100138 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 

1The reference to ‘‘this subpart’’ refers to subpart 

J of part III of subchapter N of chapter 1 of the Code, 

which includes section 987. 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 10016] 

RIN 1545–BO07 

Taxable Income or Loss and Currency 

Gain or Loss With Respect to a 

Qualified Business Unit 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final rule. 

SUMMARY: This document contains final 

regulations relating to the determination 

of taxable income or loss and foreign 

currency gain or loss with respect to a 

qualified business unit. These final 

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: Effective date: The final 

regulations are effective December 10, 

2024. 

Applicability dates: For dates of 

applicability, see § 1.987–15. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the final regulations 

generally, Adam G. Province at (865) 

329–4546; concerning the character and 

source of section 987 gain or loss, Larry 

Pounders at (202) 317–5465; concerning 

consolidated groups, Jeremy Aron-Dine 

at (202) 317–6847 (not toll-free 

numbers). 

SUPPLEMENTARY INFORMATION: 

Authority 

This document contains 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 ‘‘final regulations’’). The 

additions and amendments are issued 

under sections 987, 989, and 1502, 

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 and in the Summary of 

Comments and Explanation of Revisions 

describing the individual sections of the 

final regulations. The final regulations 

are also issued under the express 

delegation of authority under section 

7805 of the Code. 

Background 

This document contains final 

regulations under section 987 of the 

Code and related provisions under 

sections 861, 985 through 989, and 1502 

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 

taxpayer having different functional 

currencies. 

Sections 987 and 989 provide several 

explicit grants of regulatory authority. 

Section 987(3) directs the Secretary to 

prescribe the proper adjustments 

needed to determine the taxable income 

of the owner of a section 987 QBU. 

Those adjustments include (but are not 

limited to) rules for sourcing section 987 

gain or loss recognized under section 

987(3)(B). Similarly, section 987(2) 

provides that the income of a QBU is 

translated at the ‘‘appropriate’’ exchange 

rate. Section 989(b)(4) provides that the 

appropriate exchange rate generally is 

the average rate for the taxable year, 

‘‘except as provided in regulations.’’ 

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 grant of 

authority in section 989(c) includes 

regulations limiting the recognition of 

foreign currency loss on certain 

remittances from QBUs, providing for 

the appropriate treatment of related 

party transactions (including 

transactions between QBUs of the same 

taxpayer), and setting forth procedures 

for determining the average exchange 

rate for any period. Section 989(c)(2), 

(5), and (6). 

On December 8, 2016, the Department 

of the Treasury (‘‘Treasury 

Department’’) and the Internal Revenue 

Service (‘‘IRS’’) published Treasury 

Decision 9794, which contained final 

regulations under sections 861, 985, 

987, 988, and 989 (the ‘‘2016 final 

regulations’’), in the Federal Register 

(81 FR 88806). The same day, the 

Treasury Department and the IRS 

published Treasury Decision 9795, 

which contained temporary regulations 

under sections 987 and 988 (the ‘‘2016 

temporary regulations’’), in the Federal 

Register (81 FR 88854) and published a 

notice of proposed rulemaking (REG– 

128276–12, 81 FR 88882) (the ‘‘2016 

proposed regulations’’) in the Federal 

Register by cross-reference to the 

temporary regulations. On May 13, 

2019, the Treasury Department and the 

IRS published Treasury Decision 9857, 

which contained final regulations under 

section 987 (the ‘‘2019 final 

regulations’’), in the Federal Register 

(84 FR 20790). 

On November 14, 2023, the Treasury 

Department and the IRS published 

proposed regulations (REG–132422–17) 

under sections 861, 985, 987, 988, 989, 

and 1502 of the Code (the ‘‘2023 

proposed regulations’’) in the Federal 

Register (88 FR 78134). The same day, 

the Treasury Department and the IRS 

also published a notice in the Federal 

Register (88 FR 77921) that reopened 

the comment period for the 2016 

proposed regulations. 

All written comments received in 

response to the 2016 proposed 

regulations and the 2023 proposed 

regulations are available at https://

www.regulations.gov or upon request. A 

public hearing on the 2023 proposed 

regulations was not held because there 

were no requests to speak. 

Concurrently with the publication of 

the final regulations, the Treasury 

Department and the IRS are publishing 

in the proposed rule section of this 

edition of the Federal Register (RIN 

1545–BR37) a notice of proposed 

rulemaking providing additional 

proposed regulations under section 987 

(REG–117213–24) (the ‘‘2024 proposed 

regulations’’). 

Summary of Comments and 

Explanation of Revisions 

I. Overview 

The Treasury Department and the IRS 

received a number of written comments 

in response to the 2016 proposed 

regulations and the 2023 proposed 

regulations. The comments, and the 

revisions made in response to those 

comments, are summarized in this 

Summary of Comments and Explanation 

of Revisions. 

The final regulations retain the basic 

approach and structure of the 2023 

proposed regulations, with the revisions 

described in this Summary of 

Comments and Explanation of 

Revisions. 

II. Comments and Changes to Proposed 

§ 1.987–1: Scope, Definitions, and 

Special Rules 

Proposed § 1.987–1 would provide 

rules regarding the scope of the 


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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100139 

regulations under section 987 (‘‘section 

987 regulations’’), including which 

entities are subject to the regulations, 

rules relating to elections under section 

987, and other rules. 

A. Scope 

Under proposed § 1.987–1(b)(1), the 

section 987 regulations would apply to 

all taxpayers, subject to a de minimis 

rule for pass-through entities with 

minimal U.S. ownership, but they 

would not apply to foreign individuals 

or foreign corporations that either are 

not controlled foreign corporations 

(‘‘CFCs’’) or are CFCs in which no 

United States shareholders (‘‘U.S. 

shareholders’’) own (within the meaning 

of section 958(a)) stock. In contrast to 

the 2016 final regulations, the 2023 

proposed regulations would not provide 

an exception for banks, insurance 

companies, leasing companies, finance 

coordination centers, regulated 

investment companies, or real estate 

investment trusts (‘‘specified entities’’). 

The preamble to the 2023 proposed 

regulations explains that the current rate 

election and annual recognition election 

are expected to provide additional 

flexibility for specified entities to apply 

the section 987 regulations. 88 FR 

78145. Taxpayers that make a current 

rate election would treat all assets and 

liabilities attributable to a section 987 

QBU as marked items, and thus would 

not be required to track historic 

exchange rates. Taxpayers that make an 

annual recognition election would 

recognize all unrecognized section 987 

gain or loss on an annual basis and 

would not be required to calculate the 

amount of a remittance with respect to 

a section 987 QBU under § 1.987–5. See 

parts II and IV of the Explanation of 

Provisions in the preamble to the 2023 

proposed regulations. 88 FR 78138 

through 78139, 78141 through 78143. In 

addition, including specified entities in 

the scope of the section 987 regulations 

is necessary to provide these entities 

with sufficient guidance under section 

987 and to provide a consistent set of 

rules applicable to all taxpayers. 

1. Specified Entities 

Comments recommended that 

specified entities be excluded from the 

application of the section 987 

regulations. The comments asserted that 

additional rules are needed to facilitate 

the application of the section 987 

regulations to these entities. For 

example, according to the comments, it 

is unclear whether insurance reserves 

should be treated as marked items or 

historic items. A comment also noted 

that bank branches often engage in high 

volumes of intercompany transactions 

that could be difficult to account for 

under the section 987 regulations. 

The Treasury Department and the IRS 

have determined that the final 

regulations can be applied by specified 

entities in an administrable manner and 

that excluding specified entities from 

the scope of the section 987 regulations 

would not provide sufficient guidance 

to ensure that these entities are using an 

appropriate method to apply section 

987. Moreover, section 987 and its 

legislative history give no indication 

that Congress intended for banks, 

insurance companies, and other 

specified entities to be treated 

differently from other taxpayers for this 

purpose. Accordingly, specified entities 

are subject to the final regulations. 

However, the final regulations contain 

modifications intended to facilitate 

application of the section 987 

regulations to these entities. See parts 

II.B (rules relating to insurance 

companies), V.B (hedging transactions), 

and VI (modifications to annual 

remittance rules to reduce the burden of 

tracking disregarded transfers) of this 

Summary of Comments and Explanation 

of Revisions. 

2. Partnerships and Certain Other 

Entities 

One comment was received relating to 

the application of section 987 to 

partnerships, and the Treasury 

Department and the IRS continue to 

study this issue. The Treasury 

Department and the IRS have 

determined that, without additional 

guidance, the section 987 regulations in 

their entirety could not be applied to 

partnerships in an administrable way. 

Accordingly, the final regulations 

generally apply only with respect to 

corporations and individuals. However, 

as discussed in part VIII of this 

Summary of Comments and Explanation 

of Revisions, certain parts of the section 

987 regulations (including the rules 

relating to suspension of section 987 

loss and recognition of suspended 

section 987 loss) are applicable to 

partnerships and S corporations. 

The section 987 regulations do not 

apply to trusts or estates (though trusts 

and estates can be subject to section 

987) because additional guidance may 

be needed to apply section 987 to these 

entities. In particular, the Treasury 

Department and the IRS are studying 

whether specific rules are needed to 

address the apportionment of section 

987 gain or loss between the estate or 

non-grantor trust and the beneficiaries 

or whether existing rules under section 

643(a) (defining distributable net 

income of an estate or trust) sufficiently 

address this issue. In addition, specific 

rules may be needed to address a 

beneficiary’s application of section 987 

with respect to an estate or non-grantor 

trust that uses a different functional 

currency (which creates a separate layer 

of currency exposure). The Treasury 

Department and the IRS anticipate 

providing rules applicable to trusts and 

estates in future guidance. 

3. Application to CFCs 

The final regulations apply to 

individuals and corporations that are 

United States persons (‘‘U.S. persons’’) 

and to CFCs in which U.S. shareholders 

own stock (directly or indirectly within 

the meaning of section 958(a)). See 

§ 1.987–1(b)(1). As explained in parts 

II.A.2 and VIII of this Summary of 

Comments and Explanation of 

Revisions, the Treasury Department and 

the IRS are continuing to study the 

appropriate rules for applying section 

987 to partnerships. 

A comment recommended that the 

scope of the section 987 regulations be 

limited to section 987 QBUs owned 

directly by U.S. persons or by 

partnerships with partners that are U.S. 

persons. According to the comment, this 

would reduce the compliance burden on 

taxpayers and prevent the selective 

recognition of section 987 losses. The 

comment further asserted that, based on 

the legislative history of section 987(3), 

the statute primarily was intended to 

address section 987 QBUs owned by 

U.S. persons. 

The comment suggested that 

simplified mechanics under section 

986(c) could be used to account for 

currency gain or loss arising between 

the time earnings are generated by a 

section 987 QBU and the time of 

distribution, but the comment did not 

explain how those mechanics would 

operate. Section 986(c) requires a U.S. 

shareholder to recognize foreign 

currency gain or loss with respect to 

distributions of previously taxed 

earnings and profits attributable to 

movements in exchange rates between 

the date of the income inclusion giving 

rise to the previously taxed earnings and 

profits and the distribution of the 

previously taxed earnings and profits. 

The final regulations do not adopt the 

recommendations made by the 

comment. It is necessary to apply 

section 987(1) and (2) to foreign entities 

because many aspects of the income tax 

rules effectively require that the 

determination of a taxpayer’s items of 

income, gain, deduction, and loss be 

made in a single currency. In addition, 

it is not clear how a rule similar to 

section 986(c) could be applied to 

section 987 QBUs in lieu of section 

987(3). Because a CFC’s earnings and 


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profits are determined in the CFC’s 

functional currency under section 

986(b), currency gain or loss on 

previously taxed earnings and profits 

arises under section 986(c) when a 

CFC’s functional currency appreciates 

or depreciates against the U.S. dollar 

between the time the inclusion is 

computed and the time the CFC 

distributes the previously taxed 

earnings and profits. However, section 

986(c) would not account for changes in 

value of a section 987 QBU’s functional 

currency (measured against the 

functional currency of its CFC-owner or 

the U.S. shareholder) because earnings 

and profits are not tracked in the section 

987 QBU’s functional currency. 

However, the Treasury Department 

and the IRS 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 §§ 1.987– 

4 through 1.987–6, 1.987–8, and 1.987– 

11 through 1.987–13) to certain entities. 

See part II.B of the Comments and 

Request for Public Hearing section in 

the preamble to the 2024 proposed 

regulations. 

B. Special Rules for Insurance 

Companies 

1. Insurance Reserves 

A comment requested clarification as 

to whether insurance reserves are 

treated as marked items. The comment 

noted that the definition of a marked 

item under the proposed regulations is 

tied to the treatment of an asset or 

liability under section 988 and that the 

application of section 988 to insurance 

reserves is not clear. The Treasury 

Department and the IRS agree that 

treating insurance reserves as marked 

items would facilitate the application of 

section 987 to insurance companies and 

would be consistent with the treatment 

of liabilities outside the insurance 

context. Accordingly, § 1.987–1(d)(1)(iv) 

includes insurance reserves in the 

definition of marked items. 

2. Assets That Support Variable 

Contracts 

a. Background on Variable Contracts 

In general, variable contracts are life 

insurance and annuity contracts under 

which the amount of the insurance 

company’s obligation depends, at least 

in part, on the value of the assets held 

in a separate account that is segregated 

from the general asset accounts of the 

insurance company. Provided certain 

requirements are met, under section 

817(c), an insurance company that 

issues variable contracts (as defined in 

section 817(d)) must separately account 

for the various income, exclusion, 

deduction, asset, reserve, and other 

liability items properly attributable to 

such variable contracts. 

As a general matter, section 807 

provides that increases in the life 

insurance reserves of a life insurance 

company are deductible and decreases 

in the life insurance reserves are 

includible in income. However, section 

817(a) provides that for purposes of 

determining the net decrease or increase 

in reserves under section 807(a) or (b), 

amounts subtracted from or added to 

separate account reserves by reason of 

the depreciation or appreciation of 

separate account assets (whether or not 

realized) are disregarded. Under section 

817(a), deductions for items described 

in section 805(a)(1) and (6), which 

include claims and benefits accrued and 

losses incurred during the taxable year 

on insurance and annuity contracts, are 

similarly adjusted for the depreciation 

or appreciation of separate account 

assets. Additionally, section 817(b) 

provides that the basis of each separate 

account asset is decreased by the 

amount of depreciation, or increased by 

the amount of appreciation, of separate 

account assets (whether or not realized), 

to the extent separate account reserves 

are adjusted for such depreciation or 

appreciation under section 817(a). 

Generally, the result is a permanent 

elimination of any effects on companylevel taxable income that would 

otherwise result from the change in the 

value of the separate account assets. 

Sometimes, however, an insurance 

company may provide guarantees with 

respect to variable contracts with 

separate accounts that could require 

reserves to be held in a company’s 

general account. Section 817(d)(3) 

recognizes this situation and states that 

‘‘obligations under such guarantee 

which exceed obligations under the 

contract without regard to such 

guarantee shall be accounted for as part 

of the company’s general account.’’ 

Such guarantees might involve a limit 

on losses or guarantees of minimum 

crediting rates. These amounts are not 

liabilities of the separate account. 

Similarly, CFCs generally must follow 

the Code and subchapter L rules in 

determining their insurance income, 

with minor modifications for 

determining: (i) whether a contract is a 

life insurance or annuity contract, and 

(ii) the amount of insurance reserves. 

For example, U.S. tax requirements in 

sections 72(s), 101(f), 817(h), and 7702 

do not apply so long as no policyholder, 

annuitant, insured, or beneficiary under 

the contract is a United States person 

and the contract is regulated as a life 

insurance or annuity contract in the 

issuer’s home country. In addition, 

section 954(i) modifies the subchapter L 

computation of insurance reserves and 

its application to insurance contracts 

issued by CFCs. See also section 

953(b)(3). 

b. Treatment of Assets That Support 

Variable Contracts for Purposes of 

Section 987 

A comment recommended that assets 

which support variable annuity and life 

insurance contracts be treated as marked 

items. The comment explained that 

these assets are required by law to be 

segregated from the general asset 

accounts of the insurance company in a 

separate account, and the related 

contracts reflect the investment return 

and market value of the separate 

account assets. 

The comment asserted that both the 

separate account assets and the related 

insurance reserves should be treated as 

marked items in order to align the 

treatment of these assets and liabilities 

for purposes of section 987. Similarly, 

the comment recommended that these 

assets and liabilities should be treated 

as attributable to an eligible QBU if they 

are reflected on the books and records 

of the eligible QBU, even if they would 

otherwise be excluded under § 1.987– 

2(b)(2) (for example, if the separate 

account assets consist of stock or 

partnership interests). 

The final regulations provide that 

separate account assets are treated as 

marked items. See § 1.987–1(d)(1)(v). In 

addition, the final regulations carve out 

separate account assets from the 

exclusions in § 1.987–2(b)(2), so that 

separate account assets reflected on the 

books and records of an eligible QBU 

generally will be attributable to the 

eligible QBU. See § 1.987–2(b)(2)(ii). 

These rules are expected to facilitate 

matching treatment of separate account 

assets and the related insurance 

contracts, consistent with the treatment 

of these items for statutory and financial 

accounting purposes and the nature of 

the issuer’s economic obligations. 

The final regulations define a separate 

account asset as an asset that is reflected 

on the books and records of an eligible 

QBU and is held in a separate account 

with respect to a separate account 

insurance contract. See § 1.987–1(h). A 

separate account insurance contract 

generally is defined as a contract that 

would be treated as an insurance 

contract for Federal income tax 

purposes for which the assets 

supporting the insurance reserves are 

required to be held in a separate account 

under the local insurance regulatory 

rules. In addition, the contract generally 


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must qualify as a variable contract 

under section 817(d). However, if the 

contract does not qualify as a variable 

contract under section 817(d) solely 

because it fails to meet one or more of 

the requirements in section 72(s), 101(f), 

817(h), or 7702, the contract will be 

treated as a separate account insurance 

contract if it is regulated as a life 

insurance or annuity contract under 

foreign law, the contract reserves are 

computed or estimated on the basis of 

recognized mortality or morbidity tables 

and assumed rates of interest (treating 

the reflection of the investment return 

and the market value of assets in the 

separate account as an assumed rate of 

interest), and no policyholder, 

annuitant, insured, or beneficiary under 

the contract is a United States person. 

These requirements are consistent with 

the requirements for life insurance or 

annuity contracts issued by CFCs. 

3. Assets of an Insurance Company That 

Produce Financial Services Income 

A comment recommended that assets 

of an insurance company that produce 

financial services income (within the 

meaning of section 904(d)(2)(D)(ii)(II) 

and (III)) should be treated as marked 

items. The comment asserted that the 

assets insurance companies hold to 

support insurance obligations are 

closely matched to those obligations and 

that concerns related to the selective 

recognition of large noneconomic losses 

under section 987 are not present for 

insurance companies. 

The final regulations do not treat all 

assets that produce financial services 

income as marked assets. As a result, 

those assets are classified as marked or 

historic under the general rules of 

§ 1.987–1(d) or (e). The definition of a 

marked item under § 1.987–1(d)(1) is 

intended to identify those items of a 

section 987 QBU that are directly 

exposed to changes in the value of a 

section 987 QBU’s functional currency. 

This definition is designed to ensure 

that, in the absence of a current rate 

election, section 987 gain or loss 

recognized by the owner of a section 

987 QBU represents bona fide economic 

gain or loss. To the extent that a section 

987 QBU of an insurance company 

holds assets that are not directly 

exposed to exchange rate fluctuations 

(for example, publicly traded stock), and 

a current rate election is not in effect, 

those assets are properly characterized 

as historic items even if they generate 

financial services income. 

4. Deferred Acquisition Costs 

A comment recommended that the 

unamortized portion of specified policy 

acquisition expenses (as defined in 

section 848) should be treated as 

marked items. These specified policy 

acquisition expenses are generally a 

specified portion of general deductions 

and represent deferred acquisition costs. 

The comment noted that specified 

policy acquisition expenses are akin to 

prepaid expenses and the amount and 

timing of the related deductions are 

determined under insurance-specific tax 

rules. 

The final regulations do not treat the 

unamortized portion of specified policy 

acquisition expenses as marked items. 

Although certain prepaid expenses are 

treated as marked items under § 1.987– 

1(d)(1)(ii), that rule applies only to 

prepaid expenses with an original term 

of one year or less. The preamble to the 

2016 final regulations explains that, 

because these prepaid expenses have a 

short duration and often are small in 

amount, treating them as marked items 

promotes administrability without 

creating significant distortions. 81 FR 

88810. By contrast, specified policy 

acquisition expenses under section 848 

generally are amortized over a period of 

15 years and can be substantial in 

magnitude. Thus, if specified policy 

acquisition expenses were treated as 

marked items, they could give rise to 

significant amounts of non-economic 

section 987 gain or loss. 

C. Elections 

The 2023 proposed regulations would 

provide that a current rate election or an 

annual recognition election may not be 

revoked without consent for any taxable 

year beginning within 60 months of the 

first day of the taxable year for which 

it was made. Proposed § 1.987– 

1(g)(3)(ii)(B). Once revoked, a new 

current rate election or annual 

recognition election may not be made 

without consent for any taxable year 

beginning within 60 months of the first 

day of the taxable year for which it was 

revoked. Id. 

A comment recommended that, 

during the first five years in which the 

section 987 regulations are applicable, 

taxpayers should be allowed to make or 

revoke a current rate election without 

waiting 60 months or requesting 

consent. The comment noted that 

taxpayers may need more flexibility to 

reassess their elections during this 

initial period because they do not yet 

have sufficient information or 

experience regarding the impact of 

making (or not making) a current rate 

election. 

The final regulations retain the 60- 

month limitation for taxpayers that 

make a current rate election or an 

annual recognition election and apply a 

similar limitation for purposes of the 

section 988 mark-to-market election (see 

part IV.C.1 of this Summary of 

Comments and Explanation of 

Revisions). Permitting taxpayers to 

make or revoke elections on a more 

frequent basis could increase the 

potential for manipulation and abuse. 

However, taxpayers that wish to change 

their elections without waiting 60 

months can do so by requesting the 

Commissioner’s consent, and the 

Commissioner may consider the need 

for additional flexibility on a case-bycase basis. 

D. No Change in Method of Accounting 

Proposed § 1.987–1(g)(4) provides that 

elections under section 987 are not 

governed by the general rules 

concerning changes in methods of 

accounting. In addition, the final 

regulations clarify that an election 

under section 987 is not treated as a 

method of accounting for purposes of 

section 446 or 481. See § 1.987–1(g)(4). 

Similarly, the final regulations provide 

that application of the transition rules 

under § 1.987–10 is not treated as a 

change in method of accounting. See 

§ 1.987–10(k)(4). No inference is 

intended as to whether a change in 

section 987 methodology is considered 

a change in method of accounting before 

the final regulations become applicable 

(or with respect to partnerships or other 

entities that are not generally subject to 

the section 987 regulations). 

III. Comments and Changes to Proposed 

§ 1.987–2: Attribution of Items of an 

Eligible QBU, the Definition of a 

Transfer, and Related Rules 

Proposed § 1.987–2 provides rules for 

attributing items to eligible QBUs and 

rules relating to transfers of assets or 

liabilities to or from eligible QBUs. 

A. Attribution of Items to an Eligible 

QBU 

Under the proposed regulations, items 

are attributable to an eligible QBU to the 

extent they are reflected on the eligible 

QBU’s separate set of books and records. 

Proposed § 1.987–2(b)(1). The final 

regulations clarify that an item that is 

not taken into account for financial 

accounting purposes is attributed to an 

eligible QBU to the extent it would have 

been reflected on the eligible QBU’s 

books and records if it were taken into 

account for financial accounting 

purposes (for example, amortization 

attributable to an item of intangible 

property that is recognized and taken 

into account for tax purposes due to a 

section 338 election, but is not 

recognized or taken into account for 

financial reporting purposes). See 

§ 1.987–2(b)(1). Similarly, in preparing 


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an adjusted balance sheet for a section 

987 QBU, the owner must make 

adjustments to reflect items that were 

not reflected on the section 987 QBU’s 

books and records for the taxable year 

but should be so reflected under United 

States tax accounting principles. See 

§ 1.987–1(h). No inference should be 

drawn from this clarification with 

respect to other similar rules that 

attribute items based on books and 

records including under § 1.904–4(f) 

(foreign branch category income) or 

§ 1.1503(d)–5(c) (income or dual 

consolidated loss of a separate unit). 

B. Disregarded Transactions 

Under proposed § 1.987–2(c)(2)(i), an 

asset is treated as transferred to a 

section 987 QBU from its owner if, as 

a result of a disregarded transaction, the 

asset is reflected on the books and 

records of (or attributable to) the section 

987 QBU. Similarly, an asset is treated 

as transferred from a section 987 QBU 

to its owner if, as a result of a 

disregarded transaction, the asset ceases 

to be reflected on (or attributable to) the 

books and records of the section 987 

QBU. However, 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. 

Proposed § 1.987–2(c)(2)(iii). 

A comment recommended that 

interbranch loans made by banks and 

other regulated financial institutions 

should not be treated as transfers for 

purposes of determining the amount of 

a remittance under § 1.987–5(c). The 

comment asserted that an interbranch 

loan is not a permanent transfer because 

the borrower has an obligation to repay 

the lender. Another comment requested 

that the final regulations conform the 

treatment of disregarded transactions for 

purposes of section 987 with the 

reattribution rules provided in § 1.904– 

4(f)(2)(vi). Under this approach, 

disregarded payments would result in 

the reattribution of items of gross 

income between a section 987 QBU and 

its owner and between separate 987 

QBUs of the same owner, and they 

would not be treated as transfers giving 

rise to the recognition of section 987 

gain or loss. The comment noted that, 

under proposed § 1.987–2(c)(2), a 

disregarded payment for services or a 

sale of inventory (including a payment 

from one section 987 QBU to a different 

section 987 QBU with the same 

functional currency) could give rise to a 

remittance even though there is no net 

economic transfer of value. Further, 

because disregarded transactions do not 

give rise to section 987 taxable income 

or loss under proposed § 1.987– 

2(c)(2)(iii), the comment asserted that 

the amount of section 987 taxable 

income or loss may be different from the 

amount of income that is economically 

attributable to the section 987 QBU. 

The final regulations retain the 

disregarded transaction rules of 

proposed § 1.987–2(c). See § 1.987–2(c). 

These rules are needed to properly 

account for the effect of a disregarded 

transaction on the balance sheet of a 

section 987 QBU for purposes of 

determining the owner’s net 

unrecognized section 987 gain or loss 

under § 1.987–4, the amount of a 

remittance under § 1.987–5(c), and to 

properly determine the owner’s basis in 

transferred assets under § 1.987–5(f). 

In the case of a disregarded lending 

transaction in which a section 987 QBU 

lends money to its owner, although the 

owner remains obligated to repay the 

borrowed funds, the disregarded loan is 

not an asset that can be attributed to the 

QBU for tax purposes. Accordingly, for 

tax purposes, the QBU-lender’s balance 

sheet is diminished by the amount of 

the loan in the same way as any other 

transfer from the QBU to its owner. To 

the extent the loan is funded and repaid 

within the same taxable year, the two 

transfers will offset in computing the 

remittance amount under § 1.987–5(c). 

However, when a disregarded loan 

spans multiple taxable years, the owner 

must account for the effect of the 

transaction on the net equity of the 

section 987 QBU (as regarded for tax 

purposes). 

In addition, the final regulations do 

not provide for reattribution of gross 

income between a section 987 QBU and 

its owner or between section 987 QBUs 

of the same owner for purposes of 

section 987. When a section 987 QBU 

makes a disregarded payment to its 

owner, the payment properly triggers 

the recognition of section 987 gain or 

loss because the transferred asset has 

been withdrawn from the QBU and is no 

longer accounted for in the section 987 

QBU’s functional currency. Even if the 

transaction does not reduce the 

economic value of the section 987 QBU 

on a net basis (for example, because the 

disregarded payment is made in 

exchange for services of equal value), it 

nonetheless results in a net withdrawal 

of asset basis from the functional 

currency environment of the section 987 

QBU and is therefore properly treated as 

a remittance for purposes of section 987. 

Moreover, a rule determining the 

amount of a remittance based on the 

value of property transferred from a 

section 987 QBU would be difficult to 

administer and prone to manipulation. 

Similarly, because disregarded 

transactions do not give rise to taxable 

income or loss under general tax 

principles, they are not taken into 

account in determining section 987 

taxable income or loss. See § 1.987– 

2(c)(2)(iii). Instead, the regarded income 

of an owner that is properly reflected on 

the books and records of (or attributable 

to) a section 987 QBU under § 1.987– 

2(b) is determined in the functional 

currency of the section 987 QBU and 

translated into the owner’s functional 

currency under the rules of § 1.987–3. 

Disregarded payments do not serve to 

reattribute gross income between a 

section 987 QBU and its owner for 

purposes of determining section 987 

taxable income or loss. Such a 

reattribution rule would add complexity 

to the section 987 regulations (for 

example, when income is reattributed in 

a taxable year following the taxable year 

in which the disregarded payment is 

made), and it would not serve any 

necessary function. 

However, the final regulations contain 

targeted modifications that are intended 

to reduce the compliance burden of 

accounting for certain transfers between 

a section 987 QBU and its owner. See 

part VI of this Summary of Comments 

and Explanation of Revisions 

(describing modifications to the annual 

remittance rules to reduce the burden of 

tracking and translating disregarded 

transfers). Additionally, if an owner 

elects to group section 987 QBUs with 

the same functional currency under 

§ 1.987–1(b)(3)(ii), transactions between 

the section 987 QBUs will not be treated 

as transfers between the section 987 

QBUs and their owner for purposes of 

section 987. 

IV. Comments and Changes to Proposed 

§ 1.987–3: Determination of Section 987 

Taxable Income or Loss of an Owner of 

a Section 987 QBU 

Proposed § 1.987–3 would provide 

rules for determining taxable income or 

loss of a section 987 QBU, including 

section 988 transactions of a section 987 

QBU. Additional rules relating to 

section 988 transactions would be 

provided in § 1.987–3 of the 2016 

proposed regulations, for which the 

comment period was reopened in 2023. 

A. Treatment of Section 988 

Transactions Under the 2016 Proposed 

Regulations 

The 2016 proposed regulations 

provide that the determination of 

whether a transaction is a section 988 

transaction is made by reference to the 

section 987 QBU’s functional currency. 

Thus, a transaction otherwise within the 

scope of section 988 that is 

denominated in a functional currency 

other than the section 987 QBU’s 


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functional currency generally would be 

treated as a section 988 transaction. See 

§ 1.987–3(b)(4)(i) of the 2016 proposed 

regulations. However, section 988 

transactions of a section 987 QBU 

denominated in, or determined by 

reference to, the owner’s functional 

currency (‘‘specified owner functional 

currency transactions’’) would not be 

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 would 

further provide that section 988 gain or 

loss of a section 987 QBU generally is 

determined by reference to the owner’s 

functional currency. See § 1.987– 

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

regulations. However, section 988 gain 

or loss with respect to certain short-term 

section 988 transactions (‘‘qualified 

short-term section 988 transactions’’) 

accounted for under a mark-to-market 

method of accounting would be 

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. The 2016 proposed 

regulations would provide an election 

under which taxpayers can apply a 

mark-to-market method of accounting 

with respect to all qualified short-term 

section 988 transactions. See § 1.987– 

3(b)(4)(iii)(C) of the 2016 proposed 

regulations. 

Under the 2016 final regulations (and 

the 2023 proposed regulations), a 

transaction denominated in a currency 

other than the section 987 QBU’s 

functional currency is treated as a 

historic item. See § 1.987–1(d) and (e). 

However, the 2016 proposed regulations 

provide an exception under which 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 preamble to the 2023 proposed 

regulations requested comments as to 

whether section 988 gain or loss on 

nonfunctional currency transactions of a 

section 987 QBU (including specified 

owner functional currency transactions) 

should be determined in the functional 

currency of the section 987 QBU when 

a current rate election or annual 

recognition election is in effect. 88 FR 

78154. The preamble expressed concern 

that, if such a rule were adopted, 

specified owner functional currency 

transactions would give rise to offsetting 

positions in the functional currency of 

the section 987 QBU; this could create 

opportunities for taxpayers to recognize 

losses while deferring the offsetting 

gains. Id. 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 

unrecognized section 988 gain and the 

owner would have an inverse amount of 

unrecognized section 987 loss. The 

owner could cause the QBU to make a 

remittance triggering the recognition of 

section 987 loss, while deferring the 

section 988 gain. 

B. Comments on the 2023 Proposed 

Regulations Regarding Section 988 

Transactions of Section 987 QBUs 

Comments asserted that the section 

988 rules of the 2016 proposed 

regulations would impose a substantial 

compliance burden on taxpayers. The 

comments noted that for financial 

accounting purposes, foreign currency 

gain or loss on nonfunctional currency 

transactions of a QBU is measured by 

reference to the functional currency of 

the QBU. In addition, taxpayers 

typically hedge their exposure to 

nonfunctional currency transactions of a 

QBU by reference to the QBU’s 

functional currency. One comment 

noted that it is common for section 987 

QBUs of insurance companies to hold 

assets denominated in U.S. dollars for 

commercial reasons and that treating 

these assets as historic items would 

increase the compliance burden on 

insurance companies. 

Comments suggested that the rules of 

the 2016 proposed regulations be 

modified to provide that: (i) section 988 

gain or loss on nonfunctional currency 

transactions of a section 987 QBU is 

determined by reference to the 

functional currency of the section 987 

QBU, (ii) specified owner functional 

currency transactions are treated as 

section 988 transactions, and (iii) 

section 988 transactions of a section 987 

QBU are treated as marked items. 

Alternatively, comments requested that 

(if the default rules of the 2016 

proposed regulations are retained) 

taxpayers should be permitted to elect 

this modified treatment. 

According to the comments, the 

recommended modifications would 

achieve greater consistency with 

financial accounting standards and 

would ease the compliance burden on 

taxpayers. One comment stated that 

such an approach would also be more 

consistent with the statutory 

requirement to determine a section 987 

QBU’s taxable income or loss in the 

QBU’s functional currency under 

sections 985 and 987. Comments noted 

that the opportunity for selective 

recognition of losses is limited to the 

extent the taxpayer makes a current rate 

election (because section 987 losses will 

be subject to suspension) or an annual 

recognition election (because section 

987 gain or loss is recognized annually 

without regard to whether a remittance 

is made). One comment asserted that, 

even if neither of these elections is in 

effect, it is difficult to selectively 

recognize material section 987 losses 

attributable to section 988 transactions 

because the remittance proportion 

under § 1.987–5 is determined with 

respect to all the assets of the section 

987 QBU. 

Other comments recommended 

providing an election under which 

taxpayers could recognize section 988 

gain or loss with respect to all section 

988 transactions of a section 987 QBU 

on a mark-to-market basis (effectively 

expanding the special rule for qualified 

short-term section 988 transactions to 

cover all section 988 transactions of a 

QBU). For example, one comment 

requested mark-to-market timing for 

section 988 transactions of a section 987 

QBU that is subject to an annual 

recognition election. According to this 

comment, because mark-to-market 

timing would apply to both section 988 

and section 987 gains and losses on a 

current basis, the potential for abuse or 

selective loss recognition would be 

limited. Another comment requested 

that the definition of a qualified shortterm section 988 transaction under 

proposed § 1.987–3(b)(4)(iii)(B) be 

expanded to include long-term 

transactions that have been properly 

identified as a hedge for U.S. tax 

purposes. 

Finally, a comment recommended 

that, if the rules of the 2016 proposed 

regulations relating to section 988 

transactions are retained in the final 

regulations, the applicability date of the 

final regulations should be deferred 

until taxable years beginning after 

December 31, 2026, so that taxpayers 

have adequate time to update their 

internal accounting systems. 

C. Treatment of Section 988 

Transactions Under the Final 

Regulations 

1. Section 988 Mark-To-Market Election 

The final regulations provide that a 

taxpayer may elect to recognize section 

988 gain or loss with respect to section 

988 transactions of a section 987 QBU 

under a mark-to-market method of 

accounting (a ‘‘section 988 mark-tomarket election’’). See § 1.987– 

3(b)(4)(ii). This election is expected to 

result in consistent treatment of section 

988 transactions for tax and financial 

reporting purposes and to reduce the 

potential for selective recognition of 


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losses relating to these transactions, as 

indicated by the comments. The section 

988 mark-to-market election is subject to 

the same timing and consistency 

requirements as a current rate election 

or an annual recognition election. See 

§ 1.987–1(g). 

The section 988 mark-to-market 

election does not apply to a section 988 

transaction that is contributed to a 

section 987 QBU with a built-in loss if 

the section 988 transaction was not 

subject to a mark-to-market method of 

accounting in the hands of the 

transferor. See § 1.987–3(b)(4)(ii)(B). 

This rule is intended to prevent 

taxpayers from accelerating the 

recognition of section 988 loss by 

contributing a section 988 transaction 

with a built-in loss to a section 987 QBU 

that is subject to the section 988 markto-market election. 

2. Treatment of Section 988 

Transactions of a Section 987 QBU 

Under the Final Regulations 

The final regulations provide new 

rules for applying section 988 with 

respect to nonfunctional currency 

transactions of a section 987 QBU. In 

response to the comments summarized 

in part IV.B of this Summary of 

Comments and Explanation of 

Revisions, the Treasury Department and 

the IRS have determined that a different 

framework is appropriate in order to 

reduce the compliance burden and 

complexity of the section 987 

regulations. 

Under the final regulations, whether 

an asset or liability of a section 987 QBU 

is a section 988 transaction is 

determined by reference to the 

functional currency of the section 987 

QBU (instead of the owner’s functional 

currency). See § 1.987–3(b)(4)(i). The 

final regulations further provide that 

section 988 gain or loss with respect to 

section 988 transactions of a section 987 

QBU (including transactions 

denominated in the owner’s functional 

currency) is determined in the 

functional currency of the section 987 

QBU, and section 988 transactions are 

treated as marked items. See §§ 1.987– 

1(d)(1)(iii) and 1.987–3(b)(4)(i). The 

final regulations do not provide an 

exception for specified owner functional 

currency transactions; thus, such 

transactions are treated as section 988 

transactions of the section 987 QBU. 

However, the final regulations 

provide an anti-abuse rule to prevent 

taxpayers from entering into section 988 

transactions through an eligible QBU for 

the purpose of generating offsetting 

amounts of gain and loss that can 

selectively be recognized or deferred. 

Under § 1.987–2(b)(3)(iv), section 988 

transactions will not be treated as 

attributable to an eligible QBU if they 

are entered into (or reflected on the 

eligible QBU’s books and records) with 

a principal purpose of generating 

offsetting amounts of section 988 gain 

and section 987 loss or offsetting 

amounts of section 988 loss and section 

987 gain. Section 988 transactions also 

are subject to the general anti-avoidance 

rules of § 1.987–2(b)(3)(i) through (iii). 

V. Comments and Changes to Proposed 

§ 1.987–4: Determination of Net 

Unrecognized Section 987 Gain or Loss 

of a Section 987 QBU 

Proposed § 1.987–4 provides rules for 

computing net unrecognized section 987 

gain or loss with respect to a section 987 

QBU. In particular, proposed § 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 

compute the change in owner functional 

currency net value (‘‘OFCNV’’) for the 

taxable year. Proposed § 1.987–4(d)(1). 

The other steps make adjustments for 

changes to OFCNV that are not 

attributable to 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 income or 

loss of the section 987 QBU. Proposed 

§ 1.987–4(d)(2) through (9). Step 10 is a 

residual adjustment for any increase or 

decrease to the section 987 QBU’s 

balance sheet that is not otherwise 

accounted for. Proposed § 1.987– 

4(d)(10). If a current rate election is in 

effect, taxpayers are required to apply 

only steps 1 through 5 and step 10. 

Under proposed § 1.987–4(e), OFCNV 

is determined by preparing a tax basis 

balance sheet reflecting the section 987 

QBU’s assets and liabilities. The basis of 

each asset and the amount of each 

liability is then translated into the 

owner’s functional currency at the 

appropriate exchange rate. Under the 

default rules, marked items are 

translated at the year-end spot rate, 

while historic items are translated at the 

applicable historic rate. However, 

taxpayers that make a current rate 

election under § 1.987–1(d)(2) translate 

all items on the year-end balance sheet 

at the year-end spot rate. 

A. Mechanics for Calculating 

Unrecognized Section 987 Gain or Loss 

for the Current Taxable Year 

1. Earnings and Capital Method 

The preamble to the 2023 proposed 

regulations notes that, under a current 

rate election, the total amount of section 

987 gain or loss recognized by an owner 

with respect to a section 987 QBU 

would be similar to the amount 

computed under the earnings and 

capital method, which was described in 

proposed regulations published in the 

Federal Register in 1991 (56 FR 48457, 

September 25, 1991) (the ‘‘1991 

proposed regulations’’). 88 FR 78138 

through 78139. Under the earnings and 

capital method, the owner of a section 

987 QBU computes section 987 gain or 

loss by maintaining an equity pool in 

the QBU’s functional currency and a 

basis pool in the owner’s functional 

currency. The equity and basis pools are 

increased by income of the section 987 

QBU and contributions from the owner, 

and they are decreased by losses of the 

section 987 QBU and distributions from 

the section 987 QBU to the owner. The 

preamble to the 1991 proposed 

regulations explains that the equity pool 

generally represents the amount of 

branch equity (adjusted basis of assets 

net of liabilities), and the basis pool 

represents the owner’s basis in branch 

equity. 56 FR 48458. 

Comments requested that the final 

regulations include an election to apply 

the earnings and capital method of the 

1991 proposed regulations in lieu of the 

current rate election. These comments 

indicated that, even if a current rate 

election is in effect, proposed § 1.987– 

4 imposes a heightened compliance 

burden (as compared to the earnings 

and capital method) because it requires 

taxpayers to prepare tax basis balance 

sheets for each of their section 987 

QBUs on an annual basis. In addition, 

the comments asserted that taxpayers 

are already familiar with the earnings 

and capital method and would be less 

likely to make errors in applying that 

method because taxpayers track book-totax adjustments in computing taxable 

income but do not make book-to-tax 

adjustments to their balance sheets. One 

comment recommended allowing 

taxpayers to use the earnings and capital 

method only if a current rate election 

and an annual recognition election are 

both in effect. 

The final regulations do not permit 

taxpayers to use the earnings and capital 

method. As explained in the preamble 

to the 2023 proposed regulations, such 

an election would allow different 

taxpayers to apply section 987 using 

fundamentally different methodologies, 

which would increase the overall 

complexity of the section 987 

regulations and make them more 

difficult to administer. 88 FR 78138. For 

example, it would be difficult for 

taxpayers to transition from one method 

to another in an administrable way. 

Moreover, under the earnings and 

capital method, the amount of section 


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2Taxpayers would still need to track the gross 

assets of a section 987 QBU for other purposes, 

including the denominator of the remittance 

proportion under § 1.987–5. 

987 gain or loss recognized is 

determined based on the percentage of 

a section 987 QBU’s net equity remitted 

(rather than the percentage of gross 

assets remitted, as required under 

§ 1.987–5), which can inappropriately 

accelerate the recognition of section 987 

gain or loss. If a section 987 QBU has 

negative net equity, section 987 gain or 

loss cannot be recognized under the 

earnings and capital method until the 

section 987 QBU terminates, which is 

inconsistent with the statutory 

requirement to recognize currency gain 

or loss on transfers of property from the 

section 987 QBU. 

However, the final regulations modify 

the existing framework of § 1.987–4 to 

allow taxpayers that make a current rate 

election to use certain elements of the 

earnings and capital method in lieu of 

preparing a tax basis balance sheet.2

These modifications are expected to 

minimize the compliance burden of 

transitioning from the 1991 proposed 

regulations to the final regulations. 

Under the final regulations, if a current 

rate election is in effect, OFCNV is 

computed by determining the aggregate 

basis of the QBU’s assets, net of the 

QBU’s liabilities, in the functional 

currency of the section 987 QBU (‘‘QBU 

net value’’) and translating the QBU net 

value into the owner’s functional 

currency at the year-end spot rate. See 

§ 1.987–4(e)(2)(i) and (ii). The final 

regulations provide that QBU net value 

can be computed without a tax basis 

balance sheet using the formula 

provided in § 1.987–4(e)(2)(iii). 

The formula provided in § 1.987– 

4(e)(2)(iii) is modeled on the formula 

used to track the equity pool under the 

1991 proposed regulations, with certain 

modifications. Under this formula, the 

QBU net value on the last day of the 

taxable year is equal to the QBU net 

value at the end of the preceding taxable 

year, adjusted by transfers of assets and 

liabilities between the section 987 QBU 

and its owner and by income or loss of 

the section 987 QBU (each determined 

in the section 987 QBU’s functional 

currency). If a taxpayer determines QBU 

net value under § 1.987–4(e)(2)(iii), the 

taxpayer must retain the information 

used to determine QBU net value for 

each taxable year in lieu of retaining 

adjusted balance sheets. See § 1.987– 

9(b)(2). 

2. Cumulative Translation Adjustment 

Comments requested that taxpayers be 

permitted to use the cumulative 

translation adjustment (‘‘CTA’’) 

determined under U.S. generally 

accepted accounting principles (‘‘U.S. 

GAAP’’) to compute their unrecognized 

section 987 gain or loss. Alternatively, 

some comments recommended that 

taxpayers should be allowed to use the 

CTA for this purpose only with respect 

to small QBUs and subject to certain tax 

adjustments. One comment suggested 

that section 987 gain or loss with 

respect to small QBUs should be 

recognized when the CTA is included in 

income from continuing operations 

under U.S. GAAP. 

The final regulations do not permit 

taxpayers to use the CTA to determine 

their net unrecognized section 987 gain 

or loss. As explained in the preamble to 

the 2023 proposed regulations, section 

987(3) requires currency gain or loss to 

be recognized at the time of a 

remittance, rather than when the CTA is 

included in income for U.S. GAAP 

purposes. 88 FR 78141. Moreover, the 

Treasury Department and the IRS have 

determined that significant differences 

may arise between the computation of 

the CTA for financial accounting 

purposes and the determination of 

unrecognized section 987 gain or loss 

under § 1.987–4(d). For example, the 

CTA is unlikely to reflect the correct 

amount of currency gain or loss for tax 

purposes because of book-to-tax 

differences in the basis of assets or 

because certain items are disregarded 

for tax purposes but regarded for 

financial accounting purposes. If the 

comment’s recommended approach 

were adopted, complex rules would be 

needed to adjust the CTA amount in 

order to derive the correct amount to be 

recognized for tax purposes. 

3. Simplified Accounting for 

Disregarded Transactions 

A comment recommended that 

taxpayers that make a current rate 

election should be permitted to 

determine unrecognized section 987 

gain or loss for the taxable year by 

applying only two steps: step 1 

(determining the change in OFCNV) and 

step 10 (reducing 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 

recommended rule would have the 

effect of accounting for all transfers 

between the owner and the section 987 

QBU (which would otherwise be 

accounted for under steps 2 through 5) 

as part of step 10; consequently, the net 

amount of all transfers would be 

translated at the yearly average 

exchange rate. The comment posited 

that this approach would simplify the 

computations for taxpayers with a high 

volume of disregarded intercompany 

transactions. 

The final regulations retain the 

requirement to apply steps 2 through 5 

when a current rate election is in effect. 

Under these steps, transfers of marked 

assets and liabilities between a section 

987 QBU and its owner generally are 

translated at the spot rate applicable on 

the date of transfer. Because the 

applicable spot rate may differ 

significantly from the yearly average 

exchange rate, it would not be 

appropriate to account for all transfers 

between a section 987 QBU and its 

owner by translating them at the yearly 

average exchange rate under step 10. 

The Treasury Department and the IRS 

continue to study possible 

simplifications of § 1.987–4 relating to 

disregarded transactions between a 

section 987 QBU and its owner, 

including whether, in certain 

circumstances, unrecognized section 

987 gain or loss for a taxable year could 

be computed using only steps 1 and 10. 

See § 1.987–2(f) of the 2024 proposed 

regulations for proposed rules 

containing an election under which 

certain disregarded transactions 

between a section 987 QBU and its 

owner would not be taken into account 

in computing unrecognized section 987 

gain or loss. 

B. Hedging Transactions 

1. Comment on Matching Source and 

Character of Section 988 Gain or Loss 

From a Hedging Transaction With the 

Source and Character of Section 987 

Gain or Loss 

A comment recommended adoption 

of a hedging rule under which a 

taxpayer that hedges exchange rate risk 

with respect to its net investment in a 

section 987 QBU could match the 

source and character of the section 988 

gain or loss arising from the hedging 

transaction with that of the section 987 

gain or loss attributable to the hedged 

section 987 QBU. Alternatively, the 

comment suggested that the hedging 

transaction could be integrated with the 

section 987 QBU, such that section 988 

gain or loss with respect to the hedging 

transaction would directly offset the 

section 987 QBU’s unrecognized section 

987 gain or loss. The comment asserted 

that implementing either of these 

recommended rules would mitigate the 

potential for adverse consequences (or 

windfalls) under section 987 when the 

owner’s foreign currency exposure is 

economically hedged. The comment 

noted that these rules would be 

particularly beneficial for taxpayers that 

make a current rate election and an 


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3The Treasury Department and the IRS 

previously published proposed regulations in the 

Federal Register on December 19, 2017 (82 FR 

60135), which contained proposed rules relating to 

the treatment of a net investment hedge for 

purposes of the business needs exception to the 

definition of foreign personal holding company 

income under section 954(c)(1)(D) and § 1.954– 

2(g)(2)(ii). Those proposed regulations would apply 

only for purposes of the business needs exception 

and do not address the potential for mismatches in 

other contexts. 

annual recognition election (and thus 

recognize section 987 gain or loss 

whether or not there is a remittance). 

2. Treatment of Section 987 Hedging 

Transactions Under the Final 

Regulations 

The Treasury Department and the IRS 

agree with the comment that it would be 

appropriate to permit symmetrical 

treatment of currency gain or loss with 

respect to a net investment hedge and 

the hedged section 987 QBU.3

Accordingly, § 1.987–14 of the final 

regulations provides new rules that 

apply to certain identified hedging 

transactions entered into by the owner 

of a section 987 QBU (‘‘section 987 

hedging transactions’’). 

Under § 1.987–14(d), section 988 gain 

or loss that would otherwise be 

recognized on a section 987 hedging 

transaction (‘‘hedging gain or loss’’) is 

instead taken into account in adjusting 

the owner’s unrecognized section 987 

gain or loss for the taxable year (as 

determined under § 1.987–4(d)). For 

example, if the owner has unrecognized 

section 987 gain for the taxable year 

under § 1.987–4(d), the owner’s hedging 

loss reduces the unrecognized section 

987 gain. However, hedging loss cannot 

reduce unrecognized section 987 gain 

for the taxable year below zero, and 

hedging gain cannot reduce 

unrecognized section 987 loss for the 

taxable year below zero. This limitation 

ensures that hedging gain or loss in 

excess of the currency exposure 

generated by the section 987 QBU for 

the taxable year is not taken into 

account under section 987. 

3. Requirements To Qualify as a Section 

987 Hedging Transaction 

A section 987 hedging transaction 

generally is defined as a financial 

instrument (a ‘‘hedge’’) entered into by 

the owner of a section 987 QBU for the 

purpose of managing exchange rate risk 

with respect to the owner’s net 

investment in the section 987 QBU as 

part of the normal course of the owner’s 

trade or business. The hedge may be 

entered into with an unrelated 

counterparty or with a related person. 

For example, a CFC that owns a section 

987 QBU may enter into a hedge with 

its U.S. parent, which has entered into 

a similar, offsetting, transaction with a 

third party. 

Several requirements must be met in 

order for a hedge to qualify as a section 

987 hedging transaction. First, the hedge 

must be identified as a section 987 

hedging transaction with respect to the 

hedged QBU on or before the day the 

owner enters into the hedge. See 

§ 1.987–14(b)(2)(i) and (c). A hedge 

cannot be identified as a section 987 

hedging transaction with respect to 

more than one section 987 QBU. 

However, if a grouping election is in 

effect under § 1.987–1(b)(3)(ii), all 

section 987 QBUs that have the same 

functional currency will be treated as a 

single section 987 QBU. The final 

regulations also provide a special rule 

for cases in which a taxpayer fails to 

properly identify a hedge due to 

inadvertent error. See § 1.987–14(c)(2). 

Second, a current rate election must 

be in effect for the taxable year. See 

§ 1.987–14(b)(2)(ii). In the absence of a 

current rate election, gain or loss on a 

net investment hedge is unlikely to be 

comparable in amount to the owner’s 

unrecognized section 987 gain or loss, 

and thus the rules of § 1.987–14 would 

not serve their intended function. 

Third, the owner (and any members of 

the same controlled group that are 

parties to the hedge) must account for 

section 988 gain or loss with respect to 

the hedge under a mark-to-market 

method of accounting (for example, 

under section 1256 or in reliance on 

proposed § 1.988–7). See § 1.987– 

14(b)(2)(iii). As a result of this 

requirement, foreign currency gain or 

loss on the hedge will be taken into 

account in the taxable year in which the 

related currency gain or loss is 

determined under § 1.987–4(d)). 

Fourth, under U.S. GAAP, foreign 

currency gain or loss on the hedge must 

be properly accounted for as a 

cumulative foreign currency translation 

adjustment to shareholders’ equity. See 

§ 1.987–14(b)(2)(iv). This requirement 

helps to ensure that the hedge is 

economically related to the owner’s net 

investment in the section 987 QBU. 

Fifth, the hedge must be entered into 

by the owner of the section 987 QBU, 

and not by a section 987 QBU of the 

owner (that is, the hedge cannot itself be 

an asset attributable to a section 987 

QBU). See § 1.987–14(b)(2)(v). 

Finally, an anti-abuse rule provides 

that a hedge does not qualify as a 

section 987 hedging transaction if the 

hedge or a related transaction is entered 

into with a principal purpose of 

converting section 987 gain or loss into 

section 988 gain or loss. See § 1.987– 

14(b)(3). For example, a taxpayer that 

owns a section 987 QBU might enter 

into a hedging transaction with a related 

party without hedging the related 

party’s resulting exchange rate risk 

(effectively shifting the exchange rate 

risk without reducing the group’s 

overall foreign currency exposure) for 

the purpose of taking the related foreign 

currency gain or loss into account under 

section 988 (rather than section 987). 

Under the anti-abuse rule, the net 

investment hedge would not be treated 

as a section 987 hedging transaction. 

4. Consolidated Groups 

With regard to consolidated groups 

(as defined in § 1.1502–1(h)), § 1.987– 

14(b)(2)(v) of the final regulations 

requires that the same corporation be 

the owner of the QBU and enter into the 

section 987 hedging transaction with 

respect to that QBU (similar 

requirements apply when a member of 

a consolidated group engages in a 

section 988(d) hedging transaction 

under § 1.988–5(a)(5)(v) or (b)(2)(i)(F)). 

The Treasury Department and the IRS 

continue to study whether it would be 

possible to treat consolidated group 

members as a single corporation for 

purposes of § 1.987–14 and the section 

988(d) hedging transaction rules 

without inappropriately shifting income 

among members of the group. See also 

TD 8400, 57 FR 9172, 9176 (soliciting 

comments on whether to permit the 

rules of § 1.988–5 to be applied by 

treating consolidated group members as 

a single corporation). 

VI. Comments and Changes to Proposed 

§ 1.987–5: Recognition of Section 987 

Gain or Loss 

Proposed § 1.987–5 provides rules for 

determining the amount of section 987 

gain or loss recognized by the owner of 

a section 987 QBU. 

Under proposed § 1.987–5(a), when a 

section 987 QBU makes a remittance, 

the owner recognizes section 987 gain or 

loss. In general, the amount recognized 

equals the section 987 QBU’s net 

unrecognized section 987 gain or loss 

multiplied by the owner’s remittance 

proportion. The remittance proportion 

is determined in the owner’s functional 

currency; it is equal to the amount of the 

remittance for the taxable year, divided 

by the aggregate basis of the section 987 

QBU’s gross assets reflected on its yearend balance sheet (without reduction for 

the remittance). Proposed § 1.987–5(b). 

For a taxable year, the amount of a 

remittance equals the excess of (i) the 

aggregate of all amounts transferred 

from the section 987 QBU to the owner 

during the taxable year; over (ii) the 

aggregate of all amounts transferred 

from the owner to the section 987 QBU 


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during the taxable year (each 

determined in the owner’s functional 

currency). Proposed § 1.987–5(c). 

A comment noted that, for taxpayers 

with a high volume of disregarded 

intercompany transactions, it can be 

difficult to track the amount of each 

transfer between the section 987 QBU 

and its owner and to translate the 

transfer into the owner’s functional 

currency at the appropriate exchange 

rate. The comment recommended that 

the amount of a remittance should be 

deemed to be equal to the change in the 

QBU’s net value (if negative) for the 

taxable year. 

Despite compliance and 

administrative burdens that may result 

in certain cases from tracking 

disregarded transfers for purposes of 

determining the amount of a remittance, 

it would not be appropriate to 

determine the remittance amount based 

solely on the negative change in net 

value of a section 987 QBU. Such an 

approach would not properly account 

for distributions out of a section 987 

QBU’s current year earnings. For 

example, if a section 987 QBU 

distributed an amount exactly equal to 

its current year earnings, there would be 

no change in the QBU’s net value (and 

thus, no remittance) under the 

comment’s recommended approach, 

even if the QBU made a substantial 

distribution. Section 987(3) and its 

legislative history indicate that Congress 

intended for gain or loss to be 

recognized on any remittance from a 

section 987 QBU, without regard to 

whether the remittance is sourced from 

current year earnings, prior year 

earnings, or capital contributions. 

Nonetheless, the final regulations 

provide two modifications that are 

intended to reduce the burden of 

tracking disregarded transfers for 

purposes of § 1.987–5 while preserving 

consistency with the text and purpose of 

section 987. First, the final regulations 

provide an alternative formula for 

computing the annual remittance that is 

based on the comment’s recommended 

approach (and does not require tracking 

of individual transfers) but contains an 

adjustment to account for remittances 

out of current-year income. Under this 

formula, the remittance amount is equal 

to the negative change in net value of 

the section 987 QBU (determined in the 

QBU’s functional currency), adjusted for 

income and loss of the section 987 QBU. 

See § 1.987–5(c)(2). Mathematically, this 

formula will produce an amount that is 

equal to the aggregate net transfer from 

the section 987 QBU to its owner for the 

taxable year. 

Second, § 1.987–5(b) and (c) provide 

that the numerator and denominator of 

the remittance proportion (that is, the 

amount of the remittance and the 

section 987 QBU’s gross assets) are 

determined in the section 987 QBU’s 

functional currency, rather than the 

owner’s functional currency. As a result, 

it is not necessary to separately translate 

each transfer for purposes of 

determining the annual remittance. 

VII. Comments and Changes to 

Proposed § 1.987–6: Character and 

Source of Section 987 Gain or Loss 

A. Determining the Character and 

Source of Section 987 Gain or Loss 

1. In General 

Under proposed § 1.987–6, section 

987 gain or loss is assigned to the 

statutory and residual groupings in two 

steps: an initial assignment under 

proposed § 1.987–6(b)(2)(i), followed by 

a reassignment described in proposed 

§ 1.987–6(b)(2)(ii). The initial 

assignment is made using the asset 

method under §§ 1.861–9(g) and 1.861– 

9T(g). It is made after the application of 

the income attribution rules of § 1.904– 

4(f)(2)(vi) or § 1.951A–2(c)(7), but before 

expenses are allocated and apportioned 

to gross income and before the 

application of provisions that require a 

net income computation. Section 987 

gain or loss may be reassigned if 

required after the application of 

provisions that require a net income 

computation. For example, if an item of 

section 987 gain is initially assigned to 

tentative tested income, it will be 

reassigned to tested income or residual 

income depending on whether the 

taxpayer has made the GILTI high-tax 

exclusion election and, if so, whether 

the item (described in proposed § 1.987– 

6(b)(2)(iii)) is subject to a high rate of 

tax. 

2. Asset Method 

The asset method under §§ 1.861–9 

and 1.861–9T is intended to serve as an 

administrable proxy for a section 987 

QBU’s historical earnings, in line with 

the statutory requirement of section 

987(3)(B) (which provides that section 

987 gain or loss is sourced by reference 

to the source of the income giving rise 

to post-1986 accumulated earnings). As 

explained in the preamble to the 2016 

final regulations, it would be complex 

and burdensome to source and 

characterize section 987 gain or loss 

with direct reference to post-1986 

accumulated earnings, and the gross 

assets of a section 987 QBU provide a 

reasonable proxy for historical earnings 

that is relatively easy to administer. 81 

FR 88814. 

A comment recommended that CFCs 

which apportion interest expense using 

the modified gross income method be 

permitted to use the same method to 

determine the character and source of 

section 987 gain or loss (rather than 

using the asset method under §§ 1.861– 

9(g) and 1.861–9T(g)). According to the 

comment, the asset method may not 

accurately reflect the income earned by 

the CFC for the taxable year, and section 

987 losses often could be allocated to a 

subpart F income group in excess of the 

income recognized in that group for the 

taxable year. The comment noted that 

the use of the modified gross income 

method would be more administrable 

and would more readily allow section 

987 losses to be used against gross 

income recognized in the current year, 

since the source and character of the 

section 987 loss would be determined 

by reference to the section 987 QBU’s 

gross income for the current year. 

The final regulations do not permit 

CFCs to use the modified gross income 

method to source and characterize 

section 987 gain or loss because the 

source and character of a section 987 

QBU’s gross income may vary 

significantly from year to year, 

including by reason of extraordinary 

events or as a result of tax planning. 

Accordingly, the gross income earned in 

a single year is not a sufficiently reliable 

proxy for historical earnings for 

purposes of section 987(3)(B). 

3. Timing of Source and Character 

Determination 

The 2023 proposed regulations 

provide that the initial assignment of 

section 987 gain or loss would generally 

be made in the taxable year in which the 

section 987 gain or loss is treated as 

recognized, deferred, or suspended. 

Proposed § 1.987–6(b)(1). 

Comments requested that the 

character and source of suspended 

section 987 loss and deferred section 

987 gain or loss be determined in the 

year in which it is recognized, rather 

than in the year in which it becomes 

suspended or deferred. The comments 

noted that the proposed rules would 

require extensive tracking of the source 

and character of section 987 gain or loss 

in multiple categories over multiple 

years. Comments also posited that the 

potential for distortion due to changes 

in the basis of a QBU’s assets or shifts 

in the character of its income would be 

present whether the section 987 gain or 

loss is characterized in the taxable year 

in which it becomes suspended or 

deferred or in the taxable year in which 

it is recognized. 

The final regulations retain the rules 

of proposed § 1.987–6(b)(1)(ii) and (iii), 

under which suspended section 987 loss 

and deferred section 987 gain or loss are 


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characterized in the year of suspension 

and deferral, respectively, for several 

reasons. 

First, making an initial assignment in 

the taxable year of deferral or 

suspension provides parity in the timing 

of the characterization of gains and 

losses (that is, both gains and losses are 

characterized in the year of a remittance 

or termination). 

Second, this rule is expected to 

produce source and character 

determinations that more closely align 

with the historical income of the section 

987 QBU during the period in which the 

relevant section 987 gain or loss arose. 

Making an initial assignment in the 

taxable year of deferral or suspension 

means that source and character are 

determined by reference to the assets of 

the section 987 QBU 

contemporaneously with the remittance 

or termination, while the affected assets 

are still taken into account for purposes 

of applying the asset method under 

§§ 1.861–9 and 1.861–9T. By contrast, 

waiting until the year of recognition 

would require deferred section 987 gain 

or loss and (in some cases) suspended 

section 987 loss to be characterized after 

the section 987 QBU has been 

terminated and its assets have been 

transferred to a related party, which 

could result in substantial distortions. 

Third, the timing rule of § 1.987– 

6(b)(1)(ii) is needed to facilitate the 

separate application of the loss-to-theextent-of-gain rule under § 1.987–11(e) 

to section 987 gain or loss in each 

recognition grouping. As explained in 

part X.B.3 of this Summary of 

Comments and Explanation of 

Revisions, in order to prevent taxpayers 

from avoiding the loss limitation 

through the selective recognition of 

section 987 gains that are subject to a 

low rate of tax (or are not subject to U.S. 

tax), § 1.987–11(e) provides that 

suspended section 987 loss in a 

recognition grouping is not recognized 

until section 987 gain in the same 

recognition grouping is recognized. For 

this rule to achieve its policy objective, 

suspended section 987 loss must be 

sourced and characterized before 

determining whether it can be 

recognized under § 1.987–11(e). If 

suspended section 987 loss were not 

characterized until the year of 

recognition, there would be no 

administrable way to identify 

suspended section 987 loss in the 

relevant recognition grouping for 

purposes of § 1.987–11(e) because the 

source and character of the suspended 

section 987 loss would not yet have 

been determined. 

Finally, in response to comments 

regarding compliance burden generally, 

the final regulations include a number 

of new rules intended to simplify the 

tracking of suspended section 987 loss 

or deferred section 987 gain or loss. For 

instance, the new de minimis rule 

(described in part X.A.1 of this 

Summary of Comments and Explanation 

of Revisions) is expected to reduce the 

burden of tracking suspended section 

987 loss because section 987 loss will be 

suspended only if it exceeds the de 

minimis threshold (the lesser of $3 

million or two percent of gross income). 

See § 1.987–11(c)(2). In addition, 

taxpayers that make the annual 

recognition election generally would not 

be subject to the deferral and loss 

suspension rules (and thus would not 

need to track deferred section 987 gain 

or loss or suspended section 987 loss). 

The lookback rule (described in part 

X.B.1 of this Summary of Comments 

and Explanation of Revisions) will 

permit suspended section 987 loss to be 

recognized in the year of a remittance to 

the extent of gain recognized during the 

lookback period, which will limit the 

amount of suspended section 987 loss 

carried forward to future years. 

Additionally, the new rules relating to 

the characterization of section 987 gain 

or loss for purposes of subpart F 

(described in part VII.B of this Summary 

of Comments and Explanation of 

Revisions) provide taxpayers more 

flexibility in characterizing their section 

987 gain and loss relating to subpart F 

income groups, including an election 

that will limit the number of subpart F 

income groups for which tracking is 

required. 

B. Characterization of Section 987 Gain 

or Loss for Purposes of Subpart F 

1. In General 

Under proposed § 1.987–6(b)(2)(i)(C), 

section 987 gain or loss 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 

for purposes of section 954(c)(1)(D). 

Some comments recommended that, 

for subpart F purposes, section 987 gain 

or loss should instead be assigned to the 

same subpart F income groups as the 

income generated by the section 987 

QBU’s assets. The comments noted that 

the recommended rule would better 

align the characterization of section 987 

gain or loss with the underlying assets 

and income of the section 987 QBU and 

would permit broader utilization of 

section 987 loss because the loss could 

be netted against income in the same 

subpart F income groups. One comment 

asserted that the recommended rule 

would be more consistent with section 

987(3)(B), which requires section 987 

gain or loss to be sourced by reference 

to the source of the income giving rise 

to post-1986 accumulated earnings. 

Other comments stated that section 

987 gain or loss should not be treated 

as foreign personal holding company 

income described in section 954(c)(1)(D) 

because section 954(c)(1)(D) refers to 

foreign currency gains or losses under 

section 988 and makes no reference to 

gain or loss recognized under section 

987(3). One comment questioned 

whether section 987 gain or loss should 

be assigned to any subpart F income 

group because section 954 does not 

explicitly identify section 987 gain as a 

category of subpart F income. 

Another comment requested that, if 

proposed § 1.987–6(b)(2)(i)(C) is 

retained for taxpayers applying the 

default rules, a different rule should be 

provided for taxpayers that make a 

current rate election (under which all 

assets and liabilities of a section 987 

QBU give rise to currency gain or loss). 

A comment also recommended that, if 

proposed § 1.987–6(b)(2)(i)(C) is 

retained, the final regulations should 

clarify that, for taxpayers predominantly 

engaged in the active conduct of a 

banking, insurance, financing, or similar 

business, section 987 gain or loss that is 

assigned to a subpart F income group is 

treated as financial services income 

within the meaning of section 

904(d)(2)(C). 

Other comments requested that, if 

section 987 gain or loss is treated as gain 

or loss from section 988 transactions not 

directly related to the business needs of 

the CFC, taxpayers should be permitted 

to use the elections available under 

§ 1.954–2(g)(3) (characterizing section 

988 gain or loss that arises from a 

specific category of subpart F income as 

gain or loss in that category) and 

§ 1.954–2(g)(4) (treating all section 988 

gain or loss as foreign personal holding 

company income). One comment 

recommended that, for purposes of the 

election under § 1.954–2(g)(3), section 

987 gain or loss should be allocated to 

categories of foreign base company 

income on a proportionate basis without 

requiring direct tracing of section 987 

gain or loss to specific transactions or 

assets. 

The final regulations retain the 

approach in the 2023 proposed 

regulations and treat section 987 gain or 

loss as subpart F income to the extent 

that the assets of the section 987 QBU 

generate subpart F income under the 

asset method of §§ 1.861–9(g) and 

1.861–9T(g). See § 1.987–6(b)(2)(i)(A). 

However, the Treasury Department and 

the IRS agree with the comments that 

assigning section 987 gain or loss to the 


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4While § 1.954–1(c)(1)(iii)(A)(1) includes 

categories of foreign personal holding company 

income, it expressly excludes passive foreign 

personal holding company income, which is 

described in § 1.954–1(c)(1)(iii)(B). Therefore, the 

two elections apply to mutually exclusive income 

groups. 

same subpart F income groups as the 

income generated by the section 987 

QBU’s assets is most consistent with the 

principles of section 987(3)(B) and is 

therefore the most appropriate exercise 

of authority under sections 987(3) and 

989(c). Accordingly, under the final 

regulations, the characterization of 

section 987 gain or loss is determined 

under the general rule of § 1.987–6 

using the asset method of §§ 1.861–9(g) 

and 1.861–9T(g), including by assigning 

section 987 gain or loss to subpart F 

income groups. Thus, for example, if a 

QBU’s assets generate foreign base 

company sales income, the section 987 

gain or loss will be characterized as 

foreign base company sales income. 

The Treasury Department and the IRS 

do not agree with the suggestion that 

section 987 gain or loss cannot give rise 

to subpart F income merely because 

section 954 does not explicitly identify 

section 987 gain as a separate category 

of subpart F income. Section 987(3) 

requires ‘‘proper adjustments (as 

prescribed by the Secretary)’’ to taxable 

income of the owner of a section 987 

QBU. Further regulatory authority is 

provided in section 989(c). The 

adjustments required under section 

987(3) include sourcing gain or loss 

recognized on a remittance by reference 

to the QBU’s historical earnings under 

section 987(3)(B). This sourcing rule 

serves to characterize the adjustments to 

income under section 987(3) in the same 

way as the QBU’s underlying income. 

Similarly, when a QBU’s income is 

taken into account in determining the 

owner’s subpart F income, proper 

adjustments must necessarily include 

adjustments to that type of income. 

Therefore, section 987 gain or loss must 

be characterized as foreign personal 

holding company income or other types 

of income described in section 952(a), in 

appropriate circumstances, to effectuate 

the intent of Congress reflected in the 

broader statutory scheme. 

2. Election To Treat Certain Section 987 

Gain or Loss as Foreign Currency Gain 

or Loss Attributable to Section 988 

Transactions 

In the case of section 987 gain or loss 

that would otherwise be characterized 

as passive foreign personal holding 

company income, the final regulations 

provide an election to treat the section 

987 gain or loss as foreign currency gain 

or loss of the CFC-owner that is 

attributable to section 988 transactions 

not directly related to the business 

needs of the CFC (the ‘‘section 988 

characterization election’’). See § 1.987– 

6(b)(2)(i)(C)(1). This election is intended 

to benefit taxpayers because it would 

generally allow section 987 gains and 

losses assigned to passive foreign 

personal holding company income 

groups, which would otherwise be 

treated as separate items (or as allocable 

to separate items) of passive foreign 

personal holding company income 

under the rules in § 1.954–1(c)(1)(iii)(B), 

to be treated as part of (or allocable to) 

a single item of income. This would 

generally facilitate some netting of the 

CFC-owner’s section 987 gains and 

losses (because they would be assigned 

to the same item of income) and would 

also generally permit a CFC-owner to 

net its foreign currency gains and losses 

from section 988 transactions with the 

section 987 gain or loss from its QBUs 

(to the extent both comprise passive 

foreign personal holding company 

income). Similarly, the section 988 

characterization election should, in 

many cases, reduce the number of 

recognition groupings under § 1.987– 

11(f), thereby simplifying the 

application of the loss-to-the-extent-ofgain rule and minimizing the tracking 

burden with respect to any suspended 

losses. 

Section 987 gain or loss subject to the 

section 988 characterization election is 

not eligible for the business needs 

exception under § 1.954–2(g)(2) because 

this election applies only to section 987 

gain or loss that would otherwise be 

characterized by reference to assets that 

give rise to passive foreign personal 

holding company income. The business 

needs exception is available only for 

foreign currency gain or loss arising 

from a transaction or property that does 

not give rise to subpart F income (which 

includes foreign personal holding 

company income). See § 1.954– 

1(g)(2)(ii)(B)(1)(ii). 

Similarly, section 987 gain or loss 

subject to the section 988 

characterization election is not eligible 

for the election in § 1.954–2(g)(3) 

(election to characterize foreign 

currency gain or loss that arises from a 

specific category of subpart F income as 

gain or loss in that category). The 

§ 1.954–2(g)(3) election applies only to 

gain or loss that is related to income 

categories described in the foreign base 

company income groups of § 1.954– 

1(c)(1)(iii)(A)(1) or (2) or the other 

subpart F income categories described 

in section 952(a); it does not apply to 

gain or loss related to passive foreign 

personal holding company income.4 By 

contrast, the section 988 

characterization election applies only to 

section 987 gain or loss that would 

otherwise be characterized by reference 

to assets that give rise to passive foreign 

personal holding company income. 

Thus, the two elections are mutually 

exclusive by their terms. 

Finally, section 987 gain or loss 

subject to the section 988 

characterization election is not eligible 

for the election in § 1.954–2(g)(4) 

(election to treat all foreign currency 

gains or losses as foreign personal 

holding company income). Extending 

the § 1.954–2(g)(4) election to section 

987 gain or loss could permit 

inappropriate use of section 987 losses 

and would be inconsistent with the 

limited purpose of the section 988 

characterization election. Therefore, if 

an election is in effect under § 1.954– 

2(g)(3) or (4), the foreign currency gain 

or loss to which the election applies is 

simply determined without regard to the 

section 987 gain or loss treated as 

foreign currency gain or loss attributable 

to a section 988 transaction by reason of 

the section 988 characterization 

election. 

C. GILTI High-Tax Exclusion 

Under the 2023 proposed regulations, 

for purposes of applying the high-tax 

exclusion in § 1.951A–2(c)(7) (the 

‘‘GILTI HTE’’), all section 987 gain and 

loss in a tentative tested income group 

that is recognized by a CFC in a taxable 

year is treated as a single tentative 

tested income item that is treated as 

recognized by a tested unit separate 

from the CFC’s other tested units. 

Proposed § 1.987–6(b)(2)(iii). As a 

result, section 987 gain or loss is not 

taken into account in applying the 

GILTI HTE with respect to the CFC’s 

other items of tentative tested income. 

Instead, the GILTI HTE is applied 

separately to section 987 gain and loss 

and, as a result, section 987 gain or loss 

generally will not be eligible for the 

GILTI HTE unless the CFC is subject to 

foreign tax on currency gain recognized 

with respect to its interest in the QBU 

under the applicable foreign tax rules. 

See proposed § 1.987–6(b)(3). 

Some comments noted that these 

rules would preclude the application of 

the GILTI HTE with respect to section 

987 gain of a CFC even if the CFC’s 

section 987 QBUs are operating in 

jurisdictions subject to a high foreign 

tax rate. Another comment noted that 

the proposed rules would treat section 

987 gain or loss differently from 

currency gain or loss recognized under 

section 988 (for example, section 988 

gain or loss on a net investment hedge 

with respect to the section 987 QBU) 

and would make it difficult to project a 


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5While the legislative history relating to the 

GILTI high-tax exclusion indicates that high-taxed 

income does not present base erosion concerns, the 

policy rationale underlying that view does not 

extend to excluding low-taxed income from GILTI 

merely because it may be earned by an entity that 

also earns high-taxed income. See S. Comm. on the 

Budget, Reconciliation Recommendations Pursuant 

to H. Con. Res. 71, S. Print. No. 115–20, at 371 

(2017) (‘‘The Committee believes that certain items 

of income earned by CFCs should be excluded from 

the GILTI [regime], either because they should be 

exempt from U.S. tax—as they are generally not the 

type of income that is the source of the base erosion 

concerns—or are already taxed currently by the 

United States. Items of income excluded from GILTI 

because they are exempt from U.S. tax under the 

bill include foreign oil and gas extraction income 

(which is generally immobile) and income subject 

to high levels of foreign tax.’’). 

taxpayer’s effective tax rate due to the 

unpredictability of exchange rate 

fluctuations. This comment 

recommended that proposed § 1.987– 

6(b)(2)(iii) be modified to provide that 

(i) section 987 gain and loss is taken 

into account in determining the 

effective tax rate under § 1.951A– 

2(c)(7)(vi) and (ii) section 987 gain or 

loss associated with highly taxed tested 

units is excluded from the computation 

of tested income. 

The final regulations retain the rule 

that section 987 gain or loss is treated 

as a single tentative tested income item 

that is separate from the CFC’s other 

tested units. See § 1.987–6(b)(2)(iii). 

Although section 987 gain or loss is 

characterized by reference to the 

historical earnings of the section 987 

QBU, which may correspond to one or 

more tested units, it is not equivalent to 

current year income or loss attributable 

to a tested unit. Section 987 gain or loss 

is not properly attributable to the tested 

unit that corresponds to the section 987 

QBU or to the CFC tested unit, because 

in most cases neither the tested unit’s 

country of residence nor the CFC’s 

country of residence will take the 

section 987 gain or loss into account in 

determining foreign gross income. 

Therefore, attributing section 987 gain 

or loss to either tested unit would tend 

to be distortive and generally would not 

further the goals of the high-tax 

exclusion.5

In addition, treating section 987 gain 

or loss as a single item of tentative 

tested income, as if it were attributable 

to a separate tested unit (distinct from 

the section 987 QBU), is consistent with 

the determination that a branch 

comprises a separate tested unit, even if 

it is not a tax resident of the foreign 

country in which it is located, if the 

income of the branch is subject to an 

exclusion, exemption, or other similar 

relief (such as a preferential rate) in the 

CFC’s country of tax residence. See 

§ 1.951A–2(c)(7)(iv)(A)(3). Section 987 

gain or loss is currency gain or loss of 

the owner of the QBU, and these gains 

and losses are generally not subjected to 

residency-based taxation in either the 

country of the QBU or the country in 

which the CFC is a resident. Therefore, 

the section 987 gains and losses of the 

CFC are functionally equivalent to gain 

or loss of a branch that is not a tax 

resident in any country and whose 

income is not subject to residency-based 

taxation in the CFC’s country of tax 

residence. 

Accordingly, it is appropriate to test 

the effective rate of foreign tax on 

section 987 gains and losses as a 

separate item of tentative tested income. 

The alternative approach recommended 

by a comment (which would 

incorporate section 987 gain or loss in 

the tested units that correspond to the 

section 987 QBU) would distort the 

effective tax rate computation with 

respect to a CFC’s other income because 

section 987 gain or loss typically is not 

subject to foreign tax. These distortions 

could be favorable or unfavorable to 

taxpayers, depending on the 

circumstances. Moreover, the 

comment’s recommended approach 

would complicate the ordering rules 

and mechanics needed to apply the lossto-the-extent-of-gain rule of § 1.987– 

11(e) with respect to section 987 gain or 

loss assigned to a tested income group, 

which would increase the 

administrative and compliance burden 

of the section 987 regulations. 

The approach set forth in the 

proposed regulations is also most 

consistent with the policy underlying 

the determination of an appropriate 

‘‘item’’ of income for purposes of 

applying the high-tax exception under 

section 954(b)(4) as is reflected in the 

legislative history to that section, which 

directs the Treasury Department and the 

IRS to allow reasonable groupings of 

items of income that are substantially 

taxed at the same rate in a single 

country. See H.R. Rept. No. 99–426, at 

400–01 (1985) (‘‘Although this rule 

applies separately with respect to each 

‘item of income’ received by a [CFC], the 

committee expects that the Secretary 

will provide rules permitting reasonable 

groupings of items of income that bear 

substantially equal effective rates of tax 

in a given country. For example, all 

interest income received by a [CFC] 

from sources within its country of 

incorporation may reasonably be treated 

as a single item of income for purposes 

of this rule, if such interest is subject to 

uniform taxing rules in that country.’’). 

The Treasury Department and the IRS 

have determined that section 987 gains 

and losses are likely to be taxed at a 

different rate of tax than other income 

generally subject to tax either in the 

country of the tested unit or in the 

country of residence of the CFC and 

therefore should reasonably be grouped 

and tested as a separate ‘‘item’’ of 

income for this purpose. 

As noted in a comment, for purposes 

of the GILTI HTE, the final regulations 

treat section 987 gain or loss differently 

from section 988 gain or loss on a net 

investment hedge. However, the new 

hedging rule in § 1.987–14 will enable 

taxpayers to account for the hedge as an 

adjustment to unrecognized section 987 

gain or loss, as described in part V.B of 

this Summary of Comments and 

Explanation of Revisions. 

VIII. Comments and Changes to 

Proposed §§ 1.987–7A, 1.987–7B, and 

1.987–7C—Partnerships 

A. Partnership Rules Under the 2023 

Proposed Regulations 

The 2023 proposed regulations (and 

the 2016 final regulations) generally 

would apply aggregate theory to 

partnerships wholly owned by related 

persons (‘‘section 987 aggregate 

partnerships’’). See proposed § 1.987– 

7B. Under proposed § 1.987–1(b)(5)(ii), 

each partner in a section 987 aggregate 

partnership would be treated as an 

indirect owner of the partnership’s 

eligible QBUs (and a section 987 

aggregate partnership is not itself a QBU 

under section 989(a)). Thus, exchange 

gain or loss under section 987 would be 

measured from the perspective of the 

partners (rather than the partnership). 

The aggregate approach would serve to 

prevent a group of related parties from 

holding an eligible QBU through a 

partnership (rather than owning it 

directly) in order to change the section 

987 treatment of the eligible QBU 

without meaningfully altering the 

group’s economic position. 

The 2023 proposed regulations would 

provide a different set of rules for 

partnerships that are not wholly owned 

by related partners. See proposed 

§ 1.987–7A. For these partnerships, the 

2023 proposed regulations would apply 

a hybrid approach to entity theory, 

under which unrecognized section 987 

gain or loss of the partnership’s eligible 

QBUs for a taxable year is determined 

at the partnership level and then 

allocated to the partners for purposes of 

computing the pool of net unrecognized 

section 987 gain or loss. Any section 

987 gain or loss would be recognized 

and taken into account at the partner 

level. 

The preamble to the 2023 proposed 

regulations notes that the Treasury 

Department and the IRS considered 

whether it would be appropriate to 

apply a hybrid approach to all 


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partnerships, regardless of whether the 

partners are related. 88 FR 78147 

through 78148. The preamble explains 

that such an approach might reduce the 

complexity and compliance burden of 

the section 987 regulations, but that it 

could permit taxpayers to manipulate 

the application of section 987 by 

holding a section 987 QBU through a 

partnership rather than holding it 

directly. Id. at 78148. 

The 2023 proposed regulations would 

not provide rules relating to a partner’s 

application of section 987 with respect 

to a partnership that uses a different 

functional currency (which creates a 

separate layer of currency exposure). 

However, the preamble to the 2023 

proposed regulations discusses 

alternative methodologies under which 

the partners could determine and 

recognize section 987 gain or loss with 

respect to their partnership interests. 88 

FR 78148 through 78149. 

B. Partnership Rules in the Final 

Regulations 

1. In General 

The Treasury Department and the IRS 

continue to study the appropriate 

treatment of partnerships for purposes 

of section 987 and, accordingly, the 

final regulations do not provide detailed 

rules concerning the determination of 

section 987 taxable income or loss and 

section 987 gain or loss in the case of 

a partnership. The final regulations also 

reserve on the treatment of a partnership 

as a QBU under section 989(a) and 

§ 1.989(a)–1(b)(2)(i). See § 1.989(a)– 

1(b)(2)(i)(C). 

Only one comment regarding 

partnerships was received in response 

to the 2023 proposed regulations. The 

portions of the comment that relate to 

partnership rules that are not included 

in the final regulations have not been 

adopted because they are outside the 

scope of these regulations. The Treasury 

Department and the IRS expect to 

address these issues in future guidance. 

Pending future guidance, taxpayers 

must apply sections 987 and 989(a) with 

respect to partnerships using a 

reasonable method consistent with the 

statute. For example, if a domestic 

corporation owns an interest in a foreign 

partnership (which would use the euro 

as its functional currency if it is treated 

as a QBU under section 989(a)), and the 

partnership owns an eligible QBU that 

uses the Swiss franc as its functional 

currency, the domestic corporation may 

apply section 987 to the eligible QBU 

under an aggregate approach. 

Alternatively, under an entity approach, 

the partnership could be treated as a 

section 987 QBU of the domestic 

corporation, and the eligible QBU could 

be treated as a section 987 QBU of the 

partnership. The domestic corporation 

could also apply a hybrid approach 

under the principles of the 2023 

proposed regulations. However, 

taxpayers will not be considered to have 

applied a reasonable method unless 

they apply the same method 

consistently from year to year with 

respect to a particular partnership or 

eligible QBU. Members of a controlled 

group that are partners in the same 

partnership must apply the same 

method with respect to a particular 

partnership or eligible QBU, but 

unrelated partners are not subject to a 

consistency requirement. See § 1.987– 

7(b). 

2. Application of the Final Regulations 

to Partnerships 

Although section 987 applies to 

partnerships, only certain parts of the 

final regulations apply to partnerships. 

See § 1.987–7(b) and (c). In particular, 

the rules relating to suspended section 

987 loss in §§ 1.987–11 and 1.987–13 

apply to partnerships, and the deferral 

rules of § 1.987–12 continue to apply to 

partnerships, with certain 

modifications. See § 1.987–7(c)(2)(i) and 

(d). These rules are needed to prevent 

the selective recognition of losses. In 

addition, the final regulations provide 

that an annual recognition election and 

a section 988 mark-to-market election 

can be made with respect to a 

partnership (whether an aggregate or 

entity approach is applied). See § 1.987– 

7(c)(2)(ii) and (iii). These elections are 

expected to reduce the compliance 

burden of applying section 987 in the 

partnership context. 

Similarly, the rules for determining 

the source and character of section 987 

gain or loss under § 1.987–6 apply to 

partnerships, in order to facilitate 

application of the loss-to-the-extent-ofgain rule. See § 1.987–7(c)(2)(i). A 

comment suggested that special rules 

should apply to determine the source 

and character of section 987 gain or loss 

recognized in connection with the sale 

or redemption of a partnership interest 

under the principles of § 1.864(c)(8)–1. 

The final regulations do not adopt this 

approach because it would be 

inconsistent with section 987(3)(B) 

(under which section 987 gain or loss is 

sourced by reference to historical 

earnings) and could allow taxpayers to 

manipulate the source and character of 

section 987 gain or loss. 

Because the section 987 regulations 

generally do not apply to partnerships, 

the general rules of the section 987 

regulations must be adapted as 

necessary to apply § 1.987–7 and the 

other applicable provisions to 

partnerships. See § 1.987–7(c)(3). The 

rules must also be applied in this 

manner to an S corporation, which is 

treated the same way as a partnership 

for purposes of the section 987 

regulations. See § 1.987–7(f). 

3. Loss Suspension Rule 

Under the final regulations, the 

general loss suspension rule in § 1.987– 

11(c)(1) does not apply to partnerships. 

See § 1.987–7(d)(1)(i). Instead, section 

987 loss generally will be suspended in 

the taxable year in which it would 

otherwise be recognized under the 

method used by the taxpayer to apply 

section 987 with respect to the 

partnership. See § 1.987–7(d)(1)(ii). The 

loss suspension rule of § 1.987– 

7(d)(1)(ii) applies to an eligible QBU 

that is directly owned by a partnership, 

regardless of whether an aggregate 

approach, an entity approach, or a 

hybrid approach is applied. See § 1.987– 

7(d)(1)(ii)(A). However, if a partnership 

is itself treated as a section 987 QBU of 

its partners under an entity approach, 

the loss suspension rule applies only if 

at least 95% of the capital and profits 

interests in the partnership are owned 

by related persons. See § 1.987– 

7(d)(1)(ii)(B). This limitation is intended 

to reduce the complexity and 

compliance burden of the section 987 

regulations for partnerships owned by 

unrelated persons. 

The final regulations provide several 

other exceptions to the loss suspension 

rule of § 1.987–7(d)(1)(ii). First, section 

987 loss with respect to an eligible QBU 

owned by a partnership is not 

suspended if section 987 is consistently 

applied using a method under which 

section 987 gain or loss does not arise 

with respect to historic items (for 

example, a method that follows the 

principles of §§ 1.987–3 through 1.987– 

5, under which historic items are 

assigned a historic rate, such that their 

balance sheet value does not change in 

response to changes in the value of the 

section 987 QBU’s functional currency). 

See § 1.987–7(d)(2)(i). Second, section 

987 loss is not suspended if an annual 

recognition election is in effect. See 

§ 1.987–7(d)(2)(ii). Finally, section 987 

loss is not suspended if the de minimis 

rule in § 1.987–11(c)(2) applies (that is, 

if the amount of section 987 loss subject 

to suspension does not exceed the lesser 

of $3 million or two percent of gross 

income, as described in part X.A.1 of 

this Summary of Comments and 

Explanation of Revisions). See § 1.987– 

7(d)(2)(iii). These rules generally align 

with the scope of the loss suspension 

rule in § 1.987–11(c)(1). 


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4. Adjustments to the Basis of a 

Partner’s Interest in the Partnership 

The proposed regulations would 

provide that a partner’s basis in a 

partnership is adjusted when the 

partner recognizes section 987 gain or 

loss, defers section 987 gain or loss, or 

suspends section 987 loss attributable to 

the partnership. Proposed § 1.987– 

7A(e). This rule is intended to avoid 

duplication of section 987 gain or loss 

(for example, when the partnership 

interest is sold). The final regulations 

retain this rule for taxpayers that apply 

section 987 using a method that results 

in recognition, deferral, or suspension of 

section 987 gain or loss at the partner 

level. Under § 1.987–7(e), the partner’s 

basis in its partnership interest is 

adjusted under the principles of section 

705 as though the section 987 gain or 

loss was part of the partner’s 

distributive share of partnership items. 

See § 1.987–7(e). 

A commenter requested clarification 

concerning the interaction of this basis 

adjustment rule with section 704(d). 

Section 704(d)(1) provides that a 

partner’s distributive share of 

partnership loss (including capital loss) 

shall be allowed only to the extent of 

the basis of that partner’s interest in the 

partnership at the end of the partnership 

year in which such loss occurred. 

Section 704(d)(2) provides for the 

carryover of the excess of any loss over 

such basis to the next taxable year. To 

the extent that basis is available in the 

next taxable year, the partner is able to 

take the loss into account. Relatedly, the 

partner will decrease the adjusted basis 

in its partnership interest to the extent 

that any loss carryover is taken into 

account within the taxable year. See 

section 705(a)(2). 

The final regulations clarify that the 

principles of section 704(d) are applied 

as though items of section 987 loss, 

deferred section 987 loss, or suspended 

section 987 loss were part of the 

partner’s distributive share of 

partnership items. See § 1.987–7(e). The 

basis adjustment rule in § 1.987–7(e) is 

intended to replicate the basis 

adjustments that would occur if the 

relevant section 987 gain or loss was 

taken into account as part of the 

partner’s distributive share of 

partnership income or loss (including 

the effects of section 704(d)). 

5. Other Special Rules for Partnerships 

The final regulations contain several 

other rules that facilitate the application 

of section 987 to partnerships. If a 

partner in a partnership is treated as the 

owner of a section 987 QBU directly 

owned by the partnership (for example, 

under an aggregate approach), § 1.987– 

7(c)(3)(ii) provides a special rule that is 

used to determine the members of the 

owner’s controlled group for purposes 

of §§ 1.987–12 and 1.987–13. Under this 

rule, any member of the partnership’s 

controlled group is treated as a member 

of the partner’s controlled group so long 

as the partner continues to be a partner 

in the partnership. Thus, for example, if 

the partnership contributes the section 

987 QBU’s assets to a wholly owned 

subsidiary of the partnership, the 

subsidiary will be treated as a member 

of the partner’s controlled group and the 

contribution may be treated as a deferral 

event for purposes of § 1.987–12. 

When a partnership is itself treated as 

a QBU of a partner that is subject to 

section 987, and the partnership is not 

engaged in any trade or business (for 

example, a partnership that functions as 

a holding company), the rules of 

§ 1.987–13(b) through (d) do not apply. 

Those rules are designed to attribute 

suspended section 987 loss to a 

successor suspended loss QBU if the 

assets of a section 987 QBU continue to 

be used in the same trade or business by 

a member of the controlled group, and 

they trigger the recognition of 

suspended section 987 loss if the 

section 987 QBU terminates without a 

successor. However, when a QBU that 

has suspended section 987 loss is not 

engaged in any trade or business, the 

rules of § 1.987–13(b) through (d) would 

not result in the appropriate recognition 

of suspended section 987 loss and could 

be prone to manipulation. Accordingly, 

the suspended section 987 loss can be 

recognized only under the loss-to-theextent-of-gain rule of § 1.987–11(e). 

The transition rules in § 1.987–10 do 

not apply to partnerships. Instead, the 

applicable rules of the section 987 

regulations take effect on the transition 

date with respect to section 987 gain or 

loss determined and recognized under 

the taxpayer’s existing method. In 

addition, taxpayers may not apply the 

fresh start transition method with 

respect to a partnership. As explained in 

the preamble to the 2023 proposed 

regulations, the fresh start transition 

method is no longer available because 

that method results in the elimination of 

pretransition gain or loss, and (if it were 

available) it could be opportunistically 

used by taxpayers to eliminate their 

pretransition gain. 88 FR 78150 and 

78156. 

The final regulations also clarify that 

the rule in § 1.988–1(a)(10)(i), which 

provides that transactions between a 

taxpayer and its QBU generally are not 

section 988 transactions, applies only to 

disregarded transactions. Thus, a 

nonfunctional currency transaction 

between a partner and a partnership 

could be treated as a section 988 

transaction even though the partnership 

is treated as a QBU subject to section 

987. 

IX. Comments and Changes to Proposed 

§ 1.987–10: Transition Rules 

Proposed § 1.987–10 would provide 

transition rules for the first year in 

which the section 987 regulations are 

applicable. In particular, proposed 

§ 1.987–10(e) would provide rules for 

determining and recognizing 

pretransition gain or loss with respect to 

each of a taxpayer’s QBUs. 

A. Computation of Pretransition Gain or 

Loss 

1. Taxpayers That Applied Section 987 

Using an Eligible Pretransition Method 

Under the 2023 proposed regulations, 

the computation of pretransition gain or 

loss would differ depending on how the 

taxpayer applied section 987 before the 

transition date. If the taxpayer applied 

section 987 to a section 987 QBU using 

an eligible pretransition method (as 

described in part IX.B of this Summary 

of Comments and Explanation of 

Revisions), the owner would use that 

method to compute pretransition gain or 

loss. Proposed § 1.987–10(e)(2). The 

owner’s pretransition gain or loss would 

be equal to the amount of section 987 

gain or loss that it would have 

recognized under the eligible 

pretransition method if the QBU 

terminated on the day before the 

transition date, with certain 

adjustments. Proposed § 1.987– 

10(e)(2)(i)(A). 

Under proposed § 1.987–10(e)(2)(i)(B), 

the amount of pretransition gain or loss 

would be increased or reduced by the 

owner functional currency net value 

adjustment (‘‘OFCNV adjustment’’), 

which reflects 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, if a taxpayer 

applied an earnings only method under 

which currency gain or loss on the 

QBU’s capital was not recognized at the 

time of a remittance but was separately 

tracked and accounted for in 

determining the basis of distributed 

assets, the currency gain or loss on 

capital would be accounted for as part 

of the OFCNV adjustment. 

Two comments were received relating 

to the OFCNV adjustment. One 

comment requested that taxpayers be 

permitted to use the CTA prepared for 

financial accounting purposes rather 

than making the OFCNV adjustment. 

The comment asserted that taxpayers 

applying an earnings only method might 


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6Although taxpayers that own section 987 QBUs 

generally are not small businesses, this rule is 

intended to limit the compliance burden for small 

businesses that may be affected. 

not have the information necessary to 

compute the OFCNV adjustment. 

The final regulations do not permit 

taxpayers to use the CTA in lieu of 

making the OFCNV adjustment. As 

explained in part V.A.2 of this Summary 

of Comments and Explanation of 

Revisions, the CTA amount may be 

substantially different from the amount 

of section 987 gain or loss that is 

properly taken into account for tax 

purposes. Moreover, it should not be 

unduly burdensome for a taxpayer to 

compute the OFCNV adjustment 

because the relevant information is 

already needed to apply the taxpayer’s 

existing pretransition method. 

Another comment recommended that, 

in the case of taxpayers applying an 

earnings only method, currency gain or 

loss with respect to the QBU’s capital 

should not be taken into account in 

determining pretransition gain or loss 

(which is ultimately recognized as 

section 987 gain or loss after the 

transition date). The comment noted 

that taxpayers may have adopted the 

earnings only method to reduce the size 

of their section 987 gain or loss pools 

and that the earnings only method 

serves to mitigate the potential for 

selective recognition of large section 987 

losses. Therefore, the comment 

requested that the OFCNV adjustment 

instead be taken into account as an 

adjustment to asset basis. 

The Treasury Department and the IRS 

agree that, for taxpayers applying an 

earnings only method, accounting for 

the OFCNV adjustment in determining 

the basis of a section 987 QBU’s assets 

would produce a reasonable result that 

is consistent with these taxpayers’ 

pretransition method. Accordingly, 

under the final regulations, if a taxpayer 

applied an earnings only method before 

the transition date and does not make a 

current rate election for the taxable year 

beginning on the transition date, the 

historic rate assigned to the section 987 

QBU’s historic assets (other than 

inventory) is equal to the exchange rate 

that would have been used to translate 

those assets if they had been distributed 

to the owner on the day before the 

transition date (the ‘‘pretransition 

translation rate’’). See § 1.987– 

10(d)(3)(ii). As a result, no OFCNV 

adjustment is made with respect to 

those assets, but currency gain or loss 

related to those assets will be accounted 

for as the assets are sold or depreciated 

under § 1.987–3. For taxpayers that 

make a current rate election (and thus 

will not take historic rates into account 

under § 1.987–3), currency gain or loss 

on the QBU’s capital must be accounted 

for in determining pretransition gain or 

loss. See § 1.987–10(d)(3)(i) and 

(e)(2)(i)(B). 

A comment raised a question as to 

whether the delegation of regulatory 

authority under section 987(3) is selfexecuting. The comment suggested that, 

if section 987(3) is not self-executing, 

then it might not be appropriate to 

attribute pretransition gain or loss to 

taxpayers that have not accounted for 

section 987 gain or loss before the 

transition date. The Treasury 

Department and the IRS have concluded 

that section 987(3) is self-executing 

because it provides a mandatory 

delegation under which the Secretary is 

directed to determine how (rather than 

whether) the owner of a section 987 

QBU should make proper adjustments 

in computing its taxable income. See, 

e.g., 15 W 17th St. LLC v. Commissioner, 

147 T.C. 557 (2016) (articulating 

standard for determining whether a 

statute is self-executing in the absence 

of regulations); Est. of Neumann v. 

Commissioner, 106 T.C. 216 (1996) 

(holding delegation was self-executing 

because it related to how, rather than 

whether, the statute applied). Therefore, 

taxpayers currently are obligated to 

determine section 987 gain or loss in a 

reasonable manner and must account for 

pretransition gain or loss once the 

regulations become applicable. 

2. Taxpayers That Did Not Apply 

Section 987 Using an Eligible 

Pretransition Method 

Under proposed § 1.987–10(e)(3), 

taxpayers that did not apply an eligible 

pretransition method would be required 

to determine pretransition gain or loss 

by applying a simplified version of the 

computation described in § 1.987–4(d) 

to determine unrecognized section 987 

gain or loss (‘‘annual unrecognized 

section 987 gain or loss’’) for each 

taxable year since the section 987 QBU’s 

inception. Proposed § 1.987– 

10(e)(3)(iii). Pretransition gain or loss 

would be reduced by any section 987 

gain or loss recognized before the 

transition date. Proposed § 1.987– 

10(e)(3)(ii)(B). 

Comments asserted that the method 

provided in proposed § 1.987–10(e)(3) 

could be burdensome to apply and 

difficult to administer. Some comments 

recommended that taxpayers should not 

be required to compute annual 

unrecognized section 987 gain or loss 

for each taxable year since the QBU’s 

inception. Instead, the comments 

suggested that the final regulations 

provide a reasonable cutoff date before 

which pretransition gain or loss would 

not be computed. Another comment 

requested that taxpayers be permitted to 

determine pretransition gain or loss 

using the earnings and capital method 

described in the 1991 proposed 

regulations, as this would avoid the 

need to prepare tax basis balance sheets. 

A further comment recommended 

adoption of a de minimis rule for 

taxpayers with minimal pretransition 

gain or loss. 

The Treasury Department and the IRS 

agree that, when a QBU has been 

operating for a long period, computing 

annual unrecognized section 987 gain or 

loss for all taxable years since the QBU’s 

inception could be burdensome. 

Accordingly, the final regulations 

provide a cutoff date of September 7, 

2006, which is the date on which 

proposed section 987 regulations were 

published in the Federal Register (71 

FR 52876) (the ‘‘2006 proposed 

regulations’’). Under the final 

regulations, taxpayers that did not apply 

an eligible pretransition method must 

compute pretransition gain or loss only 

for taxable years beginning on or after 

September 7, 2006. The publication date 

of the 2006 proposed regulations is an 

appropriate cutoff date for this purpose 

because the 2006 proposed regulations 

contained transition rules that were 

conditioned on the application of 

section 987 using a reasonable method. 

See § 1.987–10(a)(2) of the 2006 

proposed regulations. 

The final regulations also provide a de 

minimis rule to reduce the compliance 

burden on small businesses that own 

section 987 QBUs.6 Under the de 

minimis rule, a qualifying taxpayer may 

elect to treat all QBUs that fall below the 

de minimis threshold as having no 

pretransition gain or loss. To qualify for 

the de minimis rule, the owner of a 

section 987 QBU must have gross 

receipts that fall below the threshold for 

the small business exception in section 

163(j)(3) (that is, the owner must have 

gross receipts of $25 million or less, 

indexed to inflation and averaged over 

the prior 3-year period). If this test is 

met, the de minimis rule applies to any 

section 987 QBU with gross assets of 

less than $10 million (averaged over the 

same 3-year period and taking into 

account the assets of all section 987 

QBUs in the same country that are 

owned by the same owner or a member 

of its controlled group). 

The final regulations do not permit 

taxpayers to apply an earnings and 

capital method in lieu of computing 

annual unrecognized section 987 gain or 

loss under § 1.987–10(e)(3). However, as 

explained in part V.A.1 of this Summary 


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7 In certain instances, a method that does not 

constitute a reasonable application of section 987 is 

treated as an eligible pretransition method in order 

to reduce the compliance burden of transitioning 

onto the section 987 regulations. 

of Comments and Explanation of 

Revisions, the rules for computing 

unrecognized section 987 gain or loss 

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

have been modified so that they can be 

applied without the need for tax basis 

balance sheets. As a result, the method 

provided in § 1.987–10(e)(3) can 

similarly be applied without tax basis 

balance sheets (that is, by computing 

QBU net value using the formula 

provided in § 1.987–4(e)(2)(iii)). 

B. Definition of an Eligible Pretransition 

Method 

Under the 2023 proposed regulations, 

an eligible pretransition method would 

be defined to include a reasonable 

application of the earnings and capital 

method described in the 1991 proposed 

regulations, any other reasonable 

method that produces the same total 

amount of income as the earnings and 

capital method over the life of the 

owner, or an earnings only method that 

does not produce the same total amount 

of lifetime income as an earnings and 

capital method (subject to certain 

restrictions, including a consistency 

requirement). Proposed § 1.987– 

10(e)(4)(i) through (iii). The owner must 

have applied the 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. Proposed § 1.987–10(e)(4). For 

this purpose, 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. Proposed § 1.987–10(e)(4)(iv). 

Comments requested clarification 

concerning the definition of an eligible 

pretransition method. The comments 

noted that some taxpayers have applied 

the 1991 proposed regulations with 

modifications; for example, some 

taxpayers apply an annual netting 

convention to determine the amount of 

a remittance or treat a group of QBUs 

with the same functional currency as a 

single QBU. Other comments indicated 

that taxpayers may not account for 

frequently recurring intercompany 

transactions in computing their section 

987 gain or loss. 

One comment suggested that 

taxpayers should be treated as having 

applied an eligible pretransition method 

so long as they made a good faith effort 

to apply section 987 using a reasonable 

method. Another comment 

recommended that taxpayers that have 

consistently relied on their CTA account 

as an estimate of unrealized section 987 

gain or loss should be considered to 

have applied an eligible pretransition 

method (and thus should be permitted 

to use their CTA account to determine 

the amount of pretransition gain or 

loss). 

Another comment suggested that a 

CFC that has consistently applied a 

reasonable method since the enactment 

of the Tax Cuts and Jobs Act (‘‘TCJA’’), 

Public Law 115–97, 131 Stat. 2054 

(2017), should be treated as having 

applied an eligible pretransition 

method, even if the method was not 

applied in previous taxable years. In 

particular, the comment recommended 

that an owner that began applying an 

earnings only method described in 

proposed § 1.987–10(e)(4)(iii) after the 

TCJA was enacted should be deemed to 

meet the consistency requirement of 

proposed § 1.987–10(e)(4)(iii)(B). 

In response to these comments, the 

final regulations clarify and expand the 

definition of an eligible pretransition 

method under § 1.987–10(e)(4). The 

definition is intended broadly to 

include any method that complies with 

the statutory requirements of section 

987 in a reasonable manner.7

1. Errors Made in Applying a 

Pretransition Method and Certain 

Consistent Practices That Are Not 

Treated as Errors 

The final regulations provide that a 

taxpayer is treated as applying an 

eligible pretransition method even if the 

taxpayer made an error in the 

application of its method or did not 

apply the method in all taxable years in 

which it was the owner of the section 

987 QBU. § 1.987–10(e)(4)(iv). However, 

taxpayers are required to compute 

pretransition gain or loss under § 1.987– 

10(e)(2) as though the eligible 

pretransition method had been applied 

without error for all prior taxable years. 

Thus, for example, if a taxpayer made 

an error in applying its method for a 

prior year, the deemed termination 

amount under § 1.987–10(e)(2)(i)(A) is 

equal to the amount of section 987 gain 

or loss the taxpayer would have 

recognized on termination if it had not 

made the error and its section 987 QBU 

terminated on the day before the 

transition date. 

If a taxpayer consistently used a 

reasonable convention to apply section 

987 before the transition date, the 

taxpayer must use the same convention 

in determining pretransition gain or loss 

under § 1.987–10(e)(2). See § 1.987– 

10(e)(4)(v)(B)(1). Thus, unlike a taxpayer 

that made an error in applying its 

pretransition method, a taxpayer that 

used a reasonable convention would not 

be required to recompute pretransition 

gain or loss without regard to the 

convention. Similarly, if a taxpayer had 

a consistent practice under which it did 

not account for frequently recurring 

disregarded transactions in determining 

the amount of section 987 gain or loss 

recognized upon a remittance, this 

practice is not treated as an error. See 

§ 1.987–10(e)(4)(v)(B)(2). However, this 

rule does not apply unless the taxpayer 

reasonably accounted for the 

disregarded transactions in determining 

the amount of unrecognized section 987 

gain or loss with respect to the section 

987 QBU (for example, in the case of a 

taxpayer applying the 1991 proposed 

regulations, by adjusting the equity and 

basis pools to reflect the amount of each 

transfer). 

2. Timing for Application of an Eligible 

Pretransition Method 

The final regulations provide that a 

method of applying section 987 is not 

an eligible pretransition method unless 

it was applied on at least one tax return 

filed before November 9, 2023 (when 

the 2023 proposed regulations were 

filed with the Federal Register). See 

§ 1.987–10(e)(4). Thus, a taxpayer that 

first adopted a reasonable method in the 

first taxable year after the TCJA was 

enacted would be treated as applying an 

eligible pretransition method, but a 

method adopted after November 9, 

2023, would not qualify. Similarly, the 

final regulations modify the consistency 

requirement for the earnings only 

method under § 1.987–10(e)(4)(iii)(B) to 

require consistent application for all 

taxable years since the first taxable year 

in which the owner applied an eligible 

pretransition method. As a result, an 

owner that began applying the earnings 

only method after the TCJA was enacted 

(and did not previously apply a 

different eligible pretransition method) 

would meet this requirement. 

3. Reliance on the CTA 

Under the final regulations, a method 

that relies on the CTA determined for 

financial accounting purposes would 

not qualify as an eligible pretransition 

method; thus, taxpayers relying on CTA 

computations must determine 

pretransition gain or loss using the 

method provided in § 1.987–10(e)(3). As 

discussed in part V.A.2 of this Summary 

of Comments and Explanation of 

Revisions, because the amount of the 

CTA can be substantially different from 

the amount of section 987 gain or loss 

properly computed for tax purposes, 

reliance on the CTA could result in the 

recognition of significant amounts of 

artificial pretransition gain or loss. 


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C. Recognition of Pretransition Gain or 

Loss 

In general, under the proposed 

regulations, pretransition gain is treated 

as net unrecognized section 987 gain, 

while pretransition loss is treated as 

suspended section 987 loss. Proposed 

§ 1.987–10(e)(5)(i)(A) and (B). This rule 

is intended to prevent taxpayers from 

selectively recognizing pretransition 

loss while deferring pretransition gain 

until the year of a remittance. 

Alternatively, taxpayers could 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). 

A comment recommended that 

pretransition loss should not be treated 

as suspended section 987 loss in the 

first taxable year in which the section 

987 regulations apply. Instead, the 

comment recommended that 

pretransition loss should be treated as 

net unrecognized section 987 loss upon 

transition, which would later become 

suspended in the year of a remittance. 

The comment noted that this would 

create parity between pretransition loss 

and pretransition gain, which is treated 

as net unrecognized section 987 gain in 

the first taxable year in which the 

regulations apply. 

Another comment recommended that, 

instead of determining pretransition 

gain or loss separately with respect to 

each QBU, the total amount of 

pretransition gain or loss in each 

category should be aggregated and 

netted among all QBUs of the same 

owner, with the net amounts reallocated 

to each QBU on a pro rata basis. In the 

case of a consolidated group or a group 

of related CFCs, the comment suggested 

further netting between all members of 

the consolidated group or group of 

related CFCs, respectively. 

With respect to the amortization 

election under proposed § 1.987– 

10(e)(5)(ii), a comment suggested that 

taxpayers should be allowed to elect a 

shorter amortization period in which to 

recognize pretransition gain or loss 

(either four or five years), which would 

better align with certain taxpayers’ 

internal forecasting and planning 

windows. A comment also requested 

clarification as to how the amortization 

election applies with respect to a 

terminating QBU (that is, a section 987 

QBU that terminated after November 9, 

2023, and before the taxable year in 

which the section 987 regulations are 

generally applicable). 

The final regulations provide that, if 

a current rate election is in effect in the 

taxable year beginning on the transition 

date (and an annual recognition election 

is not in effect), pretransition gain or 

loss is treated as net unrecognized 

section 987 gain or loss. Thus, 

pretransition losses are treated the same 

way as pretransition gains. However, if 

a current rate election is not in effect (or 

an annual recognition election is in 

effect) in the taxable year beginning on 

the transition date, pretransition loss is 

treated as suspended section 987 loss 

upon transition. This rule is necessary 

to prevent pretransition loss from being 

recognized without limitation. 

The final regulations do not permit 

aggregation and netting of pretransition 

gain or loss within the same category. 

Absent an amortization election, the 

source and character of pretransition 

gains and losses generally will not be 

assigned in the taxable year beginning 

on the transition date, so it would not 

be possible to net gains and losses 

separately within each recognition 

grouping. In addition, aggregation and 

netting would make the transition rules 

more complicated and would increase 

the burden of administering these rules. 

Finally, taxpayers that make the 

amortization election can, as a practical 

matter, achieve the effect of netting 

pretransition gains and losses, because 

those gains and losses will be 

recognized over the same ten-year 

period. 

The final regulations retain the tenyear amortization period under § 1.987– 

10(e)(5)(ii) and do not permit taxpayers 

to elect a shorter amortization period. 

The Treasury Department and the IRS 

have determined that a uniform 

amortization period should apply to all 

electing taxpayers to prevent the 

potential for whipsaw that could result 

from taxpayers with losses electing 

shorter amortization periods than 

taxpayers with gains. In addition, a tenyear period is appropriate given the 

expected magnitude of the pretransition 

gains and losses that are subject to 

amortization. However, taxpayers that 

do not make the amortization election 

will retain some control over when 

gains and losses are recognized (by 

choosing whether or not to make 

remittances). The final regulations also 

expand the acceleration rule of § 1.987– 

10(e)(5)(ii)(B) to cover transactions 

entered into with a principal purpose of 

avoiding the recognition of pretransition 

gain that is subject to the amortization 

election. See § 1.987–10(e)(5)(ii)(B)(1). 

In addition, the final regulations 

clarify the application of the 

amortization election in the case of a 

terminating QBU. Under § 1.987– 

10(e)(5)(ii)(C), any deferred section 987 

gain or suspended section 987 loss with 

respect to a terminating QBU that has 

not been recognized before the first 

taxable year in which the section 987 

regulations are generally applicable is 

subject to amortization beginning in that 

year. However, the final regulations do 

not modify the treatment of section 987 

gain or loss that has already been 

recognized before the transition date; 

thus, such section 987 gain or loss is not 

subject to amortization. 

X. Comments and Changes to Proposed 

§ 1.987–11: Suspended Section 987 Loss 

Relating to Certain Elections; Loss-tothe-Extent-of-Gain Rule 

Proposed § 1.987–11 provides rules 

that suspend the recognition of section 

987 loss in connection with certain 

elections and rules under which 

suspended section 987 loss is 

recognized to the extent of recognized 

section 987 gain (the ‘‘loss-to-the-extentof-gain rule’’). 

A. Loss Suspension Rule 

1. In General 

Under proposed § 1.987–11(c), in a 

taxable year in which a current rate 

election is in effect (and an annual 

recognition election is not in effect), any 

section 987 loss that would otherwise be 

recognized as a result of a remittance or 

termination would be treated as 

suspended section 987 loss. 

A comment requested that the loss 

suspension rule of § 1.987–11(c) be 

eliminated because it prevents taxpayers 

from recognizing section 987 losses in 

connection with legitimate commercial 

transactions. The comment noted that 

the recognition of section 987 loss often 

is not the primary factor in determining 

whether a taxpayer causes its branch to 

make a remittance. 

The final regulations retain the loss 

suspension rule in § 1.987–11(c). 

Congress specifically authorized loss 

limitation rules to address the potential 

for selective recognition of losses. See 

section 989(c)(2). These rules are 

integral to the current rate election; 

without a loss limitation the current rate 

election would create opportunities for 

abuse. Although remittances are often 

made for non-tax reasons, taxpayers can 

cause section 987 QBUs to make 

otherwise disregarded transfers for the 

purpose of recognizing large section 987 

losses, and taxpayers have the ability to 

structure transactions in ways that defer 

the recognition of section 987 gain. 

However, the final regulations limit 

the scope of the loss suspension rule to 

cover transactions that would otherwise 

result in the recognition of substantial 

section 987 losses. Under § 1.987– 

11(c)(2), if a current rate election is in 

effect, section 987 loss is not suspended 

unless the amount of section 987 loss 


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subject to suspension in the taxable year 

exceeds the lesser of $3 million or two 

percent of the controlled group’s gross 

income. This threshold is applied 

collectively to the section 987 loss of the 

owner and all members of the owner’s 

controlled group. This rule is expected 

to reduce the compliance burden of 

tracking suspended section 987 losses, 

particularly for taxpayers with small 

section 987 QBUs. 

2. Exception for QBUs With De Minimis 

Historic Assets 

Comments requested an exception 

from the loss suspension rule for section 

987 QBUs with minimal historic assets 

(such as financial institutions and 

insurance companies). Alternatively, a 

comment recommended that the loss 

suspension rule should apply solely to 

section 987 loss associated with historic 

items. 

The final regulations do not provide 

an exception to the loss suspension rule 

for taxpayers with a de minimis amount 

of historic assets. Such an exception 

would be difficult to administer because 

it would require long-term tracking to 

ensure that the de minimis threshold 

was met in all prior taxable years over 

which the pool of net unrecognized 

section 987 gain or loss accrued. 

Further, for taxpayers with minimal 

historic assets, the compliance burden 

of applying the default rules of the final 

regulations (that is, the rules that apply 

in the absence of a current rate election) 

is expected to be more limited. A 

taxpayer that does not make a current 

rate election generally would not be 

subject to the loss suspension rule. 

Similarly, under the final regulations, 

the loss suspension rule of § 1.987–11(c) 

is not limited to section 987 loss 

associated with historic items. Under 

§ 1.987–4, the pool of net unrecognized 

section 987 gain or loss is determined 

with respect to a section 987 QBU as a 

whole. Separate computations of 

unrecognized section 987 loss 

associated with marked and historic 

items, respectively, would add 

significant complexity. Moreover, 

concerns related to selective recognition 

of section 987 loss can arise with 

respect to both marked and historic 

items. 

B. Loss-to-the-Extent-of-Gain Rule 

Under proposed § 1.987–11(e), an 

owner of a section 987 QBU recognizes 

suspended section 987 loss to the extent 

that it recognizes section 987 gain in the 

same recognition grouping (that is, 

section 987 gain that has the same 

source and character as the suspended 

section 987 loss) in the same taxable 

year. As explained in the preamble to 

the 2023 proposed regulations, this rule 

is intended to prevent taxpayers from 

selectively recognizing section 987 

losses when a current rate election is in 

effect. 88 FR 78139. 

1. Lookback Rule 

The 2023 proposed regulations do not 

include a lookback rule under which 

suspended section 987 loss can be 

recognized to the extent of section 987 

gain recognized in previous taxable 

years. The preamble to the 2023 

proposed regulations expressed concern 

that taxpayers might exploit a lookback 

rule by selectively triggering the 

recognition of section 987 gain in a 

taxable year in which the gain could be 

offset by losses or in which a taxpayer 

had excess foreign tax credits. 88 FR 

78139. 

Several comments recommended 

adoption of a lookback rule. 

Alternatively, a comment recommended 

modifying proposed § 1.987–11(e) to 

permit taxpayers to carry back section 

987 losses to earlier years. Comments 

posited that, even if section 987 gain 

recognized in a previous year is offset 

by a loss carryforward or other tax 

attribute, the section 987 gain would 

still have a net impact on U.S. tax 

because the attribute would no longer be 

available to be utilized in subsequent 

years. However, the same comment 

expressed a minority view that a 

lookback rule would afford some 

potential for abuse, and suggested 

consideration of an anti-abuse rule 

targeting remittances that do not have 

economic effect. One comment 

recommended that the lookback period 

for section 987 gains should include 

years ending before the transition date, 

while another comment suggested that 

the lookback period should include only 

post-transition years. 

The Treasury Department and the IRS 

agree that a lookback rule would allow 

for more evenhanded treatment of 

section 987 gains and losses when 

section 987 gain is recognized in an 

earlier taxable year and that a lookback 

rule could be tailored to prevent abuse. 

Accordingly, the final regulations 

provide that suspended section 987 loss 

is recognized to the extent of net section 

987 gain recognized in the current year 

and the three preceding taxable years. 

See § 1.987–11(e)(3). Taxable years 

beginning before the transition date are 

not included in the lookback period, 

given the substantial flexibility 

taxpayers have had in determining the 

timing, amount, and character of section 

987 gain or loss recognized before the 

applicability date of the final 

regulations. 

Under an anti-abuse rule, section 987 

gain is disregarded for purposes of the 

loss-to-the-extent-of-gain rule if it is 

recognized with a principal purpose of 

reducing U.S. Federal income tax 

liability, including over multiple taxable 

years. See § 1.987–11(e)(3)(v). For 

example, this rule would apply if an 

owner recognizes section 987 gain in a 

taxable year (‘‘year 1’’) in which the 

section 987 gain is offset by a tax 

attribute that would not otherwise be 

used, the section 987 gain is recognized 

with a principal purpose of releasing 

suspended section 987 loss in a 

subsequent taxable year (‘‘year 2’’), and 

the net effect of recognizing both the 

section 987 gain and the suspended 

section 987 loss would reduce the 

combined U.S. Federal income tax 

liability for years 1 and 2. In 

determining whether such a principal 

purpose exists, one relevant factor is the 

extent to which a remittance does not 

result in a sustained economic 

contraction of the section 987 QBU 

(over a period of at least 12 months). 

Thus, for example, if a section 987 QBU 

makes a remittance giving rise to the 

recognition of section 987 gain, and the 

owner makes an offsetting contribution 

to the section 987 QBU within 12 

months of the remittance, the section 

987 gain may be disregarded for 

purposes of the loss-to-the-extent-ofgain rule. 

The lookback period generally is 

limited to three years, because a longer 

lookback period would require 

additional tracking of section 987 gains 

recognized in prior taxable years and 

would increase the compliance and 

administrative burden of the section 987 

regulations. In addition, this rule is 

consistent with other Code provisions 

that limit loss carryforward or carryback 

periods to a fixed number of years. See, 

e.g., section 1212(a)(1) (generally 

permitting capital losses to be carried 

forward for five years and carried back 

for three years). Moreover, it may be 

difficult to enforce the anti-abuse rule in 

§ 1.987–11(e)(3)(v) with respect to 

transactions occurring more than three 

years before the taxable year in which 

suspended section 987 loss is 

recognized. 

The final regulations provide a 

different lookback period for taxpayers 

that make both an annual recognition 

election and a current rate election. For 

these taxpayers, the lookback period 

includes all taxable years in which both 

elections are continuously in effect. See 

§ 1.987–11(e)(3)(iv)(B). As a result, for 

purposes of applying the loss-to-theextent-of-gain rule, the total amount of 

section 987 gain recognized under the 

annual recognition election for all 


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taxable years in which both elections 

are continuously in effect is offset by the 

total amount of section 987 loss 

recognized under the annual recognition 

election for all taxable years in which 

both elections are continuously in 

effect. As explained in the preamble to 

the proposed regulations, the Treasury 

Department and the IRS are concerned 

that, in the absence of such a rule, 

taxpayers would be able to recognize net 

losses on a cumulative basis for the 

taxable years to which the annual 

recognition election applies. 88 FR 

78140. In addition, the tracking burden 

in this context should be more limited 

because losses generally are not 

suspended in taxable years in which an 

annual recognition election is in effect. 

In general, following a transaction 

described in section 381(a), section 987 

gain recognized by the transferor 

corporation in the three years preceding 

the transaction is taken into account for 

purposes of the lookback rule. See 

§ 1.987–11(e)(5)(i). However, this rule 

does not apply in the case of an inbound 

reorganization or liquidation. See 

§ 1.987–11(e)(5)(ii). Thus, section 987 

gain recognized by the foreign transferor 

corporation (which may have been 

subject to a lower effective tax rate) 

cannot be used to release suspended 

section 987 loss of the domestic 

acquiring corporation. 

2. Application of the Loss-to-the-Extentof-Gain Rule at the Owner Level 

Under proposed § 1.987–11(e), the 

loss-to-extent-of-gain rule is applied 

separately to each owner with respect to 

all of its section 987 QBUs. Comments 

asserted that the loss-to-the-extent-ofgain rule could produce harsh results 

when one CFC recognizes section 987 

gain and a related CFC has suspended 

section 987 loss. One comment noted 

that concerns about selective 

recognition of section 987 loss should 

be mitigated to the extent that a 

different CFC in the same group 

recognizes section 987 gain. 

Another comment recommended that, 

with respect to section 987 gain or loss 

that is characterized as tested income, 

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

should be applied at the level of the 

U.S. shareholder with respect to all 

section 987 QBUs of CFCs owned by the 

U.S. shareholder, consistent with the 

general framework of section 951A. 

Under this approach, the excess of the 

U.S. shareholder’s pro rata share of 

section 987 losses of any CFC 

attributable to a tested income group 

over its pro rata share of section 987 

gains attributable to the same tested 

income group would be suspended (and 

available for recognition to the extent of 

the U.S. shareholder’s pro rata share of 

section 987 gains recognized in future 

years). Another comment recommended 

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

should be applied to a group of related 

CFCs by treating the group as a single 

owner. Under this approach, one CFC 

could recognize suspended section 987 

loss to the extent that another CFC 

recognized section 987 gain. 

The final regulations generally apply 

the loss-to-the-extent of gain rule 

separately to each owner, taking into 

account section 987 gain or loss with 

respect to all of the owner’s section 987 

QBUs. The final regulations do not 

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

at the level of the U.S. shareholder. 

Because section 987 gain or loss is a 

CFC-level income item that is taken into 

account in computing each CFC’s 

taxable income and earnings and profits, 

a U.S. shareholder level loss limitation 

rule could reach inappropriate results 

for minority shareholders and would be 

difficult to administer. For example, if 

a CFC is owned by multiple U.S. 

shareholders, application of the loss-tothe-extent-of-gain rule at the U.S. 

shareholder level would require 

multiple separate computations to 

determine the suspended section 987 

loss recognized by a single CFC. 

Similarly, the final regulations do not 

treat a group of related CFCs as a single 

owner for purposes of the loss-to-theextent-of-gain rule. A CFC grouping rule 

would make the loss-to-the-extent-ofgain-rule more complex and more 

difficult to administer. Moreover, under 

a CFC grouping rule, a CFC could 

recognize suspended section 987 loss as 

a result of a different CFC’s recognition 

of section 987 gain in the same 

recognition grouping in a taxable year in 

which the loss cannot be utilized. 

3. Expansion of the Loss-to-the-Extentof-Gain Rule 

A comment recommended expansion 

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

that suspended section 987 loss could 

be recognized to the extent of any 

income recognized by the owner 

(including but not limited to section 987 

gain) that has the same source and 

character as the suspended section 987 

loss. Another comment recommended 

that suspended section 987 loss should 

be recognized to the extent of any 

section 987 gain recognized by the 

owner, even if the section 987 gain is in 

a different recognition grouping. The 

comment suggested that the requirement 

for section 987 gain to be in the same 

recognition grouping as suspended 

section 987 loss does not serve the 

policy goals of section 987, and that 

concerns relating to mismatches 

between the source and character of 

section 987 gains and losses are 

adequately policed by other provisions 

of the Code. 

The final regulations do not expand 

the scope of the loss-to-the-extent of 

gain rule to cover taxable income other 

than section 987 gain. Taxable income 

other than section 987 gain does not 

release suspended section 987 loss 

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

because this rule is intended to target 

selective recognition of section 987 loss 

and deferral of section 987 gain. 

In addition, the final regulations 

retain the rule that section 987 gain can 

only release suspended section 987 loss 

in the same recognition grouping. This 

rule ensures that the loss-to-the-extentof-gain rule effectively limits selective 

recognition of losses pursuant to the 

authority provided in section 989(c)(2). 

In particular, it prevents taxpayers from 

avoiding the loss limitation by 

recognizing gains that are subject to a 

low rate of tax (or are not subject to U.S. 

tax). 

As explained in part VII.B of this 

Summary of Comments and Explanation 

of Revisions, the final regulations allow 

section 987 gain or loss to be assigned 

to multiple subpart F income groups. 

Therefore, each separate subpart F 

income group (as defined in § 1.960– 

1(d)(2)(ii)(B)) constitutes a separate 

recognition grouping. See § 1.987– 

11(f)(2)(ii). However, as explained in 

part VII.B.2 of this Summary of 

Comments and Explanation of 

Revisions, taxpayers can reduce the 

number of subpart F recognition 

groupings by making the section 988 

characterization election provided in 

§ 1.987–6(b)(2)(i)(C). 

4. Application to Terminating QBUs 

A comment requested clarification 

concerning the application of the lossto-the-extent-of-gain rule in the case of 

a terminating QBU. The final 

regulations clarify that, when a 

terminating QBU has suspended section 

987 loss in a taxable year before the 

final regulations are generally 

applicable, section 987 gain with 

respect to a taxpayer’s other section 987 

QBUs is assigned to a recognition 

grouping under the method applied by 

the taxpayer before the transition date. 

The owner recognizes suspended 

section 987 loss with respect to a 

terminating QBU only to the extent of 

its net section 987 gain in the same 

recognition grouping for the taxable 

year. 


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5. SRLY Rule Relating to Suspended 

Section 987 Losses 

When a corporation that is the owner 

of a section 987 QBU joins a 

consolidated group, the corporation may 

have suspended section 987 losses that 

arose in earlier years. As explained in 

the preamble to the 2023 proposed 

regulations, the regulations issued 

under the authority of section 1502 

generally limit a consolidated group’s 

ability to use tax attributes generated in 

separate return years (as defined in 

§ 1.1502–1(e)). 88 FR 78154. The 

Treasury Department and the IRS 

requested comments on how rules 

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

(limiting the use of net operating losses) 

should apply to suspended and deferred 

section 987 losses. Id. No comments 

were received in response to this 

request. 

To prevent inappropriate trafficking 

of section 987 losses, § 1.987–11(e)(6)(ii) 

of the final regulations provides that the 

separate return limitation year (SRLY) 

limitation principles of § 1.1502–21(c) 

apply to suspended section 987 losses 

that arose in separate return years. The 

rule in § 1.987–11(e)(6)(ii) is based on 

the SRLY rules for capital loss 

carryovers in § 1.1502–22(c). To 

simplify the administration of this rule, 

when a corporation that is the owner of 

a section 987 QBU joins a consolidated 

group, the SRLY limitation is not 

applied separately to each recognition 

grouping determined under § 1.987– 

11(f), but rather to the corporation’s 

section 987 losses overall. 

Because deferred section 987 losses 

under § 1.987–12 are not subject to a 

loss-to-the-extent-of-gain rule, but rather 

are treated similarly under the section 

987 regulations to other unrecognized 

section 987 losses, the SRLY limitation 

in § 1.987–11(e)(6)(ii) does not apply to 

such losses. 

XI. Comments and Changes to Proposed 

§ 1.987–13: Suspended Section 987 Loss 

Upon Terminations 

Proposed § 1.987–13 would provide 

suspended loss rules that apply in 

connection with certain transactions in 

which a section 987 QBU or a successor 

suspended loss QBU terminates. 

A. Successor Rules 

Under the 2023 proposed regulations, 

if an owner has suspended section 987 

loss with respect to a section 987 QBU 

that terminates, an eligible QBU that 

holds the assets of the section 987 QBU 

after the termination would be treated as 

a successor suspended loss QBU if it 

meets three requirements. Proposed 

§ 1.987–13(b)(1)(i). First, a significant 

portion of the assets of the terminating 

section 987 QBU must be reflected on 

the books and records of the eligible 

QBU. Second, the eligible QBU must 

carry on a trade or business of the 

section 987 QBU. Finally, the eligible 

QBU must be owned by the owner of the 

section 987 QBU or by a member of its 

controlled group (the owner of the 

successor is referred to as the ‘‘successor 

suspended loss QBU owner’’). 

Following a termination, if the 

terminated section 987 QBU has a 

successor, suspended section 987 loss 

with respect to the section 987 QBU 

would be attributed to the successor. 

Similar successor rules would apply 

upon termination of a successor 

suspended loss QBU. Proposed § 1.987– 

13(c)(1)(i). 

If a section 987 QBU or successor 

suspended loss QBU terminates without 

a successor, the owner would recognize 

its cumulative suspended section 987 

loss with respect to the QBU. Proposed 

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

the cumulative suspended section 987 

loss with respect to a successor 

suspended loss QBU would be 

recognized if the original suspended 

loss QBU owner ceases to be a member 

of the same controlled group as the 

successor suspended loss QBU owner 

due to the transfer of an ownership 

interest in the successor suspended loss 

QBU owner. Proposed § 1.987–13(d). 

A comment recommended that the 

definition of a successor suspended loss 

QBU should be aligned with the 

definition of a successor deferral QBU 

as provided in proposed § 1.987– 

12(g)(2), so that the same definition 

would apply for both purposes. The 

final regulations generally retain the 

definition of a successor suspended loss 

QBU provided in the proposed 

regulations because this definition is 

needed to ensure that suspended section 

987 loss can be recognized (in excess of 

section 987 gain) only when the trade or 

business of a section 987 QBU ceases to 

be operated by a member of the same 

controlled group. The successor rule in 

§ 1.987–12(g)(2) (which requires the 

successor to itself be a section 987 QBU) 

would not serve this function, because 

it would require suspended section 987 

loss to be recognized when a section 987 

QBU is transferred to a related owner 

that has the same functional currency as 

the section 987 QBU. 

B. Elimination or Limited Recognition of 

Suspended Section 987 Loss Following 

Certain Transactions 

Proposed § 1.987–13(e), (f), and (g) 

would provide rules that eliminate or 

limit the recognition of suspended 

section 987 loss following certain 

transactions. First, under proposed 

§ 1.987–13(e), if the original suspended 

loss QBU owner ceases to be a member 

of the same controlled group as the 

successor suspended loss QBU owner 

due to the transfer of an ownership 

interest in the original suspended loss 

QBU owner, the original suspended loss 

QBU owner’s suspended section 987 

loss would cease to be attributable to 

any section 987 QBU or successor 

suspended loss QBU. After the 

transaction, the owner’s suspended 

section 987 loss can be recognized 

under § 1.987–11(e) to the extent that 

the owner recognizes section 987 gain; 

however, the suspended section 987 

loss cannot be recognized under 

proposed § 1.987–13(b)(2), (c)(2), or (d). 

This rule would prevent taxpayers from 

transferring the stock of the original 

suspended loss QBU owner out of its 

controlled group for the purpose of 

selectively recognizing suspended 

section 987 loss, while retaining the 

assets and activities of the section 987 

QBU in the hands of a different 

controlled group member. 

Proposed § 1.987–13(f) would provide 

that, if an original suspended loss QBU 

owner ceases to exist as a result of a 

transaction in which there is no 

successor described in section 381(a) 

(for example, as a result of a section 331 

liquidation), then any suspended 

section 987 loss that is not recognized 

after applying the loss-to-the-extent-ofgain rule cannot be recognized and is 

eliminated. This rule is intended to 

prevent taxpayers from entering into 

section 331 liquidations in order to 

trigger the recognition of suspended 

section 987 loss. 

Similarly, under proposed § 1.987– 

13(g), if an owner of a section 987 QBU 

with suspended section 987 loss, or an 

original suspended loss QBU owner, 

ceases to exist in an inbound section 

332 liquidation or in an inbound 

reorganization described in section 

381(a)(2), 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 under 

proposed § 1.987–11(e) would be 

eliminated. This rule would prevent 

suspended section 987 loss that was 

generated offshore from being imported 

into the United States. 

Several comments requested that the 

rules of proposed § 1.987–13(e) through 

(g) be replaced with anti-abuse rules 

tied to the purpose for which a taxpayer 

enters into the relevant transaction. One 

comment noted that if a CFC liquidates 

into its U.S. shareholder and a current 

rate election is not in effect, the 

transaction results in a termination of 


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the CFC’s section 987 QBUs under 

§ 1.987–8, and the CFC recognizes its 

net unrecognized section 987 gain or 

loss immediately before the liquidation. 

The comment proposed that suspended 

section 987 loss should similarly be 

recognized in connection with an 

inbound liquidation. 

Other comments recommended that, 

following a section 331 liquidation or 

inbound transaction, suspended section 

987 loss should be amortized over a tenyear period or added to the acquiring 

corporation’s outside stock basis. One 

comment suggested that the suspended 

section 987 loss should be allocated pro 

rata among the U.S. shareholder’s other 

foreign entities that own section 987 

QBUs. Another comment requested that 

§ 1.987–13(f) be modified to provide 

that suspended section 987 loss is 

recognized to the extent of the owner’s 

overall gain (not limited to section 987 

gain) recognized in connection with the 

section 331 liquidation. One comment 

suggested that, in connection with an 

inbound transaction, suspended section 

987 loss could be recognized to the 

extent of the inbounded section 987 

gain. 

The Treasury Department and the IRS 

have determined that, in order to 

facilitate the current rate election 

(which can have the effect of enlarging 

the pools of unrecognized section 987 

gain or loss), effective loss limitation 

rules are needed to prevent the selective 

recognition of section 987 losses by, for 

example, entering into a section 331 

liquidation, inbound liquidation or 

reorganization, or a transfer of the 

original suspended loss QBU owner. 

Further, an anti-avoidance rule tied to 

the taxpayer’s subjective purpose for 

entering into a particular transaction 

would be difficult to administer and, 

consequently, would not be an adequate 

safeguard against abuse given the 

critical function served by the loss 

limitation rules. A subjective anti-abuse 

rule would also provide less certainty 

for taxpayers and the IRS. Therefore, the 

final regulations generally retain the 

rules of proposed § 1.987–13(e) through 

(g). 

The final regulations do not permit 

suspended section 987 loss to be 

amortized by the acquiring corporation 

over a ten-year period following an 

inbound transaction or section 331 

liquidation because this would 

nevertheless facilitate loss importation 

(in the case of an inbound transaction), 

even though the benefit would only be 

recognized over time, or would allow 

for losses to be carried over to the 

acquirer in a transaction not described 

in section 381(a) (in the case of a section 

331 liquidation). Similarly, reallocating 

losses to foreign entities other than the 

acquiring corporation would be 

inconsistent with the principles of 

section 381 and would be unduly 

complex. Adding suspended section 987 

loss of a CFC to the outside basis of a 

domestic acquiring corporation’s stock 

would have the same effect as loss 

importation (because the increased basis 

could reduce the taxable income of the 

domestic corporation’s shareholders 

upon a sale of stock) and would also 

shift losses in a manner that is contrary 

to general tax principles. 

The final regulations also do not 

permit suspended section 987 loss to be 

recognized to the extent of gain (other 

than section 987 gain) recognized in 

connection with a section 331 

liquidation. As explained in part X.B.3 

of this Summary of Comments and 

Explanation of Revisions, the loss-tothe-extent of gain rule generally does 

not allow suspended section 987 loss to 

be recognized in excess of section 987 

gain. If a different rule were adopted for 

section 331 liquidations, taxpayers 

could enter into a section 331 

liquidation in order to step up the basis 

of their assets, with any gain recognized 

with respect to those assets being offset 

by the recognition of suspended section 

987 loss. 

However, consistent with the 2023 

proposed regulations, the final 

regulations permit suspended section 

987 loss to be recognized to the extent 

of section 987 gain recognized in 

connection with a transaction described 

in § 1.987–13(f) or (g). Because those 

transactions generally would be treated 

as terminations under § 1.987–8, any net 

unrecognized section 987 gain of the 

owner will be recognized immediately 

before the transaction and will be taken 

into account under the loss-to-theextent-of-gain rule. 

C. Clarification of § 1.987–13 

A comment requested clarification as 

to the mechanics for recognizing 

suspended section 987 loss following a 

transaction described in § 1.987–13(e), 

in which an original suspended loss 

QBU owner is transferred outside the 

controlled group. The comment also 

suggested clarifying the interaction 

between the successor rules of § 1.987– 

13(b) and (c) and the inbound 

transaction rule in proposed § 1.987– 

13(g). 

The final regulations clarify that, 

following a transaction described in 

§ 1.987–13(e) (in which the original 

suspended loss QBU owner is 

transferred outside the controlled 

group), the original owner recognizes 

suspended section 987 loss to the extent 

that it recognizes section 987 gain in the 

same recognition grouping. Further, in 

the case of a transaction described in 

§ 1.987–13(e) (transfer of original 

suspended loss QBU owner), § 1.987– 

13(f) (section 331 liquidation), or 

§ 1.987–13(g) (inbound transaction), 

suspended section 987 loss is not 

recognized or attributed to a successor 

suspended loss QBU under § 1.987– 

13(b) or (c). The final regulations also 

clarify that the rules of § 1.987–13(f) 

apply to a transaction (such as a section 

331 liquidation) in which the owner of 

a section 987 QBU ceases to exist 

without having a successor (that is, this 

rule applies even if the section 987 QBU 

with respect to which the suspended 

section 987 loss arose had not 

previously been terminated, such that 

the owner was not an original 

suspended loss QBU owner). 

XII. Comments and Changes to 

Proposed § 1.987–14: Applicability Date 

Proposed § 1.987–14 would provide 

rules relating to the applicability date of 

the section 987 regulations. 

In general, the 2023 proposed 

regulations are proposed to apply to 

taxable years beginning after December 

31, 2024. Proposed § 1.987–14(a)(1). In 

the case of a terminating QBU (that is, 

a section 987 QBU that terminates after 

November 9, 2023, but before the 

section 987 regulations are generally 

applicable), the 2023 proposed 

regulations, as finalized, generally 

would apply immediately before the 

termination. 

A comment requested that the general 

applicability date be delayed until 

taxable years beginning after December 

31, 2025, to allow additional time for 

taxpayers to build systems and 

processes to comply with the final 

regulations. Another comment 

requested a deferred applicability date 

no earlier than the taxable year 

beginning on or after one year after the 

first day of the first taxable year 

following the date on which the final 

regulations are published. 

One comment requested that the 

special rule for terminating QBUs be 

eliminated. The comment asserted that 

the existing deferral rules under 

§ 1.987–12 are sufficient to prevent 

abuse. 

Under § 1.987–15, the final 

regulations generally apply to taxable 

years beginning after December 31, 

2024, consistent with the 2023 proposed 

regulations. See § 1.987–15(a)(1). See 

also §§ 1.861–9(g)(2)(v), 1.985–5(g), 

1.988–1(i), 1.988–4(b)(2)(ii), 1.989(a)- 

1(b)(4) and (d)(4), and 1.1502–13(l)(10). 

The 2016 final regulations originally 

were applicable to taxable years 

beginning on or after one year after the 


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first day of the first taxable year 

following December 7, 2016 (thus, they 

would have been applicable in 2018 for 

calendar year taxpayers). Although the 

applicability date of those regulations 

was subsequently deferred, taxpayers 

have been on notice for many years 

concerning the general framework of the 

section 987 regulations. Final 

regulations are necessary to provide 

guidance to taxpayers regarding the 

proper determination of section 987 

taxable income or loss and section 987 

gain or loss and to provide a consistent 

set of rules applicable to all taxpayers. 

Accordingly, further deferral would not 

serve the interest of sound tax 

administration. The applicability date 

under § 1.987–15(a)(1) is consistent with 

the rule under section 7805(b) of the 

Code regarding retroactivity of 

regulations or rulings. 

In addition, the final regulations 

retain the special applicability date 

providing that the section 987 

regulations apply to terminating QBUs 

immediately before the termination. See 

§ 1.987–15(a)(2). This rule is needed to 

prevent taxpayers from terminating a 

section 987 QBU before the section 987 

regulations generally become applicable 

in order to avoid the rules of the section 

987 regulations, including the loss 

suspension rules in §§ 1.987–10, 1.987– 

11, and 1.987–13. 

XIII. Comments and Changes to 

Proposed § 1.1502–13: Intercompany 

Transactions 

The 2023 proposed regulations would 

provide a new rule applicable to certain 

intercompany transactions (as defined 

in § 1.1502–13(b)(1)(i)) involving section 

987 QBUs. See proposed § 1.1502– 

13(j)(9). 

In general, § 1.1502–13 provides 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 or consolidated tax 

liability. See § 1.1502–13(a). Under 

§ 1.1502–13, the selling member (S) and 

the buying member (B) are treated as 

separate entities for some purposes but 

as divisions of a single corporation for 

other purposes. The matching rule in 

§ 1.1502–13(c) is one of the principal 

rules in § 1.1502–13 that produces the 

effect of transactions between divisions 

of a single corporation (single entity 

treatment). See § 1.1502–13(a)(6)(i). 

To address potential mismatches that 

make it difficult to apply the rules of 

§ 1.1502–13 to section 987 QBUs, the 

2023 proposed regulations would apply 

a reattribution rule that treats all 

intercompany transactions involving a 

section 987 QBU as attributable to a 

member’s home office rather than to any 

section 987 QBU. As a result, an 

intercompany transaction between one 

member of a consolidated group and a 

section 987 QBU of another member of 

the same group is treated as a 

combination of (i) an intercompany 

transaction between the consolidated 

group members (that is, S and B), and 

(ii) transfers between the section 987 

QBU and its owner as necessary to 

account for the effect of the transaction 

on the assets and liabilities of the 

section 987 QBU. This approach would 

ensure that consolidated taxable income 

includes the same amount of section 

987 gain or loss as would be recognized 

if the members were divisions of a 

single corporation. 

One comment requested that the 

proposed rule be removed, on the 

grounds that it would change the 

amount of currency gain or loss 

recognized by S and B with respect to 

intercompany transactions. For 

example, assume that S has a section 

987 QBU with the euro as its functional 

currency, and the QBU makes a eurodenominated loan to B. The comment 

noted that, under the proposed rule, B’s 

foreign currency exposure and S’s 

foreign currency exposure offset for 

Federal income tax purposes (that is, 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). The comment 

indicated that, for financial accounting 

purposes, B’s foreign currency exposure 

would result in net income (it would 

not be offset by S’s foreign currency 

exposure). According to the comment, B 

would typically enter into a separate 

hedging transaction (for example, a 

foreign currency forward contract) to 

hedge this exposure. However, under 

the proposed rule, because the section 

988 gain or loss of B and S with respect 

to the loan will offset for tax purposes, 

the hedging transaction itself will 

generate net section 988 gain or loss. 

Therefore, the comment asserted that 

the proposed rule may have the 

practical effect of giving rise to income 

or loss for tax purposes for consolidated 

groups with respect to hedging 

transactions. 

In other words, under the view 

expressed in the comment, if the 

taxpayer enters into a hedging 

transaction for U.S. GAAP purposes, B 

would have section 988 gain or loss on 

the loan absent the proposed rule, and 

such gain or loss would be offset by loss 

or gain on the hedging transaction; in 

contrast, under the proposed rule, B’s 

section 988 gain or loss on the loan 

would be offset by S’s section 988 loss 

or gain, and loss or gain on the hedging 

transaction would not be offset. 

The comment appears to reflect the 

view that, in the absence of the 

reattribution rule in proposed § 1.1502– 

13(j)(9), the matching rule of § 1.1502– 

13(c) does not apply to transactions 

involving section 987 QBUs, and as a 

result the tax treatment of S and B is 

determined independently. Therefore, 

the comment appears to assume that the 

Federal income tax treatment and the 

accounting treatment of transactions 

involving section 987 QBUs would be 

identical without the proposed rule. 

The Treasury Department and the IRS 

disagree with the comment. The 

intercompany transaction rules in 

§ 1.1502–13 apply to all intercompany 

transactions, including those that 

involve section 987 QBUs, and 

taxpayers must apply those rules to 

achieve single entity treatment. The 

reattribution rule of proposed § 1.1502– 

13(j)(9) merely reflects the application 

of the intercompany transaction rules to 

section 987 QBUs in a simpler and more 

administrable manner for taxpayers and 

the IRS. Therefore, removing the 

reattribution rule would not address the 

concerns expressed in the comment. 

Additionally, the approach discussed in 

the comment would be fundamentally 

inconsistent with the purposes of 

section 1502 and § 1.1502–13: it would 

not clearly reflect the income tax 

liability of the consolidated group, 

because it would allow intercompany 

transactions to accelerate or defer 

currency gains and losses. The proposed 

reattribution rule is therefore finalized 

without change. 

Comments also requested clarification 

regarding Example 8 in proposed 

§ 1.1502–13(j)(10)(viii). In response, the 

final regulations include additional facts 

in Example 8 as well as two alternative 

fact patterns involving (i) a member’s 

disposition of an intercompany loan 

before its satisfaction, and (ii) a member 

ceasing to be a member of the 

consolidated group while an 

intercompany loan remains outstanding. 

The final regulations also include 

formatting changes to the examples 

under § 1.1502–13(j) that were proposed 

in REG–134420–10 (88 FR 52057). 

XIV. Other Comments and Revisions 

A comment recommended that the 

Treasury Department and the IRS 

consider the impact of section 987 gain 

or loss on the corporate alternative 

minimum tax (‘‘CAMT’’) regime. The 

comment did not recommend specific 

rules to be implemented for this 

purpose. The final regulations do not 

address the application of the CAMT 

regime. Accordingly, this comment was 


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not adopted because it is outside the 

scope of the final regulations. 

Similarly, comments requested that 

information relating to section 987 

should continue to be reported on Form 

8858, Schedule C–1, with modifications 

for taxpayers that do not make a current 

rate election. The development or 

modification of forms related to section 

987 is outside the scope of the final 

regulations. Therefore, this comment 

was not adopted. 

A comment was received in response 

to the 2016 proposed regulations during 

the initial comment period for those 

proposed regulations. The comment 

requested that the 2016 final regulations 

and the 2016 temporary regulations be 

reproposed with a deferred applicability 

date, which is consistent with the 

approach taken by the 2023 proposed 

regulations and these final regulations. 

In addition to the provisions 

described in parts I through XIII of this 

Summary of Comments and Explanation 

of Revisions, the final regulations 

include other wording changes, 

additions, deletions, and organizational 

changes to the 2023 proposed 

regulations for purposes of clarification. 

For example, the rules in § 1.987–3(c)(3) 

relating to the adjustments required 

under the simplified inventory method 

have been clarified, and an example has 

been added to illustrate those rules. 

Similarly, the rules of § 1.985–5 have 

been modified to update crossreferences to the section 987 regulations 

and to clarify the example in § 1.985– 

5(f). 

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 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 

final regulations with respect to section 

987 are in §§ 1.987–1(g), 1.987–9, 1.987– 

10(k), and 1.987–14(c). The likely 

respondents are individuals who file a 

Form 1040 and businesses that file a 

Form 1065 or Form 1120. The final 

regulations do not apply to trusts and 

estates. See part II.A.2 of the Summary 

of Comments and Explanation of 

Revisions. 

The collection of information 

provided by § 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 in 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, 

annual recognition election, or section 

988 mark-to-market 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 § 1.987–1(g) 

will be used by the IRS for tax 

compliance purposes. 

Section 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 

§ 1.987–9 are considered general tax 

records under § 1.6001–1(e). For PRA 

purposes, general tax records are 

already approved by OMB under 1545– 

0074 for individuals and under 1545– 

0123 for business entities. The IRS 

intends that the information collection 

requirements pursuant to § 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, 

§ 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 (or the 

information used to determine QBU net 

value under § 1.987–4(e)(2)(iii), as 

explained in part V.A.1 of the Summary 

of Comments and Explanation of 

Revisions); 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 and 

the section 987 QBU; 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 for the taxable year; the 

amount of the remittance and the 

remittance proportion for the taxable 

year; 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; the 

cumulative suspended section 987 loss 

in each recognition grouping; the 

outstanding deferred section 987 gain or 

loss in each recognition grouping; the 

transition information required to be 

determined under § 1.987–10(k); and the 

identification required under § 1.987– 

14(c) with respect to a section 987 

hedging transaction. 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 Treasury Department and the IRS 

are adding a recordkeeping requirement 

under § 1.987–14(c) based on a public 

comment on the substantive rules of the 

2023 proposed regulations which 

requested implementation of a section 

987 hedging election. See part V.B.1 of 

the Summary of Comments and 

Explanation of Revisions. Under 

§ 1.987–14(c), the final regulations 

require an identification statement to be 

kept in the taxpayers’ books and records 

with respect to a section 987 hedging 

transaction described in § 1.987– 

14(b)(1). 

The collection of information in 

§ 1.987–10(k) is mandatory. Specifically, 

§ 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 


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transition date (as defined in § 1.987– 

10(c)). The statement would contain 

information that is necessary for a 

taxpayer to transition to the final 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 § 1.987–10(k) will be used 

by the IRS for tax compliance purposes. 

The Treasury Department and the IRS 

intend that the information described in 

§ 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 

§ 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 §§ 1.987–1(g) and 1.987–10(k) 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 the collection of information for 

those revenue procedures is control 

number 1545–1522. The final 

regulations would only require 

taxpayers to follow the procedures 

under Revenue Procedure 2024–1, IRB 

2024–1 (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 

final 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 

final 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 final 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 burden will be 

accounted for in 1545–0074 for 

individuals and in 1545–0123 for 

businesses. 

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 final 

regulations affect taxpayers with foreign 

branch operations and taxpayers that 

own an interest in a foreign partnership 

(or a partnership with a foreign branch). 

The number of small entities 

potentially affected by the final 

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. 

Total receipts/positive 

income 

(2022) 

Percentage of 

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. 

The Treasury Department and the IRS 

estimate that the total number of 

partnerships and S corporations with a 

foreign branch subject to section 987 is 

approximately 800. Approximately 50 

percent of those filers have gross 

receipts of less than $25 million, but the 

data does not indicate whether these 

partnerships are part of larger 

enterprises. The number of affected 

partnerships and S corporations with 

total receipts of less than $25 million 

represents 0.004% of all partnerships 

and S corporations with total receipts of 

less than $25 million. Small entities 

may also own partnership interests. 

The primary rules that apply to 

partnerships (that is, the deferral rules 

in § 1.987–12 and the suspended loss 

rules in §§ 1.987–11 and 1.987–13) 

apply only in the case of a remittance 

or termination that would result in the 

recognition of a significant amount of 

section 987 gain or loss. Small entities 

typically will not recognize section 987 

gain or loss in excess of the applicable 

thresholds. 

These final regulations generally 

modify the rules that would otherwise 

apply under the 2016 final regulations 

by providing taxpayers with additional 

elections that reduce the compliance 

burden of applying section 987. Small 

entities generally would not be affected 

by these rules unless they choose to 

make one of the new elections in order 

to reduce their compliance burden. In 

addition, the final regulations contain 

several rules intended to limit their 

impact on small taxpayers. For example, 

the final regulations provide a de 

minimis rule under which section 987 

loss is not suspended unless the amount 

of the loss exceeds the lesser of $3 

million or two percent of gross income, 

as described in part X.A.1 of the 

Summary of Comments and Explanation 

of Revisions. In addition, for purposes 

of the transition rules, the final 

regulations provide an election under 

which small businesses can treat small 

QBUs as having no pretransition gain or 

loss. See part IX.A.2 of the Summary of 

Comments and Explanation of 

Revisions. 

A portion of the economic impact of 

the final regulations may derive from 

the collection of information 

requirements imposed under §§ 1.987– 

1(g), 1.987–10(k), and 1.987–14(c). 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 § 1.987– 

1(g) apply only if a taxpayer chooses to 

make or revoke an election (and only in 

the year of the election or revocation), 

the requirements of § 1.987–10(k) apply 


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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100163 

only in the first taxable year in which 

the final regulations apply, and the 

requirements of § 1.987–14(c) apply 

only if a taxpayer identifies a hedge as 

a section 987 hedging transaction 

(which is unlikely to be relevant for 

small entities). 

Another portion of the economic 

impact of the final regulations may 

derive from the recordkeeping 

requirements of § 1.987–9, which 

identify the records needed to satisfy 

the taxpayer’s obligations under section 

6001. The requirements of § 1.987–9 

generally will be less burdensome for 

small entities than the requirements of 

the 2016 final regulations due to the 

modifications described in part V.A.1 of 

the Summary of Comments and 

Explanation of Revisions (which permit 

QBU net value to be computed without 

preparing a tax basis balance sheet). 

IV. Section 7805(f) 

Pursuant to section 7805(f) of the 

Code, the proposed regulations 

preceding these final regulations were 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on their 

impact on small business and no 

comments were received. 

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 final 

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 

final 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. 

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. 

Drafting Information 

The principal authors of these final 

regulations are Adam G. Province and 

Raphael J. Cohen of the Office of 

Associate Chief Counsel (International); 

and Matthew N. Palucki and Jeremy 

Aron-Dine of the Office of Associate 

Chief Counsel (Corporate). 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. 

Adoption of Amendments to the 

Regulations 

Accordingly, the Treasury Department 

and the IRS amend 26 CFR part 1 as 

follows: 

PART 1—INCOME TAXES 

■ Paragraph 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 through 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 1.987–11 in numerical order; 

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

■ h. Adding entries for §§ 1.987–13 

through 1.987–15 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; and 

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

The additions and revisions 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. 

* * * * * 

Section 1.987–1 also issued under 26 

U.S.C. 987, 989, and 1502. 

Section 1.987–2 also issued under 26 

U.S.C. 987, 989, and 1502. 

Section 1.987–3 also issued under 26 

U.S.C. 987 and 989. 

Section 1.987–4 also issued under 26 

U.S.C. 987 and 989. 

Section 1.987–5 also issued under 26 

U.S.C. 987 and 989. 

Section 1.987–6 also issued under 26 

U.S.C. 904, 987, and 989. 

Section 1.987–7 also issued under 26 

U.S.C. 987 and 989. 

Section 1.987–8 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 1.987–10 also issued under 26 

U.S.C. 987, 989, and 6001. 

Section 1.987–11 also issued under 26 

U.S.C. 987, 989, and 1502. 

Section 1.987–12 also issued under 26 

U.S.C. 987 and 989. 

Section 1.987–13 also issued under 26 

U.S.C. 987 and 989. 

Section 1.987–14 also issued under 26 

U.S.C. 987 and 989. 

Section 1.987–15 also issued under 26 

U.S.C. 987 and 989. 

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. 

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. 


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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. 

* * * * * 

Section 1.1502–13 also issued under 26 

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

* * * * * 

■ Par. 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); and 

■ 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 (QBU) (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 are 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 § 1.987–15(b), a taxpayer 

chooses to apply §§ 1.987–1 through 

1.987–15 to a taxable year before the 

first taxable year described in § 1.987– 

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

of this section applies to that taxable 

year and subsequent years. 

* * * * * 

§ 1.861–9T [Amended] 

■ Par. 3. Section 1.861–9T is amended 

by removing and reserving paragraph 

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

(g)(2)(vi). 

■ Par. 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). 

* * * * * 

■ Par. 5. Add an undesignated center 

heading before § 1.985–0 to read as 

follows: 

* * * * * 

Foreign Currency Transactions 

* * * * * 

§ 1.985–1 [Amended] 

■ Par. 6. Section 1.985–1 is amended 

by: 

■ a. In paragraph (f) designating 

Examples 1 through 12 as paragraphs 

(f)(1) through (12), respectively; and 

■ b. Removing and reserving newly 

redesignated paragraphs (f)(9) through 

(11). 

■ Par. 7. 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 ‘‘1.987–15’’ in its place; 

■ c. Revising the last sentence of 

paragraph (d)(2); 

■ d. Removing the second sentence of 

paragraph (e)(1); 

■ e. Revising and republishing 

paragraphs (e)(4) and (f); and 

■ f. Revising paragraph (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– 

15. 

(e) * * * 

(4) Adjustments to a section 987 

QBU’s balance sheet and unrecognized 

section 987 gain or loss when an owner 

changes functional currency—(i) Owner 

changing to a functional currency other 

than the section 987 QBU’s functional 

currency. If an owner of a section 987 

QBU, subject to §§ 1.987–1 through 

1.987–15 pursuant to § 1.987–1(b)(1), 

changes to a functional currency other 

than the functional currency of the 

section 987 QBU, the adjustments 

described in paragraphs (e)(4)(i)(A) 

through (C) of this section are taken into 

account for purposes of section 987. 

(A) Determining new historic rates. 

The historic rate (as defined in § 1.987– 

1(c)(3)) for the year of change and 

subsequent taxable years with respect to 

a historic item (as defined in § 1.987– 

1(e)) reflected on the balance sheet of 

the section 987 QBU immediately before 

the year of change is equal to the 

historic rate before the year of change 

(that is, a rate that translates the section 

987 QBU’s functional currency into the 

owner’s old functional currency) 

divided by the spot rate for translating 

an amount denominated in the owner’s 

new functional currency into the 

owner’s old functional currency on the 

last day of the last taxable year ending 

before the year of change. For example, 

if a taxpayer that owns a section 987 

QBU with a British pound functional 

currency changes from a U.S. dollar 

functional currency to a euro functional 

currency, and the historic rate for 

translating a specific item of the section 

987 QBU from GBP to USD is 1.50 and 

the spot rate for translating EUR to USD 

on the last day of the last taxable year 

before the change is 1.10, then the new 

historic rate for translating this historic 

item from GBP to EUR is 1.36 (1.50/ 

1.10). 

(B) Determining the owner functional 

currency net value of the section 987 

QBU on the last day of the last taxable 

year ending before the year of change 

under § 1.987–4(d)(1)(i)(B). For purposes 

of determining the change in the owner 

functional currency net value of the 

section 987 QBU on the last day of the 

last taxable year preceding the year of 

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

(e), the section 987 QBU’s marked items 

are translated into the owner’s new 

functional currency at the spot rate on 


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the last day of the last taxable year 

ending before the year of change. 

(C) Translation of unrecognized 

section 987 gain or loss. Any net 

accumulated unrecognized section 987 

gain or loss determined under § 1.987– 

4(c), cumulative suspended section 987 

loss determined under § 1.987–11(b), or 

deferred section 987 gain or loss 

determined under § 1.987–12 is 

translated from the owner’s old 

functional currency into the owner’s 

new functional currency using the spot 

rate for translating an amount 

denominated in the owner’s old 

functional currency into the owner’s 

new functional currency on the last day 

of the last taxable year ending before the 

year of change. 

(ii) Taxpayer with the same functional 

currency as its QBU changing to a 

different functional currency. If a 

taxpayer with the same functional 

currency as its QBU changes to a new 

functional currency and as a result the 

taxpayer becomes an owner of a section 

987 QBU (see § 1.987–1), the taxpayer 

and the section 987 QBU become 

subject to section 987 for the year of 

change and subsequent taxable years. 

(iii) Owner changing to the same 

functional currency as the section 987 

QBU. If an owner changes its functional 

currency to the functional currency of 

its section 987 QBU, the section 987 

QBU is treated as if it terminated on the 

last day of the last taxable year ending 

before the year of change. 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 1.987–15. 

(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 20,000 

Inventory ............................................................................................................................................... 100,000 200,000 

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

Fixed assets: 

Property ................................................................................................................................................ 200,000 400,000 

Plant ...................................................................................................................................................... 500,000 1,000,000 

Accumulated Depreciation .................................................................................................................... (200,000) (400,000) 

Equipment ............................................................................................................................................. 1,000,000 2,000,000 

Accumulated Depreciation .................................................................................................................... (400,000) (800,000) 

Total Assets ................................................................................................................................... 1,300,000 2,600,000 

Liabilities and Equity: 

Accounts Payable ................................................................................................................................. 50,000 100,000 

Long-term Liabilities ............................................................................................................................. 400,000 800,000 

Paid-in-Capital ...................................................................................................................................... 800,000 1,600,000 

Retained Earnings ................................................................................................................................ 50,000 100,000 

Total Liabilities and Equity ............................................................................................................ 1,300,000 2,600,000 

(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 

section applies to taxable years 

beginning after December 31, 2024. 

However, if pursuant to § 1.987–15(b), a 

taxpayer chooses to apply §§ 1.987–1 

through 1.987–15 to a taxable year 

before the first taxable year described in 

§ 1.987–15(a)(1), then this section 

applies to that taxable year and 

subsequent years. 

■ Par. 8. Revise §§ 1.987–0 through 

1.987–12 and add §§ 1.987.13 through 

1.987–15 to read as follows: 

Foreign Currency Transactions 

* * * * * 

Sec. 

1.987–0 Table of contents. 

1.987–1 Scope, definitions and special 

rules. 

1.987–2 Attribution of items to eligible 

QBUs; definition of a transfer and related 

rules. 

1.987–3 Determination of section 987 

taxable income or loss of an owner of a 

section 987 QBU. 

1.987–4 Determination of net unrecognized 

section 987 gain or loss of a section 987 

QBU. 

1.987–5 Recognition of section 987 gain or 

loss. 

1.987–6 Character and source of section 

987 gain or loss. 

1.987–7 Application of the section 987 

regulations to partnerships and S 

corporations. 

1.987–8 Termination of a section 987 QBU. 

1.987–9 Recordkeeping requirements. 

1.987–10 Transition rules. 

1.987–11 Suspended section 987 loss 

relating to certain elections; loss-to-theextent-of-gain rule. 

1.987–12 Deferral of section 987 gain or 

loss. 

1.987–13 Suspended section 987 loss upon 

terminations. 

1.987–14 Section 987 hedging transactions. 

1.987–15 Applicability date. 

* * * * * 

§ 1.987–0 Table of contents. 

This section lists the headings for 

§§ 1.987–1 through 1.987–15. 

§ 1.987–1 Scope, definitions and special 

rules. 

(a) In general. 


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(b) Scope of section 987 and certain rules 

relating to QBUs. 

(1) Persons subject to section 987. 

(i) In general. 

(ii) Inapplicability to certain entities. 

(2) Application of the section 987 

regulations to earnings and profits. 

(i) In general. 

(ii) Timing. 

(3) Definition of a section 987 QBU. 

(i) In general. 

(ii) Section 987 QBU grouping election. 

(4) Definition of an eligible QBU. 

(i) In general. 

(ii) Qualified business unit. 

(5) Definition of an owner. 

(i) Direct ownership. 

(ii) [Reserved] 

(6) [Reserved] 

(7) Examples illustrating paragraph (b) of 

this section. 

(i) Example 1: Owner owns an eligible 

QBU and a DE holding company. 

(ii) Example 2: Owner owns eligible QBUs 

through DEs. 

(iii) Example 3: Section 987 grouping 

election. 

(c) Exchange rates. 

(1) Spot rate. 

(i) In general. 

(ii) Election to use a spot rate convention. 

(2) Yearly average exchange rate. 

(3) Historic rate. 

(i) In general. 

(ii) Date placed in service for depreciable 

or amortizable property. 

(iii) Changed functional currency. 

(d) Marked item. 

(1) In general. 

(2) Current rate election. 

(e) Historic item. 

(f) Example: Identification of marked and 

historic items. 

(1) Facts. 

(2) Analysis. 

(g) Elections. 

(1) Persons making the election. 

(i) United States persons. 

(ii) CFCs. 

(iii) Consolidated groups. 

(iv) Partnerships. 

(2) Consistency rules. 

(i) Consolidated groups. 

(ii) CFCs and foreign partnerships. 

(iii) Section 381(a) transactions. 

(3) Manner of making or revoking 

elections. 

(i) Statement must be attached to a return. 

(ii) Election requirements. 

(iii) Elections made under the 2016 and 

2019 section 987 regulations. 

(4) No change in method of accounting. 

(5) Principles of § 1.964–1(c)(3) applicable 

to section 987 elections. 

(h) Definitions. 

§ 1.987–2 Attribution of items to eligible 

QBUs; definition of a transfer and 

related rules. 

(a) In general. 

(b) Attribution of items to an eligible QBU. 

(1) General rules. 

(2) Exceptions for non-portfolio stock, 

interests in partnerships, and certain 

acquisition indebtedness. 

(i) In general. 

(ii) Separate account assets. 

(3) Adjustments to items reflected on the 

books and records. 

(i) General rule. 

(ii) Factors indicating no tax avoidance. 

(iii) Factors indicating tax avoidance. 

(iv) Section 988 transactions. 

(c) Transfers to and from section 987 

QBUs. 

(1) In general. 

(2) Disregarded transactions. 

(i) General rule. 

(ii) Definition of a disregarded transaction. 

(iii) Items derived from disregarded 

transactions ignored. 

(3) through (6) [Reserved] 

(7) Application of general tax law 

principles. 

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

(9) Certain disregarded transactions not 

treated as transfers. 

(i) Combinations of section 987 QBUs. 

(ii) Change in functional currency from a 

combination. 

(iii) Separation of section 987 QBUs. 

(iv) Special rules for successor suspended 

loss QBUs. 

(10) Examples. 

(i) Example 1: Loan to a section 987 QBU. 

(ii) Example 2: Transfer between section 

987 QBUs. 

(iii) Example 3: Sale of property between 

two section 987 QBUs. 

(iv) through (ix) [Reserved] 

(x) Example 10: Contribution of a section 

987 QBU’s assets to a corporation. 

(xi) Example 11: Circular transfers. 

(xii) Example 12: Transfers without 

substance. 

(xiii) Example 13: Offsetting positions in 

section 987 QBUs 

(xiv) Example 14: Offsetting positions with 

respect to a section 987 QBU and a section 

988 transaction. 

(xv) Example 15: Offsetting positions with 

respect to a section 987 QBU and a section 

988 transaction. 

(xvi) Example 16: Borrowing by section 

987 QBU followed by immediate distribution 

to owner. 

(xvii) Example 17: Payment of interest by 

section 987 QBU on obligation of owner. 

(xviii) Example 18: Sale of the interests in 

a DE. 

(d) Translation of items transferred to a 

section 987 QBU. 

(1) Marked items. 

(2) Historic items. 

(e) Cross-reference. 

§ 1.987–3 Determination of section 987 

taxable income or loss of an owner of a 

section 987 QBU. 

(a) In general. 

(b) Determination of each item of income, 

gain, deduction, or loss in the section 987 

QBU’s functional currency. 

(1) In general. 

(2) Translation of items of income, gain, 

deduction, or loss that are denominated in a 

nonfunctional currency. 

(3) [Reserved] 

(4) Section 988 transactions. 

(i) In general. 

(ii) Section 988 mark-to-market election. 

(c) Translation of items of income, gain, 

deduction, or loss of a section 987 QBU into 

the owner’s functional currency. 

(1) In general. 

(2) Exceptions. 

(i) Recovery of basis with respect to 

historic assets. 

(ii) through (iii) [Reserved] 

(iv) Cost of goods sold computation. 

(v) Translation of income to account for 

certain foreign income tax claimed as a 

credit. 

(3) Adjustments to COGS required under 

the simplified inventory method. 

(i) In general. 

(ii) Adjustment for cost recovery 

deductions included in inventoriable costs. 

(iii) Adjustment for beginning inventory for 

non-LIFO inventory. 

(iv) Adjustment for year of LIFO 

liquidation. 

(d) [Reserved] 

(e) Examples. 

(1) Example 1: Item of income 

denominated in nonfunctional currency. 

(2) Example 2: Asset sold for nonfunctional 

currency. 

(3) Example 3: Historic inventory method. 

(i) Facts. 

(ii) Analysis. 

(4) Example 4: Simplified inventory 

method. 

(i) Facts. 

(ii) Analysis. 

(5) Example 5: Depreciation expense that is 

not an inventoriable cost. 

(6) Example 6: Translation of depreciation 

expense that is an inventoriable cost (historic 

inventory method). 

(7) Example 7: Sale of land. 

(8) Example 8: Current rate election. 

(9) through (12) [Reserved] 

(13) Example 13: Section 988 transaction. 

(i) Facts. 

(ii) Analysis. 

(14) Example 14: Payment of foreign 

income tax. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–4 Determination of net 

unrecognized section 987 gain or loss of 

a section 987 QBU. 

(a) In general. 

(b) Calculation of net unrecognized section 

987 gain or loss. 

(c) Net accumulated unrecognized section 

987 gain or loss for all prior taxable years. 

(1) In general. 

(2) Additional adjustments for certain 

taxable years beginning on or before 

December 31, 2024. 

(d) Calculation of unrecognized section 987 

gain or loss for a taxable year. 

(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. 

(ii) Year section 987 QBU is terminated. 

(iii) First taxable year of a section 987 

QBU. 

(iv) First year in which an election is in 

effect or ceases to be in effect. 

(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. 

(ii) Assets transferred from the section 987 

QBU to the owner during the taxable year. 

(3) Step 3: Decrease the amount 

determined in steps 1 and 2 by the amount 


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of assets transferred from the owner to the 

section 987 QBU. 

(i) In general. 

(ii) Assets transferred from the owner to 

the section 987 QBU during the taxable year. 

(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. 

(ii) Liabilities transferred from the owner to 

the section 987 QBU during the taxable year. 

(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. 

(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. 

(7) Step 7: Increase the amount determined 

in steps 1 through 6 by certain 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. 

(8) Step 8: Decrease the amount 

determined in steps 1 through 7 by the 

amount of certain 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. 

(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. 

(10) Step 10: Decrease or increase the 

amount determined in steps 1 through 9 by 

any increase or decrease, respectively, to the 

section 987 QBU’s net assets that is not 

previously taken into account under steps 2 

through 9. 

(i) In general. 

(ii) Determining the residual increase or 

decrease to net assets. 

(iii) Modifications for taxable years to 

which a current rate election or an annual 

recognition election applies. 

(e) Determination of the owner functional 

currency net value of a section 987 QBU. 

(1) In general. 

(i) Marked item. 

(ii) Historic item. 

(2) Current rate election. 

(i) In general. 

(ii) QBU net value. 

(iii) Alternative calculation of QBU net 

value. 

(f) Combinations and separations. 

(1) Combinations. 

(2) Separations. 

(3) Examples. 

(i) Example 1: Combination of two section 

987 QBUs that have the same owner. 

(ii) Example 2: Separation of two section 

987 QBUs that have the same owner. 

(g) Examples. 

(1) Example 1: Determination of net 

unrecognized section 987 gain or loss. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Determination of net 

unrecognized section 987 gain or loss if a 

current rate election in effect. 

(i) Facts. 

(ii) Analysis. 

(iii) Alternative computation of QBU net 

value. 

(3) Example 3: Determination of net 

unrecognized section 987 gain or loss when 

a current rate election is revoked. 

(i) Facts. 

(ii) Analysis. 

§ 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. 

(b) Remittance proportion. 

(1) In general. 

(2) Annual recognition election. 

(c) Remittance. 

(1) Definition. 

(2) Alternative calculation. 

(i) Step 1: Determine the change in QBU 

net value. 

(ii) Step 2: Adjust the amount determined 

in step 1 for income or loss of the section 987 

QBU. 

(iii) Step 3: Multiply the amount 

determined in step 2 by negative one. 

(3) Day when a remittance is determined. 

(4) Termination. 

(d) Aggregate of all amounts transferred 

from the section 987 QBU to the owner for 

the taxable year. 

(e) Aggregate of all amounts transferred 

from the owner to the section 987 QBU for 

the taxable year. 

(f) Determination of owner’s adjusted basis 

in transferred assets and amount of 

transferred liabilities. 

(1) In general. 

(2) Marked items. 

(3) Historic items. 

(g) Example—Calculation of section 987 

gain or loss recognized. 

(1) Facts. 

(i) In general. 

(ii) Year 1 balance sheet. 

(iii) Transfers and income in year 2. 

(iv) Year 2 balance sheet. 

(2) Analysis. 

(i) Computation of amount of remittance. 

(ii) Alternative computation of remittance 

amount. 

(iii) Computation of section 987 QBU gross 

assets plus remittance. 

(iv) Computation of remittance proportion. 

(v) Computation of section 987 gain or loss. 

(3) Annual recognition election. 

§ 1.987–6 Character and source of section 

987 gain or loss. 

(a) Ordinary income or loss. 

(b) Character and source of section 987 

gain or loss. 

(1) Timing of source and character 

determination. 

(2) Method for determining the character 

and source section 987 gain or loss. 

(i) Initial assignment 

(ii) Reassignment of section 987 gain or 

loss. 

(iii) Special rule for the application of the 

GILTI high-tax exclusion to section 987 gain 

or loss. 

(3) Allocation and apportionment of 

foreign income tax to section 987 items under 

section 861. 

(i) The foreign gross income is an item of 

foreign currency gain or loss. 

(ii) The same event or events give rise to 

both the foreign gross income and the section 

987 gain or loss. 

(c) Examples. 

(1) Example 1: Initial assignment and 

reassignment of section 987 gain or loss. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Effect of GILTI high-tax 

exclusion. 

(i) Facts. 

(ii) Analysis. 

(3) Example 3: Section 987 gain or loss 

treated as attributable to section 988 

transactions. 

(i) Facts. 

(ii) Analysis. 

(4) Example 4: Section 987 gain or loss 

assigned to passive foreign personal holding 

company income. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–7 Application of the section 987 

regulations to partnerships and S 

corporations. 

(a) Overview. 

(b) Section 987 regulations generally do not 

apply to partnerships. 

(c) Provisions of the section 987 

regulations that apply to partnerships. 

(1) In general. 

(i) Eligible QBU. 

(ii) Partnership. 

(2) Applicable provisions. 

(i) In general. 

(ii) Annual recognition election. 

(iii) Section 988 mark-to-market election. 

(3) Modifications to applicable provisions. 

(i) In general. 

(ii) Controlled group. 

(4) Terminating QBUs. 

(d) Suspended section 987 loss. 

(1) In general. 

(i) Rules of § 1.987–11(c) and (d)(2) do not 

apply. 

(ii) Suspension of section 987 loss. 

(2) Exceptions. 

(i) Method under which historic items do 

not give rise to section 987 gain or loss. 

(ii) Annual recognition election. 

(iii) De minimis rule. 

(3) Recognition of suspended section 987 

loss. 

(i) In general. 

(ii) Partnership that is not engaged in a 

trade or business. 

(iii) Application of the loss-to-the-extentof-gain rule. 

(e) Adjustments to the basis of a partner’s 

interest in the partnership. 

(f) S corporations treated as partnerships. 

(g) Examples. 

(1) Example 1: Aggregate approach to 

section 987. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Entity approach to section 

987. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–8 Termination of a section 987 

QBU. 

(a) Scope. 

(b) In general. 

(1) Trade or business ceases. 


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(2) Substantially all assets transferred. 

(3) Owner no longer a CFC. 

(4) Owner ceases to exist. 

(5) Section 987 QBU ceases to be an 

eligible QBU with a functional currency 

different from its owner. 

(6) Change in form of ownership. 

(c) Transactions described in section 

381(a). 

(1) Liquidations. 

(2) Reorganizations. 

(d) [Reserved] 

(e) Effect of terminations. 

(f) Examples. 

(1) Example 1: Cessation of operations. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Transfer of a section 987 

QBU to a member of a consolidated group. 

(i) Facts. 

(ii) Analysis. 

(3) Example 3: Cessation of controlled 

foreign corporation status. 

(i) Facts. 

(ii) Analysis. 

(4) Example 4: Section 332 liquidation. 

(i) Facts. 

(ii) Analysis. 

(5) [Reserved] 

(6) Example 6: Deemed transfers to a CFC 

upon a check-the-box election. 

(i) Facts. 

(ii) Analysis. 

(7) Example 7: Sale of a section 987 QBU 

to a member of a consolidated group. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–9 Recordkeeping requirements. 

(a) In general. 

(b) Supplemental information. 

(c) Retention of records. 

(d) Information on a dedicated section 987 

form. 

§ 1.987–10 Transition rules. 

(a) Overview. 

(1) In general. 

(2) Terms defined under prior § 1.987–12. 

(b) Scope. 

(1) Owner of a section 987 QBU. 

(2) Deferral QBU owner and owner of 

outbound loss QBU. 

(c) Transition date. 

(1) In general. 

(2) Terminating QBU. 

(i) In general. 

(ii) Ordering rule. 

(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. 

(2) Determination of historic rate. 

(3) Transition exchange rate. 

(i) In general. 

(ii) Earnings only method. 

(e) Pretransition gain or loss. 

(1) In general. 

(2) Amount of pretransition gain or loss for 

an owner that applied an eligible 

pretransition method. 

(i) Owner of a section 987 QBU 

(ii) Deferral QBU owner. 

(iii) Owner of an outbound loss QBU. 

(3) Amount of pretransition gain or loss for 

an owner that did not apply an eligible 

pretransition method. 

(i) In general. 

(ii) Computation of pretransition gain or 

loss. 

(iii) Annual unrecognized section 987 gain 

or loss. 

(iv) Deferral QBU owner. 

(v) Owner of an outbound loss QBU. 

(4) Eligible pretransition method. 

(i) Earnings and capital method. 

(ii) Other reasonable methods. 

(iii) Other earnings only methods. 

(iv) Error in the application of a section 

987 method. 

(v) Certain consistent practices not treated 

as errors. 

(vi) Deferral of section 987 gain or loss 

until termination is not reasonable. 

(vii) Anti-abuse rule. 

(5) Recognition of pretransition gain or 

loss. 

(i) In general. 

(ii) Election to recognize pretransition 

section 987 gain or loss ratably over the 

transition period. 

(6) Predecessor of an owner. 

(i) In general. 

(ii) Predecessor. 

(7) Small business election. 

(i) Scope. 

(ii) Owner threshold. 

(iii) QBU threshold. 

(iv) Small business election. 

(f) QBUs to which the fresh start transition 

method was applied. 

(1) In general. 

(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. 

(ii) Determination of historic rate. 

(iii) Unrecognized section 987 gain or loss. 

(3) Taxpayers that are required to transition 

using the fresh start transition method. 

(g) [Reserved] 

(h) Determination of source and character. 

(1) In general. 

(2) Deferral QBU or outbound loss QBU. 

(i) [Reserved] 

(j) Adjustments to avoid double counting 

or omissions. 

(k) Reporting. 

(1) In general. 

(2) QBUs for which reporting is required. 

(i) In general. 

(ii) QBUs to which the fresh start transition 

method was applied. 

(3) Attachments not required where 

information is reported on a form. 

(4) No change in method of accounting. 

(l) Examples. 

(1) Example 1: Earnings and capital 

method. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Earnings only method 

described in paragraph (e)(4)(ii) of this 

section. 

(i) Facts. 

(ii) Analysis. 

(3) Example 3: Earnings only method 

described in paragraph (e)(4)(iii) of this 

section. 

(i) Facts. 

(ii) Analysis. 

(4) Example 4: Owner did not apply 

section 987(3). 

(i) Facts. 

(ii) Analysis. 

(5) Example 5: Error in application of 

method. 

(i) Facts. 

(ii) Analysis. 

(6) Example 6: Consistent practice not 

treated as an error. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–11 Suspended section 987 loss 

relating to certain elections; loss to the 

extent of gain rule. 

(a) In general. 

(b) Cumulative suspended section 987 loss 

in a recognition grouping. 

(1) In general. 

(2) Combined QBU. 

(3) Separated QBU. 

(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. 

(1) In general. 

(2) De minimis rule. 

(3) Taxable year of controlled group 

members. 

(i) In general. 

(ii) Owner is a CFC. 

(d) Suspension of net unrecognized section 

987 loss upon making or revoking certain 

elections. 

(1) Making an annual recognition election. 

(2) Revoking a current rate election. 

(e) Loss-to-the-extent of gain rule. 

(1) In general. 

(2) Separate determination for each 

recognition grouping. 

(3) Amount of suspended section 987 loss 

recognized. 

(i) Current year gain amount. 

(ii) Lookback gain amount. 

(iii) Suspended section 987 loss not taken 

into account. 

(iv) Lookback period. 

(v) Anti-abuse rule. 

(4) Suspended section 987 loss recognized 

with respect to each section 987 QBU and 

suspended section 987 loss QBU. 

(5) Section 381(a) transactions. 

(i) In general. 

(ii) Limitation for inbound section 381(a) 

transactions. 

(6) Consolidated group members. 

(i) In general. 

(ii) Suspended section 987 losses arising in 

separate return limitation years. 

(f) Recognition groupings. 

(1) Sourcing and section 904 category. 

(2) Statutory and residual groupings for 

CFC owners. 

(g) Examples. 

(1) Example 1: Suspension of section 987 

loss and recognition of suspended section 

987 loss. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Recognition of suspended 

section 987 loss by reason of gain recognized 

during the lookback period. 

(i) Facts. 

(ii) Analysis. 

(iii) Alternative facts. 

(iv) Analysis of alternative facts. 

(3) Example 3: Suspension of section 987 

loss when a current rate election is revoked. 


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(i) Facts. 

(ii) Analysis. 

§ 1.987–12 Deferral of section 987 gain or 

loss. 

(a) Overview. 

(1) Scope. 

(2) Exceptions. 

(i) Annual recognition election. 

(ii) De minimis rule. 

(b) Treatment of section 987 gain and loss 

in connection with a deferral event. 

(1) Gain or loss recognized (or suspended) 

in the taxable year of a deferral event. 

(2) Deferred section 987 gain or loss. 

(i) In general. 

(ii) Deferred section 987 gain or loss 

attributable to a successor deferral QBU. 

(c) Recognition (or suspension) of deferred 

section 987 gain or loss following a deferral 

event. 

(1) Recognition upon a subsequent 

remittance. 

(i) In general. 

(ii) Amount. 

(iii) Deemed remittance by a successor 

deferral QBU. 

(2) Deferral events and outbound loss 

events with respect to a successor deferral 

QBU. 

(d) Successor deferral QBU becomes a 

successor suspended loss QBU. 

(e) Anti-abuse rule. 

(f) Combinations and separations of 

successor deferral QBUs. 

(1) Combined QBU. 

(2) Separated QBU. 

(g) Definitions. 

(1) Deferral event. 

(i) Events. 

(ii) Assets on books of successor deferral 

QBU. 

(2) Successor deferral QBU. 

(3) Original deferral QBU owner. 

(4) Qualified successor. 

(h) Examples. 

(1) Example 1: Contribution of a section 

987 QBU with net unrecognized section 987 

gain to a member of the controlled group. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Contribution of a section 

987 QBU with net unrecognized section 987 

loss to a member of the controlled group 

when a current rate election is in effect. 

(i) Facts. 

(ii) Analysis. 

(3) Example 3: Election to be classified as 

a corporation. 

(i) Facts. 

(ii) Analysis. 

(4) Example 4: Partial recognition of 

deferred gain or loss. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–13 Suspended section 987 loss 

upon terminations. 

(a) Overview. 

(1) In general. 

(2) Ordering rule. 

(b) Termination of a section 987 QBU with 

suspended loss. 

(1) Suspended section 987 loss becomes 

suspended section 987 loss with respect to a 

successor suspended loss QBU. 

(i) Successor suspended loss QBU. 

(ii) Attribution of suspended section 987 

loss to successor suspended loss QBU. 

(2) Recognition of suspended section 987 

loss. 

(c) Termination of a successor suspended 

loss QBU. 

(1) Successor to the successor suspended 

loss QBU. 

(i) Successor suspended loss QBU. 

(ii) Attribution of suspended section 987 

loss to successor suspended loss QBU. 

(2) Recognition of suspended section 987 

loss. 

(d) Transfer of successor suspended loss 

QBU owner. 

(e) Transfer of original suspended loss 

QBU owner. 

(f) Owner ceases to exist. 

(g) Inbound nonrecognition transactions– 

no carryover of suspended section 987 loss. 

(h) Outbound transactions–recognition or 

suspension of net unrecognized section 987 

loss. 

(1) In general. 

(2) Outbound loss event. 

(3) Loss recognition upon an outbound loss 

event 

(4) Loss suspension upon outbound loss 

event. 

(i) [Reserved] 

(j) Termination of a successor suspended 

loss QBU. 

(k) Anti-abuse. 

(l) Definitions. 

(1) Original suspended loss QBU owner. 

(i) In general. 

(ii) Successors. 

(2) Successor suspended loss QBU. 

(3) Successor suspended loss QBU owner. 

(4) Ownership interests. 

(5) Significant portion. 

(m) Examples. 

(1) Example 1: Trade or business of a 

section 987 QBU ceases. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Trade or business of a 

section 987 QBU is sold to a third party. 

(i) Facts. 

(ii) Analysis. 

(3) Example 3: Outbound loss event. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–14 Section 987 hedging 

transactions. 

(a) Overview. 

(b) Section 987 hedging transaction. 

(1) In general. 

(2) Requirements. 

(i) Identification. 

(ii) Current rate election. 

(iii) Mark-to-market method of accounting. 

(iv) Treatment under U.S. generally 

accepted accounting principles. 

(v) Hedge entered into by owner of the 

hedged QBU. 

(3) Anti-abuse rule. 

(4) Partial termination of a section 987 

hedging transaction. 

(c) Identification requirements. 

(1) In general. 

(2) Inadvertent error. 

(d) Taxation of section 987 hedging 

transactions. 

(1) Hedging gain or loss with respect to a 

hedged QBU. 

(2) Adjustment to unrecognized section 

987 gain or loss for the taxable year. 

(i) Hedging loss. 

(ii) Hedging gain. 

(3) Termination of a hedged QBU. 

(e) Examples. 

(1) Example 1: Section 987 hedging 

transaction. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2: Excess hedging gain from a 

section 987 hedging transaction. 

(i) Facts. 

(ii) Analysis. 

§ 1.987–15 Applicability date. 

(a) Applicability date of section 987 

regulations. 

(1) In general. 

(2) Applicability date for a terminating 

QBU. 

(b) Application of the section 987 

regulations to taxable years beginning on or 

before December 31, 2024, and ending after 

November 9, 2023. 

(c) Application of the 2016 and 2019 

section 987 regulations. 

(1) In general. 

(2) Application to section 987 QBUs not 

owned on the transition date. 

(3) Modifications of defined terms for 

purposes of this paragraph (c). 

(i) Application of § 1.987–10 in lieu of 

prior § 1.987–10. 

(ii) Partnerships not included in section 

987 electing group. 

(iii) Transition date. 

(d) Prior § 1.987–12. 

§ 1.987–1 Scope, definitions, and special 

rules. 

(a) In general. Sections 1.987–1 

through 1.987–15 (the section 987 

regulations) provide rules for 

determining the taxable income or loss 

and earnings and profits of a taxpayer 

with respect to a qualified business unit 

(QBU) that is subject to section 987. 

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 


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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 

1.987–7 provides rules relating to the 

application of the section 987 

regulations with respect to a partnership 

or S corporation. 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-the-extent-ofgain rule. Section 1.987–12 provides 

rules regarding when section 987 gain or 

loss is deferred, as well as when such 

deferred 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 rules relating to section 987 

hedging transactions. Section 1.987–15 

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 

individual or corporation is subject to 

the section 987 regulations. See § 1.987– 

7 for rules relating to the application of 

the section 987 regulations in the case 

of a partnership or S corporation. 

(ii) Inapplicability to certain entities. 

Section 987(3) and the section 987 

regulations do not apply to individuals 

who are not United States persons and 

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. 

(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 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. However, a QBU described 

in § 1.987–7(c)(1) may not be treated as 

part of the same QBU as a section 987 

QBU that is not described in § 1.987– 

7(c)(1). 

(B) [Reserved] 

(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, trust, estate, or 

disregarded entity 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, 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 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) [Reserved] 

(6) [Reserved] 

(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: Owner owns an eligible 

QBU and a DE holding company—(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: Owner owns eligible 

QBUs through DEs—(A) Facts. U.S. 


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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 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 neither Business A 

nor DE2 is 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: Section 987 grouping 

election—(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. 

(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. 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 section 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 

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 (E) of 

this section. 

(A) Assets generally. In the case of an 

asset other than inventory that is 

acquired by a section 987 QBU (or 

otherwise becomes attributable to a 

section 987 QBU, including through a 

transfer), the historic rate is the yearly 

average exchange rate applicable to the 

year of acquisition (or the year in which 

the asset otherwise becomes attributable 

to the section 987 QBU). 

(B) Inventory under the simplified 

inventory method. If a taxpayer has not 

elected under § 1.987–3(c)(2)(iv)(B) to 

use the historic inventory method, the 

historic rate for inventory is determined 

under this paragraph (c)(3)(i)(B). 

(1) LIFO inventory. The historic rate 

for LIFO inventory is the yearly average 

exchange rate applicable to the year in 

which the inventory’s LIFO layer arose. 

(2) Non-LIFO inventory. The historic 

rate for non-LIFO inventory is the yearly 

average exchange rate for the relevant 

taxable year. For example, in 

determining the owner functional 

currency net value of a section 987 QBU 

on the last day of the current taxable 

year under § 1.987–4(d)(1)(i)(A), the 

historic rate for non-LIFO inventory is 

the yearly average exchange rate for the 


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current taxable year. In determining 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)(i)(B), the historic rate for nonLIFO inventory is the yearly average 

exchange rate for the preceding taxable 

year. 

(C) Inventory under the historic 

inventory method. If a taxpayer has 

elected under § 1.987–3(c)(2)(iv)(B) to 

use the historic inventory method, each 

inventoriable cost with respect to a 

section 987 QBU’s inventory may have 

a different historic rate. The historic rate 

for each inventoriable cost is the 

exchange rate at which the cost 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. 

(E) Determination of historic rates 

after revocation of current rate election. 

If a current rate election is revoked or 

otherwise ceases to be in effect, the 

historic rate of all historic items (other 

than non-LIFO inventory subject to the 

simplified inventory method) that were 

attributable to a section 987 QBU on the 

last day of the last taxable year in which 

the current rate election was in effect is 

the spot rate applicable to that day. 

Similarly, except as provided in 

paragraph (c)(3)(i)(B)(2) of this section, 

if a marked item becomes a historic item 

(such as when an asset of an insurance 

company ceases to be a separate account 

asset), the historic rate for the historic 

item is equal to the spot rate applicable 

to the last day of the last taxable year 

in which it was treated as a marked 

item. 

(ii) 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. 

(iii) 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 attributable to 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 and would be 

a section 988 transaction if such item 

were held or entered into directly by the 

owner of the section 987 QBU; 

(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; 

(iii) Is a section 988 transaction of the 

section 987 QBU; 

(iv) Is an insurance reserve; or 

(v) Is a separate account asset. 

(2) Current rate election. A taxpayer 

may elect to treat all assets and 

liabilities that are attributable to 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 attributable to a section 

987 QBU under § 1.987–2(b) and that is 

not a marked item. 

(f) Example: Identification of marked 

and historic items. The following 

example illustrates the application of 

paragraphs (d) and (e) of this section. 

(1) Facts. U.S. Corp is a domestic 

corporation with the U.S. dollar as its 

functional currency and is the owner of 

Business A, a section 987 QBU that has 

the pound as its functional currency. 

Items reflected on Business A’s balance 

sheet include £10,000, $1,000, a 

building with a basis of £100,000, a light 

general purpose truck with a basis of 

£30,000, a computer with a basis of 

£1,000, a 60-day receivable for ¥15,000, 

an account payable of £5,000, and a 

foreign currency contract within the 

meaning of section 1256(g)(2) that 

requires Business A to exchange £100 

for $125 in 90 days. 

(2) Analysis. Under paragraph (d) of 

this section, the £10,000, the $1,000, the 

¥15,000 receivable, the £5,000 account 

payable, and the £/$ section 1256 

foreign currency contract are marked 

items. The other items are historic items 

under paragraph (e) of this section. 

(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 acting in 

concert. 

(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 

owner is the authorized person. 

(ii) CFCs. If the owner of a section 987 

QBU is a controlled foreign corporation, 

the controlling domestic shareholders 

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

the controlled foreign corporation are 

treated as the authorized person. 

(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 

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. All members 

of a consolidated group are treated as a 

single United States person for purposes 

of applying paragraph (g)(2)(ii) of this 

section. 

(ii) CFCs and foreign partnerships. 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 (C) 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 


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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 of the stock (by vote or 

value). 

(C) In the case of an election that can 

be made by or for a partnership, each 

foreign partnership in which the 

relevant United States person owns 

(directly or indirectly) more than fifty 

percent of the capital and profits 

interest. 

(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) (or 

must provide the information described 

in this paragraph (g)(3)(i) in the manner 

prescribed in forms or instructions or 

other guidance). Each statement must 

include an identification of the election 

that is made or revoked (including the 

section and paragraph of the regulations 

under which the election is made); 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 to which the election 

applies. The elections provided in 

§ 1.987–10 are made by reporting the 

election on the statement described in 

§ 1.987–10(k). An election to use a spot 

rate convention under paragraph 

(c)(1)(ii) of this section must describe 

the convention. 

(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 2024–1, I.R.B. 2024– 

1 (or superseding guidance). 

(B) Current rate election, annual 

recognition election, and section 988 

mark-to-market election. Except as 

provided in paragraph (g)(3)(ii)(C) of 

this section, the authorized person may 

make a current rate election, an annual 

recognition election, or a section 988 

mark-to-market 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, annual 

recognition election, or section 988 

mark-to-market 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, annual recognition election, or 

section 988 mark-to-market 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 an owner in 

which both— 

(1) The section 987 regulations apply 

(other than by applying solely to one or 

more terminating QBUs pursuant to 

§ 1.987–15(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 treated as a change in method 

of accounting for purposes of sections 

446 and 481. 

(5) Principles of § 1.964–1(c)(3) 

applicable to section 987 elections. 

Except as otherwise provided in this 

paragraph (g), if the authorized person 

makes or revokes a section 987 election 

on behalf of a controlled foreign 

corporation, the authorized person must 

make or revoke the section 987 election 

in accordance with the rules and 

principles of § 1.964–1(c)(3). 

(h) Definitions. The definitions in this 

paragraph (h) apply for purposes of the 

section 987 regulations. 

1991 proposed regulations. 1991 

proposed regulations means proposed 

§§ 1.987–1 through 1.987–3 as 

contained in 56 FR 48457–01 

(September 25, 1991). 

2006 proposed regulations. 2006 

proposed regulations means: proposed 

§§ 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) and (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. 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 (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. Adjusted 

balance sheet means a tax basis balance 

sheet in the functional currency of the 

eligible QBU, determined by— 


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(i) Preparing a balance sheet for the 

relevant date from the section 987 

QBU’s books and records (within the 

meaning of § 1.989(a)–1(d)) recorded in 

the section 987 QBU’s functional 

currency and showing all assets and 

liabilities attributable to the section 987 

QBU under § 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 

(including adjustments to reflect items 

that were not reflected on the 

preliminary balance sheet but should be 

reflected under United States tax 

accounting principles, and adjustments 

to eliminate items that are reflected on 

the preliminary balance sheet but 

should not be reflected under United 

States tax accounting principles). 

Annual recognition election. Annual 

recognition election has the meaning 

provided in § 1.987–5(b)(2). 

Authorized person. Authorized 

person has the meaning provided in 

paragraph (g)(1) of this section. 

Combination. Combination has the 

meaning provided in § 1.987–2(c)(9)(i). 

Combined QBU. Combined QBU has 

the meaning provided in § 1.987– 

2(c)(9)(i). 

Combining QBU. Combining QBU has 

the meaning provided in § 1.987– 

2(c)(9)(i). 

Consolidated group. Consolidated 

group has the meaning provided in 

§ 1.1502–1(h). 

Controlled foreign corporation. 

Controlled foreign corporation (or CFC) 

has the meaning provided in section 957 

(or, if applicable, section 953(c)(1)(B)). 

Controlled group. A controlled group 

means all persons with the relationships 

to each other specified in section 267(b) 

or section 707(b). 

Cumulative suspended section 987 

loss. Cumulative suspended section 987 

loss has the meaning provided in 

§ 1.987–11(b). 

Current rate election. Current rate 

election has the meaning provided in 

paragraph (d)(2) of this section. 

Current year gain amount. Current 

year gain amount has the meaning 

provided in § 1.987–11(e)(3)(i). 

Deferral event. Deferral event has the 

meaning provided in § 1.987–12(g)(1). 

Deferred section 987 gain or loss. 

Deferred section 987 gain or loss has the 

meaning provided in § 1.987–12(b)(2). 

Deferred section 987 gain or loss does 

not include net unrecognized section 

987 gain or loss or suspended section 

987 loss. 

Disregarded entity. 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) 

of this chapter, a qualified subchapter S 

subsidiary under section 1361(b)(3), a 

qualified REIT subsidiary within the 

meaning of section 856(i)(2), and a trust 

all of which is treated (under subpart E 

of part I of subchapter J of Chapter 1 of 

the Code) as owned by the grantor or 

another person. 

Disregarded transactions. Disregarded 

transactions has the meaning provided 

in § 1.987–2(c)(2)(ii). 

Earnings only method. Earnings only 

method means a method of applying 

section 987 before the transition date 

under which gain or loss under section 

987(3) is determined only with respect 

to the earnings of a section 987 QBU. 

ECI. ECI means income that is 

effectively connected with the conduct 

of a trade or business within the United 

States. 

Eligible pretransition method. Eligible 

pretransition method has the meaning 

provided in § 1.987–10(e)(4). 

Eligible QBU. Eligible QBU has the 

meaning provided in paragraph (b)(4) of 

this section. 

Financial instrument. Financial 

instrument has the meaning provided in 

§ 1.1275–6(b)(3). It includes a financial 

instrument entered into between related 

parties or unrelated parties. 

Foreign source income. Foreign source 

income means income from sources 

without the United States. 

Generally accepted accounting 

principles. Generally accepted 

accounting principles means United 

States generally accepted accounting 

principles described in standards 

established and made effective by the 

Financial Accounting Standards Board. 

Hedge. Hedge has the meaning 

provided in § 1.987–14(b)(1). 

Hedged QBU. Hedged QBU has the 

meaning provided in § 1.987–14(b)(1). 

Hedging gain or loss. Hedging gain or 

loss has the meaning provided in 

§ 1.987–14(d)(1). 

Historic asset. Historic asset has the 

meaning provided in paragraph (e) of 

this section. 

Historic item. Historic item has the 

meaning provided in paragraph (e) of 

this section. 

Historic liability. Historic liability has 

the meaning provided in paragraph (e) 

of this section. 

Historic rate. Historic rate has the 

meaning provided in paragraph (c)(3) of 

this section. 

Insurance reserve. Insurance reserve 

means an item that is a reserve under 

section 807(c) or section 953(b) (as 

applicable). 

LIFO. LIFO means the last-in, first-out 

inventory method (as described in 

section 472). 

LIFO inventory. LIFO inventory means 

inventory accounted for under the LIFO 

inventory method. 

Liability. 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). 

Lookback gain amount. Lookback 

gain amount has the meaning provided 

in § 1.987–11(e)(3)(ii). 

Lookback period. Lookback period 

has the meaning provided in § 1.987– 

11(e)(3)(iv). 

Loss-to-the-extent-of-gain rule. Lossto-the-extent-of-gain rule has the 

meaning provided in § 1.987–11(e)(1). 

Marked asset. Marked asset has the 

meaning provided in paragraph (d) of 

this section. 

Marked item. Marked item has the 

meaning provided in paragraph (d) of 

this section. 

Marked liability. Marked liability has 

the meaning provided in paragraph (d) 

of this section. 

Net accumulated unrecognized 

section 987 gain or loss. Net 

accumulated unrecognized section 987 

gain or loss has the meaning provided 

in § 1.987–4(c). 

Net unrecognized section 987 gain or 

loss. Net unrecognized section 987 gain 

or loss has the meaning provided in 

§ 1.987–4(b). Net unrecognized section 

987 gain or loss does not include 

deferred section 987 gain or loss or 

suspended section 987 loss. 

Non-LIFO inventory. Non-LIFO 

inventory means inventory that is not 

accounted for under the LIFO inventory 

method. 

Original deferral QBU. Original 

deferral QBU has the meaning provided 

in § 1.987–12(b). 

Original deferral QBU owner. Original 

deferral QBU owner has the meaning 

provided in § 1.987–12(g)(3). 

Original suspended loss QBU owner. 

Original suspended loss QBU owner has 

the meaning provided in § 1.987– 

13(l)(1). 

Outbound loss event. Outbound loss 

event has the meaning provided in 

§ 1.987–13(h)(2). 

Outbound loss QBU. Outbound loss 

QBU has the meaning provided in 

§ 1.987–13(h)(1). 

Outbound section 987 loss. Outbound 

section 987 loss has the meaning 

provided in § 1.987–13(h)(4). 

Owner. Owner has the meaning 

provided in paragraph (b)(5) of this 

section. 

Prior § 1.987–1. Prior § 1.987–1 means 

§ 1.987–1, as contained in 26 CFR in 

part 1 in effect on April 1, 2017. 


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Prior § 1.987–4. 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. 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. 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. 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. 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. Prior § 1.987–12T 

means § 1.987–12T, as contained in 26 

CFR in part 1 in effect on April 1, 2017. 

QBU net value. QBU net value has the 

meaning provided in § 1.987–4(e)(2)(ii). 

Recognition grouping. Recognition 

grouping has the meaning provided in 

§ 1.987–11(f). 

Remittance. Remittance has the 

meaning provided in § 1.987–5(c). 

S corporation. S corporation has the 

meaning provided in section 1361(a)(1). 

Section 904 category. Section 904 

category means a separate category of 

income described in § 1.904–5(a)(4)(v). 

Section 987 electing group. Section 

987 electing group has the meaning 

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

section. 

Section 987 elections. Section 987 

elections has the meaning provided in 

paragraph (g) of this section. 

Section 987 gain or loss. Section 987 

gain or loss means gain or loss that is 

recognized under § 1.987–5, deferred 

section 987 gain or loss, suspended 

section 987 loss, and pretransition gain 

or loss that is recognized under § 1.987– 

10(e)(5)(ii). 

Section 987 hedging transaction. 

Section 987 hedging transaction has the 

meaning provided in § 1.987–14(b). 

Section 987 QBU. Section 987 QBU 

has the meaning provided in paragraph 

(b)(3) of this section. 

Section 987 regulations. Section 987 

regulations has the meaning provided in 

paragraph (a) of this section. 

Section 987 taxable income or loss. 

Section 987 taxable income or loss has 

the meaning provided in § 1.987–3(a). 

Section 988 mark-to-market election. 

Section 988 mark-to-market election has 

the meaning provided in § 1.987– 

3(b)(4)(ii). 

Separate account. Separate account 

means a separate set of financial records 

maintained with respect to an insurance 

contract or group of contracts to report 

assets and liabilities for specific 

products that are separated from the 

insurer’s general account, provided the 

following requirements are met— 

(i) Any liability of the separate 

account is the liability only of that 

account and not the liability of any 

other separate account or the general 

account; 

(ii) The separate account is not part of 

the company’s general account and is 

protected from the general creditors of 

the company; and 

(iii) The value of each contract 

supported by the separate account is 

supported proportionately by each of 

the assets in such account. 

Separate account asset. Separate 

account asset means an asset that is 

reflected on the books and records of an 

eligible QBU and held in a separate 

account with respect to a separate 

account insurance contract. A separate 

account asset does not include an asset 

held in the general account. 

Separate account insurance contract. 

Separate account insurance contract 

means a contract that would be treated 

as an insurance contract for Federal 

income tax purposes (except to the 

extent provided in this definition with 

respect to the requirements in section 

72(s), 101(f), 817(h), or 7702) for which 

some or all of the assets supporting the 

insurance reserves are required to be 

held in a separate account under the 

insurance regulatory rules of the 

jurisdiction in which the contract is 

issued, and either— 

(i) The contract qualifies as a variable 

contract under section 817(d) (treating 

foreign law as a State law or regulation); 

or 

(ii) The contract would qualify as a 

variable contract under section 817(d) 

(treating foreign law as a State law or 

regulation) but for its failure to meet one 

or more of the requirements in section 

72(s), 101(f), 817(h), or 7702, provided 

that the following requirements are 

met— 

(A) The contract is regulated as a life 

insurance or annuity contract in the 

foreign jurisdiction in which it is 

issued; 

(B) The contract reserves are 

computed or estimated on the basis of 

recognized mortality or morbidity tables 

and assumed rates of interest. For this 

purpose, the reflection of the investment 

return and the market value of assets in 

the separate account is considered an 

assumed rate of interest; and 

(C) No policyholder, annuitant, 

insured, or beneficiary under the 

contract is a United States person. 

Separated QBU. Separated QBU has 

the meaning provided in § 1.987– 

2(c)(9)(iii). 

Separating QBU. Separating QBU has 

the meaning provided in § 1.987– 

2(c)(9)(iii). 

Separation. Separation has the 

meaning provided in § 1.987–2(c)(9)(iii). 

Separation fraction. In the case of a 

separated QBU, separation fraction 

means a fraction, the numerator of 

which is the aggregate adjusted basis of 

the gross assets attributable to the 

separated QBU immediately after the 

separation, and the denominator of 

which is the aggregate adjusted basis of 

the gross assets attributable to all 

separated QBUs immediately after the 

separation. 

Spot rate. Spot rate has the meaning 

provided in paragraph (c)(1) of this 

section. 

SRLY section 987 losses. SRLY section 

987 losses has the meaning provided in 

§ 1.987–11(e)(6)(ii). 

Successor deferral QBU. Successor 

deferral QBU has the meaning provided 

in § 1.987–12(g)(2). 

Successor deferral QBU owner. 

Successor deferral QBU owner has the 

meaning provided in § 1.987–12(c)(1). 

Successor suspended loss QBU. 

Successor suspended loss QBU has the 

meaning provided in § 1.987–13(l)(2). 

Successor suspended loss QBU owner. 

Successor suspended loss QBU owner 

has the meaning provided in § 1.987– 

13(l)(3). 

Suspended section 987 loss. 

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. Suspended 

section 987 loss does not include net 

unrecognized section 987 loss or 

deferred section 987 loss. 

Tentative tested income group. 

Tentative tested income group has the 

meaning provided in § 1.987– 

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

Terminating QBU. 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 of this chapter 

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 § 1.987–15(a)(2). 

Termination. With respect to a section 

987 QBU, 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). 


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Trade or business. Trade or business 

has the meaning provided in § 1.989(a)– 

1(c). 

Transfer. Transfer has the meaning 

provided in § 1.987–2(c). 

Transition date. Transition date has 

the meaning provided in § 1.987–10(c). 

United States person. United States 

person (or U.S. person) has the meaning 

provided in section 7701(a)(30). 

United States shareholder. United 

States shareholder (or U.S. shareholder) 

has the meaning provided in section 

951(b) (or, if applicable, section 

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

U.S. source income. U.S. source 

income means income from sources 

within the United States. 

Yearly average exchange rate. Yearly 

average exchange rate has the meaning 

provided in paragraph (c)(2) of this 

section. 

§ 1.987–2 Attribution of items to eligible 

QBUs; definition of a transfer and related 

rules. 

(a) In general. This section provides 

rules regarding when items are 

attributed to 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. 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. An item that is not taken 

into account for financial accounting 

purposes, and therefore is not reflected 

on the separate set of books and records 

of an eligible QBU, is treated as 

reflected on the separate set of books 

and records of an eligible QBU to the 

extent it would have been so reflected 

if the item were taken into account for 

financial accounting purposes. 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. (i) In general. 

Except as provided in paragraph 

(b)(2)(ii) of this section, the following 

items are not considered to be on the 

books and records of an eligible QBU: 

(A) 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.’’ 

(B) An interest in a partnership 

(whether domestic or foreign). 

(C) A liability that was incurred to 

acquire stock described in paragraph 

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

incurred to acquire a partnership 

interest described in paragraph 

(b)(2)(i)(B) of this section. 

(D) Income, gain, deduction, or loss 

arising from the items described in 

paragraphs (b)(2)(i)(A) through (C) of 

this section. For example, if a dividend 

is received with respect to stock of a 

corporation described in paragraph 

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

(ii) Separate account assets. 

Paragraph (b)(2)(i) of this section does 

not apply to separate account assets, 

liabilities related to separate account 

assets, or income, gain, deduction, or 

loss arising from those assets and 

liabilities. 

(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 a 

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 


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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. 

(iv) Section 988 transactions. A 

section 988 transaction that is reflected 

on the books and records of an eligible 

QBU is not attributable to an eligible 

QBU if the transaction was entered into 

or was reflected on the eligible QBU’s 

books and records with a principal 

purpose of generating fully or partially 

offsetting amounts of section 988 gain or 

loss and section 987 gain or loss (or if 

the taxpayer chose to denominate the 

section 988 transaction in a 

nonfunctional currency with such a 

principal purpose). 

(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 

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 otherwise becomes 

attributable 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 

otherwise ceases to be attributable 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 (F) 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 to (or from) the section 987 

QBU in a disregarded transaction. 

(B) If an asset or liability that was 

previously attributable to a section 987 

QBU of an owner begins to be 

attributable to the owner (or another 

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 by the 

section 987 QBU in a disregarded 

transaction. If an asset or liability that 

was previously attributable to the owner 

(or another eligible QBU of the owner) 

begins to be attributable to 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 to the section 987 QBU in a 

disregarded transaction. 

(C) If an asset or liability that is 

attributable to a section 987 QBU 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 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 

attributable to a section 987 QBU was 

received, transferred, 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, transferred, assumed, or 

accrued by the owner or another eligible 

QBU and transferred to or from the 

section 987 QBU in a disregarded 

transaction. Similarly, if an asset or 

liability that is not attributable to a 

section 987 QBU was received, 

transferred, 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, 

transferred, assumed, or accrued by the 

section 987 QBU and transferred to or 

from the section 987 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)(A) of this section, 

the owner is treated as receiving the 

dividend and transferring to the section 

987 QBU the amount of the dividend in 

a disregarded transaction. Similarly, if a 

section 987 QBU pays interest on a 

liability that would be attributable to the 

section 987 QBU but for paragraph 

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

987 QBU is treated as transferring to the 

owner the amount of the interest 

expense and the owner is treated as 

paying the interest expense in a 

disregarded transaction. See also 

paragraph (c)(7) of this section 

(application of general tax law 

principles). 

(F) In the first taxable year in which 

an eligible QBU is treated as a section 

987 QBU, all assets and liabilities 

attributable to the eligible QBU are 

treated as transferred from the owner to 

the section 987 QBU in a disregarded 

transaction on the first day on which the 

eligible QBU is treated as a section 987 

QBU. 

(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) through (6) [Reserved] 

(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. 


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(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 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 this paragraph (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 this paragraph (c). For this 

purpose, a combination occurs when the 

assets and liabilities that were 

attributable to two or more combining 

QBUs begin to be attributable to 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 does not result in a transfer 

of the separating QBU’s assets or 

liabilities to the owner under this 

paragraph (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 were 

attributable to a separating QBU begin to 

be attributable to 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 

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: Loan to a 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 and is 

attributable to Business A under 

paragraph (b) of this section. 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 between 

section 987 QBUs—(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). 


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(iii) Example 3: 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 a 

section 987 QBU’s 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 net 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 purported 

transfers to and from Business A may be 

disregarded 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 

the Ö100 is used to pay the operating 

expenses and other costs of Business A. 

As of the end of year 1, X has net 

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 Ö100 purported transfer 

from Business A to X may be 

disregarded 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 

their 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. Under paragraph (b)(3) 

of this section, the fact that Business A 

and Business B have offsetting positions 

in the euro is a factor indicating that 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. Under paragraph (b)(3) 

of this section, the fact that X and 

Business A have offsetting positions in 

the euro is a factor indicating that a 

principal purpose of recording the 

borrowed euros on the books and 

records of Business A, or not recording 

the corresponding euro-denominated 

liability on the books and records of 


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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 euro-denominated 

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. 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. Under paragraph (b)(3) 

of this section, the fact that Y (a related 

party to X) and Business A have 

offsetting positions in the euro is a 

factor indicating that 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 (for example, section 

267) may also apply to defer or disallow 

the loss. See § 1.1502–13(j)(9) if X and 

Y file a consolidated return. 

(xvi) Example 16: Borrowing 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. Under paragraph (b)(3) 

of this section, if 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, the items must 

be reallocated to reflect the substance of 

the transaction (for example, by moving 

the loan onto the books of X, resulting 

in the transfer not being taken into 

account for purposes of section 987). 

(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) of this section 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. The sale 

proceeds are reflected on X’s books and 

records after the sale. 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, 

X has net unrecognized section 987 gain 

with respect to Business A of $20,000. 

(B) Analysis—(1) Under paragraph 

(c)(2)(ii)(C) of this section, if an asset 

that is attributable to a section 987 QBU 

is sold or exchanged for an asset that is 

not attributable to the section 987 QBU 

immediately after the sale or exchange, 

the sold or exchanged asset is treated as 

transferred from the section 987 QBU to 

its owner in a disregarded transaction 

immediately before the sale or exchange 

and subsequently sold or exchanged by 

the owner. The sale of DE1 is treated as 

a sale of the assets of Business A in 

exchange for cash that is not 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, and X is treated as selling 

the assets to FC. 

(2) The deemed transfer of all of 

Business A’s assets to X 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). 

(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. 

§ 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 in the section 

987 QBU’s functional currency. 


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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. 

Paragraph (d) of this section is reserved. 

Paragraph (e) of this section provides 

examples illustrating the application of 

the rules of this section. 

(b) Determination of each item of 

income, gain, deduction, or loss in the 

section 987 QBU’s functional 

currency—(1) In general. The owner of 

a section 987 QBU must determine each 

item of income, gain, deduction, or loss 

attributable to the section 987 QBU in 

the section 987 QBU’s functional 

currency under Federal income tax 

principles. 

(2) Translation of items of income, 

gain, deduction, or loss that are 

denominated in a nonfunctional 

currency. Except as otherwise provided 

in paragraph (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. Paragraphs (e)(1) and (2) of this 

section (Examples 1 and 2) illustrate the 

application of this paragraph (b)(2). 

(3) [Reserved] 

(4) Section 988 transactions—(i) In 

general. Section 988 and the regulations 

under section 988 apply to section 988 

transactions of a section 987 QBU. The 

determination of whether an asset or 

liability of a section 987 QBU is a 

section 988 transaction is determined by 

reference to the functional currency of 

the section 987 QBU. Section 988 gain 

or loss is determined in, and by 

reference to, the functional currency of 

the section 987 QBU. The amount of 

section 988 gain or loss determined 

under this paragraph (b)(4)(i) is 

translated into the owner’s functional 

currency under paragraph (c) of this 

section. 

(ii) Section 988 mark-to-market 

election—(A) In general. A taxpayer 

may elect to apply the section 988 markto-market method of accounting 

described in this paragraph (b)(4)(ii) 

with respect to all section 988 

transactions that are properly 

attributable to a section 987 QBU and 

that are not otherwise accounted for 

under a mark-to-market method of 

accounting under section 475 or section 

1256 (other than a section 988 

transaction described in paragraph 

(b)(4)(ii)(B) of this section). Under the 

section 988 mark-to-market method of 

accounting, the timing of section 988 

gain or loss on section 988 transactions 

described in the preceding sentence is 

determined under the principles of 

section 1256. Only section 988 gain or 

loss is taken into account under the 

foreign currency mark-to-market method 

of accounting. Appropriate adjustments 

must be made to prevent the section 988 

gain or loss from being taken into 

account again after it is recognized 

under this paragraph (b)(4)(ii). A section 

988 transaction subject to the foreign 

currency mark-to-market method of 

accounting is not subject to the netting 

rule of section 988(b) and § 1.988– 

2(b)(8) (under which exchange gain or 

loss is limited to overall gain or loss 

realized in a transaction) in taxable 

years before the taxable year in which 

section 988 gain or loss would be 

recognized with respect to the section 

988 transaction but for this election. 

(B) Built-in loss transactions 

contributed to a section 987 QBU. 

Paragraph (b)(4)(ii)(A) of this section 

does not apply to a section 988 

transaction if— 

(1) The transaction was transferred to 

the section 987 QBU from its owner (or 

from another eligible QBU of the 

owner); 

(2) Immediately before the transfer, 

the transaction was a section 988 

transaction in the hands of the owner 

(or other eligible QBU of the owner) and 

was not subject to a mark-to-market 

method of accounting; 

(3) If the owner (or other eligible 

QBU) had disposed of the section 988 

transaction immediately before the 

transfer (and § 1.988–2(b)(8) did not 

apply), the owner would have 

recognized section 988 loss; and 

(4) Section 988 loss was not 

recognized in connection with the 

transfer under § 1.988–1(a)(10). 

(c) Translation of items of income, 

gain, deduction, or loss of a section 987 

QBU into the owner’s functional 

currency—(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. Except as otherwise 

provided in paragraph (c)(2)(v) of this 

section, this paragraph (c)(2) applies 

only to taxable years for which neither 

the annual recognition election nor the 

current rate election is in effect. 

(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. 

(ii) through (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 of inventory 

occurs (or the COGS is 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. 

(v) Translation of income to account 

for certain foreign income tax claimed 

as a credit. The owner of a section 987 

QBU claiming a credit under section 

901 for foreign income taxes, other than 

foreign income taxes deemed paid 

under section 960, that are properly 

reflected on the books and records of the 

section 987 QBU (the creditable tax 

amount) must determine section 987 

taxable income or loss attributable to the 

section 987 QBU by reducing the 

amount of section 987 taxable income or 

loss that otherwise would be 

determined under this section by an 

amount equal to the creditable tax 

amount, translated into U.S. dollars 

using the yearly average exchange rate 

for the taxable year in which the 

creditable tax is accrued, and by 

increasing the resulting amount by an 

amount equal to the creditable tax 

amount, translated using the same 

exchange rate that is used to translate 

the creditable taxes into U.S. dollars 

under section 986(a). This paragraph 

(c)(2)(v) applies whether or not a current 

rate election or an annual recognition 

election is in effect. See paragraph 

(e)(14) of this section (Example 14) for 

an illustration of this rule. 


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(3) Adjustments to COGS required 

under the simplified inventory method. 

This paragraph (c)(3) applies only 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 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—(A) In general. The translated 

COGS amount computed under 

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

increased or decreased (as appropriate) 

by the amount described in paragraph 

(c)(3)(ii)(B) of this section. 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. 

(B) Amount of adjustment. With 

respect to each cost recovery deduction 

attributable to a historic asset that is 

included in inventoriable costs for a 

taxable year, the adjustment is equal 

to— 

(1) The amount of the cost recovery 

deduction included in inventoriable 

costs, translated at the historic rate for 

the property to which the deduction is 

attributable; less 

(2) The amount of the cost recovery 

deduction included in inventoriable 

costs, translated at the yearly average 

exchange rate for the current taxable 

year. 

(iii) Adjustment for beginning 

inventory for non-LIFO inventory—(A) 

In general. In the case of 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 amount 

described in paragraph (c)(3)(iii)(B) of 

this section. 

(B) Amount of adjustment. The 

adjustment is equal to— 

(1) The ending non-LIFO inventory 

included on the closing balance sheet 

for the preceding taxable year, 

translated at the exchange rate described 

in paragraph (c)(3)(iii)(C) of this section 

(which is generally the yearly average 

exchange rate for the preceding taxable 

year); less 

(2) The ending non-LIFO inventory 

included on the closing balance sheet 

for the preceding taxable year, 

translated at the yearly average 

exchange rate for the current taxable 

year. 

(C) Exchange rate—(1) In general. 

Except as provided in paragraph 

(c)(3)(iii)(C)(2) of this section, the 

exchange rate used to translate nonLIFO inventory under paragraph 

(c)(3)(iii)(B)(1) of this section is the 

yearly average exchange rate for the 

preceding taxable year. 

(2) Revocation of current rate election 

or taxable year beginning on the 

transition date. In the first taxable year 

in which a current rate election is 

revoked or otherwise ceases to be in 

effect (or in the taxable year beginning 

on the transition date), the exchange 

rate used to translate non-LIFO 

inventory under paragraph 

(c)(3)(iii)(B)(1) of this section is the spot 

rate applicable to the last day of the 

preceding taxable year. 

(iv) Adjustment for year of LIFO 

liquidation—(A) In general. In the case 

of inventory with respect to which a 

section 987 QBU uses the LIFO 

inventory method, the translated COGS 

amount computed under paragraph 

(c)(2)(iv)(A) of this section is increased 

or decreased (as appropriate) by the 

amount described in paragraph 

(c)(3)(iv)(B) of this section. 

(B) Amount of adjustment. With 

respect to each LIFO layer liquidated in 

whole or in part during the taxable year, 

the adjustment is equal to: 

(1) The amount of the LIFO layer 

liquidated during the taxable year, 

translated at the historic rate that is 

used for translating the LIFO layer 

(which is generally the yearly average 

exchange rate for the year the LIFO layer 

arose); less 

(2) The amount of the LIFO layer 

liquidated during the taxable year, 

translated at 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 U.S. Corp 

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. 

(1) Example 1: Item of income 

denominated in nonfunctional currency. 

Business A accrues £100 of income from 

the provision of services. Under 

paragraph (b)(2) 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 

yearly average exchange rate under 

paragraph (c)(1) of this section. 

(2) Example 2: Asset sold for 

nonfunctional currency. Business A 

sells a historic asset consisting of noninventory property for £100. Under 

paragraph (b)(2) 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 convention. In 

determining U.S. Corp’s taxable income, 

the Ö85 is translated into dollars at the 

yearly average exchange rate under 

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

basis of the property is translated into 

dollars at the historic rate under 

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

(3) Example 3: Historic inventory 

method—(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. The yearly average 

exchange rate is Ö1 = $1.02 for year 1 

and Ö1 = $1.05 for year 2. 

(ii) Analysis—(A) Gross sales. 

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. Business A’s dollar 

gross sales will be computed as follows: 


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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 Ö 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) Translated basis of inventory. 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 Ö150 Ö1 = $1.02 $153.00 

Purchases in year 2 

Jan ............................................................................................................ 300 Ö 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) COGS. 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) Gross sales income. Accordingly, 

for purposes of section 987, Business A 

has gross income in dollars of $1,894.50 

($3,780.00¥$1,885.50) from the sale of 

inventory in year 2. 

(4) Example 4: Simplified inventory 

method—(i) Facts. The facts are the 

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

section (Example 3), except that U.S. 

Corp does not elect to use the historic 

inventory method with respect to 

Business A. 

(ii) Analysis. Because U.S. Corp does 

not elect to use the historic inventory 

method, the simplified inventory 

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

this section applies. 

(A) Gross sales. Business A’s dollar 

gross sales will be computed as 

described in paragraph (e)(3)(ii)(A) of 

this section (Example 3). Therefore, 

Business A has gross sales of $3,780. 

(B) COGS. Business A sold 1,200 units 

of inventory in year 2, and the purchase 

price for each unit was Ö1.50. The total 

purchase price for the inventory sold in 

year 2 was Ö1,800. Under the simplified 

inventory method provided in 

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

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 of inventory occurs. Therefore, 

before making the adjustments required 

under paragraph (c)(3) of this section, 

Business A’s dollar COGS for year 2 is 

equal to $1,890 (the purchase price for 

the inventory sold in year 2 (Ö1,800), 

translated at the yearly average 

exchange rate of Ö1 = $1.05). 


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(C) Adjustments required. Because the 

simplified inventory method applies, 

Business A’s COGS must be adjusted 

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

No adjustment is required under 

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

because no cost recovery deduction 

attributable to a historic asset is 

included in inventoriable costs for year 

2. However, an adjustment for beginning 

inventory is required under paragraph 

(c)(3)(iii)(A) of this section because 

Business A uses a FIFO method of 

accounting for inventory. 

(D) Adjustment for beginning 

inventory. The adjustment required 

under paragraph (c)(3)(iii)(A) of this 

section is equal to: the ending non-LIFO 

inventory included on Business A’s 

closing balance sheet for the preceding 

taxable year (Ö150), translated at the 

yearly average exchange rate for year 1 

(Ö1 = $1.02), which is $153; less the 

ending non-LIFO inventory included on 

Business A’s closing balance sheet for 

the preceding taxable year (Ö150), 

translated at the yearly average 

exchange rate for year 2 (Ö1 = $1.05), 

which is $157.50. Therefore, there is a 

negative adjustment to COGS of $4.50. 

Business A’s COGS for year 2 is reduced 

from $1,890 to $1,885.50. 

(E) Gross sales income. Accordingly, 

for purposes of section 987, Business A 

has gross income in dollars of $1,894.50 

($3,780.00¥$1,885.50) from the sale of 

inventory in year 2. 

(5) Example 5: Depreciation expense 

that is not an inventoriable cost. 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: Translation of 

depreciation expense that is an 

inventoriable cost (historic inventory 

method). The facts are the same as in 

paragraph (e)(5) of this section (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: Sale of land. 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 translated at the 

historic rate for year 1, which is the 

yearly average exchange rate under 

section § 1.987–1(c)(3)(i) (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: Current rate election. 

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, the 

exceptions to paragraph (c)(1) of this 

section generally do not 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) (and did not make a current rate 

election). 

(9) through (12) [Reserved] 

(13) Example 13: Section 988 

transaction—(i) Facts. Business A 

receives and accrues $100 of income 

from the provision of services on 

January 1, 2021. Business A continues 

to hold the $100 as a U.S. dollardenominated demand deposit at a bank 

on December 31, 2021. U.S. Corp has 

made a section 988 mark-to-market 

election under paragraph (b)(4)(ii) of 

this section. The euro-dollar spot rate 

without the use of a spot rate 

convention is Ö1 = $1 on January 1, 

2021, and Ö1 = $2 on December 31, 

2021, and the yearly average exchange 

rate for 2021 is Ö1 = $1.50. 

(ii) Analysis—(A) Under paragraph 

(b)(2) of this section, the $100 earned by 

Business A is translated into Ö100 at the 

spot rate on January 1, 2021, as defined 

in § 1.987–1(c)(1) without the use of a 

spot rate convention. In determining 

U.S. Corp’s taxable income, the Ö100 of 

services income is translated into $150 

at the yearly average exchange rate for 

2021, as provided in paragraph (c)(1) of 

this section. 

(B) Under paragraph (b)(4)(i) of this 

section, section 988 gain or loss for 

Business A’s section 988 transactions is 

determined in, and by reference to, the 

euro, the functional currency of 

Business A. Accordingly, section 988 

gain or loss must be determined on 

Business A’s holding of the $100 

demand deposit in, and by reference to, 

the euro. Under § 1.988–2(a)(2), 

Business A is treated as having an 

amount realized of Ö50 when the $100 

is marked to market at the end of 2021 

under paragraph (b)(4)(ii) of this section. 

Marking the dollars to market gives rise 

to a section 988 loss of Ö50 (Ö50 amount 

realized, less Business A’s Ö100 basis in 

the $100). In determining U.S. Corp’s 

taxable income, that Ö50 loss is 

translated into a $75 loss at the yearly 

average exchange rate for 2021, as 

provided in paragraph (c)(1) of this 

section. 

(14) Example 14: Payment of foreign 

income tax—(i) Facts. Business A earns 

Ö100 of revenue from the provision of 

services and incurs Ö30 of general 

expenses and Ö10 of depreciation 

expense during 2021. Except as 

otherwise provided, U.S. Corp uses the 

yearly average exchange rate described 

in § 1.987–1(c)(2) to translate items of 

income, gain, deduction, and loss of 

Business A. Business A is subject to 

income tax in Country X at a 25 percent 

rate. U.S. Corp claims a credit with 

respect to Business A’s foreign income 

taxes and elects under section 

986(a)(1)(D) to translate the foreign 

income taxes at the spot rate on the date 

the taxes were paid. The yearly average 

exchange rate for 2021 is Ö1 = $1.50. 

The historic rate used to translate the 

depreciation expense is Ö1 = $1.00. The 

spot rate on the date that Business A 

paid its foreign income taxes was Ö1 = 

$1.60. 

(ii) Analysis. Because U.S. Corp has 

elected to translate foreign income taxes 


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at the spot rate on the date such taxes 

were paid rather than at the yearly 

average exchange rate, U.S. Corp must 

make the adjustments described in 

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

Accordingly, U.S. Corp determines its 

section 987 taxable income or loss by 

reducing the section 987 taxable income 

or loss that otherwise would be 

determined under this section by Ö15, 

translated into U.S. dollars at the yearly 

average exchange rate (Ö1 = $1.50), and 

increasing the resulting amount by Ö15, 

translated using the same exchange rate 

that is used to translate the creditable 

taxes into U.S. dollars under section 

986(a) (Ö1 = $1.60). Following these 

adjustments, Business A’s section 987 

taxable income for 2021 is $96.50, 

computed as follows: 

TABLE 3 TO PARAGRAPH (E)(14)(II) 

Amount in Ö Translation rate Amount in $ 

Revenue ..................................................................................................... Ö100 Ö1 = $1.50 ....................................... $150.00 

General Expenses ..................................................................................... (30) Ö1 = $1.50 ....................................... (45.00) 

Depreciation ............................................................................................... (10) Ö1 = $1.00 ....................................... (10.00) 

Tentative section 987 taxable income ....................................................... Ö60 .......................................................... $95.00 

Adjustments under paragraph (c)(2)(v) of this section: 

Decrease by Ö15 tax translated at yearly average exchange rate 

(Ö1 = $1.50).

........................ .......................................................... ($22.50) 

Increase by Ö15 tax translated at spot rate on payment date (Ö1 = 

$1.60).

........................ .......................................................... 24.00 

Section 987 taxable income ........................................................ ........................ .......................................................... $96.50 

§ 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 

attributable to the section 987 QBU 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 and § 1.987–14. 

(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 paragraph (d) of this section for 

all prior taxable years to which this 

section applies, reduced 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. 

Accordingly, net accumulated 

unrecognized section 987 gain or loss is 

not reduced under this paragraph (c)(1) 

when deferred section 987 gain or loss 

is recognized (or suspended) under 

§ 1.987–12 or when suspended section 

987 loss is recognized under § 1.987–11 

or § 1.987–13. 

(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 applying only 

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

this section. See § 1.987–14 for 

additional adjustments that must be 

made to the unrecognized section 987 

gain or loss of a section 987 QBU for a 

taxable year in connection with a 

section 987 hedging transaction. 

(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 termination date is treated as 

the last day of the taxable year for 

purposes of this section. 

(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: 


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100186 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 

(A) The amount of the functional 

currency of the section 987 QBU and the 

aggregate adjusted basis of all other 

marked 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 spot rate applicable to the 

date of transfer; and 

(B) The aggregate adjusted basis of all 

historic assets 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 

other 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, 

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 spot rate 

applicable to the date of transfer; and 

(B) The amount of historic 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 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 

certain 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 

attributable to 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 certain 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 

attributable to 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 

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

that do not increase the basis of assets 

or reduce the amount of liabilities 

attributable to the section 987 QBU for 

the taxable year, and decreased by any 

items of deduction or loss taken into 

account in paragraph (d)(6) of this 

section (step 6) that do not reduce the 

basis of assets or increase the amount of 

liabilities attributable to 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 section 987 QBU’s 

net assets 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 net assets (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 net assets (as defined in paragraph 


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(d)(10)(ii) of this section), translated into 

the owner’s functional currency at the 

yearly average exchange rate for the 

taxable year. 

(ii) Determining the residual increase 

or decrease to net assets—(A) In 

general. The residual increase to net 

assets 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 net 

assets 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. 

(B) Application of step 1 in the 

functional currency of the section 987 

QBU if a current rate election is in 

effect. In a taxable year in which a 

current rate election is in effect, for 

purposes of applying step 1 (paragraph 

(d)(1) of this section) in the functional 

currency of the section 987 QBU, the 

change in the net value of the section 

987 QBU is determined by reference to 

the QBU net value described in 

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

(C) Application of steps 3 and 5 in the 

functional currency of the section 987 

QBU. For purposes of applying steps 3 

and 5 (paragraphs (d)(3) and (5) of this 

section) in the functional currency of 

the section 987 QBU, the amount of 

assets and liabilities transferred from an 

owner to a section 987 QBU is 

determined by translating the basis of 

the assets and the amount of the 

liabilities under § 1.987–2(d). 

(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) 

of this section’’ with ‘‘paragraphs (d)(1) 

through (5) of this section.’’ 

(e) Determination of the owner 

functional currency net value of a 

section 987 QBU—(1) In general. Except 

as provided in paragraph (e)(2) of this 

section, 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 paragraphs 

(e)(1)(i) and (ii) of this section. 

(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. 

(2) Current rate election—(i) In 

general. If a current rate election is in 

effect, the owner functional currency 

net value of a section 987 QBU on the 

last day of a taxable year is equal to the 

QBU net value described in paragraph 

(e)(2)(ii) of this section, translated into 

the owner’s functional currency at the 

spot rate applicable to that day. 

(ii) QBU net value. The QBU net value 

of a section 987 QBU on the last day of 

a taxable year is determined in the 

functional currency of the section 987 

QBU and is equal to the aggregate 

amount of functional currency and the 

adjusted basis of each other asset that is 

attributable to the section 987 QBU on 

that day, less the aggregate amount of 

each liability that is attributable to the 

section 987 QBU on that day. The QBU 

net value of a section 987 QBU on the 

last day of a taxable year may be 

determined either by preparing an 

adjusted balance sheet or by following 

the steps described in paragraph 

(e)(2)(iii) of this section (provided that 

the calculation is made consistently for 

all years in which a current rate election 

is in effect). However, in the first taxable 

year in which a current rate election 

ceases to be in effect, the owner 

functional currency net value of the 

section 987 QBU for the preceding 

taxable year must be determined by 

preparing an adjusted balance sheet. 

(iii) Alternative calculation of QBU 

net value. The QBU net value of a 

section 987 QBU on the last day of a 

taxable year can be computed using the 

following steps (each applied in the 

functional currency of the section 987 

QBU). See paragraph (g)(2)(iii) of this 

section (Example 2) for an example 

illustrating this rule. 

(A) Step 1: Determine the QBU net 

value on the last day of the preceding 

taxable year. Determine the QBU net 

value on the last day of the preceding 

taxable year under this paragraph (e)(2). 

If the owner’s taxable year is the first 

taxable year of a section 987 QBU, the 

QBU net value on the last day of the 

preceding taxable year is zero. In the 

first taxable year in which a current rate 

election is in effect (other than the 

taxable year beginning on the transition 

date or the first taxable year of a section 

987 QBU), the QBU net value on the last 

day of the preceding taxable year is 

determined by preparing an adjusted 

balance sheet. In the taxable year 

beginning on the transition date (other 

than the first taxable year of a section 

987 QBU), the QBU net value on the last 

day of the preceding taxable year may 

be determined either by preparing an 

adjusted balance sheet or by applying 

the steps described in this paragraph 

(e)(2)(iii) for each taxable year beginning 

with the first taxable year of the section 

987 QBU. 

(B) Step 2: Adjust for transfers 

between the section 987 QBU and its 

owner. The amount determined in 

paragraph (e)(2)(iii)(A) of this section is 

increased by the amount of each transfer 

described in paragraph (d)(3) or (4) of 

this section and decreased by the 

amount of each transfer described in 

paragraph (d)(2) or (5) of this section (in 

each case, after adjustment for gain or 

loss recognized under § 1.988–1(a)(10)). 

For this purpose, the amount of assets 

and liabilities transferred from an owner 

to a section 987 QBU is determined by 

translating the basis of the assets and 

the amount of the liabilities under 

§ 1.987–2(d)(1). 

(C) Step 3: Adjust for income or loss 

of the section 987 QBU. The amount 

determined in paragraph (e)(2)(iii)(B) of 

this section is increased by items of 

income and gain attributable to the 

section 987 QBU (including tax-exempt 

income described in paragraph (d)(8) of 

this section) for the taxable year and 

reduced by items of deduction and loss 

attributable to the section 987 QBU 

(including non-deductible expenses 

described in paragraph (d)(7) of this 

section) for the taxable year. However, 

no adjustment is made under the 

preceding sentence for any item of 

income, gain, deduction, or loss 

described in paragraph (d)(9) of this 

section. 

(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 

and QBU 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 assets and liabilities 

attributable to the separating QBU on 


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that day are deemed to be attributable to 

the separated QBUs on that day, and are 

apportioned between the separated 

QBUs in a reasonable manner that takes 

into account the assets and liabilities 

attributable to 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 

attributable to 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. 

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. 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 (c) and 

therefore whether a section 987 QBU is 

considered to exist. 

(1) Example 1: Determination of net 

unrecognized section 987 gain or loss— 

(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 equal to 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 

paragraphs (e)(1)(i) and (ii) of this 

section. 

(2) For this purpose, Japan Branch 

will show the following assets and 

liabilities on its adjusted balance sheet 


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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 paragraphs (e)(1)(i) and (ii) 

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)(1)(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. The determination of 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) .............................. $1,000.00 

Land ....................................................................... 55,000 $1 = ¥110 (historic rate-yearly average rate-year 1) ... 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 

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 basis of Japan Branch’s assets or the 

amount of its liabilities and are taken 

into account in computing taxable 

income. 

(G) Step 10 (no adjustment)—(1) 

Calculation of residual increase or 

decrease to net assets. Under paragraph 

(d)(10)(ii) of this section, the residual 

increase (or decrease) to net assets 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. 


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(2) Example 2: Determination of net 

unrecognized section 987 gain or loss if 

a current rate election is in effect—(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) Under paragraph (e)(2)(ii) of this 

section, because a current rate election 

is in effect, the OFCNV of Japan Branch 

at the end of year 1 is equal to the QBU 

net value, translated into U.S. dollars at 

the applicable spot rate on the last day 

of the taxable year. The QBU net value 

of Japan Branch at the end of year 1 is 

¥160,000, as shown below. The OFCNV 

of Japan Branch is $1,333.33, which is 

equal to the QBU net value of ¥160,000, 

translated at the applicable spot rate on 

December 31, year 1 of $1 = ¥120. 

TABLE 3 TO PARAGRAPH

(g)(2)(ii)(A)(2)—QBU NET VALUE— 

YEAR 1 

Amount in ¥ 

Assets: 

Yen ................................ 120,000 

Land ............................... 50,000 

Total assets ............ 170,000 

Liabilities: 

Bank loan ...................... 10,000 

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

Year 1 QBU net value .......... 160,000 

(3) 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 

$1,333.33) 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 $1,333.33. 

(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. 

(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 net 

assets 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). Under 

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

step 1 is applied by reference to Japan 

Branch’s QBU net value. See paragraphs 

(g)(2)(ii)(A) and (C) of this section for 

amounts determined in yen. The 

residual increase to net assets 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 

net assets. As explained in paragraph 

(g)(2)(ii)(F)(1) of this section, the 

residual increase to Japan Branch’s net 

assets 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. 

(iii) Alternative computation of QBU 

net value. Alternatively, for purposes of 

applying steps 1 and 10 (paragraphs 

(d)(1) and (10) of this section), U.S. Corp 

can determine QBU net value using the 

following steps under paragraph 

(e)(2)(iii) of this section. 

(A) Step 1: Determine QBU net value 

at the end of the preceding taxable year. 

Because year 1 is the first taxable year 

in which Japan Branch exists, the QBU 

net value at the end of the preceding 

taxable year is zero. 

(B) Step 2: Adjust for transfers 

between the section 987 QBU and its 

owner. During year 1, U.S. Corp 

transferred assets to Japan Branch with 

an aggregate basis of ¥150,000, as 

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

this section. Therefore, the amount 

determined in step 1 is increased from 

zero to ¥150,000. 

(C) Step 3: Adjust for income or loss 

of the section 987 QBU. During year 1, 

Japan Branch earned ¥10,000 of net 

income. Therefore, the amount 


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determined in step 2 is increased from 

¥150,000 to ¥160,000. 

(D) QBU net value. Japan Branch’s 

QBU net value at the end of the 

preceding taxable year is zero. This 

amount is increased by the transfer from 

U.S. Corp of ¥150,000 and by Japan 

Branch’s taxable income of ¥10,000. 

Japan Branch did not have any taxexempt income or non-deductible 

expenses in year 1. Accordingly, Japan 

Branch’s QBU net value at the end of 

year 1 is ¥160,000. 

(3) Example 3: Determination of net 

unrecognized section 987 gain or loss 

when a current rate election is 

revoked—(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. Under 

paragraph (e)(2)(ii) of this section, 

because a current rate election was in 

effect for year 9, the OFCNV of Japan 

Branch at the end of year 9 is equal to 

the QBU net value, translated into U.S. 

dollars at the applicable spot rate on the 

last day of the taxable year. The QBU 

net value of Japan Branch at the end of 

year 9 is ¥160,000, as shown below. The 

OFCNV of Japan Branch is $1,333.33, 

which is equal to the QBU net value of 

¥160,000, translated at the applicable 

spot rate on December 31, year 9 of $1 

= ¥120. 

TABLE 5 TO PARAGRAPH (g)(3)(ii)(A)— 

QBU NET VALUE—END OF YEAR 9 

Amount in ¥ 

Assets: 

Yen ................................ 120,000 

Land ............................... 50,000 

Total assets ............ 170,000 

Liabilities: 

Bank loan ...................... 10,000 

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

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

(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)(E), the historic rate 

applicable to historic items that were 

attributable to 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 basis of Japan Branch’s assets or the 

amount of its liabilities and are taken 


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into account in computing taxable 

income. In addition, Japan Branch does 

not have a residual increase or decrease 

to net assets (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. 

§ 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 the section 987 regulations 

(including § 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 that are attributable to the 

section 987 QBU as of the end of the 

taxable year, determined in the 

functional currency of the section 987 

QBU; 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 section 

987 QBU’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) Alternative calculation. The 

amount of a remittance described in 

paragraph (c)(1) of this section may 

alternatively be determined under the 

following steps (each applied in the 

functional currency of the section 987 

QBU). If the amount determined under 

this paragraph (c)(2) is negative, the 

amount of the remittance is zero. 

(i) Step 1: Determine the change in 

QBU net value. The change in QBU net 

value is equal to the QBU net value on 

the date provided in paragraph (c)(3) of 

this section, less the QBU net value on 

the last day of the preceding taxable 

year. In the first taxable year in which 

the section 987 QBU exists, the QBU net 

value on the last day of the preceding 

taxable year is zero. 

(ii) Step 2: Adjust the amount 

determined in step 1 for income or loss 

of the section 987 QBU. The amount 

determined in paragraph (c)(2)(i) of this 

section is reduced (including below 

zero) by items of income and gain 

attributable to the section 987 QBU 

(including tax-exempt income described 

in § 1.987–4(d)(8)) for the taxable year 

and increased by items of deduction and 

loss attributable to the section 987 QBU 

(including non-deductible expenses 

described in § 1.987–4(d)(7)) for the 

taxable year. However, no adjustment is 

made under the preceding sentence for 

any item of income, gain, deduction, or 

loss described in § 1.987–4(d)(9) (items 

that do not impact the adjusted balance 

sheet). 

(iii) Step 3: Multiply the amount 

determined in step 2 by negative one. 

The amount of a remittance is equal to 

the amount determined in paragraph 

(c)(2)(ii) of this section multiplied by 

negative one. 

(3) Day when a remittance is 

determined. An owner’s remittance 

from a section 987 QBU for a taxable 

year is determined on the last day of the 

taxable year (or, if earlier, on the day of 

the taxable year when the section 987 

QBU is terminated under § 1.987–8). 

(4) 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, for purposes of paragraph 

(b) of this section, 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 (after taking into 

account § 1.988–1(a)(10)), determined in 

the section 987 QBU’s functional 

currency. Solely for this purpose, the 

amount of liabilities transferred from 

the owner to the section 987 QBU 

(determined in the section 987 QBU’s 

functional currency under § 1.987–2(d) 

after taking into account § 1.988– 

1(a)(10)) 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 

(determined in the section 987 QBU’s 

functional currency under § 1.987–2(d) 

after taking into account § 1.988– 

1(a)(10)). Solely for this purpose, the 

amount of liabilities transferred from 

the section 987 QBU to the owner 

(determined in the section 987 QBU’s 

functional currency after taking into 

account § 1.988–1(a)(10)) is treated as a 

transfer of assets from the owner to the 


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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 into the owner’s 

functional currency at the historic rate 

for the asset or liability. 

(g) Example—Calculation of section 

987 gain or loss recognized. 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. Depreciation is ignored for 

purposes of this example. 

(1) Facts—(i) In general. 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. 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. 

(ii) Year 1 balance sheet. At the end 

of year 1, the following assets are 

attributable to Business A: cash of 

£3,350; a computer with an adjusted 

basis of £500; and a machine with an 

adjusted basis of £500. Thus, the 

aggregate basis of Business A’s assets is 

£4,350. Business A has no liabilities. 

(iii) Transfers and income in year 2. 

During year 2, Business A earned 

income of £1,500. In addition, the 

following transfers took place between 

U.S. Corp and Business A in year 2. On 

January 5, year 2, U.S. Corp transferred 

to Business A £300 (acquired by U.S. 

Corp immediately before the transfer). 

On March 5, year 2, Business A 

transferred a machine (with an adjusted 

basis of £500) to U.S. Corp. On 

November 1, year 2, Business A 

transferred £2,300 to U.S. Corp. On 

December 7, year 2, U.S. Corp 

transferred a truck to Business A. The 

adjusted basis of the truck, when 

properly translated into pounds under 

§ 1.987–2(d), is £2,000. 

(iv) Year 2 balance sheet. At the end 

of year 2, the following assets are 

attributable to Business A: cash of 

£2,850, a computer with a pound 

adjusted basis of £500, and a truck with 

a pound adjusted basis of £2,000. Thus, 

the aggregate basis of Business A’s 

assets is £5,350. Business A has no 

liabilities. 

(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 QBU’s functional 

currency (pounds) 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 

pounds 

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 

pounds 

Truck ..................................... £2,000 

Pounds .................................. £300 

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) Alternative computation of 

remittance amount. Under paragraph 

(c)(2) of this section, U.S. Corp can 

compute the amount of the remittance 

for year 2 using the following steps. 

(A) Step 1: Change in QBU net value. 

The change in Business A’s QBU net 

value is equal to £1,000 (£5,350— 

£4,350). 

(B) Step 2: Adjustment for income or 

loss. The amount determined in step 1 

(£1,000) is reduced by Business A’s 

income for year 2 of £1,500, to negative 

£500. 

(C) Step 3: Multiply by negative one. 

The amount determined in step 2 

(negative £500) is multiplied by 

negative one. The remittance for year 2 

is equal to £500. 

(iii) 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 and 

must increase this amount by the 

amount of the remittance. 

TABLE 2 TO PARAGRAPH (g)(2)(iii) 

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 

(iv) 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. 

(v) 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. 

(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. 

§ 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. 

(1) Timing of character and source 

determination. The character and source 

of section 987 gain or loss is determined 


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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 net 

unrecognized section 987 gain or loss is 

recognized. 

(ii) The taxable year in which net 

unrecognized section 987 loss or 

pretransition loss becomes suspended 

section 987 loss. 

(iii) The taxable year in which 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 the 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 attributable to the section 987 QBU 

under § 1.987–2(b). See § 1.987–11(e) 

and (f) (grouping of section 987 gain and 

loss and applying the loss-to-the-extentof-gain rule on basis of the initial 

assignment of section 987 gain and loss 

under this paragraph (b)(2)(i)). 

(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) Election to treat section 987 gain 

or loss that is assigned to subpart F 

income groups relating to foreign 

personal holding company income as 

attributable to section 988 

transactions—(1) In general. If an 

election is made under this paragraph 

(b)(2)(i)(C)(1), section 987 gain or loss 

assigned under paragraphs (b)(2)(i)(A) 

and (B) of this section to any grouping 

of passive foreign personal holding 

company income, as described in 

§ 1.960–1(d)(2)(ii)(B)(2)(i), is treated as 

foreign currency gain of the owner 

attributable to section 988 transactions 

not directly related to the business 

needs of the controlled foreign 

corporation, or as loss allocated and 

apportioned to such foreign currency 

gain. See § 1.987–1(g) for rules that 

apply to section 987 elections. 

(2) Coordination with § 1.954–2(g). 

The rules of § 1.954–2(g)(2), (3) and (4) 

apply without regard to any section 987 

gain treated as gain from section 988 

transactions, or loss allocated and 

apportioned to such gain, by reason of 

an election under paragraph 

(b)(2)(i)(C)(1) of this section. 

(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, 

section 987 gain or loss is initially 

assigned to tentative tested income 

within a section 904 category (a 

tentative tested income group) under 

paragraphs (b)(2)(i)(A) and (B) of this 

section 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 if 

no election under § 1.951A–2(c)(7)(viii) 

was in effect is initially characterized as 

tentative tested income. 

(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). 

(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 assignment in paragraph 

(b)(2)(i) of this section, but with 

appropriate changes to account for the 

application of provisions that apply to 

the section 987 gain or loss 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) 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)), as applicable, depending 

on whether the item of income (as 

described in paragraph (b)(2)(iii) of this 

section) is subject to a high rate of tax 

(as determined under § 1.951A– 

2(c)(7)(vi)). 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 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. 


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(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, except as 

otherwise indicated, assume that no 

section 987 elections are in effect. 

(1) Example 1: Initial assignment and 

reassignment of section 987 gain or 

loss—(i) Facts. 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 but is subject to an 

election under paragraph (b)(2)(i)(C) of 

this section. 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 foreign source 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) and 1.954– 

1(c)(1)(iii)(B) (subpart F income groups 

relating to passive foreign personal 

holding company income). 

(ii) Analysis. Under paragraphs 

(b)(2)(i)(A), (B), and (D) of this section, 

Sf7,500 (Sf750,000/Sf1,000,000 x 

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) 

(subpart F income groups relating to 

passive foreign personal holding 

company income) and is therefore 

generally treated under the election in 

paragraph (b)(2)(i)(C) of this section as 

foreign source foreign currency gain of 

CFC attributable to section 988 

transactions not directly related to the 

business needs of the controlled foreign 

corporation. All of the section 987 gain 

is treated as ordinary income under 

paragraph (a) of this section. 

(2) Example 2: Effect of GILTI high-tax 

exclusion—(i) Facts. The facts are the 

same as in paragraph (c)(1) of this 

section (Example 1) except that CFC 

does have an election described in 

§ 1.951A–2(c)(7)(viii) in effect. Without 

regard to the section 987 gain or loss, 

CFC has two tentative gross tested 

income items: Sf100,000 of gross 

tentative tested income attributable to a 

CFC tested unit (the CFC item) and 

Sf5,000,000 of gross tentative tested 

income attributable to a Business A 

tested unit (the Business A item). CFC 

accrues Sf1,010,000 of current year 

taxes and has no other current year 

deductions. CFC is not required by its 

country of tax residence to include in 

foreign gross income foreign currency 

gain or loss with respect to its interest 

in a foreign QBU. For purposes of 

§ 1.951A–2(c)(7)(iii)(A), Sf1,000,000 of 

current year tax is allocated and 

apportioned to the Business A item and 

Sf10,000 is allocated and apportioned to 

the CFC item. At all relevant times Sf1 

= $1. 

(ii) Analysis. As in paragraph (c)(1)(ii) 

of this section (Example 1), Sf7,500 of 

section 987 gain is initially assigned to 

the statutory grouping of foreign source 

general category tentative tested income. 

Under paragraph (b)(2)(iii) of this 

section, the section 987 gain comprises 

a single tentative gross tested income 

item of the CFC (the section 987 item). 

Therefore, the CFC has three tentative 

gross tested income items: the section 

987 item, the CFC item, and the 

Business A item. No tax is allocated and 

apportioned to the section 987 item. See 

paragraph (b)(3) of this section. 

Applying § 1.951A–2(c)(7)(vi), the 

effective tax rate of the section 987 item 

is 0% ($0/$7,500), the effective tax rate 

of the CFC item is 10% ($10,000/ 

$100,000), and the effective tax rate of 

the Business A item is 20% ($1,000,000/ 

$5,000,000). An election under 

§ 1.951A–2(c)(7)(viii) is in effect; 

therefore, the section 987 gain is 

reassigned based on the application of 

§ 1.951A–2(c)(7). Because the section 

987 item was not subject to an effective 

tax rate of greater than 90 percent of the 

maximum rate of tax specified in 

section 11, it is reassigned under 

paragraph (b)(2) of this section to 

foreign source general category tested 

income. The remaining Sf2,500 of 

section 987 gain is foreign source 

foreign currency gain of CFC 

attributable to section 988 transactions 

not directly related to the business 

needs of the controlled foreign 

corporation for the reasons stated in 

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

(Example 1). 

(3) Example 3: Section 987 gain or 

loss treated as attributable to section 

988 transactions—(i) Facts. 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, 

Sf5,000 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 a separate subpart F income 

group for non-related party interest 

income of Business A and Sf5,000 of 

which is characterized by reference to 

assets that give rise to foreign source 

passive gross income in a separate 

subpart F income group for gains from 

certain property transactions of 

Business A not derived from the active 

conduct of a trade or business. 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). 

(ii) Analysis. Under paragraph 

(b)(2)(i)(C) of this section, the Sf10,000 

total 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) and 1.954– 

1(c)(1)(iii)(B) (subpart F income groups 

relating to passive foreign personal 

holding company income) is treated as 

foreign source foreign currency loss of 


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CFC attributable to section 988 

transactions. 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). 

(4) Example 4: Section 987 gain or 

loss assigned to passive foreign personal 

holding company income—(i) Facts. 

The facts are the same as in paragraph 

(c)(3) of this section (Example 3) except 

that CFC is not subject to an election 

under paragraph (b)(2)(i)(C) of this 

section. 

(ii) Analysis. As the CFC is not subject 

to an election under paragraph 

(b)(2)(i)(C) of this section, Sf5,000 of 

section 987 loss is initially assigned to 

the statutory grouping for foreign source 

passive gross income in a separate 

subpart F income group for non-related 

party interest income of Business A, and 

Sf5,000 is initially assigned to the 

statutory grouping for foreign source 

passive gross income in a separate 

subpart F income group for gains from 

certain property transactions of 

Business A not derived from the active 

conduct of a trade or business. The 

Sf12,000 net foreign currency gain is 

foreign source passive gross income in 

a separate subpart F income group for 

foreign currency gain of CFC 

attributable to section 988 transactions 

of CFC. As a result, if the net income in 

a subpart F income group to which 

either section 987 loss is assigned is less 

than zero, that loss will not reduce any 

other category of subpart F income, 

including CFC’s foreign currency gain 

from section 988 transactions, except by 

reason of the earnings and profit 

limitation in section 952(c)(1). See 

§ 1.954–1(c)(1)(ii). 

§ 1.987–7 Application of the section 987 

regulations to partnerships and S 

corporations. 

(a) Overview. This section provides 

rules relating to the application of the 

section 987 regulations to partnerships 

and S corporations. Paragraph (b) of this 

section provides the general rule that 

the section 987 regulations do not apply 

to partnerships. Paragraph (c) of this 

section identifies certain provisions of 

the section 987 regulations that are 

applicable to partnerships, subject to 

certain modifications. Paragraph (d) of 

this section provides special rules 

relating to suspended section 987 loss. 

Paragraph (e) of this section provides 

rules for adjusting a partner’s basis in its 

partnership interest. Paragraph (f) of this 

section provides that S corporations are 

treated in the same manner as 

partnerships for purposes of the section 

987 regulations. Paragraph (g) of this 

section provides examples that illustrate 

the rules of this section. 

(b) Section 987 regulations generally 

do not apply to partnerships. Except as 

otherwise provided in this section, the 

section 987 regulations do not apply to 

a partnership, and the section 987 

regulations do not apply to an eligible 

QBU if a partnership is the owner for 

Federal income tax purposes of the 

eligible QBU’s assets and liabilities. 

However, a taxpayer must apply 

sections 987 and 989(a) to partnerships 

and eligible QBUs of partnerships in a 

reasonable manner using a method that 

is applied consistently from year to year 

with respect to a particular partnership 

or eligible QBU. In addition, all 

members of the same controlled group 

must apply the same method 

consistently with respect to a particular 

partnership or eligible QBU. 

(c) Provisions of the section 987 

regulations that apply to partnerships— 

(1) In general—(i) Eligible QBU. The 

rules described in paragraph (c)(2) of 

this section apply to an eligible QBU if 

a partnership is the owner for Federal 

income tax purposes of the eligible 

QBU’s assets and liabilities and either— 

(A) The partnership (or a partner) 

treats the eligible QBU as a qualified 

business unit of the partnership that is 

subject to section 987 (for example, 

under an entity approach); or 

(B) A partner in the partnership treats 

all or a portion of the eligible QBU as 

a qualified business unit of the partner 

that is subject to section 987 (for 

example, under an aggregate approach). 

(ii) Partnership. The rules described 

in paragraph (c)(2) of this section apply 

to a partnership if a partner in the 

partnership treats the partnership itself 

(or an interest in the partnership) as a 

qualified business unit that is subject to 

section 987 (for example, under an 

entity approach). 

(2) Applicable provisions—(i) In 

general. Sections 1.987–6 (character and 

source of section 987 gain or loss), 

1.987–9(d) (information on a dedicated 

section 987 form), §§ 1.987–11 through 

1.987–13 (suspended section 987 loss, 

deferral of section 987 gain or loss, and 

suspended section 987 loss upon 

terminations, respectively), and § 1.987– 

15 (applicability dates) apply to a QBU 

described in paragraph (c)(1) of this 

section, subject to the modifications 

described in this paragraph (c) and in 

paragraph (d) of this section. 

(ii) Annual recognition election. An 

annual recognition election under 

§ 1.987–5(b)(2) applies to a QBU 

described in paragraph (c)(1) of this 

section, subject to the modifications 

described in this paragraph (c). In each 

taxable year of the owner of a QBU 

described in paragraph (c)(1) of this 

section in which an annual recognition 

election is in effect, the owner 

recognizes any unrecognized gain or 

loss with respect to the QBU under 

section 987(3) (other than suspended 

section 987 loss) as though the QBU 

terminated on the last day of the taxable 

year. Appropriate adjustments must be 

made to prevent the gain or loss from 

being taken into account again after it is 

recognized under this paragraph 

(c)(2)(ii) (for example, in the case of a 

taxpayer applying the 1991 proposed 

regulations, by adjusting the equity and 

basis pools to reflect the gain or loss 

recognized). The rules of § 1.987–1(g) 

apply with respect to an annual 

recognition election that is made by or 

for an owner of a QBU described in 

paragraph (c)(1) of this section. 

(iii) Section 988 mark-to-market 

election. A section 988 mark-to-market 

election under § 1.987–3(b)(4)(ii) applies 

to a QBU described in paragraph (c)(1) 

of this section. The rules of § 1.987–1(g) 

apply with respect to a section 988 

mark-to-market election that is made by 

or for an owner of a QBU described in 

paragraph (c)(1) of this section. 

(3) Modifications to applicable 

provisions—(i) In general. An owner of 

a QBU described in paragraph (c)(1) of 

this section must adapt the rules 

described in paragraph (c)(2) of this 

section as necessary to recognize section 

987 gain or loss in a manner that is 

consistent with the principles of those 

rules. For purposes of applying this 

section and the rules described in 

paragraph (c)(2) of this section to a QBU 

described in paragraph (c)(1) of this 

section, the definitions provided in the 

section 987 regulations apply with 

appropriate modifications. For example, 

in the case of a QBU described in 

paragraph (c)(1) of this section, the term 

section 987 gain or loss means gain or 

loss recognized under section 987(3), 

the term owner means the person that 

recognizes gain or loss under section 

987(3), and the term section 987 QBU 

means any qualified business unit 

subject to section 987 (including a QBU 

described in paragraph (c)(1) of this 

section). In addition, references to other 

rules of the section 987 regulations must 

be adapted as necessary to apply section 

987 in a manner that is consistent with 

the principles of this section and the 

rules described in paragraphs (c)(2) of 

this section. For example, references to 

the recognition of section 987 gain or 

loss under § 1.987–5 encompass any 

recognition of gain or loss under section 

987(3). 

(ii) Controlled group. For purposes of 

applying §§ 1.987–12 and 1.987–13, if a 


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partner in a partnership is treated as the 

owner of an eligible QBU described in 

paragraph (c)(1)(i) of this section (for 

example, under an aggregate approach) 

before the QBU terminates, each 

member of the partnership’s controlled 

group is treated as a member of the 

partner’s controlled group at any time 

that the partner (or any member of the 

partner’s controlled group, determined 

without regard to this paragraph 

(c)(3)(ii)) continues to be a direct or 

indirect partner in the partnership. This 

paragraph (c)(3)(ii) does not apply for 

purposes of the de minimis rule in 

§ 1.987–11(c)(2). 

(4) Terminating QBUs. In the case of 

a terminating QBU described in 

paragraph (c)(1) of this section, the rules 

of this section and the rules described 

in paragraph (c)(2) of this section apply 

immediately before the termination, but 

§ 1.987–10 does not apply because 

§ 1.987–10 is not applicable to a QBU 

described in paragraph (c)(1) of this 

section. 

(d) Suspended section 987 loss—(1) In 

general—(i) Rules of § 1.987–11(c) and 

(d)(2) do not apply. The rules of 

§ 1.987–11(c) and (d)(2) do not apply to 

a QBU described in paragraph (c)(1) of 

this section. 

(ii) Suspension of section 987 loss. 

Except as provided in paragraph (d)(2) 

of this section, any loss that would 

otherwise be recognized under section 

987(3) (after applying § 1.987–12) with 

respect to a QBU described in paragraph 

(d)(1)(ii)(A) or (B) of this section is not 

recognized and becomes suspended 

section 987 loss. 

(A) Eligible QBU. This paragraph 

(d)(1)(ii) applies to an eligible QBU 

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

section. 

(B) Partnership. This paragraph 

(d)(1)(ii) applies to a partnership (or a 

partnership interest) described in 

paragraph (c)(1)(ii) of this section if at 

least 95 percent of the interests in 

partnership capital and profits are 

owned, directly or indirectly, by 

persons related to each other within the 

meaning of section 267(b) or section 

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). 

(2) Exceptions—(i) Method under 

which historic items do not give rise to 

section 987 gain or loss. Paragraph 

(d)(1)(ii) of this section does not apply 

to an eligible QBU described in 

paragraph (d)(1)(ii)(A) of this section if 

section 987 is consistently applied to 

the QBU using a method under which 

historic items of the QBU do not give 

rise to section 987 gain or loss (for 

example, a method that follows the 

principles of §§ 1.987–3 through 1.987– 

5). 

(ii) Annual recognition election. 

Paragraph (d)(1)(ii) of this section does 

not apply in a taxable year in which an 

annual recognition election is in effect. 

(iii) De minimis rule. Paragraph 

(d)(1)(ii) of this section does not apply 

in a taxable year described in § 1.987– 

11(c)(2). 

(3) Recognition of suspended section 

987 loss—(i) In general. Except as 

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

section, suspended section 987 loss 

with respect to a QBU described in 

paragraph (d)(1)(ii)(A) or (B) of this 

section is recognized under the rules of 

§§ 1.987–11(e) and 1.987–13. 

(ii) Partnership that is not engaged in 

a trade or business. In the case of a 

partnership described in paragraph 

(d)(1)(ii)(B) of this section that is not 

engaged in a trade or business, 

suspended section 987 loss cannot be 

recognized under § 1.987–13(b) through 

(d) (and thus can only be recognized 

under § 1.987–11(e)). 

(iii) Application of the loss-to-theextent-of-gain rule. If a partner in a 

partnership is the owner of a section 

987 QBU described in paragraph (c)(1) 

of this section and also owns one or 

more section 987 QBUs that are not 

described in paragraph (c)(1) of this 

section, the loss-to-the-extent-of-gain 

rule of § 1.987–11(e) is applied by taking 

into account all of the owner’s section 

987 gain and suspended section 987 loss 

in each recognition grouping with 

respect to all of its section 987 QBUs 

(whether or not they are described in 

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

(e) Adjustments to the basis of a 

partner’s interest in the partnership. 

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 at the partner 

level with respect to a partnership 

described in paragraph (c)(1)(ii) of this 

section or an eligible QBU of the 

partnership described in paragraph 

(c)(1)(i) of this section, the principles of 

sections 704(d) and 705 apply as though 

the item of income or loss was part of 

the partner’s distributive share of 

partnership items. Thus, proper 

adjustments must be made to the 

partner’s adjusted basis in the 

partnership under the principles of 

section 705, taking into account the 

principles of section 704(d). 

(f) 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. 

(g) Examples. The following examples 

illustrate the principles of this section. 

For purposes of these examples, DC1 

and DC2 are domestic corporations, and 

P is a foreign partnership. P is also the 

owner for Federal income tax purposes 

of the assets and liabilities of Business 

A, an eligible QBU that has the pound 

as its functional currency. DC1 and DC2 

each own 50% of the capital and profits 

interests in P. If P is treated as a 

qualified business unit under section 

989(a), P would have the euro as its 

functional currency due to activities 

unrelated to Business A. 

(1) Example 1: Aggregate approach to 

section 987—(i) Facts. DC1 and DC2 

each apply section 987 using an 

aggregate approach, under which each 

partner’s indirect interest in Business A 

is treated as a section 987 QBU of the 

partner. DC1 and DC2 each use the 

earnings and capital method described 

in the 1991 proposed regulations to 

apply section 987 with respect to 

Business A. Neither DC1 nor DC2 has 

made an annual recognition election. 

Under the earnings and capital method, 

but for the application of paragraph 

(d)(1)(ii) of this section, DC1 and DC2 

each would recognize section 987 loss 

of $10 million in year 1 with respect to 

Business A. 

(ii) Analysis—(A) Application of loss 

suspension rule to Business A. Business 

A is an eligible QBU described in 

paragraph (c)(1)(i) of this section 

because a partnership (P) is the owner 

of Business A’s assets and liabilities for 

federal income tax purposes and P’s 

partners treat Business A as a section 

987 QBU. Therefore, under paragraph 

(d)(1)(ii) of this section, the section 987 

loss of DC1 and DC2 that would 

otherwise be recognized in year 1 

becomes suspended section 987 loss, 

which DC1 and DC2 may recognize in 

year 1 or in future taxable years under 

§§ 1.987–11(e) and 1.987–13(b) through 

(d). 

(B) Annual recognition election. If 

DC1 and DC2 were subject to an annual 

recognition election in year 1, they 

would recognize section 987 gain or loss 

with respect to Business A as though 

Business A terminated at the end of year 

1, and the loss suspension rule of 

paragraph (d)(1)(ii) of this section would 

not apply. 

(C) FEEP method. If DC1 and DC2 

applied section 987 to Business A under 

the principles of §§ 1.987–3 through 

1.987–5, such that historic items of 

Business A did not give rise to section 

987 gain or loss, the loss suspension 

rule of paragraph (d)(1)(ii) of this 

section would not apply. 


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(2) Example 2: Entity approach to 

section 987—(i) Facts. P applies section 

987 to Business A using an entity 

approach, under which Business A is 

treated as a section 987 QBU of P. P is 

treated as a qualified business unit 

under section 989(a) and uses the euro 

as its functional currency. P uses the 

earnings and capital method described 

in the 1991 proposed regulations to 

apply section 987 with respect to 

Business A. Under the earnings and 

capital method, but for the application 

of paragraph (d)(1)(ii) of this section, P 

would recognize section 987 loss of $10 

million in year 1 with respect to 

Business A. In addition, DC1 and DC2 

apply section 987 to P using an entity 

approach, treating each partner’s 

interest in P as a section 987 QBU. DC1 

and DC2 each use the earnings and 

capital method described in the 1991 

proposed regulations to apply section 

987 with respect to P. Under the 

earnings and capital method, but for the 

application of paragraph (d)(1)(ii) of this 

section, DC1 and DC2 each would 

recognize section 987 loss of $10 

million in year 1 with respect to P. 

Neither DC1 nor DC2 has made an 

annual recognition election. 

(ii) Analysis—(A) Business A treated 

as a QBU subject to section 987. 

Business A is an eligible QBU described 

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

because a partnership (P) is the owner 

of Business A’s assets and liabilities for 

Federal income tax purposes, and P 

treats Business A as a QBU subject to 

section 987. Therefore, the loss 

suspension rule in paragraph (d)(1)(ii) of 

this section applies to suspend P’s 

recognition of section 987 loss with 

respect to Business A. 

(B) Treatment of P as a section 987 

QBU. P is a partnership described in 

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

because DC1 and DC2 each treat their 

interest in P as a section 987 QBU. 

Under paragraph (d)(1)(ii)(B) of this 

section, if DC1 and DC2 are related 

within the meaning of section 267(b) or 

section 707(b), the loss suspension rule 

in paragraph (d)(1)(ii) of this section 

applies to suspend DC1’s and DC2’s 

recognition of section 987 loss with 

respect to their interest in P. However, 

if DC1 and DC2 are unrelated, the loss 

suspension rule in paragraph (d)(1)(ii) of 

this section does not apply. 

§ 1.987–8 Termination of a section 987 

QBU. 

(a) Scope. This section provides rules 

regarding the termination of a section 

987 QBU. Paragraph (b) of this section 

provides general rules for determining 

when a termination occurs. Paragraph 

(c) of this section provides exceptions to 

the general termination rules for certain 

transactions described in section 381(a). 

Paragraph (d) of this section is reserved. 

Paragraph (e) of this section describes 

certain effects of terminations. 

Paragraph (f) of this section contains 

examples that illustrate the principles of 

this section. 

(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. 

(1) Trade or business ceases. A 

section 987 QBU ceases its trade or 

business. When a section 987 QBU 

ceases its trade or business is 

determined based on all the facts and 

circumstances, provided that an owner 

may continue to treat a section 987 QBU 

as a section 987 QBU for a reasonable 

period during the winding up of such 

trade or business, which period may in 

no event exceed two years from the date 

on which such QBU ceases its activities 

carried on for profit. See paragraph (f)(1) 

of this section (Example 1). 

(2) Substantially all assets transferred. 

The section 987 QBU transfers 

substantially all (within the meaning of 

section 368(a)(1)(C)) of its assets to its 

owner. For purposes of this paragraph 

(b)(2), the amount of assets transferred 

from the section 987 QBU to its owner 

as a result of a transaction is reduced by 

the amount of assets transferred from 

the owner to the section 987 QBU 

pursuant to the same transaction. See 

paragraphs (f)(2), (6), and (7) of this 

section (Examples 2, 6, and 7). 

(3) Owner no longer a CFC. A foreign 

corporation that is a controlled foreign 

corporation that is the owner of a 

section 987 QBU ceases to be a 

controlled foreign corporation as a 

result of a transaction or series of 

transactions after which persons that 

were related to the corporation within 

the meaning of section 267(b) 

immediately before the transaction or 

series of transactions collectively own 

sufficient interests in the corporation 

such that the corporation would 

continue to be considered a controlled 

foreign corporation if such persons were 

United States shareholders within the 

meaning of section 951(b). See 

paragraph (f)(3) of this section (Example 

3). 

(4) Owner ceases to exist. The owner 

of the section 987 QBU ceases to exist 

(including in connection with a 

transaction described in section 381(a)). 

See paragraph (f)(4) of this section 

(Example 4). 

(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 § 1.985–5(d)(2) and 

(e)(4)(iii) (providing that a termination 

resulting from a change in functional 

currency occurs on the last day of the 

last taxable year ending before the year 

of change). 

(6) Change in form of ownership. An 

individual or corporation that was the 

direct owner of a section 987 QBU 

ceases to be the direct owner of the 

section 987 QBU (for example, because 

the assets of the section 987 QBU are 

transferred to a partnership). 

(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. 

(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. 


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(d) [Reserved] 

(e) Effect of terminations. A 

termination of a section 987 QBU as 

determined in this section is treated as 

a remittance of all the gross assets of the 

section 987 QBU to its owner 

immediately before the section 987 QBU 

terminates. 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) Examples. The following examples 

illustrate the principles of this section. 

Except as otherwise provided, U.S. Corp 

is a domestic corporation that has the 

U.S. dollar as its functional currency, 

and Business A is a section 987 QBU. 

(1) Example 1: Cessation of 

operations—(i) Facts. U.S. Corp is the 

owner of Business A, a sales office of 

U.S. Corp in Country X. Business A 

ceases sales activities on December 31, 

year 1. During year 2, Business A sells 

all of the assets used in its sales 

activities and winds up its business, 

settling outstanding accounts. 

(ii) Analysis. Business A’s trade or 

business ceases on December 31, year 1. 

The cessation of Business A’s trade or 

business causes a termination of the 

Business A section 987 QBU under 

paragraph (b)(1) of this section on 

December 31, year 1, unless U.S. Corp 

chooses to continue to treat Business A 

as a section 987 QBU until completion 

of the wind-up activities in year 2. If 

U.S. Corp chooses to continue to treat 

Business A as a section 987 QBU during 

the wind-up of Business A, the Business 

A section 987 QBU would terminate 

under paragraph (b)(1) of this section 

upon completion of the wind-up in year 

2. 

(2) Example 2: Transfer of a section 

987 QBU to a member of a consolidated 

group—(i) Facts. U.S. Corp, the owner 

of Business A, transfers all the assets 

and liabilities of Business A to DS, a 

domestic corporation all of the stock of 

which is owned by U.S. Corp, in a 

transaction qualifying under section 

351. U.S. Corp and DS are members of 

the same consolidated group. 

(ii) Analysis. Pursuant to § 1.987– 

2(c)(2)(i) and (ii), as a result of the 

deemed exchange of the assets and 

liabilities of Business A for DS stock in 

a section 351 transaction, Business A is 

treated as transferring its assets and 

liabilities to U.S. Corp immediately 

before the transfer by U.S. Corp of the 

assets and liabilities to DS. Because a 

section 351 transaction is not a 

transaction described in section 

381(a)(2), the transfer of all of the assets 

of Business A to U.S. Corp causes a 

termination of the Business A section 

987 QBU under paragraph (b)(2) of this 

section. 

(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. 

(4) Example 4: Section 332 

liquidation—(i) Facts. U.S. Corp owns 

all of the stock of FC, a foreign 

corporation. FC is the owner of Business 

A. Pursuant to a liquidation described 

in section 332, FC distributes all of its 

assets and liabilities to U.S. Corp. 

(ii) Analysis. FC’s liquidation causes a 

termination of the Business A section 

987 QBU as provided in paragraph (b)(4) 

of this section because FC ceases to exist 

as a result of the liquidation. The 

exception for certain section 332 

liquidations provided under paragraph 

(c)(1) of this section does not apply 

because U.S. Corp is a domestic 

corporation and FC is a foreign 

corporation. See paragraph (c)(1)(ii) of 

this section. 

(5) [Reserved] 

(6) Example 6: Deemed transfers to a 

CFC upon a check-the-box election—(i) 

Facts. In year 1, U.S. Corp forms an 

entity in a foreign country, Entity A. 

Entity A owns Business A, which has 

the pound as its functional currency. 

Entity A forms Entity B in another 

foreign country. Entity B owns Business 

B, a section 987 QBU that has the euro 

as its functional currency. At the time 

of formation, Entity A and Entity B elect 

to be DEs. In year 6, Entity A files an 

election on Form 8832 to be classified 

as a corporation under § 301.7701– 

3(g)(1)(iv) of this chapter and becomes 

a CFC (FC) owned directly by U.S. Corp. 

FC has the pound as its functional 

currency. 

(ii) Analysis—(A) Under § 1.987– 

1(b)(5), U.S. Corp is the owner of 

Business A and Business B. In year 6, 

when Entity A elects to be classified as 

a corporation, U.S. Corp is deemed to 

contribute the assets and liabilities of 

Business A and Business B to FC under 

section 351 in exchange for FC stock. 

Pursuant to § 1.987–2(c)(2)(i) and (ii), as 

a result of the deemed exchange of the 

assets and liabilities of Business A and 

Business B for FC stock in a section 351 

transaction, Business A and Business B 

are each treated as transferring their 

assets and liabilities to U.S. Corp 

immediately before U.S. Corp’s transfer 

of such assets and liabilities to FC. The 

transfer of assets from Business A and 

Business B to U.S. Corp causes 

terminations of those section 987 QBUs 

under paragraph (b)(2) of this section. 

The assets and liabilities of Business A 

and Business B are now owned by FC, 

but because FC and Business A have the 

same functional currency, only Business 

B qualifies as a section 987 QBU to 

which section 987 applies. 

(B) Terminations also would have 

occurred in year 6 if U.S. Corp had 

contributed Entity A and Entity B to an 

existing foreign corporation owned by 

U.S. Corp or to a newly created foreign 

corporation owned by U.S. Corp 

pursuant to a section 351 exchange 

because the transfer of all of the assets 

of Business A and Business B would 

cause terminations of those section 987 

QBUs under paragraph (b)(2) of this 

section. 

(7) Example 7: Sale of a section 987 

QBU to a member of a consolidated 

group—(i) Facts. U.S. Corp, the owner of 

Business A, sells all of the assets and 

liabilities of Business A to DS, a 

domestic corporation, in exchange for 

cash. U.S. Corp and DS are members of 

the same consolidated group. The cash 

received on the sale is recorded on the 

books of U.S. Corp. 

(ii) Analysis. Pursuant to § 1.987– 

2(c)(2)(i) and (ii), Business A is treated 

as transferring all of its assets and 

liabilities to U.S. Corp immediately 

before the sale by U.S. Corp to DS. As 

a result of this deemed transfer from 

Business A to U.S. Corp, the Business A 

section 987 QBU terminates under 

paragraph (b)(2) of this section. 

§ 1.987–9 Recordkeeping requirements. 

(a) In general. An owner (or the 

authorized person on behalf of an 

owner) must keep a copy of the 

statement described in § 1.987–1(g)(3)(i) 

for each section 987 election made by or 


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on behalf of the owner (if not required 

to be made on a form published by the 

Commissioner) and reasonable records 

sufficient to establish section 987 

taxable income or loss and section 987 

gain or loss with respect to each section 

987 QBU, successor deferral QBU, and 

successor suspended loss QBU, as 

applicable, for each taxable year. 

(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. If a current rate election is in 

effect and the owner computes QBU net 

value under § 1.987–4(e)(2)(iii) without 

preparing an adjusted balance sheet, the 

information needed to apply § 1.987– 

4(e)(2)(iii) must be maintained in lieu of 

an adjusted balance sheet. 

(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 and 

the section 987 QBU. 

(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. 

(7) The amount of the unrecognized 

section 987 gain or loss for the taxable 

year determined under § 1.987–4(d). 

(8) The amount of the net 

accumulated unrecognized section 987 

gain or loss for the taxable year 

determined under § 1.987–4(c). 

(9) The amount of the 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, suspended section 987 

loss, or pretransition gain or 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). 

(14) The identification required under 

§ 1.987–14(c) with respect to a section 

987 hedging transaction. 

(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 (or, until that form is 

published, on Form 8858 or its 

successor) in accordance with the 

applicable forms and instructions. 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). 

§ 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. 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 is reserved. 

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 

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 and any 

person that is the owner of a terminating 

QBU on the termination 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. This paragraph (b)(2) 

does not apply to the owner of a 

terminating QBU. 

(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 

§ 1.987–15(a)(1), (b), or (c) to which this 

section applies. 

(2) Terminating QBU—(i) In general. 

With respect to a terminating QBU, the 

transition date is the day after the 

termination date. 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 

(other than the election described in 

§ 1.987–6(b)(2)(i)(C)). 

(ii) Ordering rule. In the case of a 

terminating QBU, the transition rules of 

this section are applied immediately 

before the termination, and the 

consequences of the termination are 

determined under the section 987 

regulations after applying this section. 

(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 


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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)(i)(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 

transition exchange rate described in 

paragraph (d)(3) of this section. 

(2) Determination of historic rate. 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 transition exchange 

rate described in paragraph (d)(3) of this 

section. 

(3) Transition exchange rate—(i) In 

general. Except as provided in 

paragraph (d)(3)(ii) of this section, the 

transition exchange rate is the spot rate 

applicable to the day before the 

transition date. 

(ii) Earnings only method. If an 

earnings only method described in 

paragraph (e)(4)(ii) of this section was 

applied with respect to a section 987 

QBU before the transition date, and a 

current rate election is not in effect in 

the taxable year beginning on the 

transition date, the transition exchange 

rate for each historic item (other than 

inventory subject to the simplified 

inventory method under § 1.987– 

3(c)(2)(iv)(A)) is the pretransition 

translation rate described in paragraph 

(e)(2)(i)(C) of this section. This 

paragraph (d)(3)(ii) does not apply with 

respect to a terminating QBU. 

(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 described in paragraph 

(b)(1) of this section 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 

§§ 1.987–12 and 1.987–13 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 transition exchange rate. 

(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. 

(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 on the day before the 

transition date. 

(ii) Deferral QBU owner. If a deferral 

QBU owner described in paragraph 

(b)(2) of this section 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 

described in paragraph (b)(2) of this 

section 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 described in paragraph (b)(1) of 

this section did not apply 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 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 and beginning 

after September 7, 2006, 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 and beginning after 

September 7, 2006. 

(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 

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; and 

(B) Section 1.987–4(d)(10) is applied 

by replacing ‘‘paragraphs (d)(1) through 

(9) of this section’’ with ‘‘paragraph 

(d)(1) of this section.’’ 

(iv) Deferral QBU owner. If a deferral 

QBU owner described in paragraph 

(b)(2) of this section 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 


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described in paragraph (b)(2) of this 

section 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 the QBU on a return 

filed before November 9, 2023. 

(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 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 since the first 

taxable year in which the owner applied 

an eligible pretransition method; and 

(C) The owner of the section 987 QBU 

otherwise applied section 987 in a 

reasonable manner. See paragraph (l)(3) 

of this section (Example 3) for an 

illustration of this rule. 

(iv) Error in the application of a 

section 987 method. If an owner 

generally applied section 987 with 

respect to a section 987 QBU before the 

transition date under a method 

described in paragraph (e)(4)(i), (ii), or 

(iii) of this section but made errors in 

the application of the method or failed 

to apply the method to every taxable 

year since the QBU’s inception, the 

owner is considered to have applied an 

eligible pretransition method with 

respect to the QBU. However, 

pretransition gain or loss must be 

determined under paragraph (e)(2) of 

this section as though the eligible 

pretransition method was applied 

without error since the section 987 

QBU’s inception. See paragraph (l)(5) of 

this section (Example 5) for an 

illustration of this rule. 

(v) Certain consistent practices not 

treated as errors—(A) In general. If an 

owner generally applied section 987 

with respect to a section 987 QBU 

before the transition date under a 

method described in paragraph (e)(4)(i), 

(ii), or (iii) of this section and used a 

consistent practice described in 

paragraph (e)(4)(v)(B) of this section for 

purposes of applying that method, the 

owner is considered to have applied an 

eligible pretransition method with 

respect to the QBU. In addition, the 

consistent practice is not treated as an 

error under paragraph (e)(4)(iv) of this 

section. Therefore, the owner must take 

the consistent practice into account in 

determining pretransition gain or loss 

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

See paragraph (l)(6) of this section 

(Example 6) for an illustration of this 

rule. 

(B) Practices not treated as errors—(1) 

Reasonable conventions. The use of a 

reasonable convention (for example, the 

use of a yearly average exchange rate 

rather than the applicable spot rate to 

translate frequently recurring transfers) 

is a practice described in this paragraph 

(e)(4)(v)(B). 

(2) Disregarded transactions. If, in 

determining the amount of a remittance 

that requires the recognition of gain or 

loss under section 987(3), an owner of 

a QBU consistently disregarded certain 

transfers to or from the QBU (other than 

transfers from the QBU to the owner 

that would be treated as distributions if 

the QBU were treated as a separate 

corporation), the owner is considered to 

have applied a practice described in this 

paragraph (e)(4)(v)(B) with respect to the 

QBU, provided that the owner otherwise 

accounts for the disregarded transfers in 

a reasonable manner (for example, 

under the method described in the 1991 

proposed regulations, by taking the 

disregarded transfers into account in 

computing equity and basis pools so as 

to properly reflect the owner’s net 

equity in the QBU and its functional 

currency basis in the QBU). 

(vi) Deferral of section 987 gain or loss 

until termination is not reasonable. For 

purposes of this paragraph (e)(4), 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. 

(vii) 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, pretransition gain is recognized 

under paragraph (e)(5)(i)(A) of this 

section and pretransition loss is 

recognized under paragraph (e)(5)(i)(B) 

of this section. 

(A) Pretransition gain. 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—(1) In general. 

Except as provided in paragraph 

(e)(5)(i)(B)(2) of this section, 

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). 

(2) Current rate election. If a current 

rate election is in effect (and an annual 

recognition election is not in effect) in 

the taxable year beginning on the 

transition date, pretransition loss with 

respect to a section 987 QBU (other than 


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a terminating QBU) is treated as net 

accumulated unrecognized section 987 

loss (within the meaning of § 1.987– 

4(c)), and pretransition loss with respect 

to a deferral QBU is treated as deferred 

section 987 loss and is attributed to one 

or more successor deferral QBUs under 

the principles of § 1.987–12(b)(2) and 

(c)(2). 

(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 

described in paragraph (c)(1) of this 

section. See § 1.987–1(g) for rules 

relating to section 987 elections 

(including consistency rules). 

(B) Special rules for certain 

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. This paragraph (e)(5)(ii)(B) 

also applies to any transaction entered 

into with a principal purpose of 

avoiding the recognition of pretransition 

gain under paragraph (e)(5)(ii)(A) of this 

section. 

(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 

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). 

(C) Terminating QBU. This paragraph 

(e)(5)(ii)(C) applies with respect to a 

terminating QBU if, in the taxable year 

beginning on the transition date 

described in paragraph (c)(1) of this 

section, the owner of the terminating 

QBU elects to recognize pretransition 

gain or loss ratably over the transition 

period. Any deferred section 987 gain or 

loss or suspended section 987 loss with 

respect to the terminating QBU that was 

not recognized before the transition date 

described in paragraph (c)(1) of this 

section is treated as pretransition gain or 

loss for purposes of this paragraph 

(e)(5)(ii) (and ceases to be treated as 

deferred section 987 gain or loss or 

suspended section 987 loss). The 

pretransition gain or loss is recognized 

ratably over ten taxable years beginning 

with the taxable year that begins on the 

transition date described in paragraph 

(c)(1) of this section. 

(6) Predecessor of an owner—(i) In 

general. For purposes of this paragraph 

(e), references to an owner of a section 

987 QBU, a 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. 

(7) Small business election—(i) Scope. 

This paragraph (e)(7) applies if the 

owner of a QBU meets the threshold 

described in paragraph (e)(7)(ii) of this 

section and the QBU meets the 

threshold described in paragraph 

(e)(7)(iii) of this section. This paragraph 

(e)(7) does not apply with respect to a 

terminating QBU. 

(ii) Owner threshold. An owner of a 

QBU meets the requirements of this 

paragraph (e)(7)(ii) if the owner would 

qualify for the small business exemption 

provided in section 163(j)(3) for the 

taxable year beginning on the transition 

date described in paragraph (c)(1) of this 

section. 

(iii) QBU threshold. A QBU meets the 

requirements of this paragraph (e)(7)(iii) 

if the assets attributable to the QBU 

have an adjusted basis (translated at the 

spot rate applicable to the last day of 

each taxable year) of $10 million or less 

at the end of each of the three taxable 

years of the owner ending before the 

transition date described in paragraph 

(c)(1) of this section (or, if the QBU was 

not in existence for three taxable years, 

each taxable year ending before the 

transition date in which the QBU 

existed). For this purpose, all QBUs 

owned by members of the same 

controlled group that have the same 

country of residence (as defined in 

section 988(a)(3)(B)) are treated as a 

single QBU. Solely for purposes of 

applying this paragraph (e)(7)(iii) in the 

case of a deferral QBU or outbound loss 

QBU described in paragraph (b)(2) of 

this section, the termination date is 

treated as the transition date. 

(iv) Small business election. If the 

owner of a QBU meets the requirements 

of paragraph (e)(7)(ii) of this section, the 

owner may elect to treat all QBUs that 

meet the requirements of paragraph 

(e)(7)(iii) of this section as having no 

pretransition gain or loss. 

(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)(i)(B) 

is the amount that was determined for 

the preceding taxable year under prior 

§ 1.987–4(d)(1)(A) or § 1.987–4(d)(1)(A) 

of 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 


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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) Outbound 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) [Reserved] 

(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 described in 

paragraph (b)(2) of this section 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 prior § 1.987– 

12(e)). 

(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 (including section 

988 gain or loss) being taken into 

account more than once or not being 

taken into account, then pretransition 

gain or loss, as determined under 

paragraphs (e)(2) and (3) of this section, 

is adjusted to account for the difference. 

In case of a QBU described in paragraph 

(f)(1) of this section, appropriate 

adjustments must be made under the 

principles of paragraph (e)(5) of this 

section. In the case of a terminating 

QBU, the determination as to whether 

an adjustment is required under this 

paragraph (j) is made after taking into 

account section 988 gain or loss 

recognized in connection with the 

termination. 

(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 

(including extensions) 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, 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) Whether the authorized person 

has made a small business election 

under paragraph (e)(7) of this section 

and the computations used to determine 

eligibility for the election. 

(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 

described in paragraph (b)(2) of this 

section and each of its successor 

suspended loss QBUs. 

(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) No change in method of 

accounting. The application of this 

section is not treated as a change in 

method of accounting for purposes of 

sections 446 and 481. 

(l) Examples. The following examples 

illustrate the application of this section. 

For purposes of the examples, DC is a 


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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: Earnings and capital 

method—(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. 

TABLE 1 TO PARAGRAPH (l)(1)(i)(B)— 

EXCHANGE RATES—Continued 

Spot rate 

Yearly average exchange rate 

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 in the table below. 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. 

TABLE 2 TO PARAGRAPH (l)(1)(i)(D)—YEAR 3 EQUITY AND BASIS POOLS

Equity pool Translation rate Basis pool 

Contribution (11/30/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 

(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 (Example 1), 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. 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 transition exchange rate, 

reduced by the basis of the land, 


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translated into U.S. dollars at the 

pretransition translation rate. Under 

paragraph (d)(3)(i) of this section, the 

transition exchange rate is the spot rate 

applicable to 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 transition exchange rate, which is 

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: Earnings only method 

described in paragraph (e)(4)(ii) of this 

section—(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. In addition, a current rate 

election is in effect for Year 4. 

(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 

in the table below. 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). 

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 

Total .................................................. Ö50 .......................................................... .................................................................. 60 

(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 in the table below. 

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. 

TABLE 4 TO PARAGRAPH (l)(2)(i)(C)(2)—CAPITAL EQUITY AND BASIS POOLS

Equity pool Translation rate Basis pool 

Contribution (11/30/Year 1) ..................... Ö150 ........................................................ Ö1 = $1 .................................................... $150 

Total .................................................. Ö150 ........................................................ .................................................................. 150 

(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 


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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 

(Example 2). 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 (Example 2), 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. 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 

section, the owner functional currency 

net value adjustment is equal to the 

basis of Branch’s land, translated into 

U.S. dollars at the transition exchange 

rate, 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. Under 

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

because a current rate election is in 

effect for year 4, the transition exchange 

rate is the spot rate applicable to 

December 31, year 3. 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 transition exchange rate, which is 

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. 

(iii) Alternative facts—(A) No current 

rate election. Assume the facts are the 

same as described in paragraph (l)(2)(i) 

of this section (Example 2), except that 

a current rate election is not in effect for 

year 4. 

(B) Analysis. As explained in 

paragraph (l)(2)(ii)(A) of this section 

(Example 2), DC determines its 

pretransition gain or loss with respect to 

Branch under paragraph (e)(2) of this 

section. Because a current rate election 

is not in effect, the transition exchange 

rate is determined under paragraph 

(d)(3)(ii) of this section. 

(1) Transition exchange rate. DC 

applied an earnings only method 

described in paragraph (e)(4)(ii) of this 

section before the transition date. Under 

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

because a current rate election is not in 

effect for year 4, the transition exchange 

rate for Branch’s land is equal to the 

pretransition translation rate. As 

explained in paragraph (l)(2)(ii)(B)(2) of 

this section (Example 2), the 

pretransition translation rate is Ö1 = $1. 

(2) Pretransition gain or loss. Because 

the transition exchange rate for the land 

(Branch’s sole asset) is equal to the 

pretransition translation rate, the owner 

functional currency net value 

adjustment is zero. As explained in 

paragraph (l)(2)(ii)(B)(1) of this section 

(Example 2), the deemed termination 

amount is also zero. Therefore, DC has 

no pretransition gain or loss with 

respect to Branch. 

(3) 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 


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day of year 3 is determined by 

translating the Ö100 basis of the land at 

the transition exchange rate, which is 

the pretransition translation rate of Ö1 = 

$1. Therefore, the owner functional 

currency net value of Branch on the last 

day of year 3 is $100. 

(3) Example 3: Earnings only method 

described in paragraph (e)(4)(iii) of this 

section—(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 

in the table below. 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. 

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 

(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 DC 

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 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)(3)(ii)(B)(1) 

and (2) of this section (Example 3), 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. 

(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. 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 

transition exchange rate, reduced by the 

basis of the land, translated into U.S. 

dollars at the pretransition translation 

rate. Under paragraph (d)(3)(i) of this 

section, the transition exchange rate is 

the spot rate applicable to 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. 


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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: Owner did not apply 

section 987(3)—(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 (Example 4), 

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 net 

assets) are applied. As explained in 

paragraphs (l)(4)(ii)(C)(1) and (2) of this 

section (Example 4), 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 net assets 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 net assets (and 

increased by any residual decrease to 

net assets), 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 net assets is 

equal to the change in net value of the 

section 987 QBU, determined in the 

section 987 QBU’s functional currency 

(that is, the QBU net value). See 

§ 1.987–4(d)(10)(ii)(B) and (e)(2)(ii). 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 QBU net value of Ö150. 

Because Branch was formed in year 1, 

its QBU 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 net assets 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 (Example 4), 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 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 (Example 

4), Branch’s owner functional currency 

net value on the last day of year 1 was 

$165. Therefore, the change in owner 

functional currency net value is an 

increase of $45. 

(2) Residual increase to net assets for 

year 2. On December 31, year 2, Branch 

held land with a basis of Ö100 and Ö75 

cash. Therefore, on the last day of year 

2, Branch has a QBU net value of Ö175. 

As explained in paragraph (l)(4)(ii)(C)(2) 

of this section (Example 4), Branch had 

a QBU net value of Ö150 on December 

31, year 1. Therefore, the residual 

increase to net assets 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 (Example 4), 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 (Example 4), 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. 


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(2) Residual decrease to net assets 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 QBU net value of Ö100. As 

explained in paragraph (l)(4)(ii)(D)(2) of 

this section (Example 4), Branch had a 

QBU net value of Ö175 on December 31, 

year 2. Therefore, the residual decrease 

to net assets 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. 

(5) Example 5: Error in application of 

method—(i) Facts. The facts are the 

same as described in paragraph (l)(1)(i) 

of this section (Example 1), except that 

DC inadvertently miscalculated the 

amount of the June 30, year 3, 

remittance as being Ö90 rather than 

Ö100. This reduced the amount of 

section 987 gain recognized by DC in 

year 3. 

(ii) Analysis. DC committed an error 

in its application of the earnings and 

capital method to Branch. Under 

paragraph (e)(4)(iv)(A) of this section, 

DC is nonetheless treated as having 

applied an eligible pretransition 

method. However, under paragraph 

(e)(4)(iv)(B) of this section, DC must 

determine its pretransition gain or loss 

as though the error had not been made. 

Therefore, DC computes its 

pretransition gain or loss as described in 

paragraph (l)(1)(ii)(B) of this section 

(Example 1). DC has $35 of pretransition 

gain with respect to Branch. 

(6) Example 6: Consistent practice not 

treated as an error—(i) Facts. Before the 

transition date, DC used the earnings 

and capital method described in the 

1991 proposed regulations under 

section 987 with respect to Branch, as 

described in paragraph (l)(1)(i) of this 

section (Example 1). In years 1, 2, and 

3, Branch made recurring purchases of 

inventory from Owner, which Branch 

sold to unrelated customers. In 

connection with the purchase 

transactions, Branch transferred cash to 

Owner, and Owner transferred 

inventory to Branch. Owner did not take 

these transfers into account in 

determining the amount of any 

remittance and, accordingly, did not 

recognize section 987 gain or loss with 

respect to these transfers. However, 

Owner consistently adjusted Branch’s 

equity and basis pools in a reasonable 

manner to reflect all transfers between 

Owner and Branch; for this purpose, the 

amount of each transfer made in 

connection with the purchase 

transactions was translated using the 

average rate for the relevant taxable 

year. Owner also adjusted Branch’s 

equity and basis pools to account for 

Branch’s income from the sale of 

inventory. 

(ii) Analysis—(A) DC’s method is an 

eligible pretransition method. Before the 

transition date, DC followed the 

earnings and capital method described 

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) Effect of consistent practice. 

Before the transition date, Owner 

engaged in a consistent practice under 

which Owner did not account for 

inventory purchase transactions in 

determining the amount of a remittance 

requiring the recognition of gain or loss 

under section 987(3). However, Owner 

consistently accounted for the 

disregarded transfers in a reasonable 

manner for purposes of computing its 

equity and basis pools. Under paragraph 

(e)(4)(v) of this section, this consistent 

practice is not treated as an error in the 

application of a pretransition method 

and does not preclude Owner’s method 

from being treated as an eligible 

pretransition method. Therefore, Owner 

must take this consistent practice into 

account in determining pretransition 

gain or loss under paragraph (e)(2) of 

this section. In particular, Owner must 

use the equity and basis pools computed 

under its consistent practice (rather than 

the equity and basis pools it would have 

computed if it had historically taken the 

disregarded transfers into account in 

determining the amount of remittances) 

to determine the deemed termination 

amount under paragraph (e)(2)(i)(A) of 

this section. 

§ 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. 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-tothe-extent-of-gain 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 (including under § 1.987– 

10(e)(5)(i)(B)(1)). 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’s (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. 

(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 


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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—(1) 

In general. Except as provided in 

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

(2) De minimis rule. Paragraph (c)(1) 

of this section does not apply in a 

taxable year of an owner in which the 

total amount of net unrecognized 

section 987 loss or deferred section 987 

loss of the owner and all members of the 

owner’s controlled group that would 

(but for the application of this paragraph 

(c)(2) and § 1.987–7(d)(2)(iii)) become 

suspended section 987 loss under 

paragraph (c)(1) of this section or 

§ 1.987–7(d) does not exceed the lesser 

of— 

(i) $3 million; or 

(ii) Two percent of the total amount 

of gross income of the owner and all 

members of the owner’s controlled 

group for the taxable year. 

(3) Taxable year of controlled group 

members—(i) In general. Except as 

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

section, for purposes of applying 

paragraph (c)(2) of this section with 

respect to an owner, suspended section 

987 loss and gross income of a member 

of the owner’s controlled group is 

determined by reference to the 

member’s suspended section 987 loss 

and gross income for its taxable year 

ending with or within the owner’s 

taxable year. 

(ii) Owner is a CFC. For purposes of 

applying paragraph (c)(2) of this section 

with respect to an owner that is a CFC, 

suspended section 987 loss and gross 

income of a member of the owner’s 

controlled group is determined by 

reference to the member’s suspended 

section 987 loss and gross income for its 

taxable year ending with or within the 

owner’s required year described in 

section 898(c)(1), without regard to 

section 898(c)(2). 

(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 

which an annual recognition election is 

in effect, an owner’s 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. 

At the beginning of the first taxable year 

in which a current rate election ceases 

to be in effect, an owner’s net 

accumulated unrecognized section 987 

loss and deferred section 987 loss are 

converted into suspended section 987 

loss. See paragraph (g)(3) of this section 

(Example 3) for an illustration of this 

rule. 

(e) Loss-to-the-extent-of-gain rule—(1) 

In general. An owner of a section 987 

QBU (or an original suspended loss 

QBU owner) only recognizes suspended 

section 987 loss to the extent described 

in this paragraph (e) (the loss-to-theextent-of-gain rule). See § 1.987–13(b) 

through (d) for rules requiring the 

recognition of additional suspended 

section 987 loss (after the application of 

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

connection with certain transactions. 

(2) Separate determination for each 

recognition grouping. The amount of 

suspended section 987 loss recognized 

is determined separately for the 

suspended section 987 loss in each 

recognition grouping. Because the 

recognition groupings generally 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-theextent-of-gain rule generally is applied 

on the basis of the initial assignment of 

section 987 gain or loss. 

(3) Amount of suspended section 987 

loss recognized. Except as provided in 

paragraph (e)(5) or (6) of this section, 

the amount of suspended section 987 

loss in each recognition grouping that 

an owner recognizes in a taxable year is 

equal to the sum (if positive) of the 

current year gain amount described in 

paragraph (e)(3)(i) of this section and 

the lookback gain amount described in 

paragraph (e)(3)(ii) of this section, but 

may not exceed the owner’s total 

cumulative suspended section 987 loss 

in the recognition grouping. If the sum 

of the current year gain amount and the 

lookback gain amount is negative, then 

the amount of suspended section 987 

loss recognized under this paragraph (e) 

is zero. See paragraphs (g)(1) and (2) of 

this section (Examples 1 and 2) for an 

illustration of this rule. 

(i) Current year gain amount. The 

current year gain amount described in 

this paragraph (e)(3)(i) is equal to the 

section 987 gain in the recognition 

grouping that is recognized by the 

owner in the taxable year, reduced 

(including below zero) by section 987 

loss (other than suspended section 987 

loss) in the recognition grouping that is 

recognized by the owner in the taxable 

year. 

(ii) Lookback gain amount. The 

lookback gain amount described in this 

paragraph (e)(3)(ii) is equal to the 

section 987 gain in the recognition 

grouping that was recognized by the 

owner in the lookback period, reduced 

(including below zero) by section 987 

loss (other than suspended section 987 

loss described in paragraph (e)(3)(iii) of 

this section) in the recognition grouping 

that was recognized by the owner in the 

lookback period. The total amount of 

suspended section 987 loss recognized 

by reason of the recognition of an 

amount of section 987 gain cannot, in 

any event, exceed the amount of section 

987 gain recognized. 

(iii) Suspended section 987 loss not 

taken into account—(A) In general. For 

purposes of applying paragraph (e)(3)(ii) 

of this section in a taxable year (the 

current taxable year), suspended section 

987 loss recognized during the lookback 

period is not taken into account if it was 

recognized under this paragraph (e) by 

reason of the recognition of section 987 


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gain that was recognized before the 

lookback period for the current taxable 

year. 

(B) Ordering rule. For purposes of this 

paragraph (e)(3)(iii), suspended section 

987 loss is treated as recognized by 

reason of the most recently recognized 

section 987 gain in the same recognition 

grouping. See paragraph (g)(2) of this 

section (Example 2) for an illustration of 

this rule. 

(iv) Lookback period—(A) In general. 

Except as provided in paragraph 

(e)(3)(iv)(B) of this section, the lookback 

period with respect to a taxable year of 

an owner means the three preceding 

taxable years of the owner (or, if the 

owner was not in existence for three 

preceding taxable years, each taxable 

year in which the owner existed), but it 

does not include any taxable year 

beginning before the transition date 

described in § 1.987–10(c)(1). 

(B) Taxable years in which both a 

current rate election and an annual 

recognition election are in effect. In a 

taxable year of an owner in which both 

a current rate election and an annual 

recognition election are in effect, the 

lookback period includes all prior 

taxable years of the owner in which 

both a current rate election and an 

annual recognition election were 

continuously in effect. 

(v) Anti-abuse rule. If an owner 

recognizes section 987 gain with a 

principal purpose of reducing the 

Federal income tax liability of the 

owner (or its U.S. shareholders or 

partners, as applicable), including over 

multiple taxable years, the section 987 

gain is disregarded for purposes of this 

paragraph (e)(3). For example, this 

paragraph (e)(3)(v) may apply if an 

owner that is a CFC recognizes section 

987 gain that is offset by a tax attribute 

of one of the CFC’s U.S. shareholders 

that would not otherwise be used (such 

as excess foreign tax credits with respect 

to section 951A category income, or a 

tested loss). In determining whether a 

principal purpose described in this 

paragraph (e)(3)(v) exists, all relevant 

facts and circumstances are considered, 

including the extent to which the 

transaction giving rise to the recognition 

of section 987 gain resulted in a 

sustained economic contraction of the 

section 987 QBU over a period of at 

least twelve months. 

(4) Suspended section 987 loss 

recognized with respect to each section 

987 QBU and suspended section 987 

loss QBU. The amount of suspended 

section 987 loss in a recognition 

grouping that is recognized by an owner 

in a taxable year is treated as 

attributable to each section 987 QBU or 

successor suspended loss QBU in 

proportion to the QBU’s suspended 

section 987 loss in that recognition 

grouping. 

(5) Section 381(a) transactions—(i) In 

general. Except as provided in 

paragraph (e)(5)(ii) of this section (or to 

the extent that other limitations apply), 

if one corporation (acquiring 

corporation) acquires the assets of 

another corporation (transferor 

corporation) in a transaction described 

in section 381(a), section 987 gain or 

loss recognized by the transferor 

corporation during the lookback period 

is taken into account in determining the 

lookback gain amount of the acquiring 

corporation in taxable years ending after 

the transaction under paragraph 

(e)(3)(ii) of this section. If the lookback 

period for a taxable year of the acquiring 

corporation is determined under 

paragraph (e)(3)(iv)(A) of this section, 

the lookback period includes each 

taxable year of the transferor 

corporation ending with or within the 

current taxable year of the acquiring 

corporation or during the acquiring 

corporation’s lookback period. If the 

lookback period for a taxable year of the 

acquiring corporation is determined 

under paragraph (e)(3)(iv)(B) of this 

section, the lookback period includes 

only taxable years of the transferor 

corporation in which both an annual 

recognition election and a current rate 

election were continuously in effect 

before the transaction (and only if both 

elections were continuously in effect 

from the date of the transaction through 

the current taxable year). 

(ii) Limitation for inbound 

nonrecognition transactions. If a foreign 

corporation ceases to exist in a 

transaction described in § 1.987– 

8(c)(1)(ii) (inbound section 332 

liquidation) or § 1.987–8(c)(2)(ii) 

(inbound reorganization), section 987 

gain recognized by the foreign 

corporation before the transaction is 

disregarded for purposes of applying 

paragraph (e)(3) of this section in 

taxable years ending after the 

transaction. 

(6) Consolidated group members—(i) 

In general. All members of a 

consolidated group are treated as a 

single owner for purposes of applying 

this paragraph (e). 

(ii) Suspended section 987 losses 

arising in separate return limitation 

years. This paragraph (e)(6)(ii) applies to 

suspended section 987 losses arising in 

a separate return limitation year (SRLY, 

as defined in § 1.1502–1(f)) or treated as 

arising in a SRLY under the principles 

of § 1.1502–21(c) (SRLY section 987 

losses). The aggregate of a member’s 

SRLY section 987 losses that are 

included in the determination of 

consolidated taxable income for all 

consolidated return years of the group 

may not exceed the aggregate 

consolidated net income for all 

consolidated return years of the group 

determined by reference to only the 

member’s items of section 987 gain or 

loss, including the member’s section 

987 losses actually absorbed by the 

group in the taxable year (whether or 

not absorbed by the member). For 

purposes of applying this paragraph 

(e)(6)(ii), the principles of § 1.1502– 

21(c) (including the SRLY subgroup 

principles of § 1.1502–21(c)(2)) apply 

with appropriate adjustments. 

(f) Recognition groupings. The term 

recognition grouping means the section 

987 gain or loss (including section 987 

gain or loss that is recognized under 

§ 1.987–5, deferred section 987 gain or 

loss, suspended section 987 loss, or 

pretransition gain or loss that is 

recognized under § 1.987–10(e)(5)(ii)) 

described in paragraph (f)(1) or (2) of 

this section, as applicable. If an owner 

has suspended section 987 loss with 

respect to a terminating QBU in a 

taxable year ending before the transition 

date described in § 1.987–10(c)(1), 

section 987 gain or loss of the owner 

(other than section 987 gain or loss with 

respect to the terminating QBU) is 

assigned to a recognition grouping based 

on the method that is used to determine 

the source and character of section 987 

gain or loss for that taxable year. 

(1) Sourcing and section 904 category. 

Except as provided in paragraph (f)(2) of 

this section, a recognition grouping 

includes only section 987 gain or loss 

that is initially assigned to one of the 

following statutory and residual 

groupings— 

(i) U.S. source income; or 

(ii) Foreign source income in a single 

section 904 category. 

(2) Statutory and residual groupings 

for CFC owners. In the case of an owner 

that is a controlled foreign corporation, 

a recognition grouping includes only 

section 987 gain or loss that is initially 

assigned to one of the statutory and 

residual groupings described in 

paragraph (f)(1) of this section and that 

is also initially assigned to one of the 

following statutory and residual 

groupings— 

(i) Tentative tested income; 

(ii) Each separate subpart F income 

group (as defined in § 1.960– 

1(d)(2)(ii)(B)); 

(iii) Income described in section 

952(b) (ECI that is excluded from 

subpart F income); or 

(iv) Income not described in 

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

section. 


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(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. CFC is also subject 

to an election under § 1.987–6(b)(2)(i)(C) 

(treating section 987 gain or loss relating 

to passive foreign personal holding 

company income as attributable to 

section 988 transactions). An election 

has not been made under § 1.951A– 

2(c)(7)(viii) (GILTI high-tax exclusion) 

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 the three 

years before year 2, CFC did not 

recognize any 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. Another member of CFC’s 

controlled group owns a section 987 

QBU with respect to which $10 million 

of net unrecognized section 987 loss 

becomes suspended section 987 loss 

under paragraph (c)(1) of this section in 

year 2. 

(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, in year 2 CFC would 

recognize $50 of section 987 loss with 

respect to QBU1 (25% of $200) and 

$150 of 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. The de minimis rule 

under paragraph (c)(2) of this section 

does not apply because a member of 

CFC’s controlled group has more than 

$3 million of section 987 loss that is 

suspended in year 2 under paragraph 

(c)(1) of this section. 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 is treated as foreign 

currency loss of the CFC attributable to 

section 988 transactions not directly 

related to the business needs of the CFC 

because an election under § 1.987– 

6(b)(2)(i)(C) is in effect. 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 income in a separate subpart F 

income group for foreign currency gains 

of CFC 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) Current year gain amount and 

lookback gain amount. Under paragraph 

(e)(3) of this section, in year 2, CFC 

recognizes suspended section 987 loss 

in a recognition grouping to the extent 

of the sum of the current year gain 

amount described in paragraph (e)(3)(i) 

of this section and the lookback gain 

amount described in paragraph (e)(3)(ii) 

of this section. In the recognition 

grouping of foreign source general 

category tentative tested income, the 

current year gain amount described in 

paragraph (e)(3)(i) of this section is 

equal to the section 987 gain of $100 

recognized by CFC in year 2 with 

respect to QBU3. The current year gain 

amount for all other recognition 

groupings is zero. During the lookback 

period (the three years before year 2), 

CFC did not recognize any section 987 

gain or loss. Therefore, the lookback 

gain amount described in paragraph 

(e)(3)(ii) of this section is zero for all 

recognition groupings. 

(D) Recognition of suspended section 

987 loss. In year 2, CFC has $50 of total 

cumulative suspended section 987 loss 

in the recognition grouping of foreign 

source passive category income in a 

separate subpart F income group for 

foreign currency gains of CFC and $150 

of total cumulative suspended section 

987 loss in the recognition grouping of 

foreign source general category tentative 

tested income. In the recognition 

grouping of foreign source general 

category tentative tested income, CFC 

has a current year gain amount of $100 

and a lookback gain amount of zero 

($100 in total). Therefore, CFC 

recognizes $100 of suspended section 

987 loss in that recognition grouping. 

Under paragraph (e)(4) of this section, 

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 

assigned to foreign source passive 

category income in the subpart F 

income group for foreign currency gains 

of CFC with respect to QBU1 and $50 

of suspended section 987 loss assigned 

to foreign source general category 

tentative tested income with respect to 

QBU2) remain suspended. 

(2) Example 2: Recognition of 

suspended section 987 loss by reason of 

gain recognized during the lookback 

period—(i) Facts. CFC is a controlled 

foreign corporation that has the U.S. 

dollar as its functional currency. CFC 

owns QBU1, a section 987 QBU with the 

euro as its functional currency, and CFC 

has no other QBUs. Assume that all 

section 987 gain or loss (including 

suspended section 987 loss) is assigned 

to the same recognition grouping. CFC 

is subject to a current rate election but 

not an annual recognition election. 

Before year 1, QBU1 does not have 

cumulative suspended section 987 loss. 

In year 1, CFC recognizes section 987 

gain of $10 million with respect to 

QBU1. In year 3, CFC recognizes section 

987 gain of $15 million with respect to 


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QBU1. In year 4, QBU1 has net 

unrecognized section 987 loss, and $10 

million of the net unrecognized section 

987 loss becomes suspended section 987 

loss under paragraph (c) of this section. 

In year 6, an additional $10 million of 

net unrecognized section 987 loss with 

respect to QBU1 becomes suspended 

section 987 loss under paragraph (c) of 

this section. 

(ii) Analysis—(A) Recognition of 

suspended section 987 loss in year 4. In 

year 4, CFC’s total cumulative 

suspended section 987 loss is $10 

million (that is, the loss that becomes 

suspended in year 4). The current year 

gain amount under paragraph (e)(3)(i) of 

this section is zero, because CFC does 

not recognize section 987 gain in year 4. 

The lookback period under paragraph 

(e)(3)(iv)(A) of this section is three years 

(years 1 through 3). The lookback gain 

amount under paragraph (e)(3)(ii) of this 

section is $25 million (the sum of the 

$10 million of section 987 gain 

recognized in year 1 and the $15 million 

of section 987 gain recognized in year 

3). Therefore, under paragraph (e)(3) of 

this section, CFC recognizes suspended 

section 987 loss of $10 million. Under 

paragraph (e)(3)(iii)(B) of this section, 

the suspended section 987 loss is 

considered to be recognized by reason of 

the section 987 gain recognized in year 

3, which is the most recent taxable year 

in which section 987 gain was 

recognized. 

(B) Recognition of suspended section 

987 loss in year 6. In year 6, CFC’s total 

cumulative suspended section 987 loss 

is $10 million (that is, the loss that 

becomes suspended in year 6). The 

current year gain amount under 

paragraph (e)(3)(i) of this section is zero, 

because CFC does not recognize section 

987 gain in year 6. The lookback period 

under paragraph (e)(3)(iv)(A) of this 

section is three years (years 3 through 

5). The lookback gain amount under 

paragraph (e)(3)(ii) of this section is $5 

million (the sum of the section 987 gain 

of $15 million recognized in year 3 and 

the suspended section 987 loss of $10 

million recognized in year 4 by reason 

of the section 987 gain recognized in 

year 3). Therefore, under paragraph 

(e)(3) of this section, CFC recognizes $5 

million of suspended section 987 loss in 

year 6. 

(iii) Alternative facts. Assume the 

facts are the same as described in 

paragraph (g)(2)(i) of this section, with 

the following modifications. In year 1, 

CFC recognizes section 987 gain of $10 

million with respect to QBU1. CFC does 

not recognize section 987 gain in year 3. 

In year 4, $10 million of net 

unrecognized section 987 loss with 

respect to QBU1 becomes suspended 

section 987 loss under paragraph (c) of 

this section. In year 5, CFC recognizes 

section 987 gain of $15 million with 

respect to QBU1. In year 6, $10 million 

of net unrecognized section 987 loss 

with respect to QBU1 becomes 

suspended section 987 loss under 

paragraph (c) of this section. 

(iv) Analysis of alternative facts—(A) 

Recognition of suspended section 987 

loss in year 4. In year 4, CFC’s total 

cumulative suspended section 987 loss 

is $10 million (that is, the loss that 

becomes suspended in year 4). The 

current year gain amount under 

paragraph (e)(3)(i) of this section is zero, 

because CFC does not recognize section 

987 gain in year 4. The lookback period 

under paragraph (e)(3)(iv)(A) of this 

section is three years (years 1 through 

3). The lookback gain amount under 

paragraph (e)(3)(ii) of this section is $10 

million (equal to the $10 million of 

section 987 gain recognized in year 1). 

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

section, CFC recognizes suspended 

section 987 loss of $10 million in year 

4. Under paragraph (e)(3)(iii)(B) of this 

section, the suspended section 987 loss 

is considered to be recognized by reason 

of the section 987 gain recognized in 

year 1, which is the most recent taxable 

year in which section 987 gain was 

recognized. 

(B) Recognition of suspended section 

987 loss in year 6. In year 6, CFC’s total 

cumulative suspended section 987 loss 

is $10 million (that is, the loss that 

becomes suspended in year 6). The 

current year gain amount under 

paragraph (e)(3)(i) of this section is zero 

because CFC does not recognize section 

987 gain in year 6. The lookback period 

under paragraph (e)(3)(iv)(A) of this 

section is three years (years 3 through 

5). The lookback gain amount under 

paragraph (e)(3)(ii) of this section is $15 

million (equal to the section 987 gain of 

$15 million recognized in year 5). Under 

paragraph (e)(3)(iii)(A) of this section, 

the suspended section 987 loss 

recognized in year 4 is not taken into 

account in determining the lookback 

gain amount, because it was recognized 

by reason of the section 987 gain 

recognized in year 1 (before the 

beginning of the lookback period for 

year 6). Therefore, under paragraph 

(e)(3) of this section, CFC recognizes $10 

million of suspended section 987 loss in 

year 6. 

(3) Example 3: 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. 

§ 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 

of 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. 


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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 

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— 

(i) In general. 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 or suspended in the taxable 

year of the deferral event becomes 

deferred section 987 gain or loss of the 

original deferral QBU owner. 

Suspended section 987 loss does not 

become deferred section 987 loss under 

this paragraph (b)(2). 

(ii) Deferred section 987 gain or loss 

attributable to a successor deferral QBU. 

A portion of the deferred section 987 

gain or loss described in paragraph 

(b)(2)(i) of this section 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) or under 

§ 1.987–7(d)(1)(ii) (in the case of a 

partnership). 

(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 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 (the deemed 

transaction), then, in accordance with 

the rules of this section and § 1.987– 

13(h)— 

(i) The original deferral QBU owner 

recognizes its outstanding deferred 

section 987 gain or loss, or suspends its 

outstanding deferred section 987 loss, to 

the extent it would have recognized or 

suspended net unrecognized section 987 

gain or loss as a result of the deemed 

transaction; and 

(ii) Each section 987 QBU is a 

successor deferral QBU to the extent it 

would have been after 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 after the deemed 

transaction; 

(iii) Each eligible QBU is a successor 

suspended loss QBU to the extent it 

would have been after 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 after 

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 


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100216 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 

QBU and the original deferral QBU 

owner may also be an original 

suspended loss QBU owner. 

(e) Anti-abuse rule. 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 outstanding 

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’ 

outstanding deferred section 987 gain or 

loss in that recognition grouping. 

(2) Separated QBU. The outstanding 

deferred section 987 gain or loss of a 

separated QBU in each recognition 

grouping for a taxable year is equal to 

the separating QBU’s outstanding 

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. 

(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: 

(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) (individual or 

corporation ceases to be a direct owner 

of a section 987 QBU); or 

(B) [Reserved] 

(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 paragraph (g)(1)(i) of this section. 

(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 

paragraph (g)(1)(i) of this section 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 paragraph (g)(1)(i) of this 

section 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 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 


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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 its net 

unrecognized section 987 gain (which 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 with net unrecognized 

section 987 loss to a member of the 

controlled group when a current rate 

election is in effect—(i) Facts. The facts 

are the same as in paragraph (h)(1) of 

this section (Example 1) except that a 

current rate election is in effect for the 

taxable year (and an annual recognition 

election is not in effect) and, at the time 

of the contribution, Business A has net 

unrecognized section 987 loss of $100x. 

Business A is engaged in the business of 

manufacturing Product X before the 

contribution, and Business B is engaged 

in the same business after the 

contribution. After the contribution, the 

Ö100x of assets that are reflected on the 

books and records of DC1’s home office 

are not used in the business of 

manufacturing Product X. 

(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 its net unrecognized section 

987 loss 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 cumulative 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. After the 

transaction, DC1 may recognize its 

suspended section 987 loss with respect 

to Business B under § 1.987–11(e) or 

§ 1.987–13(b) through (d), as applicable. 

(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) 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 

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 and cumulative suspended 

section 987 loss of $50x. After the 

contribution, Entity A continues to 

conduct the same trade or 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 § 1.987–13(b)(1)(i), 

Business B is a successor suspended 

loss QBU because, immediately after the 


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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 DC1’s 

cumulative suspended section 987 loss 

with respect to Business A becomes 

suspended section 987 loss of DC1 with 

respect to Business B. 

(C) 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 

remittance proportion of 0.25 of DC2 

with respect to Business B for the 

taxable year as determined under 

§ 1.987–5(b). In addition, under § 1.987– 

11(e), DC1 recognizes its cumulative 

suspended section 987 loss to the extent 

of the deferred section 987 gain 

recognized in the same recognition 

grouping. 

§ 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. 

However, this paragraph (b) does not 

apply to a termination that occurs in 

connection with a transaction described 

in paragraph (f) or (g) of this section. 

(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 (determined 

immediately after the transaction), then 

the eligible QBU is a successor 

suspended loss QBU and the rules 

provided 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 section 

987 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. However, this 

paragraph (c) does not apply to a 

termination that occurs in connection 

with a transaction described in 

paragraph (e), (f), or (g) of this section. 

(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 (determined 

immediately after the transaction), then 

the subsequent successor is a successor 

suspended loss QBU and the rules 

provided 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 section 

987 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 


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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 attributable 

to any successor suspended loss QBU 

(but it continues to be suspended 

section 987 loss of the original 

suspended loss QBU owner). As a 

result, the suspended section 987 loss 

can be recognized by the original 

suspended loss QBU owner under 

§ 1.987–11(e) but cannot be recognized 

under paragraph (b)(2), (c)(2), or (d) of 

this section. 

(f) Owner ceases to exist. If the owner 

of a section 987 QBU with suspended 

section 987 loss or an original 

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 of the owner that is not 

recognized after application of the lossto-the-extent-of-gain rule in § 1.987– 

11(e) is eliminated and cannot be 

recognized. 

(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 § 1.987–8(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 loss-to-the-extent-of-gain rule in 

§ 1.987–11(e) is eliminated and cannot 

be recognized. 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) [Reserved] 

(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. 

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 and partnership interests in 

a partnership. 

(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. 


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(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. Business A 

has cumulative suspended section 987 

loss under § 1.987–11(b) of $500x. 

(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 

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. Business A has cumulative 

suspended section 987 loss under 

§ 1.987–11(b) of $500x. 

(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 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 (which are 

the only books and records maintained 

by CFC1). CFC1 continues to use those 

assets in the same trade or business after 

the contribution (Business B). Neither a 

current rate election nor an annual 

recognition election is in effect. 

Business A has net unrecognized 

section 987 loss of $500x. 

(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 (Business B) 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 B 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 B (which 

is the only set of books and records 

maintained by CFC1), Business B was 

an eligible QBU that continued to carry 

on the same trade or business as 

Business A did before the contribution, 

and Business B 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). See § 1.987–1(b)(4)(ii) 

(providing that, if a corporation is solely 

engaged in activities that constitute a 

trade or business, and the corporation 

maintains only one set of books and 

records, the activities (but not the 

corporation) are a qualified business 

unit). 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 of DC1 with respect to 

Business B. 

§ 1.987–14 Section 987 hedging 

transactions. 

(a) Overview. This section provides 

rules relating to section 987 hedging 

transactions. Paragraph (b) of this 

section provides the definition of a 

section 987 hedging transaction. 

Paragraph (c) of this section provides 

identification requirements for section 

987 hedging transactions. Paragraph (d) 

of this section provides rules relating to 

the taxation of section 987 hedging 

transactions. Paragraph (e) of this 

section provides examples illustrating 

the rules of this section. 

(b) Section 987 hedging transaction— 

(1) In general. A section 987 hedging 

transaction is a financial instrument or 

a combination or series of financial 

instruments (a hedge), that is entered 

into by the owner of a section 987 QBU 

as part of the normal course of the 

owner’s trade or business for the 

purpose of managing exchange rate risk 

with respect to all or part of the owner’s 

net investment in the section 987 QBU 

(the hedged QBU), provided that the 

requirements of paragraph (b)(2) of this 


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section are met. If only part of a 

financial instrument (or combination or 

series of financial instruments) is 

described in the preceding sentence, 

that part is treated as a section 987 

hedging transaction for purposes of this 

section. 

(2) Requirements. A transaction is a 

section 987 hedging transaction 

described in paragraph (b)(1) of this 

section for a taxable year only if the 

following requirements are met. 

(i) Identification. The hedge must be 

identified as a section 987 hedging 

transaction with respect to the hedged 

QBU under paragraph (c) of this section. 

The financial instrument or instruments 

that comprise the hedge must not be 

identified as a section 987 hedging 

transaction with respect to any other 

section 987 QBU. If only part of a 

financial instrument (or combination or 

series of financial instruments) is a 

section 987 hedging transaction, that 

part must be clearly identified. 

(ii) Current rate election. A current 

rate election must be in effect for the 

taxable year. 

(iii) Mark-to-market method of 

accounting. Section 988 gain or loss of 

the owner with respect to the hedge 

must be accounted for under a mark-tomarket method of accounting (for 

example, under section 1256). In 

addition, if a member of the owner’s 

controlled group is a party to the hedge, 

any section 988 gain or loss of the 

controlled group member with respect 

to the hedge must be accounted for 

under a mark-to-market method of 

accounting. 

(iv) Treatment under U.S. generally 

accepted accounting principles. Foreign 

currency gain or loss on the hedge must 

be properly accounted for under 

generally accepted accounting 

principles as a cumulative foreign 

currency translation adjustment to 

shareholders’ equity. 

(v) Hedge entered into by owner of the 

hedged QBU. The hedge must be 

entered into by the owner of the hedged 

QBU (and not by a section 987 QBU of 

the owner). In the case of a hedged QBU 

that is owned by a member of a 

consolidated group, the hedge must be 

entered into by the member that owns 

the hedged QBU. 

(3) Anti-abuse rule. If a taxpayer 

enters into a hedge or a related 

transaction with a principal purpose of 

effectively converting section 987 gain 

or loss into section 988 gain or loss (or 

another type of income or loss) of the 

owner or a related party, the hedge is 

not treated as a section 987 hedging 

transaction. 

(4) Partial termination of a section 

987 hedging transaction. If only part of 

a financial instrument is a section 987 

hedging transaction, and a part of the 

financial instrument is terminated or 

disposed of, a proportionate part of the 

section 987 hedging transaction is 

treated as terminated or disposed of. 

(c) Identification requirements—(1) In 

general. The owner of a hedged QBU 

must clearly identify the hedge as a 

section 987 hedging transaction with 

respect to the hedged QBU in its books 

and records on or before the close of the 

day on which the owner entered into 

the hedge. The identification must meet 

the requirements of § 1.1221–2(f)(4) and 

must include the following 

information— 

(i) The date on which the hedge is 

entered into by the owner of the hedged 

QBU and the date on which the hedge 

is identified as a section 987 hedging 

transaction; 

(ii) A description of the hedge; and 

(iii) Identification of the hedged QBU. 

(2) Inadvertent error. If a hedge is not 

identified under paragraph (c)(1) of this 

section, but the hedge would otherwise 

qualify as a section 987 hedging 

transaction with respect to a hedged 

QBU within the meaning of paragraph 

(b) of this section and the taxpayer can 

demonstrate to the satisfaction of the 

Commissioner that its failure to identify 

the hedge was due to inadvertent error, 

the taxpayer may treat the hedge as a 

section 987 hedging transaction if all of 

the owner’s hedges described in 

paragraph (b) of this section in all open 

years are being treated on either original 

or, if necessary, amended returns as 

section 987 hedging transactions subject 

to the rules of paragraph (d) of this 

section. 

(d) Taxation of section 987 hedging 

transactions—(1) Hedging gain or loss 

with respect to a hedged QBU. If the 

owner of a section 987 QBU has entered 

into a section 987 hedging transaction 

with respect to the section 987 QBU, the 

owner’s hedging gain or loss with 

respect to the hedged QBU for a taxable 

year is equal to the gain or loss that the 

owner would (but for the application of 

this paragraph (d)) recognize under 

section 988 with respect to the section 

987 hedging transaction in the taxable 

year under the mark-to-market method 

of accounting described in paragraph 

(b)(2)(iii) of this section (including gain 

or loss that would be recognized in 

connection with a complete or partial 

disposition or termination of the section 

987 hedging transaction). If only part of 

a financial instrument is a section 987 

hedging transaction, a proportionate 

part of the gain or loss that would (but 

for the application of this paragraph (d)) 

be recognized under section 988 with 

respect to the financial instrument in 

the taxable year is treated as hedging 

gain or loss with respect to the hedged 

QBU. See paragraph (d)(3) of this 

section for rules relating to the 

determination of hedging gain or loss in 

the taxable year in which the hedged 

QBU terminates. 

(2) Adjustment to unrecognized 

section 987 gain or loss for the taxable 

year—(i) Hedging loss. In a taxable year 

in which an owner has hedging loss 

with respect to a hedged QBU and has 

unrecognized section 987 gain for the 

taxable year with respect to the hedged 

QBU (as determined under § 1.987–4(d), 

without regard to this paragraph (d)), 

the unrecognized section 987 gain for 

the taxable year is reduced (but not 

below zero) by the amount of the 

hedging loss. The amount of hedging 

loss that reduces unrecognized section 

987 gain under this paragraph (d)(2)(i) is 

not recognized under section 988. Any 

hedging loss that does not reduce 

unrecognized section 987 gain under 

this paragraph (d)(2)(i) is recognized 

under section 988. 

(ii) Hedging gain. In a taxable year in 

which an owner has hedging gain with 

respect to a hedged QBU and has 

unrecognized section 987 loss for the 

taxable year with respect to the hedged 

QBU (as determined under § 1.987–4(d), 

without regard to this paragraph (d)), 

the unrecognized section 987 loss for 

the taxable year is reduced (but not 

below zero) by the amount of the 

hedging gain. The amount of hedging 

gain that reduces unrecognized section 

987 loss under this paragraph (d)(2)(ii) 

is not recognized under section 988. 

Any hedging gain that does not reduce 

unrecognized section 987 loss under 

this paragraph (d)(2)(ii) is recognized 

under section 988. 

(3) Termination of a hedged QBU. If 

the owner of a section 987 QBU has 

entered into a section 987 hedging 

transaction with respect to the section 

987 QBU and the hedged QBU 

terminates, the owner’s hedging gain or 

loss with respect to the hedged QBU for 

the taxable year is equal to the hedging 

gain or loss that the owner would (but 

for the application of this paragraph (d)) 

recognize with respect to the section 

987 hedging transaction under the markto-market method of accounting 

described in paragraph (b)(2)(iii) of this 

section if the taxable year ended on the 

termination date. Appropriate 

adjustments must be made to prevent 

the section 988 gain or loss from being 

taken into account again after it is 

applied to reduce unrecognized section 

987 gain or loss under this paragraph 

(d). 

(e) Examples. The following examples 

illustrate the application of this section. 


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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. A 

current rate election is in effect for years 

1 and 2, but no other elections are in 

effect. In year 1, DC1 had net 

unrecognized section 987 loss 

(determined under § 1.987–4(b)) of 

$1,000x with respect to Business A, and 

Business A did not make a remittance 

in year 1. As a result, in year 2, DC1’s 

net accumulated unrecognized section 

987 loss from prior taxable years 

(determined under § 1.987–4(c)) was 

$1,000x. In year 2, DC1 had 

unrecognized section 987 loss for the 

taxable year (determined under § 1.987– 

4(d) before the application of paragraph 

(d) of this section) of $500x. 

(1) Example 1: Section 987 hedging 

transaction—(i) Facts. In year 2, DC1 

entered into a six-month foreign 

currency forward contract with an 

unrelated bank in the normal course of 

DC1’s trade or business for the purpose 

of managing exchange rate risk with 

respect to DC1’s net investment in 

Business A. On the same day, DC1 

identified the forward contract as a 

section 987 hedging transaction with 

respect to Business A under paragraph 

(c) of this section. Under generally 

accepted accounting principles, 

currency gain or loss from the forward 

contract is accounted for as a 

cumulative translation adjustment to 

shareholder’s equity. For Federal 

income tax purposes, DC1 accounts for 

section 988 gain or loss with respect to 

the forward contract under a mark-tomarket method of accounting. But for 

the application of paragraph (d) of this 

section, DC1 would recognize $400x of 

section 988 gain with respect to the 

forward contract. 

(ii) Analysis—(A) Qualification of the 

hedge as a section 987 hedging 

transaction. The forward contract 

qualifies as a section 987 hedging 

transaction under paragraph (b) of this 

section because it is a financial 

instrument that manages DC1’s 

exchange rate risk with respect to 

Business A (the hedged QBU) as part of 

the normal course of DC1’s trade or 

business, and the hedge meets the 

requirements of paragraph (b)(2) of this 

section. 

(B) Treatment of the section 987 

hedging transaction. But for the 

application of paragraph (d) of this 

section, DC1 would recognize $400x of 

section 988 gain with respect to the 

forward contract in year 2. Therefore, 

DC1 has $400x of hedging gain in year 

2. In year 2, DC1 had unrecognized 

section 987 loss of $500x for the taxable 

year (determined under § 1.987–4(d) 

before the application of paragraph (d) 

of this section). Therefore, under 

paragraph (d)(2)(ii) of this section, DC1’s 

unrecognized section 987 loss for the 

taxable year of $500x is reduced by the 

$400x of hedging gain. Accordingly, 

DC1 has unrecognized section 987 loss 

of $100x for the taxable year with 

respect to Business A. Under § 1.987– 

4(b), DC1 has $1,100x of net 

unrecognized section 987 loss in year 2 

(equal to the sum of its net accumulated 

section 987 loss of $1,000x from prior 

taxable years and its unrecognized 

section 987 loss for the taxable year of 

$100x). DC1 does not recognize its 

hedging gain under section 988 because 

all of the hedging gain reduces 

unrecognized section 987 loss for the 

taxable year. 

(2) Example 2: Excess hedging gain 

from a section 987 hedging 

transaction—(i) Facts. The facts are the 

same as in paragraph (e)(1) of this 

section (Example 1) except that, but for 

the application of paragraph (d) of this 

section, DC1 would recognize $600x of 

section 988 gain with respect to the 

forward contract. 

(ii) Analysis. Under paragraph 

(d)(2)(ii) of this section, DC1’s 

unrecognized section 987 loss for the 

taxable year of $500x is reduced by the 

hedging gain, but not below zero. 

Accordingly, $500x of the hedging gain 

is applied to reduce DC1’s unrecognized 

section 987 loss for the taxable year to 

zero. DC1 has $1,000x of net 

unrecognized section 987 loss in year 2 

under § 1.987–4(b) (equal to its net 

accumulated section 987 loss of $1,000x 

from prior taxable years). The $500x 

hedging gain that reduces unrecognized 

section 987 loss for the taxable year is 

not recognized under section 988. The 

excess amount of hedging gain ($100x) 

is recognized by DC1 under section 988. 

§ 1.987–15 Applicability date. 

(a) Applicability date of the section 

987 regulations—(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 immediately before 

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. 

(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 for the first taxable 

year to which the taxpayer chooses to 

apply the section 987 regulations. 

(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 

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 


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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100223 

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) of this section and 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. 

(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. 

■ Par. 9. Section 1.988–1 is amended 

by: 

■ a. Removing and reserving paragraph 

(a)(4); 

■ b. Revising paragraph (a)(10)(i); 

■ c. Removing the language ‘‘1988’’ in 

the fourth sentence of paragraph 

(a)(1)(iii) and adding the language 

‘‘2025’’ in its place; and 

■ d. Revising paragraph (i). 

The revisions read as follows: 

§ 1.988–1 Certain definitions and special 

rules. 

(a) * * * 

(10) * * * 

(i) In general. Except as provided in 

paragraph (a)(10)(ii) of this section, 

disregarded transactions between or 

among the taxpayer and/or qualified 

business units of that taxpayer (‘‘intrataxpayer transactions’’) are not section 

988 transactions. See section 987 and 

the regulations thereunder. 

* * * * * 

(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) Paragraph (a)(10)(ii). Generally, 

paragraph (a)(10)(ii) of this section 

applies to taxable years beginning after 

December 31, 2024. However, if 

pursuant to § 1.987–15(b), a taxpayer 

chooses to apply §§ 1.987–1 through 

1.987–15 to a taxable year before the 

first taxable year described in § 1.987– 

15(a)(1), then paragraph (a)(10)(ii) of 

this section applies to that taxable year. 

See § 1.988–1(i), as contained in 26 CFR 

in part 1 in effect on April 1, 2024, for 

a prior applicability date for paragraph 

(a)(10)(ii) of this section. 

■ Par. 10. 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 § 1.987–15(b), a taxpayer 

chooses to apply §§ 1.987–1 through 

1.987–15 to a taxable year before the 

first taxable year described in § 1.987– 

15(a)(1), then paragraph (b)(2)(i) of this 

section applies to that taxable year. 

* * * * * 

■ Par. 11. Section 1.989(a)–1 is 

amended by: 

■ a. Removing and reserving paragraph 

(b)(2)(i)(C). 

■ b. Revising paragraphs (b)(4), (d)(3) 

and (4). 

The revisions read as follows: 

§ 1.989(a)–1 Definition of a qualified 

business unit. 

* * * * * 

(b) * * * 

(4) Applicability date. Generally, 

paragraph (b)(2)(i) of this section applies 

to taxable years beginning after 

December 31, 2024. However, if 

pursuant to § 1.987–15(b), a taxpayer 

chooses to apply §§ 1.987–1 through 

1.987–15 to a taxable year before the 

first taxable year described in § 1.987– 

15(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, 2024, 

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. 

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 § 1.987–15(b), a taxpayer 

applies §§ 1.987–1 through 1.987–15 to 

a taxable year before the first taxable 

year described in § 1.987–15(a)(1), then 

paragraph (d)(3) 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, 2024, for a prior 

applicability date for paragraph (d)(3) of 

this section. 

* * * * * 

■ Par. 12. Section 1.1502–13 is 

amended by revising paragraph (j)(9) 

and adding paragraphs (j)(10) and (l)(7) 

to read as follows: 

§ 1.1502–13 Intercompany transactions. 

* * * * * 

(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. 


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(10) Examples. The operating rules of 

this paragraph (j) are illustrated 

generally throughout this section, and 

by the following examples. 

(i) Example 1. Intercompany sale 

followed by section 351 transfer to 

member—(A) Facts. S holds land for 

investment with a basis of $70. On 

January 1 of Year 1, S sells the land to 

M for $100. M also holds the land for 

investment. On July 1 of Year 3, M 

transfers the land to B in exchange for 

all of B’s stock in a transaction to which 

section 351 applies. Under section 358, 

M’s basis in the B stock is $100. B holds 

the land for sale to customers in the 

ordinary course of business and, under 

section 362(b), B’s basis in the land is 

$100. On December 1 of Year 5, M sells 

20% of the B stock to X for $22. In an 

unrelated transaction on July 1 of Year 

8, B sells 20% of the land for $22. 

(B) Definitions. Under paragraph 

(b)(1) of this section, S’s sale of the land 

to M and M’s transfer of the land to B 

are both intercompany transactions. S is 

the selling member and M is the buying 

member in the first intercompany 

transaction, and M is the selling 

member and B is the buying member in 

the second intercompany transaction. M 

has no intercompany items under 

paragraph (b)(2) of this section. Because 

B acquired the land in an intercompany 

transaction, B’s items from the land are 

corresponding items to be taken into 

account under this section. Under the 

successor asset rule of paragraph (j)(1) of 

this section, references to the land 

include references to M’s B stock. Under 

the successor person rule of paragraph 

(j)(2) of this section, references to M 

include references to B with respect to 

the land. 

(C) Timing and attributes resulting 

from the stock sale. Under paragraph 

(c)(3) of this section, M is treated as 

owning and selling B’s stock for 

purposes of the matching rule even 

though, as divisions, M could not own 

and sell stock in B. Under paragraph 

(j)(3) of this section, both M’s B stock 

and B’s land can cause S’s 

intercompany gain to be taken into 

account under the matching rule. Thus, 

S takes $6 of its gain into account in 

Year 5 to reflect the $6 difference 

between M’s $2 gain taken into account 

from its sale of B stock and the $8 

recomputed gain. Under paragraph (j)(4) 

of this section, the attributes of this gain 

are determined by treating S, M, and B 

as divisions of a single corporation. 

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

S’s $6 gain and M’s $2 gain are treated 

as long-term capital gain. The gain 

would be capital on a separate entity 

basis (assuming that section 341 does 

not apply), and this treatment is not 

inconsistent with treating S, M, and B 

as divisions of a single corporation 

because the stock sale and subsequent 

land sale are unrelated transactions and 

B remains a member following the sale. 

(D) Timing and attributes resulting 

from the land sale. Under paragraph 

(j)(3) of this section, S takes $6 of its 

gain into account in Year 8 under the 

matching rule to reflect the $6 

difference between B’s $2 gain taken 

into account from its sale of an interest 

in the land and the $8 recomputed gain. 

Under paragraph (j)(4) of this section, 

the attributes of this gain are determined 

by treating S, M, and B as divisions of 

a single corporation and taking into 

account the activities of S, M, and B 

with respect to the land. Thus, both S’s 

gain and B’s gain might be ordinary 

income as a result of B’s activities. (If B 

subsequently sells the balance of the 

land, S’s gain taken into account is 

limited to its remaining $18 of 

intercompany gain.) 

(E) Sale of successor stock resulting in 

deconsolidation. The facts are the same 

as in paragraph (j)(10)(i)(A) of this 

section (Example 1), except that M sells 

60% of the B stock to X for $66 on 

December 1 of Year 5 and B becomes a 

nonmember. Under the matching rule, 

M’s sale of B stock results in $18 of S’s 

gain being taken into account (to reflect 

the difference between M’s $6 gain 

taken into account and the $24 

recomputed gain). Under the 

acceleration rule, however, the entire 

$30 gain is taken into account (to reflect 

B becoming a nonmember, because its 

basis in the land reflects M’s $100 cost 

basis from the prior intercompany 

transaction). Under paragraph (j)(4) of 

this section, the attributes of S’s gain are 

determined by treating S, M, and B as 

divisions of a single corporation. 

Because M’s cost basis in the land will 

be reflected by B as a nonmember, all 

of S’s gain is treated as from the land 

(rather than a portion being from B’s 

stock), and B’s activities with respect to 

the land might therefore result in S’s 

gain being ordinary income. 

(ii) Example 2. Intercompany sale of 

member stock followed by 

recapitalization—(A) Facts. Before 

becoming a member of the P group, S 

owns P stock with a basis of $70. On 

January 1 of Year 1, P buys all of S’s 

stock. On July 1 of Year 3, S sells the 

P stock to M for $100. On December 1 

of Year 5, P acquires M’s original P 

stock in exchange for new P stock in a 

recapitalization described in section 

368(a)(1)(E). 

(B) Timing and attributes. Although 

P’s basis in the stock acquired from M 

is eliminated under paragraph (f)(4) of 

this section, the new P stock received by 

M is exchanged basis property (within 

the meaning of section 7701(a)(44)) 

having a basis under section 358 equal 

to M’s basis in the original P stock. 

Under the successor asset rule of 

paragraph (j)(1) of this section, 

references to M’s original P stock 

include references to M’s new P stock. 

Because it is still possible to take S’s 

intercompany item into account under 

the matching rule with respect to the 

successor asset, S’s gain is not taken 

into account under the acceleration rule 

as a result of the basis elimination under 

paragraph (f)(4) of this section. Instead, 

the gain is taken into account based on 

subsequent events with respect to M’s 

new P stock (for example, a subsequent 

distribution or redemption of the new 

stock). 

(iii) Example 3. Back-to-back 

intercompany transactions—matching— 

(A) Facts. S holds land for investment 

with a basis of $70. On January 1 of Year 

1, S sells the land to M for $90. M also 

holds the land for investment. On July 

1 of Year 3, M sells the land for $100 

to B, and B holds the land for sale to 

customers in the ordinary course of 

business. During Year 5, B sells all of 

the land to customers for $105. 

(B) Timing. Under paragraph (b)(1) of 

this section, S’s sale of the land to M 

and M’s sale of the land to B are both 

intercompany transactions. S is the 

selling member and M is the buying 

member in the first intercompany 

transaction, and M is the selling 

member and B is the buying member in 

the second intercompany transaction. 

Under paragraph (j)(4) of this section, S, 

M and B are treated as divisions of a 

single corporation for purposes of 

determining the timing of their items 

from the intercompany transactions. See 

also paragraph (j)(2) of this section (B is 

treated as a successor to M for purposes 

of taking S’s intercompany gain into 

account). Thus, S’s $20 gain and M’s 

$10 gain are both taken into account in 

Year 5 to reflect the difference between 

B’s $5 gain taken into account with 

respect to the land and the $35 

recomputed gain (the gain that B would 

have taken into account if the 

intercompany sales had been transfers 

between divisions of a single 

corporation, and B succeeded to S’s $70 

basis). 

(C) Attributes. Under paragraph (j)(4) 

of this section, the attributes of the 

intercompany items and corresponding 

items of S, M, and B are also determined 

by treating S, M, and B as divisions of 

a single corporation. For example, the 

attributes of S’s and M’s intercompany 

items are determined by taking B’s 

activities into account. 


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(iv) Example 4. Back-to-back 

intercompany transactions— 

acceleration—(A) Facts. During Year 1, 

S performs services for M in exchange 

for $10 from M. S incurs $8 of employee 

expenses. M capitalizes the $10 cost of 

S’s services under section 263 as part of 

M’s cost to acquire real property from X. 

Under its separate entity method of 

accounting, S would take its income and 

expenses into account in Year 1. M 

holds the real property for investment 

and, on July 1 of Year 5, M sells it to 

B at a gain. B also holds the real 

property for investment. On December 1 

of Year 8, while B still owns the real 

property, P sells all of M’s stock to X 

and M becomes a nonmember. 

(B) M’s items. M takes its gain into 

account immediately before it becomes 

a nonmember. Because the real property 

stays in the group, the acceleration rule 

redetermines the attributes of M’s gain 

under the principles of the matching 

rule as if B sold the real property to an 

affiliated corporation that is not a 

member of the group for a cash payment 

equal to B’s adjusted basis in the real 

property, and S, M, and B were 

divisions of a single corporation. Thus, 

M’s gain is capital gain. 

(C) S’s items. Under paragraph 

(b)(2)(ii) of this section, S includes the 

$8 of expenses in determining its $2 

intercompany income. In Year 1, S takes 

into account $8 of income and $8 of 

expenses. Under paragraph (j)(4) of this 

section, appropriate adjustments must 

be made to treat both S’s performance of 

services for M and M’s sale to B as 

occurring between divisions of a single 

corporation. Thus, S’s $2 of 

intercompany income is not taken into 

account as a result of M becoming a 

nonmember, but instead will be taken 

into account based on subsequent 

events (e.g., under the matching rule 

based on B’s sale of the real property to 

a nonmember, or under the acceleration 

rule based on P’s sale of the stock of S 

or B to a nonmember). See the successor 

person rules of paragraph (j)(2) of this 

section (B is treated as a successor to M 

for purposes of taking S’s intercompany 

income into account). 

(D) Sale of S’s stock. The facts are the 

same as in paragraph (j)(9)(iv)(A) of this 

section (Example 4), except that P sells 

all of S’s stock (rather than M’s stock) 

and S becomes a nonmember on July 1 

of Year 5. S’s remaining $2 of 

intercompany income is taken into 

account immediately before S becomes 

a nonmember. Because S’s 

intercompany income is not from an 

intercompany sale, exchange, or 

distribution of property, the attributes of 

the intercompany income are 

determined on a separate entity basis. 

Thus, S’s $2 of intercompany income is 

ordinary income. M does not take any 

of its intercompany gain into account as 

a result of S becoming a nonmember. 

(E) Intercompany income followed by 

intercompany loss. The facts are the 

same as in paragraph (j)(9)(iv)(A) of this 

section (Example 4), except that M sells 

the real property to B at a $1 loss (rather 

than a gain). M takes its $1 loss into 

account under the acceleration rule 

immediately before M becomes a 

nonmember. But see § 1.267(f)-1 (which 

might further defer M’s loss if M and B 

remain in a controlled group 

relationship after M becomes a 

nonmember). Under paragraph (j)(4) of 

this section appropriate adjustments 

must be made to treat the group as if 

both intercompany transactions 

occurred between divisions of a single 

corporation. Accordingly, P’s sale of M 

stock also results in S taking into 

account $1 of intercompany income as 

capital gain to offset M’s $1 of 

corresponding capital loss. The 

remaining $1 of S’s intercompany 

income is taken into account based on 

subsequent events. 

(v) Example 5. Successor group—(A) 

Facts. On January 1 of Year 1, B borrows 

$100 from S in return for B’s note 

providing for $10 of interest annually at 

the end of each year, and repayment of 

$100 at the end of Year 20. As of 

January 1 of Year 3, B has paid the 

interest accruing under the note. On that 

date, X acquires all of P’s stock and the 

former P group members become 

members of the X consolidated group. 

(B) Successor. Under paragraph (j)(5) 

of this section, although B’s note ceases 

to be an intercompany obligation of the 

P group, the note is not treated as 

satisfied and reissued under paragraph 

(g) of this section as a result of X’s 

acquisition of P stock. Instead, the X 

consolidated group succeeds to the 

treatment of the P group for purposes of 

paragraph (g) of this section, and B’s 

note is treated as an intercompany 

obligation of the X consolidated group. 

(vi) Example 6. Liquidation—80% 

distributee—(A) Facts. X has had 

preferred stock described in section 

1504(a)(4) outstanding for several years. 

On January 1 of Year 1, S buys all of X’s 

common stock for $60, and B buys all 

of X’s preferred stock for $40. X’s assets 

have a $0 basis and $100 value. On July 

1 of Year 3, X distributes all of its assets 

to S and B in a complete liquidation. 

Under § 1.1502–34, section 332 applies 

to both S and B. Under section 337, X 

has no gain or loss from its liquidating 

distribution to S. Under sections 336 

and 337(c), X has a $40 gain from its 

liquidating distribution to B. B has a $40 

basis under section 334(a) in the assets 

received from X, and S has a $0 basis 

under section 334(b) in the assets 

received from X. 

(B) Intercompany items from the 

liquidation. Under the matching rule, 

X’s $40 gain from its liquidating 

distribution to B is not taken into 

account under this section as a result of 

the liquidation (and therefore is not yet 

reflected under §§ 1.1502–32 and 

1.1502–33). Under the successor person 

rule of paragraph (j)(2)(i) of this section, 

S and B are both successors to X. Under 

section 337(c), X recognizes gain or loss 

only with respect to the assets 

distributed to B. Under paragraph 

(j)(2)(ii) of this section, to be consistent 

with the purposes of this section, S 

succeeds to X’s $40 intercompany gain. 

The gain will be taken into account by 

S under the matching and acceleration 

rules of this section based on 

subsequent events. (The allocation of 

the intercompany gain to S does not 

govern the allocation of any other 

attributes.) 

(vi) Example 7. Liquidation—no 80% 

distributee—(A) Facts. X has only 

common stock outstanding. On January 

1 of Year 1, S buys 60% of X’s stock for 

$60, and B buys 40% of X’s stock for 

$40. X’s assets have a $0 basis and $100 

value. On July 1 of Year 3, X distributes 

all of its assets to S and B in a complete 

liquidation. Under § 1.1502–34, section 

332 applies to both S and B. Under 

sections 336 and 337(c), X has a $100 

gain from its liquidating distributions to 

S and B. Under section 334(b), S has a 

$60 basis in the assets received from X 

and B has a $40 basis in the assets 

received from X. 

(B) Intercompany items from the 

liquidation. Under the matching rule, 

X’s $100 intercompany gain from its 

liquidating distributions to S and B is 

not taken into account under this 

section as a result of the liquidation 

(and therefore is not yet reflected under 

§§ 1.1502–32 and 1.1502–33). Under the 

successor person rule of paragraph 

(j)(2)(i) of this section, S and B are both 

successors to X. Under paragraph 

(j)(2)(ii) of this section, to be consistent 

with the purposes of this section, S 

succeeds to X’s $40 intercompany gain 

with respect to the assets distributed to 

B, and B succeeds to X’s $60 

intercompany gain with respect to the 

assets distributed to S. The gain will be 

taken into account by S and B under the 

matching and acceleration rules of this 

section based on subsequent events. 

(The allocation of the intercompany 

gain does not govern the allocation of 

any other attributes.) 

(viii) Example 8: Loan by section 987 

QBU—(A) Facts. S owns all the interests 

in DE1, a disregarded entity operating a 


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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. All payments 

are made in euros, and B recognizes no 

section 988 gain or loss on the euros it 

uses to pay the interest and principal. B 

is never insolvent within the meaning of 

section 108(d)(3). Other than with 

respect to the loan, there are no transfers 

between S and S QBU during years 1 

through 3, and neither S nor B had any 

other foreign currency gain or loss. 

Neither S nor B has made an election 

under section 988 or the section 988 

regulations. 

(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. Under 

the matching rule in paragraph (c) of 

this section, 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. 

(C) Loan sold to non-member. The 

facts are the same as in paragraph 

(j)(10)(viii)(A) of this section, except 

that, in year 3, S QBU sells the loan to 

unrelated X for Ö90, reflecting an 

increase in prevailing market interest 

rates. Up until the sale, the analysis is 

the same as in paragraphs 

(j)(10)(viii)(B)(1) and (2) of this section. 

Because the loan is attributable to S (see 

paragraphs (j)(9) and (j)(10)(viii)(B)(1) of 

this section), the sale is treated as a sale 

by S. Under paragraph (g)(3) of this 

section, immediately before the sale, B 

is deemed to satisfy and reissue the loan 

for its fair market value of Ö90. As a 

result, B takes into account cancellation 

of indebtedness income, and S takes 

into account an offsetting amount of 

ordinary loss. See paragraph (g)(7)(ii) 

(Example 2) of this section. If there is 

currency gain or loss, S and B take into 

account offsetting amounts of gain and 

loss under section 988 (subject to the 

limitation of § 1.988–2(b)(8)). Because S 

has a basis of Ö90 in the new loan, S 

recognizes no gain or loss on the sale to 

X. S is then treated as transferring the 

Ö90 to S QBU. 

(D) Party becomes a nonmember. The 

facts are the same as in paragraph 

(j)(10)(viii)(A) of this section, except 

that, in year 3, B becomes a nonmember. 

Up until B leaves the group, the analysis 

is the same as in paragraphs 

(j)(10)(viii)(B)(1) and (2) of this section. 

Immediately before B becomes a 

nonmember, B is deemed to satisfy and 

reissue the loan for its fair market value 

under paragraph (g)(3) of this section, 

with the same consequences as 

described in paragraph (j)(10)(viii)(C) of 

this section. When B becomes a 

nonmember, the loan (which is no 

longer an intercompany obligation) 

ceases to be subject to paragraph (j)(9) 

of this section. If the loan is attributable 

to S QBU under § 1.987–2, S is treated 

as transferring the loan to S 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 

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 

takes 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) * * * 

(7) 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 December 11, 2024. 

However, if pursuant to § 1.987–15(b), a 

taxpayer chooses to apply §§ 1.987–1 

through 1.987–15 to a taxable year 

before the first taxable year described in 

§ 1.987–15(a)(1), then paragraph (j)(9) of 

this section applies to that taxable year 

and subsequent years. 

Douglas W. O’Donnell, 

Deputy Commissioner. 

Approved: November 20, 2024 

Aviva R. Aron-Dine, 

Deputy Assistant Secretary of the Treasury 

(Tax Policy). 

[FR Doc. 2024–28372 Filed 12–10–24; 8:45 am] 

BILLING CODE 4830–01–P 


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