```

[Federal Register Volume 89, Number 238 (Wednesday, December 11, 2024)]
[Proposed Rules]
[Pages 99782-99790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28371]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-117213-24]
RIN 1545-BR37

Accounting for Disregarded Transactions Between a Qualified 
Business Unit and Its Owner

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: 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. The proposed 
regulations include an election that is intended to reduce the 
compliance burden of accounting for certain disregarded transactions 
between a qualified business unit and its owner. This document also 
includes a request for comments relating to the treatment of 
partnerships and controlled foreign corporations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 11, 2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-117213-24) 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eRulemaking Portal, comments cannot be edited or withdrawn.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-117213-24), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Adam G. Province at (865) 329-4546; concerning submissions of comments, 
requests for a public hearing, and access to a public hearing, 
Publications and Regulations Section at (202) 317-6901 (not toll-free 
numbers) or by email to [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Authority

    This document contains proposed additions and amendments to 26 CFR 
part 1 (Income Tax Regulations) addressing the application of section 
987 of the Internal Revenue Code (Code) and related provisions (the 
``proposed regulations''). The additions and amendments are issued 
under sections 987 and 989, pursuant to the express delegations of 
authority provided under those sections. The express delegations relied 
upon are referenced in the Background section of this preamble. The 
proposed regulations are also issued under the express delegation of 
authority under section 7805 of the Code.

Background

    This document contains proposed regulations under section 987 of 
the 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

[[Page 99783]]

taxpayer having different functional currencies.
    Sections 987 and 989 provide several explicit grants of regulatory 
authority. The statute does not specify how the proper adjustments 
should be made under section 987(3), but instead directs the Secretary 
to prescribe the proper adjustments needed to determine the taxable 
income of the owner of a section 987 QBU. Section 989(c) directs the 
Secretary to ``prescribe such regulations as may be necessary or 
appropriate to carry out the purposes of this subpart.'' \1\ The grants 
of authority in section 989(c) include regulations providing for the 
appropriate treatment of related party transactions (including 
transactions between QBUs of the same taxpayer). Section 989(c)(5).
---------------------------------------------------------------------------

    \1\ The reference to ``this subpart'' refers to subpart J of 
part III of subchapter N of chapter 1 of the Code, which includes 
section 987.
---------------------------------------------------------------------------

    Concurrently with the publication of these proposed regulations, 
the Treasury Department and the IRS are publishing in the rules and 
regulations section of this edition of the Federal Register (RIN 1545-
BO07) final regulations under sections 861, 985, 987 through 989, and 
1502 of the Code (the ``final regulations''). On November 14, 2023, the 
Treasury Department and the IRS published proposed regulations (REG-
132422-17) under those same sections of the Code (the ``2023 proposed 
regulations'') in the Federal Register (88 FR 78134). The comments 
received in response to the 2023 proposed regulations, and the 
revisions made in response to those comments, are summarized in the 
Summary of Comments and Explanation of Revisions in the preamble to the 
final regulations. In response to certain comments, the Treasury 
Department and the IRS are publishing this notice of proposed 
rulemaking to provide additional proposed rules under section 987 and 
to request comments relating to the application of section 987 to 
partnerships and controlled foreign corporations (``CFCs'').

Explanation of Provisions

    The proposed regulations provide an election under which, in 
certain cases, taxpayers can translate a group of frequently recurring 
transfers between a section 987 QBU and its owner using the yearly 
average exchange rate (rather than the spot rate applicable on the date 
of each transfer). The proposed regulations also would simplify the 
computation of unrecognized section 987 gain or loss under Sec.  1.987-
4 for taxpayers that make this election.

I. Rules of the Final Regulations Relating to Disregarded Transactions

A. Accounting for Disregarded Transactions Between a Section 987 QBU 
and Its Owner
    Under the final regulations, an asset is treated as transferred to 
a section 987 QBU from its owner if, because of a disregarded 
transaction, the asset is reflected on the books and records of the 
section 987 QBU. See Sec.  1.987-2(c)(2)(i). Similarly, an asset is 
treated as transferred from a section 987 QBU to its owner if, because 
of a disregarded transaction, the asset ceases to be reflected on the 
books and records of the section 987 QBU. Thus, for example, if a 
section 987 QBU purchases inventory from its owner (or another eligible 
QBU of its owner) in a disregarded transaction, the section 987 QBU is 
treated as distributing cash to its owner, and the owner is treated as 
contributing the inventory to the section 987 QBU. Disregarded 
transactions, however, 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 Sec.  1.987-3. See Sec.  1.987-
2(c)(2)(iii).
    The final regulations provide rules for determining the basis of an 
asset or the amount of a liability that has been transferred by an 
owner to a section 987 QBU. In general, marked items are translated 
into the section 987 QBU's functional currency at the spot rate 
applicable on the date of the transfer, while historic items are 
translated at the applicable historic rate. See Sec.  1.987-2(d). 
Similarly, when an asset or liability is transferred from a section 987 
QBU to its owner, marked items are translated into the owner's 
functional currency at the spot rate applicable on the date of 
transfer, while historic items are translated at the applicable 
historic rate. See Sec.  1.987-5(f). These rules apply to all transfers 
of assets and liabilities between a section 987 QBU and its owner, 
including transfers made in connection with ordinary course disregarded 
transactions (for example, sales of inventory).
    The definition of a marked item under the final regulations 
includes an asset or liability denominated in, or determined by 
reference to, the functional currency of the section 987 QBU that would 
be a section 988 transaction if it were held or entered into directly 
by the owner of the section 987 QBU; it also includes several other 
categories of assets and liabilities. See Sec.  1.987-1(d)(1). However, 
the final regulations provide an election to treat all items of a 
section 987 QBU as marked items (the ``current rate election''). See 
Sec.  1.987-1(d)(2).
B. Determination of Unrecognized Section 987 Gain or Loss With Respect 
to a Section 987 QBU
    Section 1.987-4 provides rules for computing net unrecognized 
section 987 gain or loss with respect to a section 987 QBU. Under Sec.  
1.987-4(b), net unrecognized section 987 gain or loss is equal to the 
sum of (i) the unrecognized section 987 gain or loss for the current 
taxable year and (ii) net accumulated unrecognized section 987 gain or 
loss for all prior taxable years.
    Section Sec.  1.987-4(d) provides a ten-step formula for computing 
unrecognized section 987 gain or loss for the current taxable year. The 
first step of this formula is to determine the change in owner 
functional currency net value (``OFCNV'') of the section 987 QBU for 
the taxable year, computed using end-of-year exchange rates for marked 
items and historic rates for historic items. See Sec.  1.987-4(d)(1) 
and (e). The other steps adjust for amounts comprising the separate 
components of the annual change in OFCNV (other than changes in the 
exchange rate). Steps 2 through 5 relate to transfers of assets and 
liabilities between a section 987 QBU and its owner, and steps 6 
through 9 relate to items of income or loss of the section 987 QBU. See 
Sec.  1.987-4(d)(2) through (9). Step 10 is a residual adjustment for 
any remaining increase or decrease to the section 987 QBU's functional 
currency balance sheet. This residual adjustment is translated into the 
owner's functional currency using the yearly average exchange rate for 
the taxable year. See Sec.  1.987-4(d)(10).
    In applying steps 2 through 5, an owner must account for all 
transfers of assets and liabilities between a section 987 QBU and its 
owner, including transfers made in connection with ordinary course 
disregarded transactions. See Sec.  1.987-4(d)(2) through (5). For this 
purpose, marked items are translated into the owner's functional 
currency at the spot rate applicable on the date of the transfer, while 
historic items are translated at the applicable historic rate.

II. Proposed Rules Relating to Disregarded Transactions

A. Comment Concerning the Compliance Burden of Accounting for 
Disregarded Transactions
    A comment to the 2023 proposed regulations asserted that it is 
burdensome for taxpayers to track and translate disregarded 
transactions between a section 987 QBU and its owner (or between 
different section 987 QBUs of the same owner) that arise in

[[Page 99784]]

the ordinary course of a section 987 QBU's trade or business. The 
comment recommended that, for taxpayers that make a current rate 
election, unrecognized section 987 gain or loss for the taxable year 
should be computed by applying only two of the steps provided in Sec.  
1.987-4(d): step 1 (determining the change in OFCNV) and step 10 
(reducing or increasing the amount determined in step 1 by the change 
in QBU net value, translated into the owner's functional currency at 
the yearly average exchange rate). The comment asserted that, under 
this approach, it would not be necessary to track ordinary course 
disregarded transactions between a section 987 QBU and its owner (or 
different section 987 QBUs of the same owner), because those 
transactions would be eliminated from the computation of unrecognized 
section 987 gain or loss.
    As explained in the preamble to the final regulations, the effect 
of the comment's recommended rule would be to translate the net amount 
of all transfers between a section 987 QBU and its owner at the yearly 
average exchange rate under step 10. See part V.A.3 of the Summary of 
Comments and Explanation of Revisions in the preamble to the final 
regulations. By contrast, Sec.  1.987-4(d) requires each transfer to be 
translated at the appropriate exchange rate in applying steps 2 through 
5. Under the final regulations, if a current rate election is in 
effect, the basis of each asset and the amount of each liability 
transferred is translated at the spot rate applicable on the date of 
transfer (because all assets and liabilities are treated as marked 
items). The final regulations do not adopt the rule recommended by the 
comment because the applicable spot rate could be significantly higher 
or lower than the yearly average exchange rate, in which case the 
comment's recommended rule could substantially distort the computation 
of unrecognized section 987 gain or loss.
B. Recurring Transfer Group Election
    Notwithstanding the concern described in part II.A of this 
Explanation of Provisions, the Treasury Department and the IRS are of 
the view that, in certain cases, a group of frequently recurring 
transfers between a section 987 QBU and its owner could be translated 
using the yearly average exchange rate without creating significant 
distortions. Further, permitting taxpayers to use the yearly average 
exchange rate in lieu of the applicable spot rate would reduce the 
compliance burden of the section 987 regulations.
    Therefore, the proposed regulations would provide that a taxpayer 
that has made a current rate election may elect to use the yearly 
average exchange rate to translate assets that are transferred between 
a section 987 QBU and its owner as part of a recurring transfer group 
(a ``recurring transfer group election''). Proposed Sec.  1.987-
2(f)(1). The recurring transfer group election would be subject to the 
general timing and consistency requirements provided in Sec.  1.987-
1(g) of the final regulations.
    If a recurring transfer group election is in effect, assets 
transferred between a section 987 QBU and its owner as part of a 
recurring transfer group (``grouped assets'') are translated under 
Sec. Sec.  1.987-2(d), 1.987-4(d)(2), and 1.987-5(f) using the yearly 
average exchange rate in lieu of the applicable spot rate. Proposed 
Sec.  1.987-2(f)(4). In addition, proposed Sec.  1.987-2(f)(5)(i) would 
provide that transfers made as part of a recurring transfer group are 
disregarded for purposes of Sec.  1.987-4(d)(2) and (3) (steps 2 and 
3). Proposed Sec.  1.987-2(f)(5). That is, because all transfers that 
are part of a recurring transfer group are translated at the yearly 
average exchange rate, these transfers do not need to be separately 
tracked and translated for purposes of determining unrecognized section 
987 gain or loss.
    Transfers that are part of a recurring transfer group are also 
disregarded when applying steps 2 and 3 in the functional currency of 
the section 987 QBU for purposes of determining the residual increase 
or decrease to net assets under Sec.  1.987-4(d)(10). Proposed Sec.  
1.987-4(d)(10)(ii)(D). To the extent that these transfers increase or 
reduce the year-end net assets of the section 987 QBU (determined in 
the section 987 QBU's functional currency), the residual increase or 
decrease to net assets will be translated at the yearly average 
exchange rate under Sec.  1.987-4(d)(10) (step 10).
    Under the proposed regulations, if a recurring transfer group 
election is in effect, and the only transfers between a section 987 QBU 
and its owner are part of a recurring transfer group, the owner would 
determine unrecognized section 987 gain or loss for the taxable year by 
applying only steps 1 and 10 (as recommended by the comment). Transfers 
that are not part of a recurring transfer group must be taken into 
account at the applicable spot rate under steps 2 through 5. However, 
the final regulations permit taxpayers to use a spot rate convention 
based on the average of spot rates for a reasonable period (which can 
be as long as three months), which should reduce the compliance burden 
of accounting for these transfers. See Sec.  1.987-1(c)(1)(ii).
    The special rule for computing unrecognized section 987 gain or 
loss in proposed Sec.  1.987-2(f)(5)(i) would not apply if the owner of 
a section 987 QBU determines QBU net value using the formula provided 
in Sec.  1.987-4(e)(2)(iii). Proposed Sec.  1.987-2(f)(5)(ii). 
Taxpayers using this formula must separately track each transfer for 
purposes of computing QBU net value, and therefore disregarding the 
transfers for purposes of Sec.  1.987-4(d)(2) and (3) would not reduce 
the compliance burden for these taxpayers.
    The proposed regulations also would modify the recordkeeping 
requirements in Sec.  1.987-9 to provide that taxpayers are not 
required to maintain records concerning amounts transferred between an 
owner and a section 987 QBU unless the transferred amounts are taken 
into account in applying Sec.  1.987-4 or Sec.  1.987-5. Proposed Sec.  
1.987-9(b)(5) and (6). Therefore, if a taxpayer makes a recurring 
transfer group election and uses the alternative calculation provided 
in Sec.  1.987-5(c)(2) (under which the remittance for a taxable year 
is determined by reference to the change in QBU net value, adjusted for 
income or loss of the section 987 QBU), the taxpayer generally would 
not be required to maintain records with respect to transfers of 
grouped assets.
C. Definition of a Recurring Transfer Group
    Under the proposed regulations, a recurring transfer group would be 
defined as a group of frequently recurring transfers between a section 
987 QBU and its owner (or another eligible QBU of the owner) that are 
made in the ordinary course of a trade or business. Proposed Sec.  
1.987-2(f)(2)(i). Only transfers made in connection with sales of 
inventory, payments for services, or rent or royalty transactions in 
which arm's length compensation (determined by applying the principles 
of the arm's length standard of Sec.  1.482-1(b)(1)) has been paid 
would be included in a recurring transfer group. Proposed Sec.  1.987-
2(f)(2)(ii). For this purpose, the principles of the arm's length 
standard apply as if the section 987 QBU were a corporation that is 
separate from its owner and, thus, as if the disregarded transaction 
were a controlled transfer within the meaning of Sec.  1.482-1(i)(8). A 
recurring transfer group would not include a transfer between the 
section 987 QBU and its owner if the transfer (or a portion of the 
transfer) would be treated as a distribution with respect to stock, or 
an exchange for stock (or a contribution to

[[Page 99785]]

capital), for U.S. tax purposes if the QBU were treated as a separate 
corporation. Proposed Sec.  1.987-2(f)(2)(iii). Those transfers are 
unlikely to be made in the ordinary course of a trade or business and 
could be used to manipulate the computation of unrecognized section 987 
gain or loss.
    The definition of a recurring transfer group in Sec.  1.987-2(f)(2) 
is tailored to identify ordinary business transactions for which the 
use of the yearly average exchange rate would not cause significant 
distortions and which could be burdensome to account for under the 
rules of the final regulations. The Treasury Department and the IRS 
request comments as to whether other transfers should be included in a 
recurring transfer group. For example, comments are requested as to 
whether intercompany lending transactions (or other transactions) of a 
bank or other financial entity should be included in a recurring 
transfer group and, if so, how the scope of the covered transactions 
should be defined. Although lending transactions are made in the 
ordinary course of a bank's trade or business, it may be difficult to 
distinguish between ordinary course loans and extraordinary 
transactions that could be used to manipulate a taxpayer's unrecognized 
section 987 gain or loss.
D. Exception for Disproportionate Transfers
    The rules of proposed Sec.  1.987-2(f)(4) and (5) would not apply 
in a taxable year in which a disproportionate amount of the assets 
transferred as part of a recurring transfer group are transferred 
during one or more quarters of the taxable year. Proposed Sec.  1.987-
2(f)(6). In particular, proposed Sec.  1.987-2(f)(4) and (5) would not 
apply if either (i) more than 50 percent of the total amount 
transferred during the taxable year is transferred during one quarter 
of the taxable year or (ii) more than 80 percent of the total amount 
transferred during the taxable year is transferred during two quarters 
of the taxable year.
    The exception in proposed Sec.  1.987-2(f)(6) is intended to 
prevent significant distortions that could arise from using the yearly 
average exchange rate to translate transfers that primarily occur in 
only part of the taxable year, while being flexible enough to 
accommodate ordinary course disregarded transactions between a section 
987 QBU and its owner. The Treasury Department and the IRS request 
comments as to whether other standards could be used to identify 
transfers that can appropriately be translated at the yearly average 
exchange rate. For example, comments are requested as to whether more 
flexibility should be provided in taxable years in which exchange rates 
do not significantly fluctuate.

Applicability Dates

    Once finalized, the regulations would apply to taxable years 
beginning after the date the Treasury Decision adopting these rules as 
final regulations is published in the Federal Register. A taxpayer may 
rely on these proposed regulations for a taxable year in which the 
final regulations (that is, the final regulations that are being 
published concurrently with the proposed regulations) apply, provided 
the taxpayer and each member of its consolidated group and section 987 
electing group, as applicable, consistently follow the proposed 
regulations in their entirety and in a consistent manner.
    In addition, for a taxable year in which the final regulations 
apply, a taxpayer may continue to rely on the parts of the proposed 
regulations published in the Federal Register (REG-128276-12, 81 FR 
88882) on December 8, 2016 (the ``2016 proposed regulations'') that 
have not been finalized or withdrawn, provided that the taxpayer and 
each member of its consolidated group and section 987 electing group, 
as applicable, consistently follow these parts in their entirety and in 
a consistent manner. The following parts of the 2016 proposed 
regulations have not been finalized or withdrawn: (1) rules regarding 
QBUs with the U.S. dollar as their functional currency (see Sec. Sec.  
1.987-1 and 1.987-6 of the 2016 proposed regulations); and (2) rules 
requiring the deferral of certain section 988 loss that arises with 
respect to related-party loans (see Sec.  1.988-2 of the 2016 proposed 
regulations).

Comments and Request for Public Hearing

I. In General

    Before these proposed 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. In 
addition to the specific requests for comments in parts II.C and II.D 
of the Explanation of Provisions, the Treasury Department and the IRS 
request comments on all other aspects of the proposed regulations as 
well as on the specific issues identified in part II of this Comments 
and Request for Public Hearing section. Any comments submitted will be 
made available at https://www.regulations.gov or upon request.
    A public hearing concerning the proposed regulations will be 
scheduled if requested in writing by any person who timely submits 
electronic or 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.

II. Additional Requests for Comments

A. Treatment of Partnerships for Purposes of Sections 987 and 989(a)
    The final regulations do not provide detailed rules concerning the 
application of section 987 to partnerships, and they reserve on the 
treatment of a partnership as a QBU under section 989(a). See part 
VIII.B.1 of the Summary of Comments and Explanation of Revisions in the 
preamble to the final regulations. See also part VIII of the 
Explanation of Provisions in the preamble to the 2023 proposed 
regulations. The Treasury Department and the IRS continue to study 
those issues and therefore request comments on the following topics:
    1. Should section 987 be applied to partnerships using an entity 
approach, an aggregate approach, or a hybrid approach? Comments 
recommending an entity approach should address the concerns raised in 
the preamble to the 2023 proposed regulations regarding the potential 
for unrecognized section 987 gain or loss to be shifted between 
partners upon a sale of a partnership interest. See part VIII.C of the 
Explanation of Provisions in the preamble to the 2023 proposed 
regulations.
    2. Should a partnership be treated as a per se QBU under section 
989(a) and Sec.  1.989(a)-1(b)(2)(i)?
    3. Should different rules be provided for purposes of sections 987 
and 989(a) depending on whether the partners in the partnership are 
related parties? Comments recommending an entity approach for 
partnerships owned by related parties should address the concerns 
raised in the preamble to the 2023 proposed regulations regarding the 
potential for a group of related parties to hold an eligible QBU 
through a partnership (rather than directly) in order to alter the 
section 987 treatment of the eligible QBU without meaningfully altering 
the group's economic position. See part VIII.E of the Explanation of 
Provisions in the preamble to the 2023 proposed regulations.
    4. Under an entity approach, if a partnership's functional currency 
differs from that of its partners, how should the

[[Page 99786]]

partners account for currency gain or loss with respect to their 
partnership interests?
    Comments submitted in response to the 2023 proposed regulations do 
not need to be resubmitted in response to these proposed regulations.
B. Application of Section 987 to CFCs
    As discussed in part II.A.3 of the Summary of Comments and 
Explanation of Revisions in the preamble to the final regulations, a 
comment on the 2023 proposed regulations recommended that the 
application of section 987 be simplified by applying rules similar to 
section 986(c) to section 987 QBUs owned by CFCs in lieu of applying 
section 987. In response to this comment, the preamble to the final 
regulations explained that the Treasury Department and the IRS are of 
the view that it would not be feasible to adopt this comment, but 
nonetheless are studying whether there are instances in which it would 
be possible to simplify the application of section 987 by modifying the 
application of section 987(3) (and the related regulations, including 
Sec. Sec.  1.987-4 through 1.987-6, 1.987-8, and 1.987-11 through 
1.987-13) to certain entities.
    In considering the appropriateness of such a rule, it is helpful to 
consider United States persons (``U.S. persons'') and foreign persons 
separately. In the case of a U.S. person, except to the extent that the 
Code specifically provides otherwise, the taxable income of the U.S. 
person should reflect that person's accession to wealth, as measured in 
the U.S. dollar. Accordingly, when the amount of the U.S. person's 
basis in its assets or the amount of its liabilities fluctuates as a 
result of fluctuations in the functional currency of a section 987 QBU, 
section 987(3) is necessary to ensure that currency gain or loss is 
taken into account to prevent these fluctuations from artificially 
increasing or decreasing the taxpayer's income, gain, deduction, and 
loss, as measured in the U.S. dollar. In contrast, in the case of a 
foreign person, such as a CFC or a partnership with only foreign 
partners, the Treasury Department and the IRS are studying whether the 
U.S. tax system appropriately tracks and taxes the foreign person's 
accession to wealth given that its functional currency may not be the 
U.S. dollar.
    The Treasury Department and the IRS agree with the comment that the 
compliance and administrative burdens of the section 987 regulations 
would be substantially reduced if section 987(3) and the related 
regulations did not apply to CFCs or to partnerships with only foreign 
partners. Under such an approach, a CFC or a partnership with only 
foreign partners would not calculate net unrecognized section 987 gain 
or loss with respect to a section 987 QBU and would not recognize 
section 987 gain or loss on a remittance or termination. Instead, if a 
section 987 QBU owned by the CFC or partnership transferred assets or 
liabilities to its owner, the CFC or partnership would merely take a 
basis in the assets or measure the amount of the liabilities by 
translating from the section 987 QBU's functional currency into the CFC 
or partnership's functional currency at the spot rate on the date of 
the transfer.
    Relatedly, the Treasury Department and the IRS are concerned about 
the ability of foreign entities to manipulate the recognition of 
section 987 gain and loss under section 987(3) and the related 
regulations. This concern is not entirely alleviated by the loss-to-
the-extent-of-gain-rule in Sec.  1.987-11, which suspends the 
recognition of section 987 loss for taxpayers that make a current rate 
election.
    Accordingly, the Treasury Department and the IRS are studying 
whether, in certain cases, it would be appropriate to not apply section 
987(3) and the related regulations to CFCs and partnerships with only 
foreign partners. However, the Treasury Department and the IRS have a 
number of concerns, including that, under this approach, the amount of 
currency gain (or loss) that would have been taken into account under 
section 987(3) would give rise to an increase (or decrease) in a CFC's 
aggregate inside asset basis without a corresponding change in the 
CFC's earnings and profits, and the resulting mismatch between inside 
asset basis and earnings and profits could produce inappropriate 
results.
    For example, over time, it would be common for a CFC's aggregate 
inside asset basis to be greater or less than the sum of its (i) 
earnings and profits determined under the principles of Sec.  1.367(b)-
2(d) but without regard to whether the exchanging shareholder is a U.S. 
person or foreign person, (ii) total basis in the stock of the CFC; and 
(iii) the amount of the CFC's liabilities. Although it is possible for 
a CFC to have aggregate inside asset basis in excess of these amounts 
(``excess asset basis'') \2\ under current law, the Treasury Department 
and the IRS are concerned that, if CFCs were not required to recognize 
currency gain or loss under section 987(3), excess asset basis would 
become more prevalent. If the United States shareholder (``U.S. 
shareholder'') ultimately sells its stock in the CFC, the U.S. 
shareholder would generally recognize the appropriate amount of gain or 
loss on the sale of stock (notwithstanding the potential excess asset 
basis of the CFC). However, if, in lieu of a sale of stock, the CFC 
merges or liquidates into a domestic corporation pursuant to an inbound 
asset reorganization or liquidation described in Sec.  1.367(b)-3, the 
excess asset basis could be imported into the United States without a 
corresponding inclusion of income or gain under Sec.  1.367(b)-3, and 
thus permanently escape U.S. taxation.
---------------------------------------------------------------------------

    \2\ For a discussion of ``excess asset basis,'' see the 
preambles accompanying issuance of Sec.  1.367(b)-3(g) (TD 10004, 89 
FR 58275) and proposed Sec.  1.367(b)-3(g) (88 FR 69559), 
respectively.
---------------------------------------------------------------------------

    Accordingly, the Treasury Department and the IRS request comments 
concerning the following topics:
    1. Should the final regulations be modified to provide that section 
987(3) and the related regulations do not apply to CFCs or to 
partnerships with only foreign partners? If so, how should currency 
gain or loss be recognized with respect to the section 987 QBU (if at 
all)?
    2. If section 987(3) did not apply to CFCs and partnerships with 
only foreign partners, what other rules would be needed to prevent 
value equal to the amount of excess asset basis from permanently 
escaping U.S. taxation upon an inbound transaction such as an asset 
reorganization or liquidation described in Sec.  1.367(b)-3? For 
example, should the importation of excess asset basis trigger the 
recognition of gain in the same manner that Sec.  1.367(b)-3 triggers a 
deemed dividend to a shareholder? If so, are there circumstances in 
which excess asset basis should not trigger gain (such as excess asset 
basis arising by reason of section 362(e) or by reason of minority 
interests)? How should excess asset basis be computed? What additional 
rules would be needed to similarly prevent taxpayers from planning into 
the permanent avoidance or indefinite deferral of gain or acceleration 
of losses?
    3. If section 987(3) and the related regulations continue to apply 
to CFCs and partnerships with only foreign partners generally, are any 
modifications needed to the calculation of section 987 gain and loss 
for these entities?

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order

[[Page 99787]]

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 Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
requires that a Federal agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit. 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 
OMB.
    The collections of information in the proposed regulations with 
respect to section 987 are in proposed Sec.  1.987-2(f)(1) (and the 
related election rules in Sec.  1.987-1(g) of the final regulations). 
The likely respondents are individuals who file a Form 1040 and 
businesses that file a Form 1065 or Form 1120.
    The collection of information in proposed Sec.  1.987-2(f)(1) is 
required only when a taxpayer makes or revokes a recurring transfer 
group election under proposed Sec.  1.987-2(f)(1). In the first year in 
which the section 987 regulations apply to a taxpayer, or the first 
year in which the taxpayer or a member of its consolidated group or 
section 987 electing group is the owner of a section 987 QBU, the 
taxpayer is permitted to make a recurring transfer group election 
without the Commissioner's consent. Thereafter, the taxpayer may make 
or revoke a recurring transfer group election 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 Sec.  1.987-2(f)(1) will be used by the IRS for tax compliance 
purposes.
    The Treasury Department and the IRS intend that the information 
required by Sec.  1.987-1(g) with respect to a recurring transfer group 
election under proposed Sec.  1.987-2(f)(1) 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 forms). For 
purposes of the PRA, the reporting burden associated with those 
collections of information will be reflected in the PRA submissions 
associated with those forms. The OMB Control Numbers for the forms will 
be approved under 1545-0074 for individuals and under 1545-0123 for 
business entities.
    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 PRA 
submissions associated with revenue procedures governing private letter 
rulings. The OMB Control Number for those revenue procedures is control 
number 1545-1522. The proposed regulations would only require taxpayers 
to follow the procedures under Revenue Procedure 2024-1, IRB 2024-1 (or 
future revenue procedures governing private letter rulings) and would 
not change the collection requirements of the Revenue Procedure.
    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

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that this rulemaking will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of section 601(6) of the Regulatory Flexibility Act. The 
proposed regulations affect individuals and corporations (other than S 
corporations) with foreign branch 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 wholly owned foreign operations are 
typically larger businesses. The Treasury Department and the IRS 
estimate that the total number of corporations (other than S 
corporations) with a foreign branch subject to section 987 is 
approximately 2,000. This estimate is based on the number of 
corporations (other than S corporations) that filed a Form 8858 in 2022 
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 or 
branch was a section 989 QBU. As shown in the following table, only a 
small percentage of those filers are small entities.

------------------------------------------------------------------------
                                                           Percentage of
          Total receipts/positive income (2022)               filers
------------------------------------------------------------------------
Under $5 Million........................................               7
$5 Million to $10 Million...............................               2
$10 Million to $25 Million..............................               4
Over $25 Million........................................              87
------------------------------------------------------------------------

    The number of affected corporations (other than S corporations) 
with total receipts of less than $25 million represents 0.02% of all 
corporations (other than S corporations) with total receipts of less 
than $25 million.
    These proposed regulations generally modify the rules that would 
otherwise apply under the final regulations by providing taxpayers with 
an election that reduces the compliance burden of applying section 987. 
Small entities generally would not be affected by these rules unless 
they choose to make an election to reduce their compliance burden.
    A portion of the economic impact of the proposed regulations may 
derive from the collection of information requirements imposed under 
proposed Sec.  1.987-2(f)(1) (and the related election rules in Sec.  
1.987-1(g) of the final regulations). The Treasury Department and the 
IRS have determined that the average burden is 1.95 hours per response. 
The IRS's Research, Applied Analytics, and Statistics division 
estimates that the appropriate wage rate for this set of taxpayers is 
$99.87 per hour. Thus, the annual burden per taxpayer from each 
collection of information requirement is $194.75. The requirements of 
proposed Sec.  1.987-2(f)(1) apply only if a taxpayer chooses to make 
or revoke an election (and only in the year of the election or 
revocation).

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Code, 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.

[[Page 99788]]

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.

Drafting Information

    The principal authors of these proposed regulations are Adam G. 
Province and Raphael J. Cohen of the Office of Associate Chief Counsel 
(International). However, other personnel from the Treasury Department 
and the IRS participated in their development.

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

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.987-2 also issued under 26 U.S.C. 987, 989, and 1502.
* * * * *
    Section 1.987-4 also issued under 26 U.S.C. 987 and 989.
* * * * *
    Section 1.987-9 also issued under 26 U.S.C. 987, 989, and 6001.
* * * * *
    Section 1.987-15 also issued under 26 U.S.C. 987 and 989.
* * * * *

0
Par. 2. Section 1.987-2 is amended by adding paragraph (f) to read as 
follows:

Sec.  1.987-2  Attribution of items to eligible QBUs; definition of a 
transfer and related rules.

* * * * *
    (f) Recurring transfer group election--(1) In general. For a 
taxable year in which a current rate election is in effect, the owner 
of a section 987 QBU may elect to use the yearly average exchange rate 
to translate all assets that are transferred to or from the section 987 
QBU in a taxable year as part of a recurring transfer group (a 
recurring transfer group election). The rules of this paragraph (f) 
apply to all transfers that are part of a recurring transfer group in 
any taxable year to which the recurring transfer group election applies 
(regardless of whether transfers of the same kind occurred in the first 
year to which the election applied).
    (2) Recurring transfer group. A recurring transfer group is a group 
of frequently recurring transfers made between a section 987 QBU and 
its owner (or another eligible QBU of the owner) in a taxable year that 
meet the requirements of paragraphs (f)(2)(i) through (iii) of this 
section.
    (i) Ordinary course transfers. The transfers must be made in the 
ordinary course of a trade or business.
    (ii) Specified transactions. The transfers must be made as part of 
one or more disregarded transactions described in paragraphs 
(f)(2)(ii)(A) through (C) of this section between the section 987 QBU 
and its owner (or another eligible QBU of the owner), the compensation 
for which would satisfy the principles of the arm's length standard 
(within the meaning of Sec.  1.482-1(b)) if the section 987 QBU were 
treated as a separate corporation. Transfers made in connection with 
different disregarded transactions described in paragraphs 
(f)(2)(ii)(A) through (C) of this section in the same taxable year are 
treated as part of a single recurring transfer group.
    (A) Sales of inventory;
    (B) Payments for services;
    (C) Rents or royalties.
    (iii) Distributions and contributions excluded. A transfer is not 
included in a recurring transfer group if the transfer (or any portion 
of the transfer) would be treated as a distribution with respect to 
stock, or an exchange for stock (or a contribution to capital), if the 
section 987 QBU were treated as a separate corporation.
    (3) Consistency requirement. The determination as to which 
transfers are included in a recurring transfer group must be made 
consistently from year to year. However, this determination may change 
from one year to the next based on changes in the nature and timing of 
the relevant transfers.
    (4) Effect of recurring transfer group election. Except as provided 
in paragraph (f)(6) of this section, in a taxable year in which a 
recurring transfer group election is in effect, assets that are 
transferred to or from a section 987 QBU in a taxable year as part of a 
recurring transfer group (grouped assets) are translated under 
paragraph (d) of this section and Sec. Sec.  1.987-4(d)(2) and 1.987-
5(f) by deeming the spot rate applicable on the date of each transfer 
to be equal to the yearly average exchange rate for the taxable year. 
However, if the Commissioner determines that the use of the yearly 
average exchange rate to translate grouped assets in a taxable year 
does not clearly reflect income, the Commissioner may require some or 
all transfers of the grouped assets to be excluded from the recurring 
transfer group or may prescribe the use of a different exchange rate to 
translate the grouped assets.
    (5) Accounting for a disregarded transfer group in determining 
unrecognized section 987 gain or loss for the taxable year--(i) In 
general. Except as provided in paragraph (f)(5)(ii) or (f)(6) of this 
section, in a taxable year in which a recurring transfer group election 
is in effect, transfers of grouped assets are disregarded for purposes 
of Sec.  1.987-4(d)(2) and (3) (steps 2 and 3).
    (ii) Exception. Paragraph (f)(5)(i) of this section does not apply 
to a section 987 QBU in a taxable year in which the owner determines 
QBU net value with respect to the section 987 QBU under the steps 
provided in Sec.  1.987-4(e)(2)(iii) (alternative formula for 
determining QBU net value without preparing an adjusted balance sheet).
    (6) Exception for taxable years in which a disproportionate amount 
of grouped assets is transferred in one or more quarters of the taxable 
year--(i) In general. Paragraphs (f)(4) and (5) of this section do not 
apply to a section 987 QBU in a taxable year in which--
    (A) More than 50 percent of the total amount of grouped assets 
transferred to or from the section 987 QBU during the taxable year is 
transferred during one quarter of the taxable year; or
    (B) More than 80 percent of the total amount of grouped assets 
transferred to or from the section 987 QBU during the taxable year is 
transferred during two quarters of the taxable year.
    (ii) Amount of grouped assets transferred. For the purpose of 
applying paragraph (f)(6)(i) of this section, the amount of grouped 
assets transferred to or from a section 987 QBU in a taxable year and 
in each quarter of the taxable year is determined in the functional 
currency of the section 987 QBU by reference to the aggregate of the 
amount of functional currency transferred and the basis of the other 
assets transferred (taking into account the total gross amount of both 
the transfers from the section 987 QBU to the owner or another eligible 
QBU of the owner and

[[Page 99789]]

the transfers from the owner or another eligible QBU of the owner to 
the section 987 QBU). For this purpose, amounts transferred from the 
owner (or another eligible QBU of the owner) to the section 987 QBU are 
translated into the section 987 QBU's functional currency at the yearly 
average exchange rate.
    (iii) Short taxable year. For purposes of applying this paragraph 
(f)(6) in a short taxable year, each quarter comprises a number of days 
equal to one fourth of the total number of days in the taxable year. If 
a section 987 QBU did not exist for the full taxable year of the owner, 
this paragraph (f)(6) is applied with respect to the section 987 QBU by 
treating the taxable year as comprising the portion of the taxable year 
in which the section 987 QBU existed.
    (7) Examples. The following examples illustrate the application of 
this paragraph (f). For purposes of the examples, DC1 is a domestic 
corporation that owns Business A, a section 987 QBU that has the euro 
as its functional currency. In year 1, DC1's home office provides 
services to Business A in exchange for arm's length cash payments 
(within the meaning of Sec.  1.482-1(b)). The payments are made in the 
ordinary course of the Business A trade or business. A current rate 
election and a recurring transfer group election are in effect for year 
1. DC1 does not determine QBU net value with respect to Business A 
under the steps provided in Sec.  1.987-4(e)(2)(iii).
    (i) Example 1: Transfers treated as part of a recurring transfer 
group--(A) Facts. In year 1, Business A made 50 payments for services 
to DC1's home office, totaling [euro]30,000x. Of this amount, Business 
A paid [euro]5,000x in the first quarter of year 1, [euro]7,500x in the 
second quarter of year 1, [euro]10,000x in the third quarter of year 1, 
and [euro]7,500x in the fourth quarter of year 1. No other transfers 
were made between Business A and DC1 for year 1.
    (B) Analysis--(1) Recurring transfer group. Under paragraph (c)(2) 
of this section, each payment for services is treated as a transfer of 
assets from Business A to DC1. These transfers qualify as a recurring 
transfer group under paragraph (f)(2) of this section because they are 
frequently recurring payments for services made in the ordinary course 
of the Business A trade or business that would satisfy the principles 
of the arm's length standard (within the meaning of Sec.  1.482-1(b)) 
if Business A were treated as a separate corporation. In addition, the 
exception in paragraph (f)(6) of this section does not apply because 
Business A did not transfer more than 50 percent of the total amount of 
grouped assets transferred in year 1 in any one quarter, and Business A 
did not transfer more than 80 percent of the total amount of grouped 
assets transferred in year 1 in any two quarters.
    (2) Effect of recurring transfer group election. Under paragraph 
(f)(4) of this section, because Business A's transfers to DC1 comprise 
a recurring transfer group, DC1 applies Sec.  1.987-5(f) by deeming the 
spot rate applicable on the date of each transfer to be equal to the 
yearly average exchange rate for year 1. As a result, DC1 determines 
its basis in the euros received from Business A by translating the 
total amount of euros transferred in year 1 at the yearly average 
exchange rate for year 1. In addition, under paragraph (f)(5) of this 
section, the transfers are disregarded for purposes of determining 
unrecognized section 987 gain or loss for year 1 under Sec.  1.987-
4(d)(2).
    (ii) Example 2: Disproportionate transfers--(A) Facts. The facts 
are the same as in paragraph (f)(7)(i) of this section (Example 1), 
except that most of the payments are made in the fourth quarter of year 
1 to compensate DC1's home office for additional services provided at 
the end of year 1. Specifically, of the [euro]30,000 paid by Business A 
for services in year 1, [euro]18,000x is transferred in the fourth 
quarter of year 1, and [euro]4,000x is transferred in each of the first 
three quarters of year 1.
    (B) Analysis. The amount of grouped assets transferred in the 
fourth quarter ([euro]18,000x) exceeds 50 percent of the total amount 
of grouped assets transferred in year 1 ([euro]30,000x). Therefore, 
under paragraph (f)(6) of this section, paragraphs (f)(4) and (5) of 
this section do not apply. As a result, DC1 determines its basis in the 
euros received from Business A by translating each transfer at the 
applicable spot rate under Sec.  1.987-5(f), and DC1 must take each 
transfer into account for purposes of determining unrecognized section 
987 gain or loss for year 1 under Sec.  1.987-4(d)(2).
    (iii) Example 3: Determination of the transfers including in a 
recurring transfer group over multiple taxable years--(A) Facts. The 
facts in year 1 are the same as in paragraph (f)(7)(i) of this section 
(Example 1). The recurring transfer group election remains in effect in 
years 2 and 3. In year 2, DC1's home office continues to provide 
services to Business A in exchange for arm's length cash payments made 
in the ordinary course of the Business A trade or business. 
Additionally, in year 2, Business A begins to sell Product X inventory 
to Business B, an eligible QBU of DC1 that is not a section 987 QBU, in 
exchange for arm's length cash payments. In year 3, DC1's home office 
no longer provides services to Business A, but Business A continues to 
sell Product X inventory to Business B in exchange for arm's length 
cash payments. Additionally, in year 3, Business A begins to sell 
Product Y inventory to Business B in exchange for arm's length cash 
payments. In each of years 1, 2, and 3, the transfers to and from 
Business A are made on a frequent basis in the ordinary course of the 
Business A trade or business.
    (B) Analysis. In year 1, the cash payments for services made by 
Business A to DC1's home office are part of a recurring transfer group. 
In year 2, the recurring transfer group includes the cash payments for 
services made by Business A to DC1's home office, the transfers of 
Product X inventory from Business A to Business B, and the cash 
payments made by Business B to Business A in connection with the 
inventory sales. In year 3, the recurring transfer group includes the 
transfers of Product X inventory and Product Y inventory from Business 
A to Business B and the cash payments made by Business B to Business A 
in connection with the inventory sales. Therefore, in each of years 1, 
2, and 3, unless the exception in paragraph (f)(6) of this section 
applies, the grouped assets are translated at the yearly average 
exchange under paragraph (f)(4) of this section, and the transfers of 
the grouped assets are disregarded for purposes of determining 
unrecognized section 987 gain or loss under Sec.  1.987-4(d)(2) and 
(3).
* * * * *
0
Par 3. Section 1.987-4 is amended by adding paragraph (d)(10)(ii)(D) to 
read as follows:

Sec.  1.987-4  Determination of net unrecognized section 987 gain or 
loss of a section 987 QBU.

* * * * *
    (d) * * *
    (10) * * *
    (ii) * * *
    (D) Recurring transfer group. In order to determine the residual 
increase or decrease to net assets under this paragraph (d)(10) in a 
taxable year in which transfers of grouped assets are disregarded under 
Sec.  1.987-2(f)(5), the transfers of grouped assets are disregarded 
for purposes of applying steps 2 and 3 (paragraphs (d)(2) and (3) of 
this section) in the functional currency of the section 987 QBU.
* * * * *

[[Page 99790]]

0
Par 4. Section 1.987-9 is amended by revising paragraphs (b)(5) and (6) 
to read as follows:

Sec.  1.987-9  Recordkeeping requirements.

* * * * *
    (b) * * *
    (5) The amount of assets and liabilities transferred by the owner 
to the section 987 QBU determined in the functional currency of the 
owner and the section 987 QBU (to the extent those amounts are taken 
into account in applying Sec.  1.987-4 or Sec.  1.987-5).
    (6) The amount of assets and liabilities transferred by the section 
987 QBU to the owner determined in the functional currency of the owner 
and the section 987 QBU (to the extent those amounts are taken into 
account in applying Sec.  1.987-4 or Sec.  1.987-5).
* * * * *
0
Par 5. Section 1.987-15 is amended by adding paragraph (e) to read as 
follows:

Sec.  1.987-15  Applicability date.

* * * * *
    (e) Recurring transfer group election. Sections 1.987-2(f),1.987-
4(d)(10)(ii)(D), and 1.987-9(b)(5) and (6) apply to taxable years 
beginning after [DATE OF PUBLICATION OF THE FINAL RULE IN THE FEDERAL 
REGISTER].

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-28371 Filed 12-10-24; 8:45 am]
BILLING CODE 4830-01-P
```