Td 10016

100138 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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
Internal Revenue Service (IRS),
Treasury.
ACTION: Final rule.
AGENCY:

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).
SUMMARY:

SUPPLEMENTARY INFORMATION:

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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.

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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
1 The reference to ‘‘this subpart’’ refers to subpart
J of part III of subchapter N of chapter 1 of the Code,
which includes section 987.

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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.

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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

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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

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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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100140 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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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

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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

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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

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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 60month limitation for taxpayers that
make a current rate election or an
annual recognition election and apply a
similar limitation for purposes of the

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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–

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100143
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

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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

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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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100145
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).
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2. Cumulative Translation Adjustment
Comments requested that taxpayers be
permitted to use the cumulative
2 Taxpayers 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.

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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

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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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100146 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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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
3 The 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.

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100147
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

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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

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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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100148 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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,

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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

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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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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

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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
4 While § 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.

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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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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
5 While 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.’’).

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100151
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.

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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

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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

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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

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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,

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100153
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

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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

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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
6 Although 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.

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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

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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
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.

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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

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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

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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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100156 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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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

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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.

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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

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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

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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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100158 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100159
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

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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

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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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100161
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.

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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

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19:51 Dec 10, 2024

Jkt 265001

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

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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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100162 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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19:51 Dec 10, 2024

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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.

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
III. Regulatory Flexibility Act
rules in §§ 1.987–11 and 1.987–13)
Pursuant to the Regulatory Flexibility apply only in the case of a remittance
Act (5 U.S.C. chapter 6), it is hereby
or termination that would result in the
certified that this rulemaking will not
recognition of a significant amount of
have a significant economic impact on
section 987 gain or loss. Small entities
a substantial number of small entities
typically will not recognize section 987
within the meaning of section 601(6) of
gain or loss in excess of the applicable
the Regulatory Flexibility Act. The final thresholds.
regulations affect taxpayers with foreign
These final regulations generally
branch operations and taxpayers that
modify the rules that would otherwise
own an interest in a foreign partnership apply under the 2016 final regulations
(or a partnership with a foreign branch). by providing taxpayers with additional
The number of small entities
elections that reduce the compliance
potentially affected by the final
burden of applying section 987. Small
regulations is unknown; however, it is
entities generally would not be affected
unlikely to be a substantial number
by these rules unless they choose to
because taxpayers with wholly owned
make one of the new elections in order
foreign operations are typically larger
to reduce their compliance burden. In
businesses. The Treasury Department
addition, the final regulations contain
several rules intended to limit their
and the IRS estimate that the total
impact on small taxpayers. For example,
number of corporations (other than S
the final regulations provide a de
corporations) with a foreign branch
minimis rule under which section 987
subject to section 987 is approximately
loss is not suspended unless the amount
2,000. This estimate is based on the
of the loss exceeds the lesser of $3
number of corporations (other than S
million or two percent of gross income,
corporations) that filed a Form 8858 in
as described in part X.A.1 of the
2022 that showed that the filer: (1)
owned at least one disregarded entity or Summary of Comments and Explanation
of Revisions. In addition, for purposes
branch with a functional currency
different from the functional currency of of the transition rules, the final
regulations provide an election under
the owner, and (2) indicated that the
which small businesses can treat small
disregarded entity or branch was a
QBUs as having no pretransition gain or
section 989 QBU. As shown in the
following table, only a small percentage loss. See part IX.A.2 of the Summary of
Comments and Explanation of
of those filers are small entities.
Revisions.
A portion of the economic impact of
Total receipts/positive
Percentage of
income
the
final regulations may derive from
filers
(2022)
the collection of information
requirements imposed under §§ 1.987–
Under $5 Million ...................
7
$5 Million to $10 Million ........
2 1(g), 1.987–10(k), and 1.987–14(c). The
$10 Million to $25 Million ......
4 Treasury Department and the IRS have
Over $25 Million ...................
87 determined that the average burden is
1.95 hours per response. The IRS’s
Research, Applied Analytics, and
The number of affected corporations
Statistics division estimates that the
(other than S corporations) with total
appropriate wage rate for this set of
receipts of less than $25 million
taxpayers is $99.87 per hour. Thus, the
represents 0.02% of all corporations
annual burden per taxpayer from each
(other than S corporations) with total
collection of information requirement is
receipts of less than $25 million.
The Treasury Department and the IRS $194.75. The requirements of § 1.987–
estimate that the total number of
1(g) apply only if a taxpayer chooses to
partnerships and S corporations with a
make or revoke an election (and only in
foreign branch subject to section 987 is
the year of the election or revocation),
approximately 800. Approximately 50
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)

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.

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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.

Jkt 265001

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.

*

Adoption of Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS amend 26 CFR part 1 as
follows:

V. Unfunded Mandates Reform Act

19:51 Dec 10, 2024

Section 1.861–9T also issued under 26
U.S.C. 861, 863(a), 864(e), 864(e)(7), 865(i),
and 7701(f).

List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.

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.

VerDate Sep<11>2014

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.

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).

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*

*

*

*

*

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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100164 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
Section 1.988–5 also issued under 26
U.S.C. 988.

*

*

*

*

(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.
*
*
*
*
*

*

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:
■

§ 1.861–9T

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*
*
*
*
(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).
*
*
*
*
*

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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:
■

§ 1.861–9 Allocation and apportionment of
interest expense and rules for asset-based
apportionment.

*

[Amended]

§ 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:
■

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§ 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

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Assets:
Cash on hand .......................................................................................................................................
Accounts Receivable ............................................................................................................................
Inventory ...............................................................................................................................................
100,000 Euro Bond (100,000 historical basis) .....................................................................................
Fixed assets:
Property ................................................................................................................................................
Plant ......................................................................................................................................................
Accumulated Depreciation ....................................................................................................................
Equipment .............................................................................................................................................
Accumulated Depreciation ....................................................................................................................

EUR

£40,000
10,000
100,000
50,000

Ö80,000
20,000
200,000
100,000

200,000
500,000
(200,000)
1,000,000
(400,000)

400,000
1,000,000
(400,000)
2,000,000
(800,000)

Total Assets ...................................................................................................................................
Liabilities and Equity:
Accounts Payable .................................................................................................................................
Long-term Liabilities .............................................................................................................................
Paid-in-Capital ......................................................................................................................................
Retained Earnings ................................................................................................................................

1,300,000

2,600,000

50,000
400,000
800,000
50,000

100,000
800,000
1,600,000
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.

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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.

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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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100166 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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.

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(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.

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(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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100167
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.

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(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.

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(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.

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(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).

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(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.

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(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.

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(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
rules.

Scope, definitions, and special

(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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100170 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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(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

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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

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(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

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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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100172 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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)

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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.

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100173
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

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(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

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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

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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).

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100175
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

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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).

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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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100176 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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§ 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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100177
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

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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

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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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100178 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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

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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

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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

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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

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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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100180 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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.

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(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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100181
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

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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.

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(i) Recovery of basis with respect to
historic assets. Except as otherwise
provided in this paragraph (c)(2), the
exchange rate to be used by the owner
in translating any recovery of basis
(whether through a sale or exchange;
deemed sale or exchange; cost recovery
deduction such as depreciation,
depletion or amortization; or otherwise)
with respect to a historic asset is the
historic rate for the property to which
such recovery of basis is attributable.
(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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100182 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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

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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

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(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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100183
TABLE 1 TO PARAGRAPH (e)(3)(ii)(A)—GROSS SALES
[Year 2]
Number of
units

Month
Jan ...................................................................................................................
Feb ...................................................................................................................
March ...............................................................................................................
April ..................................................................................................................
May ..................................................................................................................
June .................................................................................................................
July ...................................................................................................................
Aug ...................................................................................................................
Sept ..................................................................................................................
Oct ...................................................................................................................
Nov ...................................................................................................................
Dec ...................................................................................................................

(B) Translated basis of inventory. The
purchase price for each inventory unit
was Ö1.50. Under § 1.987–1(c)(3)(i) and

Amount in
Ö

100
200
0
200
100
0
100
100
0
0
100
300

Ö 300
600
0
600
300
0
300
300
0
0
300
900

1,200

........................

paragraph (c)(2)(iv)(B) of this section,
the basis of each item of inventory is
translated into dollars at the yearly

Ö/$ yearly
average rate
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1

=
=
=
=
=
=
=
=
=
=
=
=

Amount in $

$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05

$315.00
630.00
0.00
630.00
315.00
0.00
315.00
315.00
0.00
0.00
315.00
945.00

........................

3,780.00

average exchange rate for the year the
inventory was acquired.

TABLE 2 TO PARAGRAPH (e)(3)(ii)(B)—OPENING INVENTORY AND PURCHASES
[Year 2]
Number of
units

Month

Amount in
Ö

Ö/$ yearly
average rate

Amount in $

Opening inventory (purchased in Dec. year 1)

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Purchases in year 2
Jan ............................................................................................................
Feb ............................................................................................................
March ........................................................................................................
April ...........................................................................................................
May ...........................................................................................................
June ..........................................................................................................
July ...........................................................................................................
Aug ...........................................................................................................
Sept ..........................................................................................................
Oct ............................................................................................................
Nov ...........................................................................................................
Dec ...........................................................................................................

(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

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100

Ö150

300
0
0
300
0
0
300
0
0
0
300
0

Ö 450
0
0
450
0
0
450
0
0
0
450
0

1,200

........................

($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.

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Ö1 = $1.02

$153.00

Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1
Ö1

$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05
$1.05

$472.50
0
0
472.50
0
0
472.50
0
0
0
472.50
0

........................

1,890.00

=
=
=
=
=
=
=
=
=
=
=
=

(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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100184 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100185
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

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

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
Revenue .....................................................................................................
General Expenses .....................................................................................
Depreciation ...............................................................................................
Tentative section 987 taxable income .......................................................
Adjustments under paragraph (c)(2)(v) of this section:
Decrease by Ö15 tax translated at yearly average exchange rate
(Ö1 = $1.50).
Increase by Ö15 tax translated at spot rate on payment date (Ö1 =
$1.60).
Section 987 taxable income ........................................................

lotter on DSK11XQN23PROD with RULES3

§ 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

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Translation rate

Ö100
(30)
(10)
Ö60

Ö1 = $1.50 .......................................
Ö1 = $1.50 .......................................
Ö1 = $1.00 .......................................
..........................................................

$150.00
(45.00)
(10.00)
$95.00

........................

..........................................................

($22.50)

........................

..........................................................

24.00

........................

..........................................................

$96.50

§ 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

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Amount in $

Sfmt 4700

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–

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100187
(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

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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

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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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100188 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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.

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(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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100189
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 ¥
Assets
Yen ........................................................................
Land .......................................................................

Translation rate

Amount in $

120,000
55,000

$1 = ¥120 (spot rate-12/31/year 1) ..............................
$1 = ¥110 (historic rate-yearly average rate-year 1) ...

$1,000.00
500.00

Total assets ...........................................................
Liabilities
Bank loan ..............................................................

175,000

.......................................................................................

1,500.00

10,000

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

83.33

Total liabilities ........................................................
Year 1 ending net value ...............................................

10,000
165,000

.......................................................................................
.......................................................................................

83.33
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

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Change in net value in yen (step 1) ..............................................................................................................................................
Subtract amount determined in yen under step 3 (transfers from owner to section 987 QBU) ...................................................
Subtract amount determined in yen under step 6 (section 987 taxable income or loss) .............................................................
Residual increase or decrease to the adjusted balance sheet ..............................................................................................

(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

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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

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¥165,000
(¥155,000)
(¥10,000)
¥0

10). Accordingly, the unrecognized
section 987 loss of Japan Branch for year
1 is $174.24.

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100190 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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.

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
TABLE 3 TO PARAGRAPH
paragraph (d)(3) of this section (step 3),
(g)(2)(ii)(A)(2)—QBU NET VALUE— the amount determined in previous
steps is reduced by $1,500, from
YEAR 1
$1,333.33 to negative $166.67.
Amount in ¥
(D) Steps 4 and 5 (no adjustment). No
adjustment is made under paragraphs
Assets:
(d)(4) and (5) of this section (steps 4 and
Yen ................................
120,000
5) because no liabilities were transferred
Land ...............................
50,000
by U.S. Corp to Japan Branch or by
Total assets ............
170,000 Japan Branch to U.S. Corp during the
taxable year.
Liabilities:
Bank loan ......................
10,000
(E) Steps 6 through 9 do not apply.
Under paragraph (d) of this section,
Total liabilities .........
10,000
paragraphs (d)(6) through (9) of this
Year 1 QBU net value ..........
160,000
section (steps 6 through 9) do not apply
because a current rate election is in
(3) Under paragraph (d)(1) of this
effect.
section, the change in OFCNV of Japan
(F) Step 10—(1) Application of
Branch for year 1 is equal to the OFCNV
relevant steps in Japan Branch’s
of the branch determined in dollars on
functional currency. Under paragraph
December 31, year 1, (which is
$1,333.33) less the OFCNV of the branch (d)(10)(iii) of this section, because a
current rate election is in effect, the
determined in dollars on the last day of
the preceding taxable year. Because this residual increase or decrease to net
is the first taxable year of Japan Branch, assets is determined by applying
the OFCNV of Japan Branch determined paragraphs (d)(1) through (5) of this
section (steps 1 through 5) in the
in dollars on the last day of the
functional currency of the section 987
preceding taxable year is zero under
QBU. The relevant steps that must be
paragraph (d)(1)(iii) of this section.
applied under paragraph (d)(10) of this
Accordingly, the change in OFCNV of
section in the functional currency of
Japan Branch for year 1 is $1,333.33.
Japan Branch are paragraphs (d)(1) and
(B) Step 2 (no adjustment). No
(3) of this section (steps 1 and 3). Under
adjustment is made under paragraph
(d)(2) of this section (step 2) because no paragraph (d)(10)(ii)(B) of this section,
assets were transferred by Japan Branch step 1 is applied by reference to Japan
Branch’s QBU net value. See paragraphs
to U.S. Corp during the taxable year.
(C) Step 3. On July 1, year 1, U.S.
(g)(2)(ii)(A) and (C) of this section for
Corp transferred to Japan Branch
amounts determined in yen. The
¥100,000 with a basis of $1,000.00 and
residual increase to net assets is
raw land with a basis of $500.00 (equal
determined as follows:

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TABLE 4 TO PARAGRAPH (g)(2)(ii)(F)(1)—APPLICATION OF RELEVANT STEPS IN YEN
Step 1: Change in net value ..........................................................................................................................................................
Step 3: Subtract amount of transfers from owner to section 987 QBU ........................................................................................

¥160,000
(¥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.

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(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.

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(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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100191
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 ................................
Land ...............................

120,000
50,000

Total assets ............
Liabilities:
Bank loan ......................

170,000

Total liabilities .........
Year 9 ending net value .......

10,000
160,000

10,000

(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 ¥

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Assets:
Yen ........................................................................
Land .......................................................................

Translation rate

Amount in $

¥130,000
50,000

$1 = ¥130 (spot rate-12/31/year 10) ............................
$1 = ¥120 (historic rate-spot rate-12/31/year 9) ..........

$1,000.00
416.67

Total assets ....................................................
Liabilities:
Bank loan ..............................................................

180,000

.......................................................................................

1,416.67

10,000

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

76.92

Total liabilities .................................................
Year 10 ending net value .............................................

10,000
170,000

.......................................................................................
.......................................................................................

76.92
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.

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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

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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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100192 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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§ 1.987–5
or loss.

Recognition of section 987 gain

(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

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(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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100193
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

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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:

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 .........................................
Pounds ............................................
Truck ...............................................

£500
£2,850
£2,000

Aggregate gross assets ...............
Remittance ......................................
Aggregate basis of Business A’s
gross assets at end of year 2, increased by amount of remittance

£5,350
£500

£5,850

(iv) Computation of remittance
proportion. Under paragraph (b) of this
section, Business A must compute the
TABLE 1 TO PARAGRAPH (g)(2)(i)
remittance proportion by dividing the
Transfers from Business A to U.S. Corp in £500 remittance amount by the £5,850
pounds
sum of the aggregate basis of Business
A’s gross assets and the amount of the
Machine ................................
£500 remittance. The resulting remittance
Pounds ..................................
£2,300
proportion is 0.085.
(v) Computation of section 987 gain or
Aggregate transfers from
loss. The amount of U.S. Corp’s section
Business A to U.S.
Corp ...........................
£2,800 987 gain or loss that is recognized with
respect to Business A is determined
Transfers from U.S. Corp to Business A in under paragraph (a) of this section by
pounds
multiplying the 0.085 remittance
proportion by the $80 of net
Truck .....................................
£2,000
unrecognized section 987 gain. U.S.
Pounds ..................................
£300
Corp’s resulting recognized section 987
gain for year 2 is $6.80.
Aggregate transfers from
(3) Annual recognition election. If an
U.S. Corp to Business
A .................................
£2,300 annual recognition election under
paragraph (b)(2) of this section were in
Computation of amount of remittance:
effect for year 2, U.S. Corp’s remittance
proportion would be one. Accordingly,
Aggregate transfers from
U.S. Corp would recognize all $80 of the
Business A to U.S.
Corp ...........................
£2,800 net unrecognized section 987 gain with
respect to Business A.
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

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§ 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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100194 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100195
(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,

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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

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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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100196 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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).

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§ 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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100197
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

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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

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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
QBU.

Termination of a section 987

(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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100199
(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

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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–

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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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100200 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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.

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100201
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

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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

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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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100202 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100203
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

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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.

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(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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100204 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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:

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(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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100205
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
Yearly average exchange rate

Spot rate
November 30, Year 1
December 31, Year 1
December 31, Year 2
June 30, Year 3 ..........
December 31, Year 3
Year 1 .........................
Year 2 .........................

Ö1 = $1.
Ö1 = $1.10.
Ö1 = $1.20.
Ö1 = $1.35.
Ö1 = $1.40.
....................
....................

Ö1 = $1.05.
Ö1 = $1.15.

TABLE 1 TO PARAGRAPH (l)(1)(i)(B)—
EXCHANGE RATES—Continued

Year 3 .........................

Spot rate

Yearly average exchange rate

....................

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

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Equity pool

Translation rate

Basis pool

Contribution (11/30/Year 1) .............................................................................................
Year 2 Earnings ...............................................................................................................
Year 3 Earnings ...............................................................................................................

Ö150
Ö25
Ö25

Ö1 = $1 .......................................................
Ö1 = $1.15 ..................................................
Ö1 = $1.25 ..................................................

$150
28.75
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

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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

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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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100206 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

Year 2 Earnings .......................................
Year 3 Earnings .......................................

Ö25 ..........................................................
Ö25 ..........................................................

Ö1 = $1.15 ...............................................
Ö1 = $1.25 ...............................................

$28.75
31.25

Total ..................................................

Ö50 ..........................................................

..................................................................

60

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

(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,

Basis pool

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.

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

Translation rate

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

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the remittance out of earnings and the
$50 basis of the distribution out of
capital) for $135. Therefore, DC

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Basis pool

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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100207
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

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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

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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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100208 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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Equity pool

Translation rate

Basis pool

Year 2 Earnings ...............................................................................................................
Year 3 Earnings ...............................................................................................................

Ö25
Ö25

Ö1 = $1.15 ..................................................
Ö1 = $1.25 ..................................................

$28.75
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.

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(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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100209
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

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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

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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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100210 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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

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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.

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100211
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

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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

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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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100212 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100213
(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

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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

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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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100214 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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

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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
loss.

Deferral of section 987 gain or

(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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100215
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

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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

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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.

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(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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100217
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

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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

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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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100218 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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.

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§ 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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100219
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

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§ 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

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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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100220 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100221
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

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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

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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)

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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.

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(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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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
rules.

Certain definitions and special

(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

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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.

*

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*

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*

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*

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(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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100224 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
(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

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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

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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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Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations 100225
(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.

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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

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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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100226 Federal Register / Vol. 89, No. 238 / Wednesday, December 11, 2024 / Rules and Regulations
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

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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.

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(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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