View all text of Subjgrp 6 [§ 1.985-0 - § 1.989(b)-1]
§ 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.
(b) Scope of section 987 and certain rules relating to QBUs.
(1) Persons subject to section 987.
(i) In general.
(ii) Inapplicability to certain entities.
(2) Application of the section 987 regulations to earnings and profits.
(i) In general.
(ii) Timing.
(3) Definition of a section 987 QBU.
(i) In general.
(ii) Section 987 QBU grouping election.
(4) Definition of an eligible QBU.
(i) In general.
(ii) Qualified business unit.
(5) Definition of an owner.
(i) Direct ownership.
(ii) [Reserved]
(6) [Reserved]
(7) Examples illustrating paragraph (b) of this section.
(i) Example 1: Owner owns an eligible QBU and a DE holding company.
(ii) Example 2: Owner owns eligible QBUs through DEs.
(iii) Example 3: Section 987 grouping election.
(c) Exchange rates.
(1) Spot rate.
(i) In general.
(ii) Election to use a spot rate convention.
(2) Yearly average exchange rate.
(3) Historic rate.
(i) In general.
(ii) Date placed in service for depreciable or amortizable property.
(iii) Changed functional currency.
(d) Marked item.
(1) In general.
(2) Current rate election.
(e) Historic item.
(f) Example: Identification of marked and historic items.
(1) Facts.
(2) Analysis.
(g) Elections.
(1) Persons making the election.
(i) United States persons.
(ii) CFCs.
(iii) Consolidated groups.
(iv) Partnerships.
(2) Consistency rules.
(i) Consolidated groups.
(ii) CFCs and foreign partnerships.
(iii) Section 381(a) transactions.
(3) Manner of making or revoking elections.
(i) Statement must be attached to a return.
(ii) Election requirements.
(iii) Elections made under the 2016 and 2019 section 987 regulations.
(4) No change in method of accounting.
(5) Principles of § 1.964-1(c)(3) applicable to section 987 elections.
(h) Definitions.
§ 1.987-2 Attribution of items to eligible QBUs; definition of a transfer and related rules.(a) In general.
(b) Attribution of items to an eligible QBU.
(1) General rules.
(2) Exceptions for non-portfolio stock, interests in partnerships, and certain acquisition indebtedness.
(i) In general.
(ii) Separate account assets.
(3) Adjustments to items reflected on the books and records.
(i) General rule.
(ii) Factors indicating no tax avoidance.
(iii) Factors indicating tax avoidance.
(iv) Section 988 transactions.
(c) Transfers to and from section 987 QBUs.
(1) In general.
(2) Disregarded transactions.
(i) General rule.
(ii) Definition of a disregarded transaction.
(iii) Items derived from disregarded transactions ignored.
(3) through (6) [Reserved]
(7) Application of general tax law principles.
(8) Interaction with § 1.988-1(a)(10).
(9) Certain disregarded transactions not treated as transfers.
(i) Combinations of section 987 QBUs.
(ii) Change in functional currency from a combination.
(iii) Separation of section 987 QBUs.
(iv) Special rules for successor suspended loss QBUs.
(10) Examples.
(i) Example 1: Loan to a section 987 QBU.
(ii) Example 2: Transfer between section 987 QBUs.
(iii) Example 3: Sale of property between two section 987 QBUs.
(iv) through (ix) [Reserved]
(x) Example 10: Contribution of a section 987 QBU's assets to a corporation.
(xi) Example 11: Circular transfers.
(xii) Example 12: Transfers without substance.
(xiii) Example 13: Offsetting positions in section 987 QBUs
(xiv) Example 14: Offsetting positions with respect to a section 987 QBU and a section 988 transaction.
(xv) Example 15: Offsetting positions with respect to a section 987 QBU and a section 988 transaction.
(xvi) Example 16: Borrowing by section 987 QBU followed by immediate distribution to owner.
(xvii) Example 17: Payment of interest by section 987 QBU on obligation of owner.
(xviii) Example 18: Sale of the interests in a DE.
(d) Translation of items transferred to a section 987 QBU.
(1) Marked items.
(2) Historic items.
(e) Cross-reference.
§ 1.987-3 Determination of section 987 taxable income or loss of an owner of a section 987 QBU.(a) In general.
(b) Determination of each item of income, gain, deduction, or loss in the section 987 QBU's functional currency.
(1) In general.
(2) Translation of items of income, gain, deduction, or loss that are denominated in a nonfunctional currency.
(3) [Reserved]
(4) Section 988 transactions.
(i) In general.
(ii) Section 988 mark-to-market election.
(c) Translation of items of income, gain, deduction, or loss of a section 987 QBU into the owner's functional currency.
(1) In general.
(2) Exceptions.
(i) Recovery of basis with respect to historic assets.
(ii) through (iii) [Reserved]
(iv) Cost of goods sold computation.
(v) Translation of income to account for certain foreign income tax claimed as a credit.
(3) Adjustments to COGS required under the simplified inventory method.
(i) In general.
(ii) Adjustment for cost recovery deductions included in inventoriable costs.
(iii) Adjustment for beginning inventory for non-LIFO inventory.
(iv) Adjustment for year of LIFO liquidation.
(d) [Reserved]
(e) Examples.
(1) Example 1: Item of income denominated in nonfunctional currency.
(2) Example 2: Asset sold for nonfunctional currency.
(3) Example 3: Historic inventory method.
(i) Facts.
(ii) Analysis.
(4) Example 4: Simplified inventory method.
(i) Facts.
(ii) Analysis.
(5) Example 5: Depreciation expense that is not an inventoriable cost.
(6) Example 6: Translation of depreciation expense that is an inventoriable cost (historic inventory method).
(7) Example 7: Sale of land.
(8) Example 8: Current rate election.
(9) through (12) [Reserved]
(13) Example 13: Section 988 transaction.
(i) Facts.
(ii) Analysis.
(14) Example 14: Payment of foreign income tax.
(i) Facts.
(ii) Analysis.
§ 1.987-4 Determination of net unrecognized section 987 gain or loss of a section 987 QBU.(a) In general.
(b) Calculation of net unrecognized section 987 gain or loss.
(c) Net accumulated unrecognized section 987 gain or loss for all prior taxable years.
(1) In general.
(2) Additional adjustments for certain taxable years beginning on or before December 31, 2024.
(d) Calculation of unrecognized section 987 gain or loss for a taxable year.
(1) Step 1: Determine the change in the owner functional currency net value of the section 987 QBU for the taxable year.
(i) In general.
(ii) Year section 987 QBU is terminated.
(iii) First taxable year of a section 987 QBU.
(iv) First year in which an election is in effect or ceases to be in effect.
(2) Step 2: Increase the amount determined in step 1 by the amount of assets transferred from the section 987 QBU to the owner.
(i) In general.
(ii) Assets transferred from the section 987 QBU to the owner during the taxable year.
(3) Step 3: Decrease the amount determined in steps 1 and 2 by the amount of assets transferred from the owner to the section 987 QBU.
(i) In general.
(ii) Assets transferred from the owner to the section 987 QBU during the taxable year.
(4) Step 4: Decrease the amount determined in steps 1 through 3 by the amount of liabilities transferred from the section 987 QBU to the owner.
(i) In general.
(ii) Liabilities transferred from the owner to the section 987 QBU during the taxable year.
(5) Step 5: Increase the amount determined in steps 1 through 4 by the amount of liabilities transferred from the owner to the section 987 QBU.
(6) Step 6: Decrease or increase the amount determined in steps 1 through 5 by the section 987 taxable income or loss, respectively, of the section 987 QBU for the taxable year.
(7) Step 7: Increase the amount determined in steps 1 through 6 by certain expenses or losses that are not deductible in computing the section 987 taxable income or loss of the section 987 QBU for the taxable year.
(8) Step 8: Decrease the amount determined in steps 1 through 7 by the amount of certain income or gain that is not included in taxable income in computing the section 987 taxable income or loss of the section 987 QBU for the taxable year.
(9) Step 9: Increase or decrease the amount determined in steps 1 through 8 by any income or gain, or any deduction or loss, respectively, that does not impact the adjusted balance sheet.
(10) Step 10: Decrease or increase the amount determined in steps 1 through 9 by any increase or decrease, respectively, to the section 987 QBU's net assets that is not previously taken into account under steps 2 through 9.
(i) In general.
(ii) Determining the residual increase or decrease to net assets.
(iii) Modifications for taxable years to which a current rate election or an annual recognition election applies.
(e) Determination of the owner functional currency net value of a section 987 QBU.
(1) In general.
(i) Marked item.
(ii) Historic item.
(2) Current rate election.
(i) In general.
(ii) QBU net value.
(iii) Alternative calculation of QBU net value.
(f) Combinations and separations.
(1) Combinations.
(2) Separations.
(3) Examples.
(i) Example 1: Combination of two section 987 QBUs that have the same owner.
(ii) Example 2: Separation of two section 987 QBUs that have the same owner.
(g) Examples.
(1) Example 1: Determination of net unrecognized section 987 gain or loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Determination of net unrecognized section 987 gain or loss if a current rate election in effect.
(i) Facts.
(ii) Analysis.
(iii) Alternative computation of QBU net value.
(3) Example 3: Determination of net unrecognized section 987 gain or loss when a current rate election is revoked.
(i) Facts.
(ii) Analysis.
§ 1.987-5 Recognition of section 987 gain or loss.(a) Recognition of section 987 gain or loss by the owner of a section 987 QBU.
(b) Remittance proportion.
(1) In general.
(2) Annual recognition election.
(c) Remittance.
(1) Definition.
(2) Alternative calculation.
(i) Step 1: Determine the change in QBU net value.
(ii) Step 2: Adjust the amount determined in step 1 for income or loss of the section 987 QBU.
(iii) Step 3: Multiply the amount determined in step 2 by negative one.
(3) Day when a remittance is determined.
(4) Termination.
(d) Aggregate of all amounts transferred from the section 987 QBU to the owner for the taxable year.
(e) Aggregate of all amounts transferred from the owner to the section 987 QBU for the taxable year.
(f) Determination of owner's adjusted basis in transferred assets and amount of transferred liabilities.
(1) In general.
(2) Marked items.
(3) Historic items.
(g) Example—Calculation of section 987 gain or loss recognized.
(1) Facts.
(i) In general.
(ii) Year 1 balance sheet.
(iii) Transfers and income in year 2.
(iv) Year 2 balance sheet.
(2) Analysis.
(i) Computation of amount of remittance.
(ii) Alternative computation of remittance amount.
(iii) Computation of section 987 QBU gross assets plus remittance.
(iv) Computation of remittance proportion.
(v) Computation of section 987 gain or loss.
(3) Annual recognition election.
§ 1.987-6 Character and source of section 987 gain or loss.(a) Ordinary income or loss.
(b) Character and source of section 987 gain or loss.
(1) Timing of source and character determination.
(2) Method for determining the character and source section 987 gain or loss.
(i) Initial assignment
(ii) Reassignment of section 987 gain or loss.
(iii) Special rule for the application of the GILTI high-tax exclusion to section 987 gain or loss.
(3) Allocation and apportionment of foreign income tax to section 987 items under section 861.
(i) The foreign gross income is an item of foreign currency gain or loss.
(ii) The same event or events give rise to both the foreign gross income and the section 987 gain or loss.
(c) Examples.
(1) Example 1: Initial assignment and reassignment of section 987 gain or loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Effect of GILTI high-tax exclusion.
(i) Facts.
(ii) Analysis.
(3) Example 3: Section 987 gain or loss treated as attributable to section 988 transactions.
(i) Facts.
(ii) Analysis.
(4) Example 4: Section 987 gain or loss assigned to passive foreign personal holding company income.
(i) Facts.
(ii) Analysis.
§ 1.987-7 Application of the section 987 regulations to partnerships and S corporations.(a) Overview.
(b) Section 987 regulations generally do not apply to partnerships.
(c) Provisions of the section 987 regulations that apply to partnerships.
(1) In general.
(i) Eligible QBU.
(ii) Partnership.
(2) Applicable provisions.
(i) In general.
(ii) Annual recognition election.
(iii) Section 988 mark-to-market election.
(3) Modifications to applicable provisions.
(i) In general.
(ii) Controlled group.
(4) Terminating QBUs.
(d) Suspended section 987 loss.
(1) In general.
(i) Rules of § 1.987-11(c) and (d)(2) do not apply.
(ii) Suspension of section 987 loss.
(2) Exceptions.
(i) Method under which historic items do not give rise to section 987 gain or loss.
(ii) Annual recognition election.
(iii) De minimis rule.
(3) Recognition of suspended section 987 loss.
(i) In general.
(ii) Partnership that is not engaged in a trade or business.
(iii) Application of the loss-to-the-extent-of-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.
(2) Substantially all assets transferred.
(3) Owner no longer a CFC.
(4) Owner ceases to exist.
(5) Section 987 QBU ceases to be an eligible QBU with a functional currency different from its owner.
(6) Change in form of ownership.
(c) Transactions described in section 381(a).
(1) Liquidations.
(2) Reorganizations.
(d) [Reserved]
(e) Effect of terminations.
(f) Examples.
(1) Example 1: Cessation of operations.
(i) Facts.
(ii) Analysis.
(2) Example 2: Transfer of a section 987 QBU to a member of a consolidated group.
(i) Facts.
(ii) Analysis.
(3) Example 3: Cessation of controlled foreign corporation status.
(i) Facts.
(ii) Analysis.
(4) Example 4: Section 332 liquidation.
(i) Facts.
(ii) Analysis.
(5) [Reserved]
(6) Example 6: Deemed transfers to a CFC upon a check-the-box election.
(i) Facts.
(ii) Analysis.
(7) Example 7: Sale of a section 987 QBU to a member of a consolidated group.
(i) Facts.
(ii) Analysis.
§ 1.987-9 Recordkeeping requirements.(a) In general.
(b) Supplemental information.
(c) Retention of records.
(d) Information on a dedicated section 987 form.
§ 1.987-10 Transition rules.(a) Overview.
(1) In general.
(2) Terms defined under prior § 1.987-12.
(b) Scope.
(1) Owner of a section 987 QBU.
(2) Deferral QBU owner and owner of outbound loss QBU.
(c) Transition date.
(1) In general.
(2) Terminating QBU.
(i) In general.
(ii) Ordering rule.
(d) Application of the section 987 regulations after the transition date.
(1) Owner functional currency net value on the last day of the preceding taxable year.
(2) Determination of historic rate.
(3) Transition exchange rate.
(i) In general.
(ii) Earnings only method.
(e) Pretransition gain or loss.
(1) In general.
(2) Amount of pretransition gain or loss for an owner that applied an eligible pretransition method.
(i) Owner of a section 987 QBU
(ii) Deferral QBU owner.
(iii) Owner of an outbound loss QBU.
(3) Amount of pretransition gain or loss for an owner that did not apply an eligible pretransition method.
(i) In general.
(ii) Computation of pretransition gain or loss.
(iii) Annual unrecognized section 987 gain or loss.
(iv) Deferral QBU owner.
(v) Owner of an outbound loss QBU.
(4) Eligible pretransition method.
(i) Earnings and capital method.
(ii) Other reasonable methods.
(iii) Other earnings only methods.
(iv) Error in the application of a section 987 method.
(v) Certain consistent practices not treated as errors.
(vi) Deferral of section 987 gain or loss until termination is not reasonable.
(vii) Anti-abuse rule.
(5) Recognition of pretransition gain or loss.
(i) In general.
(ii) Election to recognize pretransition section 987 gain or loss ratably over the transition period.
(6) Predecessor of an owner.
(i) In general.
(ii) Predecessor.
(7) Small business election.
(i) Scope.
(ii) Owner threshold.
(iii) QBU threshold.
(iv) Small business election.
(f) QBUs to which the fresh start transition method was applied.
(1) In general.
(2) Application of the section 987 regulations after the transition date.
(i) Owner functional currency net value on the last day of the preceding taxable year.
(ii) Determination of historic rate.
(iii) Unrecognized section 987 gain or loss.
(3) Taxpayers that are required to transition using the fresh start transition method.
(g) [Reserved]
(h) Determination of source and character.
(1) In general.
(2) Deferral QBU or outbound loss QBU.
(i) [Reserved]
(j) Adjustments to avoid double counting or omissions.
(k) Reporting.
(1) In general.
(2) QBUs for which reporting is required.
(i) In general.
(ii) QBUs to which the fresh start transition method was applied.
(3) Attachments not required where information is reported on a form.
(4) No change in method of accounting.
(l) Examples.
(1) Example 1: Earnings and capital method.
(i) Facts.
(ii) Analysis.
(2) Example 2: Earnings only method described in paragraph (e)(4)(ii) of this section.
(i) Facts.
(ii) Analysis.
(3) Example 3: Earnings only method described in paragraph (e)(4)(iii) of this section.
(i) Facts.
(ii) Analysis.
(4) Example 4: Owner did not apply section 987(3).
(i) Facts.
(ii) Analysis.
(5) Example 5: Error in application of method.
(i) Facts.
(ii) Analysis.
(6) Example 6: Consistent practice not treated as an error.
(i) Facts.
(ii) Analysis.
§ 1.987-11 Suspended section 987 loss relating to certain elections; loss to the extent of gain rule.(a) In general.
(b) Cumulative suspended section 987 loss in a recognition grouping.
(1) In general.
(2) Combined QBU.
(3) Separated QBU.
(c) Suspension of section 987 loss for taxable years in which a current rate election is in effect and an annual recognition election is not in effect.
(1) In general.
(2) De minimis rule.
(3) Taxable year of controlled group members.
(i) In general.
(ii) Owner is a CFC.
(d) Suspension of net unrecognized section 987 loss upon making or revoking certain elections.
(1) Making an annual recognition election.
(2) Revoking a current rate election.
(e) Loss-to-the-extent of gain rule.
(1) In general.
(2) Separate determination for each recognition grouping.
(3) Amount of suspended section 987 loss recognized.
(i) Current year gain amount.
(ii) Lookback gain amount.
(iii) Suspended section 987 loss not taken into account.
(iv) Lookback period.
(v) Anti-abuse rule.
(4) Suspended section 987 loss recognized with respect to each section 987 QBU and suspended section 987 loss QBU.
(5) Section 381(a) transactions.
(i) In general.
(ii) Limitation for inbound section 381(a) transactions.
(6) Consolidated group members.
(i) In general.
(ii) Suspended section 987 losses arising in separate return limitation years.
(f) Recognition groupings.
(1) Sourcing and section 904 category.
(2) Statutory and residual groupings for CFC owners.
(g) Examples.
(1) Example 1: Suspension of section 987 loss and recognition of suspended section 987 loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Recognition of suspended section 987 loss by reason of gain recognized during the lookback period.
(i) Facts.
(ii) Analysis.
(iii) Alternative facts.
(iv) Analysis of alternative facts.
(3) Example 3: Suspension of section 987 loss when a current rate election is revoked.
(i) Facts.
(ii) Analysis.
§ 1.987-12 Deferral of section 987 gain or loss.(a) Overview.
(1) Scope.
(2) Exceptions.
(i) Annual recognition election.
(ii) De minimis rule.
(b) Treatment of section 987 gain and loss in connection with a deferral event.
(1) Gain or loss recognized (or suspended) in the taxable year of a deferral event.
(2) Deferred section 987 gain or loss.
(i) In general.
(ii) Deferred section 987 gain or loss attributable to a successor deferral QBU.
(c) Recognition (or suspension) of deferred section 987 gain or loss following a deferral event.
(1) Recognition upon a subsequent remittance.
(i) In general.
(ii) Amount.
(iii) Deemed remittance by a successor deferral QBU.
(2) Deferral events and outbound loss events with respect to a successor deferral QBU.
(d) Successor deferral QBU becomes a successor suspended loss QBU.
(e) Anti-abuse rule.
(f) Combinations and separations of successor deferral QBUs.
(1) Combined QBU.
(2) Separated QBU.
(g) Definitions.
(1) Deferral event.
(i) Events.
(ii) Assets on books of successor deferral QBU.
(2) Successor deferral QBU.
(3) Original deferral QBU owner.
(4) Qualified successor.
(h) Examples.
(1) Example 1: Contribution of a section 987 QBU with net unrecognized section 987 gain to a member of the controlled group.
(i) Facts.
(ii) Analysis.
(2) Example 2: Contribution of a section 987 QBU with net unrecognized section 987 loss to a member of the controlled group when a current rate election is in effect.
(i) Facts.
(ii) Analysis.
(3) Example 3: Election to be classified as a corporation.
(i) Facts.
(ii) Analysis.
(4) Example 4: Partial recognition of deferred gain or loss.
(i) Facts.
(ii) Analysis.
§ 1.987-13 Suspended section 987 loss upon terminations.(a) Overview.
(1) In general.
(2) Ordering rule.
(b) Termination of a section 987 QBU with suspended loss.
(1) Suspended section 987 loss becomes suspended section 987 loss with respect to a successor suspended loss QBU.
(i) Successor suspended loss QBU.
(ii) Attribution of suspended section 987 loss to successor suspended loss QBU.
(2) Recognition of suspended section 987 loss.
(c) Termination of a successor suspended loss QBU.
(1) Successor to the successor suspended loss QBU.
(i) Successor suspended loss QBU.
(ii) Attribution of suspended section 987 loss to successor suspended loss QBU.
(2) Recognition of suspended section 987 loss.
(d) Transfer of successor suspended loss QBU owner.
(e) Transfer of original suspended loss QBU owner.
(f) Owner ceases to exist.
(g) Inbound nonrecognition transactions-no carryover of suspended section 987 loss.
(h) Outbound transactions-recognition or suspension of net unrecognized section 987 loss.
(1) In general.
(2) Outbound loss event.
(3) Loss recognition upon an outbound loss event
(4) Loss suspension upon outbound loss event.
(i) [Reserved]
(j) Termination of a successor suspended loss QBU.
(k) Anti-abuse.
(l) Definitions.
(1) Original suspended loss QBU owner.
(i) In general.
(ii) Successors.
(2) Successor suspended loss QBU.
(3) Successor suspended loss QBU owner.
(4) Ownership interests.
(5) Significant portion.
(m) Examples.
(1) Example 1: Trade or business of a section 987 QBU ceases.
(i) Facts.
(ii) Analysis.
(2) Example 2: Trade or business of a section 987 QBU is sold to a third party.
(i) Facts.
(ii) Analysis.
(3) Example 3: Outbound loss event.
(i) Facts.
(ii) Analysis.
§ 1.987-14 Section 987 hedging transactions.(a) Overview.
(b) Section 987 hedging transaction.
(1) In general.
(2) Requirements.
(i) Identification.
(ii) Current rate election.
(iii) Mark-to-market method of accounting.
(iv) Treatment under U.S. generally accepted accounting principles.
(v) Hedge entered into by owner of the hedged QBU.
(3) Anti-abuse rule.
(4) Partial termination of a section 987 hedging transaction.
(c) Identification requirements.
(1) In general.
(2) Inadvertent error.
(d) Taxation of section 987 hedging transactions.
(1) Hedging gain or loss with respect to a hedged QBU.
(2) Adjustment to unrecognized section 987 gain or loss for the taxable year.
(i) Hedging loss.
(ii) Hedging gain.
(3) Termination of a hedged QBU.
(e) Examples.
(1) Example 1: Section 987 hedging transaction.
(i) Facts.
(ii) Analysis.
(2) Example 2: Excess hedging gain from a section 987 hedging transaction.
(i) Facts.
(ii) Analysis.
§ 1.987-15 Applicability date.(a) Applicability date of section 987 regulations.
(1) In general.
(2) Applicability date for a terminating QBU.
(b) Application of the section 987 regulations to taxable years beginning on or before December 31, 2024, and ending after November 9, 2023.
(c) Application of the 2016 and 2019 section 987 regulations.
(1) In general.
(2) Application to section 987 QBUs not owned on the transition date.
(3) Modifications of defined terms for purposes of this paragraph (c).
(i) Application of § 1.987-10 in lieu of prior § 1.987-10.
(ii) Partnerships not included in section 987 electing group.
(iii) Transition date.
(d) Prior § 1.987-12.