party—(i) Facts. DC1 sells all the 

interests in Entity A to a third party for 

cash. 

(ii) Analysis. Under § 1.987–2(c)(2)(ii), 

the sale of the Business A assets and 

liabilities for cash that is reflected on 

the books of DC1 is treated as a transfer 

of all of the assets and liabilities of 

Business A to DC1, followed 

immediately by DC1’s sale of those 

assets and liabilities. Because the 

deemed transfer from Business A to DC1 

is a transfer of substantially all of 

Business A’s assets to DC1, the Business 

A section 987 QBU terminates under 

§ 1.987–8(b)(2). Immediately after the 

termination of the Business A section 

987 QBU, a significant portion of 

Business A’s assets is not reflected on 

the books and records of an eligible 

QBU that carries on a trade or business 

of Business A and is owned by DC1 or 

a member of its controlled group. 

Therefore, Business A has no successor 

suspended loss QBU under paragraph 

(b)(1) of this section. Consequently, DC1 

recognizes the cumulative suspended 

section 987 loss with respect to the 

Business A section 987 QBU under 

paragraph (b)(2) of this section. 

(3) Example 3: Outbound loss event— 

(i) Facts. Entity A elects to be classified 

as a corporation under § 301.7701–3(c) 

of this chapter. As a result of the 

election and pursuant to § 301.7701– 

3(g)(1)(iv) of this chapter, DC1 is treated 

as contributing all of the assets and 

liabilities of Business A to newlyformed CFC1, which has the euro as its 

functional currency. Immediately after 

the contribution, the assets and 

liabilities of Business A are reflected on 

CFC1’s books and records. After being 

classified as a corporation, CFC1 owns 

Business A, and Business A conducts 

the same trade or business it conducted 

when it was owned by DC1. Neither a 

current rate election nor an annual 

recognition election is in effect. 

(ii) Analysis—(A) Under § 1.987– 

2(c)(2)(ii), DC1’s contribution of all of 

the assets and liabilities of Business A 

to CFC1 is treated as a transfer of all of 

the assets and liabilities of Business A 

to DC1, followed immediately by DC1’s 

contribution of those assets and 

liabilities to CFC1. Because the deemed 

transfer from Business A to DC1 is a 

transfer of substantially all of Business 

A’s assets to DC1, the Business A 

section 987 QBU terminates under 

§ 1.987–8(b)(2). The contribution of 

Business A’s assets to CFC1 is not a 

deferral event within the meaning of 

§ 1.987–12(g)(1) because, immediately 

after the transaction, no assets of 

Business A are reflected on the books 

and records of a successor deferral QBU 

within the meaning of § 1.987–12(g)(2) 

due to the fact that the assets of 

Business A are not reflected on the 

books and records of a section 987 QBU 

immediately after the termination, as 

well as the fact that the requirement of 

§ 1.987–12(g)(2)(iii) is not met because 

Business A was owned by a U.S. person 

and the potential successor deferral 

QBU, which is owned by CFC1, is not 

owned by a U.S. person. The 

termination of the Business A section 

987 QBU as a result of the transfer of the 

assets of Business A by a U.S. person 

(DC1) to a foreign person (CFC1) that is 

a member of DC1’s controlled group is 

an outbound loss event described in 

paragraph (h)(2) of this section. 

(B) Under paragraphs (h)(1) and (3) of 

this section, in the taxable year of the 

outbound loss event, DC1 includes in 

taxable income section 987 loss 

recognized with respect to Business A 

as determined under § 1.987–5, except 

that, for purposes of applying § 1.987– 

5, all assets and liabilities of Business A 

that are reflected on the books and 

records of CFC1, a related foreign 

person described in paragraph (h)(2) of 

this section, are treated as not having 

been transferred. Accordingly, DC1’s 

remittance proportion with respect to 

Business A is 0, and DC1 recognizes no 

section 987 loss with respect to 

Business A. DC1’s outbound section 987 

loss is $500x, which is the amount of 

section 987 loss that DC1 would have 

recognized under § 1.987–5 without 

regard to paragraph (h) of this section 

($500x), less the amount of section 987 

loss recognized by DC1 under paragraph 

(h)(3) of this section ($0). Under 

paragraph (h)(4) of this section, the 

$500x of outbound section 987 loss 

becomes suspended section 987 loss. 

(C) Under paragraph (b)(1)(i) of this 

section, Business A (in the hands of 

CFC1) is a successor suspended loss 

QBU because, immediately after the 

termination of the Business A section 

987 QBU, the Business A assets are 

reflected on the books and records of 

Business A (in the hands of CFC1), 

Business A was an eligible QBU that 

continued to carry on the same trade or 

business, and Business A was owned by 

CFC1, a member of the same controlled 

group as DC (which is the original 

suspended loss QBU owner under 

paragraph (l)(1) of this section). 

Therefore, under paragraph (b)(1)(ii) of 

this section, all of Business A’s 

suspended section 987 loss (including 

the suspended section 987 loss resulting 

from the termination of Business A) is 

treated as suspended section 987 loss 

with respect to Business A (in the hands 

of CFC1). 

■ 22. Section 1.987–14 is added to read 

as follows: 

§ 1.987–14 Applicability date. 

(a) Section 987 regulations 

applicability date—(1) In general. 

Except as provided in this section, the 

section 987 regulations apply to taxable 

years beginning after December 31, 

2024. 

(2) Applicability date for a 

terminating QBU. The section 987 

regulations apply to the owner of a 

terminating QBU beginning on the day 

the section 987 QBU terminates, but 

only with respect to the section 987 

QBU, any successor deferral QBUs or 

successor suspended loss QBUs (in their 

capacity as such), and any net 

unrecognized section 987 gain or loss, 

deferred section 987 gain or loss, or 

suspended section 987 loss with respect 

thereto. See § 1.987–1(h) for the 

definition of a terminating QBU. 

(3) Partnerships. If the section 987 

regulations apply to a taxable year of a 

partnership and would not otherwise 

apply to the taxable year of a partner in 

which or with which the partnership’s 

taxable year ends, then the section 987 

regulations apply to that taxable year of 

the partner solely with respect to the 

partner’s interest in the partnership and 

its section 987 gain or loss attributable 

to an eligible QBU held by the 

partnership. 

(b) Application of the section 987 

regulations to taxable years beginning 

on or before December 31, 2024, and 

ending after November 9, 2023. A 

taxpayer (including a taxpayer that has 

applied the 2016 and 2019 section 987 

regulations to a prior taxable year under 

paragraph (c) of this section) may 

choose to apply the section 987 

regulations to a taxable year beginning 

on or before December 31, 2024, and 

ending after November 9, 2023, 

provided the taxpayer and each member 

of its consolidated group and section 

987 electing group: 

(1) Consistently apply the section 987 

regulations in their entirety to the 

taxable year and all subsequent taxable 

years beginning on or before December 

31, 2024; and 

(2) Apply the section 987 regulations 

on their original timely filed (including 

extensions) returns in the first taxable 

year in which the section 987 

regulations apply. 

(c) Application of the 2016 and 2019 

section 987 regulations—(1) In general. 

A taxpayer may choose to apply the 

2016 and 2019 section 987 regulations 


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to a taxable year beginning after 

December 7, 2016, and beginning on or 

before December 31, 2024, provided the 

taxpayer and each member of its 

consolidated group and section 987 

electing group: 

(i) First apply the 2016 and 2019 

section 987 regulations to a taxable year 

ending before November 9, 2023; 

(ii) Consistently apply the 2016 and 

2019 section 987 regulations in their 

entirety to all section 987 QBUs (within 

the meaning of prior § 1.987–1(b)(2)) 

directly or indirectly owned (within the 

meaning of prior § 1.987–1(b)(4)) by the 

taxpayer and each member of its 

consolidated group and section 987 

electing group on the transition date for 

that taxable year and all subsequent 

taxable years before the taxable year in 

which the taxpayer and each member of 

its consolidated group and section 987 

electing group apply the section 987 

regulations pursuant to paragraph (a) or 

(b) of this section; and 

(iii) Either— 

(A) First applied the 2016 and 2019 

section 987 regulations on their returns 

filed before November 9, 2023; or 

(B) First apply the 2016 and 2019 

section 987 regulations on their returns 

filed on or after November 9, 2023 and 

apply § 1.987–10 in lieu of prior 

§ 1.987–10. 

(2) Application to section 987 QBUs 

not owned on the transition date. For 

any taxable year in which a taxpayer 

applies the 2016 and 2019 section 987 

regulations pursuant to paragraph (c)(1) 

of this section, the taxpayer may choose 

to apply the 2016 and 2019 section 987 

regulations to any section 987 QBU 

(within the meaning of prior § 1.987– 

1(b)(2)) that the taxpayer did not 

directly or indirectly own (within the 

meaning of prior § 1.987–1(b)(4)) on the 

transition date, provided the taxpayer 

applies the 2016 and 2019 section 987 

regulations consistently to that QBU for 

that taxable year and all subsequent 

taxable years before the taxable year in 

which the taxpayer applies the section 

987 regulations pursuant to paragraph 

(a) or (b)(1) of this section, provided that 

the taxpayer either— 

(i) First applied the 2016 and 2019 

section 987 regulations to the section 

987 QBU on its return filed before 

November 9, 2023; or 

(ii) First applies the 2016 and 2019 

section 987 regulations to the section 

987 QBU on its return filed on or after 

November 9, 2023 and applies § 1.987– 

10 in lieu of prior § 1.987–10. 

(3) Modifications of defined terms for 

purposes of this paragraph (c). Solely 

for purposes of this paragraph (c)— 

(i) Application of § 1.987–10 in lieu of 

prior § 1.987–10. For any taxpayer to 

which paragraph (c)(1)(iii)(B) or (c)(2)(ii) 

of this section applies, the term 2016 

and 2019 section 987 regulations 

includes § 1.987–10 and not prior 

§ 1.987–10. 

(ii) Partnerships not included in 

section 987 electing group. The term 

section 987 electing group does not 

include foreign partnerships, foreign 

non-grantor trusts, or foreign estates. 

(iii) Transition date. The term 

transition date has the meaning 

provided in prior § 1.987–10. 

(d) Prior § 1.987–12. For the 

applicability dates of prior § 1.987–12, 

see prior § 1.987–12(j). Prior § 1.987–12 

applies through the end of the taxable 

year immediately preceding the first 

taxable year in which a taxpayer applies 

§ 1.987–12 pursuant to paragraph (a) or 

(b) of this section. 

■ 23. Section 1.988–1, as proposed to be 

amended by 81 FR 88882 (December 8, 

2016), is further amended by: 

■ a. Removing the language ‘‘§ 1.987– 

1(b)(5)’’ in paragraph (a)(4)(i) and 

adding the language ‘‘§ 1.987–1(h)’’ in 

its place. 

■ b. Removing the language ‘‘§ 1.987– 

1(b)(3)’’ wherever it appears in 

paragraphs (a)(4)(i) and (iv) and adding 

the language ‘‘§ 1.987–1(b)(4)’’ in its 

place. 

c. Removing the language ‘‘§ 1.987– 

1(b)(4)’’ wherever it appears in 

paragraphs (a)(4)(ii) and (iii) and adding 

the language ‘‘§ 1.987–1(b)(5)’’ in its 

place. 

■ d. Removing the language ‘‘§ 1.987– 

7(b)’’ in the second sentence of 

paragraph (a)(4)(ii) and adding the 

language ‘‘§ 1.987–7B(b)’’ in its place. 

■ 2. Revising paragraph (i). 

The revisions read as follows: 

§ 1.988–1 Certain definitions and special 

rules. 

* * * * * 

(i) Applicability date—(1) In general. 

Except as otherwise provided in this 

section, this section applies to taxable 

years beginning after December 31, 

1986. Thus, except as otherwise 

provided in this section, any payments 

made or received with respect to a 

section 988 transaction in taxable years 

beginning after December 31, 1986, are 

subject to this section. 

(2) Paragraphs (a)(4) and (a)(10)(ii). 

Generally, paragraphs (a)(4) and 

(a)(10)(ii) of this section apply to taxable 

years beginning after December 31, 

2024. However, if pursuant to § 1.987– 

14(b), a taxpayer chooses to apply 

§§ 1.987–1 through 1.987–14 to a 

taxable year before the first taxable year 

described in § 1.987–14(a)(1), then 

paragraphs (a)(4) and (a)(10)(ii) of this 

section apply to that taxable year. See 

§ 1.988–1(i), as contained in 26 CFR in 

part 1 in effect on April 1, 2017, for a 

prior applicability date for paragraphs 

(a)(4) and (a)(10)(ii) of this section. 

■ 24. Section 1.988–4 is amended by 

revising paragraph (b)(2) to read as 

follows: 

§ 1.988–4 Source of gain or loss realized 

on a section 988 transfer 

* * * * * 

(b) * * * 

(2) Proper reflection on the books of 

the taxpayer or qualified business 

unit—(i) In general. For purposes of 

paragraph (b)(1) of this section, the 

principles of § 1.987–2(b) apply in 

determining whether an asset, liability, 

or item of income, gain, deduction, or 

loss is reflected on the books and 

records of a qualified business unit. 

(ii) Applicability date. Generally, 

paragraph (b)(2)(i) of this section applies 

to taxable years beginning after 

December 31, 2024. However, if 

pursuant to § 1.987–14(b), a taxpayer 

chooses to apply §§ 1.987–1 through 

1.987–14 to a taxable year before the 

first taxable year described in § 1.987– 

14(a)(1), then paragraph (b)(2)(i) of this 

section applies to that taxable year. 

* * * * * 

■ 25. Section 1.989(a–1 is amended by: 

■ a. In paragraph (b) removing the 

language ‘‘§ 1.987–1(b)(5)’’ in paragraph 

(b)(2)(i)(C) and adding the language 

‘‘§ 1.987–1(h)’’ in its place; and 

■ b. Revising paragraphs (b)(2)(i)(D), 

(b)(4), and (d)(3) and (4). 

The revisions read as follows: 

§ 1.989(a)–1 Definition of a qualified 

business unit. 

* * * * * 

(b) * * * 

(2) * * * 

(i) * * * 

(D) Trusts and estates. A non-grantor 

trust (within the meaning of § 1.987– 

1(h)) and an estate is a QBU. 

* * * * * 

(4) Applicability date. Generally, 

paragraph (b)(2)(i) of this section applies 

to taxable years beginning after 

December 31, 2024. However, if 

pursuant to § 1.987–14(b), a taxpayer 

chooses to apply §§ 1.987–1 through 

1.987–14 to a taxable year before the 

first taxable year described in § 1.987– 

14(a)(1), then paragraph (b)(2)(i) of this 

section applies to that taxable year. See 

§ 1.989(a)–1(b)(4), as contained in 26 

CFR in part 1 in effect on April 1, 2017, 

for a prior applicability date for 

paragraph (b)(2)(i) of this section. 

* * * * * 

(d) * * * 

(3) Proper reflection on the books of 

the taxpayer or qualified business unit. 


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The principles of § 1.987–2(b) apply in 

determining whether an asset, liability, 

or item of income, gain, deduction, or 

loss is reflected on the books of a 

qualified business unit (and therefore is 

attributable to such unit). 

(4) Applicability date. Generally, 

paragraph (d)(3) of this section applies 

to taxable years beginning after 

December 31, 2024. However, if 

pursuant to § 1.987–14(b), a taxpayer 

applies §§ 1.987–1 through 1.987–14 to 

a taxable year before the first taxable 

year described in § 1.987–14(a)(1), then 

paragraph (b)(2)(i) of this section applies 

to that taxable year. See § 1.989(a)– 

1(d)(4), as contained in 26 CFR in part 

1 in effect on April 1, 2017, for a prior 

applicability date for paragraph (d)(3) of 

this section. 

* * * * * 

■ 26. Section 1.1502–13, as proposed to 

be amended at 88 FR 52057 (August 7, 

2023), is further amended by: 

■ a. In paragraph (a)(6)(ii) in the table 

revising the entry ‘‘(G) Miscellaneous 

operating rules’’ 

■ b. Redesignating paragraph (j)(9) as 

paragraph (j)(10). 

■ c. Adding a new paragraph (j)(9). 

■ d. Adding paragraphs (j)(10)(viii) and 

(ix). 

■ e. Adding paragraph (l)(10). 

The additions and revision read as 

follows: 

§ 1.1502–13 Intercompany transactions. 

(a) * * * 

(6) * * * 

(ii) * * * 

Rule General 

location Paragraph Example 

*******

(G) Miscellaneous operating rules ......................... § 1.1502–13(j)(10) ......... (i) .................. Example 1. Intercompany sale followed by section 351 transfer to member. 

(ii) ................. Example 2. Intercompany sale of member stock 

followed by recapitalization. 

(iii) ................ Example 3. Back-to-back intercompany transactions—matching. 

(iv) ................ Example 4. Back-to-back intercompany transactions—acceleration. 

(v) ................. Example 5. Successor group. 

(vi) ................ Example 6. Liquidation—80% distributee. 

(vii) ............... Example 7. Liquidation—no 80% distributee. 

(viii) .............. Example 8. Loan by section 987 QBU. 

(ix) ................ Example 9. Sale of property by section 987 QBU. 

* * * * * 

(j) * * * 

(9) Section 987 QBUs. No 

intercompany transaction is attributable 

to a section 987 QBU (within the 

meaning of § 1.987–2(b)). That is, in 

order to produce single entity treatment, 

an intercompany transaction that 

otherwise would involve the section 987 

QBU(s) of one or more members is 

treated instead as occurring directly 

between the members (without the 

involvement of any section 987 QBUs), 

and transfers are deemed to take place 

between each section 987 QBU and its 

owner (see § 1.987–2(c)(2)(ii)). For 

example, if a member (M1) lends money 

to the section 987 QBU of another 

member (M2), this intercompany 

transaction is treated as a loan from M1 

to M2 and a contribution from M2 to its 

section 987 QBU. 

(10) * * * 

(viii) Example 8. Loan by section 987 

QBU. (A) Facts. S owns all the interests 

in DE1, a disregarded entity operating a 

business that is a section 987 QBU (S 

QBU) whose functional currency is the 

euro. S has net unrecognized section 

987 gain with respect to S QBU. In year 

1, S QBU lends Ö100 to B with interest 

due annually. B makes interest 

payments on the loan to S QBU in years 

1 through 3. In year 3, B repays the loan 

and recognizes section 988 loss of $12 

on the loan repayment. B recognizes no 

section 988 gain or loss on the euros it 

uses to pay the interest and principal. 

Other than with respect to the loan, 

there are no transfers between S and S 

QBU during years 1 through 3. 

(B) Analysis—(1) Loan. Under 

paragraph (j)(9) of this section, the loan 

is treated as a transfer from S QBU to 

S and a loan directly between S and B. 

Specifically, S is treated as receiving a 

transfer of Ö100 from S QBU in year 1; 

S is then treated as lending Ö100 

directly to B. For purposes of § 1.987– 

2, the loan is attributable to S, not to S 

QBU. As an intercompany loan, S’s loan 

to B is subject to the rules of this 

section. Because there is a remittance 

from S QBU to S in year 1, S recognizes 

section 987 gain under § 1.987–5. 

(2) Interest payments. While the loan 

is outstanding, each of B’s interest 

payments to S QBU is treated as an 

interest payment from B to S, followed 

by a transfer from S to S QBU. S’s 

intercompany interest income offsets B’s 

corresponding interest expense. See 

paragraph (g)(7)(ii)(A)(2) of this section 

(Example 1). Since the functional 

currency of both S and B is the dollar, 

if B recognizes any section 988 gain or 

loss on the interest payments, S will 

recognize an offsetting amount of 

section 988 loss or gain. Because the 

only transfer between S and S QBU in 

year 2 is from S to S QBU, there is no 

remittance from S QBU to S and S does 

not recognize section 987 gain under 

§ 1.987–5. 

(3) Repayment. Upon the year 3 

repayment of the loan, B is treated as 

repaying Ö100 to S, and S is treated as 

transferring Ö100 to S QBU. Since the 

functional currency of both S and B is 

the dollar, and B recognizes section 988 

loss of $12 on the loan repayment, S 

will recognize an offsetting section 988 

gain of $12. Because the only transfers 

between S and S QBU in year 3 are from 

S to S QBU, there is no remittance from 

S QBU to S and S does not recognize 

section 987 gain under § 1.987–5. 

(4) Summary. Overall, the group’s 

taxable income includes S’s section 987 

gain in year 1 (the section 988 

inclusions offset). This result is 

consistent with the treatment of a single 

corporation that borrows from its 

section 987 QBU. 

(ix) Example 9. Sale of property by 

section 987 QBU—(A) Facts. M1 owns 

all the interests in DE1, a disregarded 

entity operating a business that is a 

section 987 QBU (M1 QBU) whose 

functional currency is the euro. M1 has 

net unrecognized section 987 gain with 

respect to M1 QBU. M1 QBU sells 

property to M2 for Ö100 in year 1. 

(B) Analysis—(1) In general. Under 

paragraph (j)(9) of this section, the sale 


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of property is treated as a transfer of the 

property from M1 QBU to M1, followed 

by an exchange of the property for Ö100 

directly between M1 and M2, and a 

transfer of the Ö100 from M1 to M1 

QBU. 

(2) Distribution. M1 QBU is treated as 

transferring the property to M1. 

(3) Exchange. M1 is then treated as 

selling the property to M2 for Ö100. M1 

will take into account its intercompany 

gain or loss on the property under the 

rules of this section. M2 recognizes 

intercompany section 988 gain or loss 

on its exchange of Ö100 for the property. 

See paragraph (b)(1)(iii) of this section 

for property exchanges between 

members. 

(4) Contribution. Finally, M1 is 

treated as transferring the Ö100 to M1 

QBU. Because M1’s basis in the Ö100 

equals its fair market value, M1 has a 

corresponding section 988 gain or loss 

of zero upon the contribution. See 

§ 1.988–1(a)(10). Both the transfer of the 

property from M1 QBU to M1 and the 

transfer of the Ö100 from M1 to M1 QBU 

are taken into account in determining 

whether there is a remittance from M1 

QBU to M1 in year 1 and whether M1 

recognizes section 987 gain under 

§ 1.987–5. 

(5) Summary. Overall, in year 1, M1 

may take into account section 987 gain 

if the transfers between M1 and M1 

QBU result in a remittance, and M2 

takes into account section 988 gain or 

loss on the Ö100. This result is 

consistent with the treatment of a single 

corporation that purchases property 

from its section 987 QBU. 

(l) * * * 

(10) Applicability date. Generally, 

paragraph (j)(9) of this section applies to 

taxable years beginning after December 

31, 2024, for which the original Federal 

income tax return is due (without 

extensions) after [DATE OF 

PUBLICATION OF THE FINAL 

REGULATIONS IN THE FEDERAL 

REGISTER]. However, if pursuant to 

§ 1.987–14(b), a taxpayer chooses to 

apply §§ 1.987–1 through 1.987–14 to a 

taxable year before the first taxable year 

described in § 1.987–14(a)(1), then 

paragraph (j)(9) of this section applies to 

that taxable year and subsequent years. 

Douglas W. O’Donnell, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2023–24649 Filed 11–9–23; 4:15 pm] 

BILLING CODE 4830–01–P 


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