Recognition and Deferral of Section 987 Gain or Loss


Published: 2016-12-08

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Federal Register, Volume 81 Issue 236 (Thursday, December 8, 2016)


[Federal Register Volume 81, Number 236 (Thursday, December 8, 2016)]
[Rules and Regulations]
[Pages 88854-88880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28380]



[[Page 88853]]

Vol. 81

Thursday,

No. 236

December 8, 2016

Part IV





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Recognition and Deferral of Section 987 Gain or Loss; Final Rule

Federal Register / Vol. 81 , No. 236 / Thursday, December 8, 2016 /
Rules and Regulations

[[Page 88854]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9795]
RIN 1545-BL12


Recognition and Deferral of Section 987 Gain or Loss

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations under section 987
of the Internal Revenue Code (Code) relating to the recognition and
deferral of foreign currency gain or loss under section 987 with
respect to a qualified business unit (QBU) in connection with certain
QBU terminations and certain other transactions involving partnerships.
This document also contains temporary regulations under section 987
providing: an annual deemed termination election for a section 987 QBU;
an elective method, available to taxpayers that make the annual deemed
termination election, for translating all items of income or loss with
respect to a section 987 QBU at the yearly average exchange rate; rules
regarding the treatment of section 988 transactions of a section 987
QBU; rules regarding QBUs with the U.S. dollar as their functional
currency; rules regarding combinations and separations of section 987
QBUs; rules regarding the translation of income used to pay creditable
foreign income taxes; and rules regarding the allocation of assets and
liabilities of certain partnerships for purposes of section 987.
Finally, this document contains temporary regulations under section 988
requiring the deferral of certain section 988 loss that arises with
respect to related-party loans. The text of these temporary regulations
also serves as the text of the proposed regulations set forth in the
Proposed Rules section in this issue of the Federal Register. In
addition, in the Rules and Regulations section of this issue of the
Federal Register, final regulations are being issued under section 987
to provide general guidance under section 987 regarding the
determination of the taxable income or loss of a taxpayer with respect
to a QBU.

DATES: Effective date. These regulations are effective on December 7,
2016.
Applicability date. For dates of applicability, see Sec. Sec.
1.987-1T(h), 1.987-2T(e), 1.987-3T(f), 1.987-4T(h), 1.987-6T(d), 1.987-
7T(d), 1.987-8T(g), 1.987-12T(j), 1.988-1T(j), and 1.988-2T(j).

FOR FURTHER INFORMATION CONTACT: Steven D. Jensen at (202) 317-6938
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These temporary regulations are being issued without prior notice
and public procedure pursuant to the Administrative Procedure Act (5
U.S.C. 553). For this reason, the collection of information contained
in these regulations has been reviewed and, pending receipt and
evaluation of public comments, approved by the Office of Management and
Budget under control number 1545-2265. Responses to this collection of
information are mandatory.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
For further information concerning this collection of information,
the accuracy of the estimated burden and suggestions for reducing this
burden, and where to submit comments on the collection of information,
please refer to the preamble to the cross-referencing notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Books and 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.

Background

This document contains temporary regulations under section 987 of
the Code relating to the recognition and deferral of foreign currency
gain or loss under section 987 with respect to a QBU in connection with
certain QBU terminations and certain other transactions involving
partnerships. This document also contains temporary regulations under
section 987 providing (i) an annual deemed termination election for a
section 987 QBU; (ii) an elective method, available to taxpayers that
make the annual deemed termination election, for translating all items
of income or loss with respect to a section 987 QBU at the yearly
average exchange rate; (iii) rules regarding the treatment of section
988 transactions of a section 987 QBU; (iv) rules regarding QBUs with
the U.S. dollar as their functional currency; (v) rules regarding
combinations and separations of section 987 QBUs; (vi) rules regarding
the translation of income used to pay creditable foreign income taxes;
and (vii) rules regarding the allocation of assets and liabilities of
certain partnerships for purposes of section 987. Finally, this
document contains temporary regulations under section 988 requiring the
deferral of certain section 988 loss that arises with respect to
related-party loans.
Section 987 generally provides that, when a taxpayer owns one or
more QBUs with a functional currency other than the U.S. dollar and
such functional currency is different than that of the taxpayer, the
taxable income or loss of the taxpayer with respect to each such QBU is
determined by computing the taxable income or loss of each QBU
separately in its functional currency and translating such income or
loss at the appropriate exchange rate. Section 987 further requires the
taxpayer to make ``proper adjustments'' (as prescribed by the Secretary
of the Treasury (the Secretary)) for transfers of property between QBUs
having different functional currencies, including by treating post-1986
remittances from each such QBU as made on a pro rata basis out of post-
1986 accumulated earnings, by treating section 987 gain or loss as
ordinary income or loss, and by sourcing such gain or loss by reference
to the source of the income giving rise to post-1986 accumulated
earnings.
Section 989(c) directs the Secretary to ``prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of [subpart J], including regulations . . . limiting the
recognition of foreign currency loss on certain remittances from
qualified business units . . . [and] providing for the appropriate
treatment of related party transactions (including transactions between
qualified business units of the same taxpayer). . . .''
On September 6, 2006, the Treasury Department and the IRS issued
proposed regulations under section 987 (REG-208270-86, 71 FR 52876)
(the 2006 proposed regulations). The Treasury Department and the IRS
received many written comments in response to the 2006 proposed
regulations and, after consideration of those comments, are issuing
final regulations (TD 9794) under section 987 (the final regulations)
that are being published contemporaneously with these temporary
regulations. These temporary regulations also reflect the consideration
of comments received on the 2006 proposed regulations, as well as other
considerations described in this preamble.

[[Page 88855]]

Explanation of Provisions

1. Deferral of Section 987 Gain or Loss on Certain Terminations and
Other Transactions Involving Partnerships

A. Background
Under the final regulations, the owner of a section 987 QBU that
terminates includes in income all of the net unrecognized section 987
gain or loss with respect to the section 987 QBU in the year it
terminates. See Sec. Sec. 1.987-5(c)(3) and 1.987-8(e). Section 1.987-
8(b) and (c) describe the circumstances in which a section 987 QBU
terminates, which include the transfer (or deemed transfer) of
substantially all of the assets of the section 987 QBU and when the
section 987 QBU's owner ceases to exist (except in connection with
certain liquidations or reorganizations described in section 381(a)).
Under these rules, a termination can result solely from a transfer of a
section 987 QBU between related parties or, when a QBU is owned by an
entity that is disregarded as an entity separate from its owner for
Federal tax purposes (DE), from the deemed transfer that occurs when an
election is made to treat the DE as a corporation for Federal tax
purposes, notwithstanding that the QBU's assets continue to be used in
the same trade or business.
The preamble to the 2006 proposed regulations requested comments
regarding whether inbound liquidations under section 332 and inbound
asset reorganizations under section 368(a) should result in
terminations of section 987 QBUs. The preamble also requested comments
on the interaction of the rules of Sec. 1.1502-13 regarding
intercompany transactions with the 2006 proposed regulations, including
whether section 987 gain or loss resulting from the transfer of assets
and liabilities of a section 987 QBU between members of the same
consolidated group in a section 351 transaction should be deferred
under Sec. 1.1502-13. Many comments recommended that such a section
351 exchange should not trigger the recognition of section 987 gain or
loss.
Because a termination can result in the deemed remittance of all
the assets of a section 987 QBU in circumstances in which the assets
continue to be used by a related person in the conduct of the same
trade or business that formerly was conducted by the section 987 QBU,
terminations can facilitate the selective recognition of section 987
losses. Section 989(c)(2) provides the Treasury Department and the IRS
with authority to ``limit[] the recognition of foreign currency loss on
certain remittances from qualified business units.'' The Treasury
Department and the IRS have determined that terminations of section 987
QBUs generally should not be permitted to achieve the selective
recognition of losses when the assets and liabilities of the section
987 QBU are transferred to a related person and remain subject to
section 987 in the hands of the transferee, as in the case, for
example, of a section 351 transfer of a section 987 QBU within a
consolidated group. Similar policy considerations arise when the
transfer of a partnership interest to a related person results in
deemed transfers that cause the recognition of section 987 loss with
respect to a section 987 QBU owned through the partnership,
notwithstanding that the trade or business of the section 987 QBU
continues without interruption and remains subject to section 987. In
order to address these policy concerns, as described in greater detail
in Part 1.C of this Explanation of Provisions, the temporary
regulations defer section 987 losses resulting from certain termination
events and partnership transactions in which the assets and liabilities
of the section 987 QBU remain within a single controlled group (defined
as all persons with the relationships to each other described in
sections 267(b) or 707(b)) and remain subject to section 987.
The Treasury Department and the IRS also acknowledge, however, that
part of the rationale for deferring section 987 losses--that is, the
continuity of ownership of the section 987 QBU within a single
controlled group--applies equally to section 987 gains that otherwise
would be triggered when taxpayers transfer a section 987 QBU within a
single controlled group. Thus, consistent with the recommendations of
comments on the 2006 proposed regulations, the temporary regulations
generally apply to defer the recognition of section 987 gains as well
as losses when the transferee is subject to section 987 with respect to
the assets of the section 987 QBU. The Treasury Department and the IRS
have determined, however, that gain should not be deferred to the
extent the assets of a section 987 QBU are transferred by a U.S. person
to a related foreign person. Since recognition of the deferred gain
generally would occur only as a result of remittances to the foreign
owner, the IRS could face administrative difficulty in attempting to
ensure that such deferred gain is appropriately recognized and not
indefinitely deferred. Treating gains differently than losses in the
context of transfers to related foreign persons generally is consistent
with the policies underlying sections 267 and 367. In particular, this
rule is consistent with the policy of recognizing foreign currency
gains and not losses with respect to property transferred outbound in a
nonrecognition transaction. See section 367(a)(3)(B)(iii).
In addition, the Treasury Department and the IRS have determined
that selective recognition of losses should not be permitted in the
context of certain outbound transfers even when the assets do not
remain subject to section 987 in the hands of the transferee (because,
for example, the transferee has the same functional currency as the
QBU). Accordingly, consistent with the principles of sections 267 and
367(a), the temporary regulations also provide special rules to prevent
the selective recognition of section 987 losses in certain other
transactions involving outbound transfers.
B. Scope of Application of Sec. 1.987-12T
Section 1.987-12T provides for the deferral of certain net
unrecognized section 987 gain or loss that otherwise would be
recognized in connection with specified events under Sec. 1.987-5,
which governs the recognition of section 987 gain or loss by the owner
of a section 987 QBU to which the final regulations apply. In addition,
because the policy concerns that motivate Sec. 1.987-12T exist
regardless of whether section 987 gain or loss is computed pursuant to
the final regulations or some other reasonable method, Sec. 1.987-12T
applies to any foreign currency gain or loss realized under section
987(3), including foreign currency gain or loss realized under section
987 with respect to a QBU to which the final regulations generally are
not applicable. In order to achieve this, the temporary regulations
specify that references in Sec. 1.987-12T to section 987 gain or loss
refer to any foreign currency gain or loss realized under section
987(3) and that references to a section 987 QBU refer to any eligible
QBU (as defined in Sec. 1.987-1(b)(3)(i), but without regard to Sec.
1.987-1(b)(3)(ii)) that is subject to section 987. Additionally, the
temporary regulations specify that references in Sec. 1.987-12T to the
recognition of section 987 gain or loss under Sec. 1.987-5 encompass
any determination and recognition of gain or loss under section 987(3)
that would occur but for Sec. 1.987-12T. Accordingly, the temporary
regulations require an owner of a QBU that is not subject to Sec.
1.987-5 to adapt the rules set forth in Sec. 1.987-12T to recognize
section 987 gains or losses consistent with the principles of Sec.
1.987-12T.

[[Page 88856]]

The policy concerns regarding selective realization of section 987
losses do not apply, however, with respect to a section 987 QBU that
has made the annual deemed termination election described in Part 2 of
this Explanation of Provisions, because all section 987 gain and loss
is recognized annually under that election. Accordingly, Sec. 1.987-
12T is not applicable to section 987 gain or loss of a section 987 QBU
with respect to which the annual deemed termination election is in
effect.
Finally, in order to avoid any compliance burden associated with
applying Sec. 1.987-12T in circumstances involving relatively small
amounts of section 987 gain or loss, Sec. 1.987-12T includes a de
minimis rule. That rule provides that Sec. 1.987-12T does not apply to
a section 987 QBU if the net unrecognized section 987 gain or loss of
the section 987 QBU that, as a result of Sec. 1.987-12T, would not be
recognized under Sec. 1.987-5 does not exceed $5 million.
Section 1.987-12T defers the recognition of section 987 gains and
losses in connection with two types of specified events, which are
referred to as ``deferral events'' and ``outbound loss events.'' Parts
1.C and 1.D of this Explanation of Provisions describe the rules
governing deferral events and outbound loss events, respectively.
C. Deferral Events
As described in greater detail below, the temporary regulations
provide that, notwithstanding Sec. 1.987-5, the owner of a section 987
QBU with respect to which a deferral event occurs (a deferral QBU) must
defer section 987 gain or loss that otherwise would be taken into
account under Sec. 1.987-5 in connection with the deferral event to
the extent determined under Sec. 1.987-12T(b)(3) and (c). Such
deferred gain or loss is taken into account based on subsequent events
in accordance with Sec. 1.987-12T(c).
i. Deferral Events
The temporary regulations provide that a deferral event with
respect to a section 987 QBU means any transaction or series of
transactions that satisfy two conditions. Under the first condition,
the transaction or series of transactions must be described in one of
two categories. The first category, which is set forth in Sec. 1.987-
12T(b)(2)(ii)(A), is any termination of a section 987 QBU other than
(i) a termination described in Sec. 1.987-8(b)(3) (that is, a
termination that results from the owner of the section 987 QBU ceasing
to be a controlled foreign corporation (as defined in section 957(a))
(CFC) after certain related-party transactions); (ii) a termination
described in Sec. 1.987-8(c) (that is, a termination that results from
a liquidation or asset reorganization described in section 381(a)
involving an inbound or outbound transfer, a transfer by a CFC to a
related non-CFC foreign corporation, or a transfer to a transferee that
has the same functional currency as the section 987 QBU); \1\ or (iii)
a termination described solely in Sec. 1.987-8(b)(1) (that is, a
termination that results solely from the cessation of the trade or
business of the section 987 QBU). Thus, the first category generally
involves terminations that occur as a result of a transfer of
substantially all the assets of a section 987 QBU other than a transfer
as part of a transaction described in section 381(a) in which the owner
ceases to exist. (A termination that results from an outbound section
381(a) transaction, however, may be an outbound loss event.)
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\1\ The transfer of a section 987 QBU as part of a liquidation
or asset reorganization described in section 381(a) in which the
transferor and transferee have the same tax status is not a
termination under Sec. 1.987-8(b) and (c) and, therefore, cannot
constitute a deferral event under the first category.
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The second category, which is described in Sec. 1.987-
12T(b)(ii)(B), encompasses certain partnership transactions that result
in a net deemed transfer from a section 987 QBU to its owner as a
result of which section 987 gain or loss otherwise would be recognized
under Sec. 1.987-5. The second category refers to two types of
transactions involving partnerships.
First, the second category includes a disposition of part of an
interest in a DE or partnership. Under Sec. 1.987-2(c)(5), a transfer
of part of an interest in a DE or section 987 aggregate partnership
results in deemed transfers to the owner of a section 987 QBU held
through that DE or partnership that may result in a remittance, but
that generally do not cause a termination. For an illustration of the
application of Sec. 1.987-12T to a deferral event resulting from the
conversion of a disregarded entity into a section 987 aggregate
partnership, see Sec. 1.987-12T(h), Example 4.
The second type of transaction included in the second category is a
contribution of assets by a related person to a partnership or DE
through which a section 987 QBU is held, provided that the contributed
assets are not included on the books and records of an eligible QBU and
the contribution causes a net transfer from a section 987 QBU owned
through the partnership or DE. The rules of Sec. 1.987-2 must be
applied to determine whether the contribution would cause a net
transfer from any section 987 QBUs held through a partnership. For
example, if two partners (Partner A and Partner B) each own a 50%
interest in an existing section 987 aggregate partnership with a single
section 987 QBU, and Partner A contributes cash that is included on the
books of the section 987 QBU after the contribution and Partner B
contributes an equal amount of non-portfolio stock, the contributions
would not cause either Partner A nor Partner B to have a net transfer
from the section 987 QBU under Sec. 1.987-2 and there would be no
section 987 gain or loss to defer. As a result of the broad scope of
application for Sec. 1.987-12T specified in Sec. 1.987-12T(a)(2), the
second category includes transactions involving partnerships that are
not section 987 aggregate partnerships even though QBUs that are held
through such partnerships generally are not subject to the final
regulations. Accordingly, Sec. 1.987-12T applies to a disposition of a
partnership interest or a contribution to a partnership if it otherwise
would result in recognition of gain or loss under a taxpayer's
reasonable method of applying section 987.
The second condition described in Sec. 1.987-12T(b)(2) is that,
immediately after the transaction or series of transactions, assets of
the section 987 QBU are reflected on the books and records of a
successor QBU. For this purpose, a successor QBU with respect to a
section 987 QBU (original QBU) generally means a section 987 QBU on
whose books and records assets of the original QBU are reflected
immediately after the deferral event, provided that, immediately after
the deferral event, the section 987 QBU is owned by a member of the
controlled group that includes the person that owned the original QBU
immediately before the deferral event. This relatedness requirement
would not be met, for example, if the person that owned the original
QBU ceased to exist in connection with the deferral event.
However, if the owner of the original QBU is a U.S. person, then a
successor QBU does not include a section 987 QBU owned by a foreign
person, except in the case of a deferral event that is solely described
in the second category of transactions involving partnership and DE
interests. This limitation on the definition of a successor QBU in the
context of outbound transfers serves two purposes. First, consistent
with the general policy of recognizing foreign currency gains upon an
outbound transfer, the limitation ensures that section 987 gain is
recognized to the extent section 987 QBU assets are transferred
outbound in connection with a termination. Second, the

[[Page 88857]]

limitation coordinates the deferral event rules with the outbound loss
event rules described in Part 1.D of this Explanation of Provisions,
which contain different rules for the recognition of section 987 loss
attributable to assets of a section 987 QBU that are transferred
outbound in connection with a termination of the section 987 QBU.
ii. Recognition of Section 987 Gain or Loss Under Sec. 1.987-5 in the
Taxable Year of a Deferral Event
The temporary regulations provide that, in the taxable year of a
deferral event, the owner of the deferral QBU generally recognizes
section 987 gain or loss as determined under Sec. 1.987-5, except
that, solely for purposes of applying Sec. 1.987-5, all assets and
liabilities of the deferral QBU that, immediately after the deferral
event, are properly reflected on the balance sheet of a successor QBU
are treated as not having been transferred and therefore as remaining
on the balance sheet of the deferral QBU, notwithstanding the deferral
event. The effect of these rules is that, in the taxable year of a
deferral event, only assets and liabilities of the deferral QBU that
are not reflected on the books and records of a successor QBU
immediately after the deferral event are taken into account in
determining the amount of a remittance from the deferral QBU. Section
987 gain or loss that, as a result of these rules, is not recognized
under Sec. 1.987-5 in the taxable year of the deferral event is
referred to as deferred section 987 gain or loss. As discussed in Part
1.D of this Explanation of Provisions, if the deferral event also
constitutes an outbound loss event, the amount of loss recognized by
the owner may be further limited under the rules applicable to outbound
loss events.
iii. Recognition of Deferred Section 987 Gain or Loss in the Taxable
Year of a Deferral Event and in Subsequent Taxable Years
The temporary regulations provide rules for determining when a
deferral QBU owner recognizes deferred section 987 gain or loss. For
this purpose, a deferral QBU owner means, with respect to a deferral
QBU, the owner of the deferral QBU immediately before the deferral
event with respect to the deferral QBU or the owner's qualified
successor. The temporary regulations define a qualified successor with
respect to a corporation (transferor corporation) as another
corporation (acquiring corporation) that acquires the assets of the
transferor corporation in a transaction described in section 381(a),
but only if (A) the acquiring corporation is a domestic corporation and
the transferor corporation was a domestic corporation, or (B) the
acquiring corporation is a CFC and the transferor corporation was a
CFC. A qualified successor of a corporation includes a qualified
successor of a qualified successor of the corporation.
As described in the remainder of this Part 1.C.iii, the temporary
regulations provide that deferred section 987 gain or loss is
recognized upon subsequent remittances from a successor QBU, or upon a
deemed remittance that occurs when a successor QBU ceases to be owned
by a member of the deferral QBU owner's controlled group, subject to an
exception that applies when a successor QBU terminates in an outbound
transfer. In general, these rules depend on the continued existence of
a deferral QBU owner (which includes a qualified successor) and a
successor QBU and preserve the location of the deferred section 987
gain or loss as gain or loss of the deferral QBU owner.
a. Subsequent Remittances
A deferral QBU owner generally recognizes deferred section 987 gain
or loss in the taxable year of a remittance from a successor QBU to the
owner of the successor QBU (successor QBU owner). The amount of
deferred section 987 gain or loss that a deferral QBU owner recognizes
upon a remittance is the outstanding deferred section 987 gain or loss
(that is, the deferred section 987 gain or loss not previously
recognized) multiplied by the remittance proportion of the successor
QBU owner with respect to the successor QBU for the taxable year as
determined under Sec. 1.987-5(b) and, to the extent relevant, Sec.
1.987-12T. For an illustration of this rule, see Sec. 1.987-12T(h),
Example 5.
In certain cases, there may be multiple successor QBUs with respect
to a single deferral QBU. For instance, there may be multiple successor
QBUs if the owner of a section 987 aggregate partnership interest
transfers part of its interest or if a successor QBU separates into two
or more separated QBUs under Sec. 1.987-2T(c)(9)(ii). To ensure that a
deferral QBU owner recognizes the appropriate amount of deferred
section 987 gain or loss in connection with a remittance in such cases,
the temporary regulations provide that multiple successor QBUs of the
same deferral QBU are treated as a single successor QBU for purposes of
determining the amount of deferred section 987 gain or loss that is
recognized.
For example, if the owner (Corp A) of a section 987 aggregate
partnership interest transfers part of its interest to another member
of Corp A's consolidated group (Corp B), the transfer would give rise
to a deferral event with respect to the section 987 QBU (QBU A) that
Corp A indirectly owns through the partnership. QBU A would be
considered a deferral QBU, and Corp A would be considered a deferral
QBU owner. In addition, QBU A would be considered a successor QBU with
respect to itself, and the section 987 QBU (QBU B) that Corp B owns
indirectly through the partnership interest it acquired also would be
considered a successor QBU with respect to QBU A. In determining the
amount of deferred section 987 gain or loss recognized upon subsequent
remittances from successor QBUs, the two successor QBUs are treated as
a single successor QBU, such that their remittance proportion is
determined under Sec. 1.987-5 on a combined basis, taking into account
the assets and remittances of both successor QBUs.
b. Deemed Remittance When a Successor QBU Ceases To Be Owned by a
Member of the Deferral QBU Owner's Controlled Group
Solely for purposes of determining a deferral QBU owner's
recognition of any outstanding deferred section 987 gain or loss, a
successor QBU owner is treated as having a remittance proportion of 1
in a taxable year in which its successor QBU ceases to be owned by a
member of a controlled group that includes the deferral QBU owner,
including as a result of the deferral QBU owner ceasing to exist
without having a qualified successor. Accordingly, a deferral QBU owner
would recognize all outstanding deferred section 987 gain or loss upon
a successor QBU ceasing to be owned by a member of the deferral QBU
owner's controlled group if there is only one successor QBU, but would
recognize only a proportional amount if there are multiple successor
QBUs, one or more of which remain in the deferral QBU owner's
controlled group.
c. Recognition of Deferred Section 987 Loss in Certain Outbound
Successor QBU Terminations
Notwithstanding that deferred section 987 gain or loss generally is
recognized upon remittances from a successor QBU, Sec. 1.987-12T(c)(3)
provides that, if assets of a successor QBU are transferred (or deemed
transferred) in an exchange that would constitute an outbound loss
event if the successor QBU had a net accumulated section 987 loss at
the time of the exchange, the deferral QBU owner recognizes any
outstanding deferred section 987 loss on a similar basis as it would if
it originally had transferred the

[[Page 88858]]

deferral QBU in an outbound loss event. Any outstanding deferred
section 987 loss with respect to the deferral QBU that, as a result of
this rule, is not recognized is recognized by the deferral QBU owner in
the first taxable year in which the deferral QBU owner (including any
qualified successor) and the acquirer of the assets of the successor
QBU (or any qualified successor) cease to be members of the same
controlled group. Section 1.987-12T(c)(4) ensures that the policy
concerns that motivate the treatment of outbound loss events under the
temporary regulations apply in comparable circumstances involving
successor QBUs. See Part 1.D of this Explanation of Provisions for an
explanation of outbound loss events.
d. Special Rules Regarding Successor QBUs
The temporary regulations include three special rules regarding
successor QBUs that are relevant to the recognition of deferred section
987 gain or loss. First, if a section 987 QBU is a successor QBU with
respect to a deferral QBU that is a successor QBU with respect to
another deferral QBU, the first-mentioned section 987 QBU is considered
a successor QBU with respect to the second-mentioned deferral QBU. For
example, if QBU A is a successor QBU with respect to QBU B, and QBU B
is a successor QBU with respect to QBU C, then QBU A is a successor QBU
with respect to QBU C.
Second, if a successor QBU with respect to a deferral QBU separates
into two or more separated QBUs (as defined in Sec. 1.987-
2T(c)(9)(iii)), each separated QBU is considered a successor QBU with
respect to the deferral QBU.
Third, if a successor QBU with respect to a deferral QBU combines
with another section 987 QBU of the same owner, resulting in a combined
QBU (as defined in Sec. 1.987-2T(c)(9)(i)), the combined QBU is
considered a successor QBU with respect to the deferral QBU.
iv. Source and Character of Deferred Section 987 Gain and Loss
The temporary regulations provide that the source and character of
deferred section 987 gain or loss is determined under Sec. 1.987-6 as
if such gain or loss had been recognized with respect to the deferral
QBU under Sec. 1.987-5 on the date of the deferral event that gave
rise to the deferred section 987 gain or loss. Thus, the source and
character of deferred section 987 gain or loss is determined under
Sec. 1.987-6 without regard to the timing rules of Sec. 1.987-12T.
D. Outbound Loss Events
Section 1.987-12T(d) of the temporary regulations contains rules
that defer section 987 loss to the extent assets of a section 987 QBU
are transferred outbound to a related foreign person in connection with
an ``outbound loss event.'' Specifically, the temporary regulations
provide that, notwithstanding Sec. 1.987-5, the owner of a section 987
QBU with respect to which an outbound loss event occurs (outbound loss
QBU) includes in taxable income in the year of the outbound loss event
section 987 loss with respect to that section 987 QBU only to the
extent provided in Sec. 1.987-12T(d)(3). Sections 1.987-12T(d)(4) and
(5) provide rules for the subsequent recognition of losses that are
deferred under Sec. 1.987-12T(d) that differ from the remittance-based
rules that generally apply following deferral events.
Like the definition of deferral event, an outbound loss event
includes two categories of transactions with respect to a section 987
QBU with net unrecognized section 987 loss. First, an outbound loss
event includes any termination of the section 987 QBU in connection
with a transfer of assets of the section 987 QBU by a U.S. person to a
foreign person that was a member of the same controlled group as the
U.S. transferor immediately before the transaction or, if the
transferee did not exist immediately before the transaction,
immediately after the transaction (related foreign person). The second
category of outbound loss events includes any transfer by a U.S. person
of part of an interest in a section 987 aggregate partnership or DE
through which the U.S. person owns the section 987 QBU to a related
foreign person that has the same functional currency as the section 987
QBU. The second category also includes a contribution of assets by such
a related foreign person to the partnership or DE if the contribution
has the effect of reducing the U.S. person's interest in the section
987 QBU (and therefore causes a deemed transfer of assets and
liabilities to the U.S. person from the section 987 QBU) and the
contributed assets are not included on the books and records of an
eligible QBU of the partnership or DE. The second category would be
implicated, for example, if a U.S. person transferred part of the
interest in a DE through which it owned a section 987 QBU to a foreign
corporation that had the same functional currency as the section 987
QBU in an outbound section 351 transaction.
Under these rules, the owner of the outbound loss QBU recognizes
section 987 loss in the taxable year of the outbound loss event as
determined under Sec. 1.987-5 and the deferral event rules of Sec.
1.987-12T(b) and (c), except that, solely for purposes of applying
Sec. 1.987-5, certain assets and liabilities of the outbound loss QBU
are treated as not having been transferred and therefore as remaining
on the balance sheet of the section 987 QBU, notwithstanding the
outbound loss event. In the first category of outbound loss event
(involving outbound asset transfers resulting in terminations), assets
and liabilities that, immediately after the outbound loss event, are
properly reflected on the books and records of the related foreign
person or a section 987 QBU of the related foreign person are treated
as not having been transferred. In the second category of outbound loss
event (involving certain partnership and DE transactions), assets and
liabilities that, immediately after the outbound loss event, are
reflected on the books and records of the eligible QBU from which the
assets and liabilities of the outbound loss QBU are allocated, and not
on the books and records of a section 987 QBU, are treated as not
having been transferred. The difference between the amount that
otherwise would have been recognized and the amount actually recognized
under this rule is referred to as outbound section 987 loss.
Although an outbound loss event in the second category also would
constitute a deferral event, the rules governing deferral events only
defer section 987 loss of a deferral QBU to the extent assets and
liabilities are reflected on the books and records of a successor QBU
immediately after the deferral event. Assets and liabilities of a
deferral QBU that are reflected on the books and records of an eligible
QBU of a partnership and allocated to a partner that has the same
functional currency as the eligible QBU, as would occur in an outbound
loss event, are not reflected on the books and records of a successor
QBU and so would not cause section 987 loss to be deferred under the
deferral event rules. Thus, there is no overlap in terms of the effect
of the outbound loss event rules and the deferral event rules.
If an outbound loss event results from the transfer of assets of
the outbound loss QBU in a nonrecognition transaction, the basis of the
stock that is received in the transaction is increased by an amount
equal to the outbound section 987 loss. In effect, this rule converts a
section 987 loss into an unrealized stock loss, which may be recognized
upon a recognition event with respect to the stock. This treatment

[[Page 88859]]

is similar to the treatment under section 367(a) of foreign currency
losses with respect to foreign-currency denominated property that is
transferred outbound in a nonrecognition event to a foreign corporation
that has as its functional currency the currency in which the property
is denominated. Outbound section 987 loss attributable to an outbound
loss event that does not occur in connection with a nonrecognition
transaction is recognized by the owner of the outbound loss QBU in the
first taxable year in which the owner (or any qualified successor) and
the related foreign person that participated in the outbound loss event
(or any qualified successor) cease to be members of the same controlled
group. In many circumstances this treatment will provide similar
results as converting section 987 loss into stock basis as in the case
of outbound loss events that result from a nonrecognition transaction.
The temporary regulations provide that, if loss is recognized on
the sale or exchange of stock within two years of an outbound loss
event that gave rise to an adjustment to the basis of the stock, then,
to the extent of the outbound section 987 loss, the source and
character of the loss recognized on the sale or exchange will be
determined under Sec. 1.987-6 as if such loss were section 987 loss
recognized pursuant to Sec. 1.987-5 without regard to Sec. 1.987-12T
on the date of the outbound loss event.
E. Anti-Abuse Rule
The temporary regulations provide an anti-abuse rule to address
transactions structured to avoid the deferral rules in Sec. 1.987-12T.
This rule provides that no section 987 loss is recognized under Sec.
1.987-5 in connection with a transaction or series of transactions that
are undertaken with a principal purpose of avoiding the purposes of
Sec. 1.987-12T. This rule would apply, for example, if, with a
principal purpose of recognizing a deferred section 987 loss, a
taxpayer engaged in a transaction that caused a deferral QBU owner to
cease to exist without a qualified successor or caused a successor QBU
to cease to exist, such that deferred section 987 loss otherwise would
be recognized under Sec. 1.987-12T(c).
F. Coordination With Fresh Start Transition Method
The temporary regulations require adjustments to coordinate the
application of Sec. 1.987-12T with the fresh start transition method
described in Sec. 1.987-10(b) for transitioning to the final
regulations. If a deferral QBU owner is required under Sec. 1.987-
10(a) to apply the fresh start transition method with respect to the
deferral QBU on the transition date, or if a deferral QBU owner would
have been so required if it had owned the deferral QBU on the
transition date, the outstanding deferred section 987 gain or loss of
the deferral QBU owner with respect to the deferral QBU must be
adjusted on the transition date to equal the amount of outstanding
deferred section 987 gain or loss that the deferral QBU owner would
have had with respect to the deferral QBU on the transition date if,
immediately before the deferral event, the deferral QBU had
transitioned to the final regulations pursuant to the fresh start
transition method. Additionally, if the owner of an outbound loss QBU
is required under Sec. 1.987-10(a) to apply the fresh start transition
method with respect to the outbound loss QBU on the transition date, or
if the owner would have been so required if it had owned the outbound
loss QBU on the transition date, the basis of any stock that was
subject to a basis adjustment under Sec. 1.987-12T as a result of the
outbound loss event must be adjusted to equal the basis that such stock
would have had on the transition date if, immediately prior to the
outbound loss event, the outbound loss QBU had transitioned to the
final regulations pursuant to the fresh start transition method.
Outbound section 987 loss that is not reflected in stock basis but that
will be recognized when the owner and the related foreign person that
participated in the outbound loss event cease to be members of the same
controlled group must be adjusted in a similar manner. These
adjustments to coordinate the application of Sec. 1.987-12T with the
fresh start transition method must be made even if the deferral QBU
owner or the owner of the outbound loss QBU continues to own the
deferral QBU or the outbound loss QBU on the transition date, as in the
case of a deferral event or outbound loss event resulting from a
transfer of part of an interest in a section 987 aggregate partnership
that does not result in the termination of the deferral QBU or outbound
loss QBU.
G. Effective Date
The temporary regulations under Sec. 1.987-12T generally apply to
any deferral event or outbound loss event that occurs on or after
January 6, 2017. However, if the deferral event or outbound loss event
is undertaken with a principal purpose of recognizing section 987 loss,
the 30 day delayed effective date does not apply and Sec. 1.987-12T is
effective immediately on December 7, 2016.

2. Annual Deemed Termination Election

A comment on the 2006 proposed regulations recommended that
taxpayers be permitted to make a one-time election under Sec. 1.987-5
to deem a section 987 QBU as having terminated at the end of each year,
thereby requiring the owner to recognize all section 987 gains or
losses with respect to the QBU on an annual basis. The comment
suggested that such an election would allow taxpayers to reduce the
complexity and administrative cost of complying with section 987
because taxpayers would not be required to track transactions between
an owner and its section 987 QBU or unrecognized section 987 gains and
losses carried over from previous years.
The Treasury Department and the IRS have determined that an annual
deemed termination election would not obviate the need to track
transactions between an owner and its section 987 QBU, since the net
transfer would remain relevant to the annual calculation of section 987
gain or loss. Nonetheless, the Treasury Department and the IRS agree
that an annual deemed termination election could enhance
administrability of the final regulations by reducing the recordkeeping
requirements necessary to apply the final regulations. Additionally,
when an annual deemed termination election is in effect, taxpayers
could not strategically time remittances in order to selectively
recognize section 987 losses but not section 987 gains. Eliminating
this planning opportunity would obviate the need for the deferral
provisions of Sec. 1.987-12T. Furthermore, as discussed in Part 3 of
this Explanation of Provisions, an annual deemed termination election
would address a policy concern with permitting the hybrid approach to
section 987 suggested by comments on the 2006 proposed regulations.
Based on the foregoing considerations, Sec. 1.987-8T(d) provides
an election for a taxpayer to deem its section 987 QBUs to terminate on
the last day of each taxable year for which the election is in effect.
Because the considerations supporting an annual deemed termination
election generally are relevant regardless of whether a taxpayer is
subject to the final regulations, the election under Sec. 1.987-8T(d)
is available to any taxpayer without regard to the applicability of the
final regulations to that taxpayer or any of its section 987 QBUs. A
section 987 QBU to which this election applies is treated as having
made a remittance of all of its gross assets to its owner

[[Page 88860]]

immediately before the section 987 QBU terminates on the last day of
each taxable year, resulting in the recognition of any net unrecognized
section 987 gain or loss of the section 987 QBU. See Sec. Sec. 1.987-
5(c)(3) and 1.987-8(e). The owner is then treated as having transferred
all of the assets and liabilities of the terminated section 987 QBU to
a new section 987 QBU on the first day of the following taxable year.
As noted in Part 1 of this Explanation of Provisions, the temporary
regulations provide that the deferral provisions of Sec. 1.987-12T do
not apply with respect to section 987 QBUs for which the annual deemed
termination election is in effect. Consequently, a taxpayer that finds
the annual deemed termination election preferable to Sec. 1.987-12T
based on ease of compliance or other reasons may make the annual deemed
termination election. Moreover, as discussed in Part 3 of this
Explanation of Provisions, a taxpayer that makes the annual deemed
termination election with respect to a section 987 QBU may reduce the
compliance burden associated with computing taxable income or loss
under the final regulations by electing to translate taxable income or
loss of the section 987 QBU into the owner's functional currency at the
yearly average exchange rate without any adjustments.
The Treasury Department and the IRS have determined that special
consistency and effective date rules are needed for the annual deemed
termination election to prevent taxpayers from using the election to
selectively recognize section 987 losses without recognizing section
987 gains. Unless the annual deemed termination election is required to
be made with respect to all section QBUs owned by related persons at
the time of the election, taxpayers could choose to make the election
only with respect to section 987 QBUs that have net unrecognized
section 987 losses at the time of the election. Accordingly, Sec.
1.987-1T(g)(2)(i)(B)(1) provides that the annual deemed termination
election generally applies to all section 987 QBUs owned by an electing
taxpayer, as well as to all section 987 QBUs owned by any person that
has a relationship to the taxpayer described in section 267(b) or
section 707(b) (substituting ``and the profits interest'' for ``or the
profits interest'' in section 707(b)(1)(A) and substituting ``and
profits interests'' for ``or profits interests'' in section
707(b)(1)(B)) on the last day of the first taxable year for which the
election applies to the taxpayer (a related person).
A taxpayer that is subject to the final regulations and that must
transition to the final regulations under the fresh start transition
method of Sec. 1.987-10(b) (fresh start taxpayer) may make the annual
deemed termination election only if the first taxable year for which
the election would apply is either (i) the first taxable year beginning
on or after the transition date (as defined in Sec. 1.987-11(c)) with
respect to the taxpayer or (ii) a subsequent taxable year in which the
``taxpayer's controlled group aggregate section 987 loss'' (if any)
does not exceed $5 million. For this purpose, a ``taxpayer's controlled
group aggregate section 987 loss'' means the aggregate net amount of
section 987 gain or loss that would be recognized pursuant to the
election under Sec. 1.987-8T(d) by the taxpayer and all related
persons in the first taxable year of each person for which the election
would apply.
Taxpayers that used a method based on a reasonable application of
the 2006 proposed regulations prior to the transition date, and which
therefore are not subject to the fresh start transition method pursuant
to Sec. 1.987-10(c), and taxpayers for which the final regulations are
not applicable, must follow the election rules for fresh start
taxpayers if any related party is a fresh start taxpayer. If no related
party is a fresh start taxpayer, the annual deemed termination election
may be made only if the first taxable year for which the election would
apply is either (i) the first taxable year beginning on or after
December 7, 2016, in which the election is relevant in determining
section 987 taxable income or loss or section 987 gain or loss or (ii)
a subsequent taxable year in which the ``taxpayer's controlled group
aggregate section 987 loss'' (if any) does not exceed $5 million.
If a taxpayer makes the annual deemed termination election, the
election will apply to the first taxable year of a related person that
ends with or within a taxable year of the taxpayer to which the
taxpayer's election applies. Once made, the annual deemed termination
election may not be revoked.
As provided in Sec. 1.987-1T(g)(2)(i)(B)(2), the special
consistency and effective date rules in Sec. 1.987-1T(g)(2)(i)(B)(1)
do not apply and a taxpayer may make a separate election under Sec.
1.987-8T(d) with respect to any section 987 QBU owned by the taxpayer
if the first taxable year for which the election would apply to the
taxpayer with respect to the section 987 QBU is a taxable year in which
the deemed termination results in the recognition of section 987 gain
with respect to the section 987 QBU or the deemed termination results
in the recognition of $1 million or less of section 987 loss with
respect to the section 987 QBU.

3. Election To Translate All Items at the Yearly Average Exchange Rate

As discussed in the preamble to the final regulations, comments on
the 2006 proposed regulations recommended a hybrid approach that would
combine the methodology of the regulations proposed under section 987
in 1991 (INTL-965-86, 56 FR 48457) for computing a section 987 QBU's
net income with the methodology of the 2006 proposed regulations for
computing section 987 gain or loss. Under the proposed hybrid approach,
section 987 gain or loss generally would be determined under the method
of the 2006 proposed regulations, but taxable income or loss would be
translated into the owner's functional currency at the yearly average
exchange rate without any adjustments.
Although a hybrid approach would simplify the calculation of
section 987 taxable income or loss, the preamble to the final
regulations observes that the hybrid approach gives rise to offsetting
effects in section 987 taxable income or loss and in the foreign
exchange exposure pool (FEEP) that raise concerns similar to those
addressed by Congress in enacting section 1092. In particular, under
the hybrid approach, exchange rate effects with respect to historic
assets would be reflected in section 987 taxable income or loss to the
extent of any cost recovery deductions with respect to those assets,
but equal and offsetting amounts would be reflected in the FEEP and
would be recognized only upon remittances. Thus, offsetting effects
arising from a single asset would be taken into account at different
times. The Treasury Department and the IRS have determined that it
would be inappropriate for regulations under section 987 to permit
distortions to section 987 taxable income or loss that have the effect
of causing potentially large offsetting amounts of loss or gain to be
reflected in the FEEP with respect to the same asset, since the loss or
gain in the FEEP would be recognized only upon voluntary remittances
from the QBU.
Nonetheless, the Treasury Department and the IRS acknowledge the
concerns expressed in comments regarding the complexity of the 2006
proposed regulations that underlie the recommendation to adopt the
hybrid approach. Concerns about offsetting amounts recognized at
different times under the hybrid approach would not

[[Page 88861]]

arise for taxpayers that make the annual deemed termination election
set forth in Sec. 1.987-8T(d). A taxpayer that recognizes all section
987 gain or loss with respect to its section 987 QBUs annually would
take into account in recognized section 987 gain or loss the exchange
rate effects with respect to historic assets that are reflected in the
FEEP in the same taxable year in which the offsetting effects are taken
into account in section 987 taxable income or loss. Although the hybrid
approach could result in differences in character of exchange gain or
loss relative to the final regulations even for taxpayers that make the
annual deemed termination election, the Treasury Department and the IRS
have determined that the administrative convenience of allowing
taxpayers to translate a section 987 QBU's taxable income at the yearly
average exchange rate outweighs that consideration.
Accordingly, the temporary regulations provide that a taxpayer that
is otherwise generally subject to the final regulations may elect to
apply the hybrid approach with respect to a section 987 QBU that is
subject to the annual deemed termination election. In particular, Sec.
1.987-3T(d) provides that, notwithstanding the rules of Sec. 1.987-
3(c) for translating items determined under Sec. 1.987-3(b) in a
section 987 QBU's functional currency into the owner's functional
currency, a taxpayer may elect to translate all items of income, gain,
deduction, and loss of a section 987 QBU with respect to which the
annual deemed termination election described in Sec. 1.987-8T(d) is in
effect into the owner's functional currency, if necessary, at the
yearly average exchange rate for the taxable year. An owner of multiple
section 987 QBUs may make the election described in Sec. 1.987-3T(d)
with respect to all of its section 987 QBUs or only certain designated
section 987 QBUs.

4. Section 988 Transactions of a Section 987 QBU

A. Background Regarding the Treatment of Section 988 Transactions Under
the Proposed Regulations
The 2006 proposed regulations reflected a two-pronged approach to
the application of section 988 to transactions of a section 987 QBU,
with different consequences generally depending on whether a
transaction is denominated in (or determined by reference to) the
owner's functional currency or a currency that is a nonfunctional
currency with respect to both the owner and the section 987 QBU (third
currency). As a general rule, Sec. 1.987-3(e)(1) of the 2006 proposed
regulations provided that section 988 applies to section 988
transactions attributable to a section 987 QBU and that the timing of
any gain or loss is determined under the applicable provisions of the
Code, but the 2006 proposed regulations did not clearly specify whether
section 988 gain or loss would be determined with respect to the
functional currency of the section 987 QBU or the owner's functional
currency. Assets and liabilities giving rise to section 988
transactions were defined under proposed Sec. 1.987-1(d) and (e) as
historic items. Under Sec. 1.987-3(e)(2) of the 2006 proposed
regulations, transactions of a section 987 QBU described in section
988(c)(1)(B)(i) (relating to the acquisition of, or becoming an obligor
under, a debt instrument), section 988(c)(1)(B)(ii) (relating to
accrual of items of expense or gross income or receipts) or section
988(c)(1)(C) (relating to the disposition of nonfunctional currency)
that are denominated in (or determined by reference to) the owner's
functional currency, however, were not treated as section 988
transactions of the section 987 QBU, and no gain or loss was recognized
under section 988 with respect to such transactions. Assets and
liabilities giving rise to such transactions were required to be
reflected on the balance sheet of the section 987 QBU in the owner's
functional currency under Sec. 1.987-2(d)(2) of the 2006 proposed
regulations.
Additionally, Sec. 1.987-3(d) of the 2006 proposed regulations
provided that an item of income, gain, deduction, or loss of a section
987 QBU denominated in a currency other than the functional currency of
the owner is translated at the spot rate on date the item is
appropriately taken into account. Under Sec. 1.987-3(c) of the 2006
proposed regulations, an item of income, gain, deduction, or loss of a
section 987 QBU denominated in the owner's functional currency is not
translated and is taken into account by the section 987 QBU in the
owner's functional currency.
One comment indicated that the 2006 proposed regulations were
unclear regarding the interaction of the rules for the treatment of
section 988 transactions denominated in a third currency with the
treatment of assets that give rise to section 988 transactions as
historic assets. Upon the disposition of a historic asset, the 2006
proposed regulations required translation of the basis of the historic
asset at the historic rate and the amount realized with respect to the
asset at the yearly average exchange rate for the taxable year of the
disposition or, if properly elected, the appropriate spot rate. Yet,
Sec. 1.987-3(f), Example 10 of the 2006 proposed regulations
illustrated the determination of section 988 gain or loss on a third-
currency section 988 transaction in, and by reference to, the section
987 QBU's functional currency and translation of that amount into the
owner's functional currency at the yearly average exchange rate. Under
the approach of the example, historic asset basis is effectively
translated at the yearly average exchange rate rather than the
appropriate historic rate.
B. General Rules for Section 988 Transactions in the Temporary
Regulations
In light of the comment regarding the uncertain application of
section 988 to transactions of a section 987 QBU under the 2006
proposed regulations and further consideration of the appropriate
rules, the temporary regulations clarify and elaborate upon the
application of section 988 to transactions attributable to a section
987 QBU. In this regard, the Treasury Department and the IRS have
determined that computing section 988 gain or loss by reference to the
functional currency of the section 987 QBU, rather than the owner's
functional currency, and translating that amount at the yearly average
exchange rate would be inconsistent with the treatment of items that
give rise to section 988 transactions as historic items. Such items
were treated as historic items under the 2006 proposed regulations
because they do not economically expose the owner to fluctuations in
the section 987 QBU's functional currency.
Taking these considerations into account, the Treasury Department
and the IRS have determined that it is appropriate to continue to treat
assets and liabilities giving rise to section 988 transactions of a
section 987 QBU as historic items under Sec. Sec. 1.987-1(d) and (e)
of the final regulations. Thus, for example, a note denominated in a
nonfunctional currency that gives rise to a section 988 transaction
when acquired is a historic asset. However, the temporary regulations
generally provide that section 988 gain or loss arising from section
988 transactions of a section 987 QBU is determined by reference to the
owner's functional currency, rather than the functional currency of the
section 987 QBU. See Sec. 1.987-3T(b)(4)(i). Accordingly, in
determining section 988 gain or loss with respect to a section 988
transaction of a section 987 QBU, the amounts required under section
988 to be translated on the applicable booking date or payment date
with respect to the section 988 transaction are translated from the
currency in which the amounts are denominated (or by reference to

[[Page 88862]]

which they are determined) into the owner's functional currency at the
rate required under section 988 and the section 988 regulations, which
provide for translation at the appropriate spot rate.
When a section 987 QBU recognizes gain or loss on the disposition
of a historic asset that gives rise to a section 988 transaction, some
or all of the total gain or loss that is realized on the disposition
may be section 988 gain or loss that, under section 988, is ordinary
income that is sourced by reference to the residence of the section 987
QBU. For example, on the disposition of a nonfunctional currency note,
the total gain or loss realized may be comprised of section 988 gain or
loss that reflects exchange rate changes and other gain or loss that
reflects other factors, such as changes in prevailing interest rates or
in the creditworthiness of the note issuer. The total gain or loss on
the disposition of a historic asset that gives rise to a section 988
transaction is determined under the general rules of section 987 by
reference to the functional currency of the section 987 QBU. Section
988 gain or loss on the note is determined under Sec. Sec. 1.988-
2(b)(5) and (8) and 1.987-3T(b)(4)(i) by comparing the section 987
QBU's acquisition price for the note in nonfunctional currency
translated into the owner's functional currency at the spot rates on
the date of acquisition and the date of disposition, respectively. See
Sec. 1.987-3T(e), Example 11. To provide for consistent translation
rates for determining both the total gain or loss on such a historic
asset and the portion of the total gain or loss that is section 988
gain or loss, Sec. 1.987-3T(c)(2)(ii) specifies that the spot rate
also must be used to translate the amount received with respect to a
historic asset if the acquisition of the historic asset gave rise to a
section 988 transaction. Additionally, consistent with the regulations
under Sec. 1.988-1(d) regarding the use of spot rate conventions for
section 988 transactions, Sec. 1.987-1T(c)(1)(ii)(B) specifies that
the election in Sec. 1.987-1(c)(1)(ii)(A) to use a spot rate
convention generally does not apply for purposes of determining section
987 taxable income or loss with respect to a historic item (as defined
in Sec. 1.987-1(e)) if acquiring, accruing, or entering into such item
gave rise to a section 988 transaction or a specified owner functional
currency transaction (discussed in this Part B).
Because assets and liabilities that give rise to section 988
transactions generally are historic items that have a spot rate as the
historic rate under Sec. 1.987-1T(c)(3)(i)(E), such assets and
liabilities are translated at historic rates and do not give rise to
section 987 gain or loss. Thus, when the general rules for section 988
transactions of a section 987 QBU apply, the owner will take into
account under subpart J foreign currency exposure with respect to a
section 988 transaction of a section 987 QBU only to the extent of the
owner's economic exposure to fluctuations of its functional currency
relative to the currency in which the section 988 transaction is
denominated.
Additionally, consistent with the 2006 proposed regulations, the
temporary regulations confirm that certain transactions that are
denominated in (or determined by reference to) the owner's functional
currency are not subject to section 988. Specifically, Sec. 1.987-
3T(b)(4)(ii) provides that specified owner functional currency
transactions, which are defined as transactions described in section
988(c)(1)(B)(i) or (ii) or section 988(c)(1)(C) (including the
acquisition of nonfunctional currency described in Sec. 1.988-1(a)(1))
that are denominated in (or determined by reference to) the owner's
functional currency, other than certain transactions described in Sec.
1.987-3T(b)(4)(iii)(A) that are subject to a mark-to-market regime
(discussed in Part 4.C of this Explanation of Provisions), are not
treated as section 988 transactions. Although the temporary regulations
do not follow the 2006 proposed regulations in specifying that assets
and liabilities that give rise to specified owner functional currency
transactions must be reflected on the balance sheet of the section 987
QBU in the owner's functional currency, the temporary regulations treat
items that give rise to specified owner functional currency
transactions as historic items that generally have a spot rate as the
historic rate under Sec. 1.987-1T(c)(3)(i)(E) and provide under Sec.
1.987-3T(b)(2)(ii) that the basis and amount realized of a historic
asset that gives rise to a specified owner functional currency
transactions are not translated if denominated in the owner's
functional currency. Together, these rules have the same effect as the
treatment of specified owner functional currency transactions under the
2006 proposed regulations.
C. Special Rules To Allow Greater Conformity With the Financial
Accounting Treatment for Certain Section 988 Transactions
As discussed in the preamble to the final regulations, under the
financial accounting standard described in Accounting Standards
Codification, Foreign Currency Matters, section 830 (ASC 830), gains
and losses from changes in exchange rates with respect to transactions
that are denominated in a currency other than the entity's functional
currency are referred to as ``transaction'' gains and losses. The
category of foreign currency transactions that give rise to transaction
gains and losses for financial accounting purposes overlaps
considerably with the definition of a section 988 transaction for tax
purposes, such that transaction gains and losses under financial
accounting rules are conceptually similar to section 988 gains and
losses. The financial accounting rules require the inclusion of
transaction gains and losses in net income for the period in which the
exchange rate changes occur. See ASC 830-20-35-1. Moreover, transaction
gain or loss is always determined by reference to the functional
currency of the entity that entered into the transaction. Thus, the
financial accounting rules differ from the general tax rules applicable
to section 988 transactions entered into by a section 987 QBU in two
respects. First, the financial accounting rules require transaction
gain or loss to be determined on a mark-to-market basis, whereas gain
or loss from a section 988 transaction generally is not recognized
until there is a realization event under general tax principles and the
applicable provisions of the Code. Second, the financial accounting
rules require transaction gain or loss to be determined by reference to
the entity's functional currency, even when it differs from the
reporting currency used in the consolidated financial statements and
the transaction is denominated in the reporting currency.
As noted in the preamble to the final regulations, comments on the
2006 proposed regulations expressed a preference for greater
consistency of the section 987 regulations with financial accounting
rules. Taking these comments into account, the Treasury Department and
the IRS have determined that providing treatment similar to the
financial accounting treatment for certain section 988 transactions of
section 987 QBUs will enhance administrability of the section 987
regulations with respect to such transactions and is consistent with
the policies of sections 987 and 988.
Accordingly, as discussed in Part 1.C.i of this Explanation of
Provisions, the temporary regulations permit a taxpayer to elect to
determine section 987 gain or loss with respect to qualified short-term
section 988 transactions (described in Part 1.C.i of this Explanation
of Provisions) of a section 987 QBU under a foreign currency mark-to-
market method of accounting. In addition, as discussed in Part 4.C.ii
of this

[[Page 88863]]

Explanation of Provisions, the temporary regulations provide that
section 988 gain or loss with respect to qualified short-term section
988 transactions that are accounted for under a mark-to-market method
of accounting for Federal tax purposes (including the elective method
described in Part 1.C.i of this Explanation of Provisions) is
determined in, and by reference to, the functional currency of the
section 987 QBU rather than the functional currency of its owner.
i. Election To Apply a Foreign Currency Mark-to-Market Method of
Accounting for Certain Section 988 Transactions
The Treasury Department and the IRS have determined that allowing a
taxpayer to mark to market foreign currency gain or loss with respect
to qualified short-term section 988 transactions of a section 987 QBU
will enhance administrability by aligning the timing for recognizing
gain or loss with respect to such transactions with the financial
accounting rules. Accordingly, a taxpayer may elect, on a QBU-by-QBU
basis, under Sec. 1.987-3T(b)(4)(iii)(C) to apply the foreign currency
mark-to-market method of accounting to qualified short-term section 988
transactions. Under this election, the timing of section 988 gain or
loss is determined for applicable transactions under the principles of
section 1256(a)(1). Thus, when the election applies, section 988 gain
or loss with respect to a qualified short-term section 988 transaction
is recognized on an annual basis, but other gain or loss with respect
to any property underlying the transaction (e.g., gain or loss on a
debt instrument due to interest rate fluctuations) is determined under
the otherwise applicable recognition provisions.
A qualified short-term section 988 transaction is defined in Sec.
1.987-3T(b)(4)(iii)(B) as a section 988 transaction, including a
transaction denominated in the owner's functional currency, that both
(1) occurs in the ordinary course of the section 987 QBU's business and
(2) has an original term of one year or less on the day it is entered
into by the section 987 QBU. The holding of currency that is
nonfunctional currency (within the meaning of section 988(c)(1)(C)(ii))
to the section 987 QBU in the ordinary course of a section 987 QBU's
trade or business also is treated as a qualified short-term section 988
transaction.
ii. Special Rule Requiring Gain or Loss From Certain Section 988
Transactions That Are Subject to a Mark-to-Market Method of Accounting
To Be Determined by Reference to the Functional Currency of the Section
987 QBU
The temporary regulations include a special rule for determining
section 988 gain or loss with respect to qualified short-term section
988 transactions (as described in Part 4.C.i of this Explanation of
Provisions) of a section 987 QBU that are accounted for under a mark-
to-market method of accounting. Specifically, Sec. 1.987-
3T(b)(4)(iii)(A) provides that section 988 gain or loss with respect to
qualified short-term section 988 transactions of a section 987 QBU, and
certain related hedges, that are accounted for under a mark-to-market
method of accounting under section 475, section 1256, or Sec. 1.987-
3T(b)(4)(iii)(C) (discussed in Part 4.C.i of this Explanation of
Provisions) is determined in, and by reference to, the functional
currency of the section 987 QBU rather than the owner's functional
currency. Items that give rise to qualified short-term section 988
transactions for which section 988 gain or loss is determined under
Sec. 1.987-3T(b)(4)(iii)(A) by reference to the section 987 QBU's
functional currency are treated as marked items under Sec. 1.987-
1T(d)(3), with the result that gain or loss attributable to such items
is translated at the yearly average exchange rate and that such items
give rise to net unrecognized section 987 gain or loss.
Under the rules for qualified short-term section 988 transactions
accounted for under a mark-to-market method of accounting, a section
987 QBU owner will take into account the full amount of its economic
foreign currency exposure arising from such transactions, but the
effects of such exposure generally will be bifurcated into a component
reflected in section 987 taxable income or loss and a component
reflected in the FEEP pool and recognized upon a remittance. These
components could offset each other if the currency in which the section
988 transaction is denominated and the owner's functional currency
moved in opposite directions relative to the section 987 QBU's
functional currency. Restricting this treatment to qualified short-term
section 988 transactions accounted for under a mark-to-market method of
accounting limits the potential for abusive planning. In particular,
the restriction to transactions accounted for under a mark-to-market
method of accounting prevents selective realization of section 988
losses that would be taken into account in section 987 taxable income
or loss in situations in which an offsetting gain is reflected in the
FEEP. Additionally, short-term, ordinary-course section 988
transactions are less likely than other section 988 transactions to
give rise to substantial offsetting effects in section 987 taxable
income or loss and in the FEEP.

5. Application of Section 987 to QBUs With the U.S. Dollar as a
Functional Currency

Consistent with the opening clause of section 987, which indicates
that section 987 applies to the determination of the taxable income of
any taxpayer ``having 1 or more qualified business units with a
functional currency other than the dollar,'' Sec. 1.987-1T(b)(6)(i)
sets forth a general rule that section 987 and the regulations
thereunder do not apply with respect to an eligible QBU (determined
without regard to the scope limitations of Sec. 1.987-1(b)(3)(ii))
that has the U.S. dollar as its functional currency and that would be
subject to section 987 if it had a functional currency other than the
U.S. dollar (dollar QBU).
The Treasury Department and the IRS have determined, however, that
it is appropriate for a CFC that is the owner of a dollar QBU to
recognize foreign currency gain or loss with respect to transactions of
the dollar QBU that would be section 988 transactions if entered into
directly by the owner. Accordingly, pursuant to the authority granted
in section 985(a), Sec. 1.987-1T(b)(6)(ii)(A) provides that the CFC
owner of a dollar QBU will be subject to section 988 with respect to
any item that is properly reflected on the books and records of the
dollar QBU and that would give rise to a section 988 transaction if
such item were acquired, accrued, or entered into directly by the owner
of the dollar QBU. For purposes of applying section 988 to such items,
Sec. 1.987-1T(b)(6)(ii)(A) provides that such items are treated as
properly reflected on the books and records of the dollar QBU's owner.
Thus, except as provided in the special rule described later in this
Part 5 of this Explanation of Provisions for computing income that is
effectively connected with the conduct of a trade or business within
the United States (ECI), a CFC would determine section 988 gain or loss
from transactions of a dollar QBU by reference to the CFC's functional
currency. For example, for purposes of determining its earnings and
profits, a CFC that has a euro functional currency and that is the
owner of a dollar QBU with a U.S. dollar-denominated liability

[[Page 88864]]

would apply section 988 with respect to that U.S. dollar-denominated
liability, measuring section 988 gain or loss on the section 988
transaction arising from the liability by reference to the euro.
As a result of treating such items as properly reflected on the
books and records of the CFC, instead of those of the dollar QBU, the
CFC's section 988 gain or loss with respect to such items generally
would be treated as foreign source income because section 988(a)(3)
generally provides that the source of section 988 gain or loss is
determined by reference to the residence of the taxpayer or QBU on
whose books the asset, liability, or other item giving rise to the
section 988 transaction is properly reflected. Section 1.988-4 then
would apply to determine whether the section 988 gain or loss would be
treated as ECI. Because a QBU with ECI must have the U.S. dollar as its
functional currency (Sec. 1.985-1(b)(1)(v)), section 988 gain or loss
measured by reference to the owner CFC's functional currency would not
be ECI. However, the temporary regulations provide a special rule for
certain section 988 transactions of a dollar QBU (including section 988
transactions denominated in the owner's functional currency) that arise
from the conduct of a United States trade or business.
The special rule applies to a CFC owner of a dollar QBU that would
have a section 988 transaction that would give rise to section 988 gain
or loss that would be treated as ECI under Sec. 1.988-4(c) if the item
that would give rise to the section 988 transaction were treated as
properly reflected on the books and records of the dollar QBU. Under
Sec. 1.987-1T(b)(6)(ii)(B), solely for purposes of determining the
amount of section 988 gain or loss of the CFC that is ECI, any section
988 gain or loss that would be determined under section 988 as a result
of the acquisition or accrual of any item and treated as ECI if the
item were treated as properly reflected on the books and records of the
dollar QBU is determined by treating such item as properly reflected on
the books and records of the dollar QBU and, consequently, is
determined by reference to the U.S. dollar.
The application of Sec. 1.987-1T(b)(6)(ii) to a section 988
transaction that is denominated in a third currency (that is, neither
the CFC's functional currency nor the U.S. dollar) could result in the
same section 988 transaction generating ECI (determined by reference to
the U.S. dollar) and generating subpart F income (determined by
reference to the CFC owner's functional currency), subject to any
limitation imposed by section 952(b). Under section 952(b), if the
amount determined under Sec. 1.987-1T(b)(6)(ii)(A) by reference to the
owner's functional currency and the amount of ECI determined under
Sec. 1.987-1T(b)(6)(ii)(B) were both gains, only the excess, if any,
of the gain determined by reference to the owner's functional currency
over the ECI gain would be taken into account in determining subpart F
income. If the amount determined under Sec. 1.987-1T(b)(6)(ii)(A) by
reference to the owner's functional currency and the amount of ECI
determined under Sec. 1.987-1T(b)(6)(ii)(B) were both losses, the loss
determined by reference to the owner's functional currency would be
taken into account in determining subpart F income only to the extent
it exceeds the ECI loss.
The Treasury Department and the IRS recognize the potential
administrative burden associated with applying the foregoing rules to a
dollar QBU, which may give rise to a large number of section 988
transactions. Accordingly, Sec. 1.987-1T(b)(6)(iii) provides an
election for a CFC that directly or indirectly owns a dollar QBU to
apply section 987 and the regulations thereunder in lieu of applying
section 988 pursuant to Sec. 1.987-1T(b)(6)(ii). The Treasury
Department and the IRS have determined that, when this election
applies, the source of foreign currency gain or loss that is determined
under section 987 pursuant to the election should be consistent with
the source that would have been determined under section 988 in the
absence of the election. Accordingly, consistent with the source rule
in section 988(a)(3), Sec. 1.987-6T(b)(4) provides that the source of
section 987 gain or loss determined with respect to a dollar QBU for
which the owner has elected to apply section 987 is determined by
reference to the residence of the CFC owner. Thus, such section 987
gain or loss will have a foreign source.
As is the case for dollar QBUs of CFCs that do not make the
election under Sec. 1.987-1T(b)(6)(iii) to apply section 987, CFCs
that make the election and that have a dollar QBU that engages in a
U.S. trade or business must apply a special rule to determine the
amount of ECI that arises from transactions that would give rise to
section 988 gain or loss if determined by reference to the dollar QBU's
U.S. dollar functional currency. This special rule for determining the
amount of ECI applies only to dollar QBUs that generate ECI because,
under Sec. 1.985-1(b)(1)(v), a QBU that produces income or loss that
is, or is treated as, ECI must use the dollar as its functional
currency. The special rule is needed for dollar QBUs that elect to be
treated as section 987 QBUs because, under the general rules of Sec.
1.987-3T(b)(4)(i) and (ii), which apply to all section 987 QBUs other
than with respect to certain short-term transactions described in Sec.
1.987-3T(b)(4)(iii)(B) that are accounted for under a mark-to-market
method of accounting, section 988 gain or loss of a section 987 QBU
with respect to transactions denominated in a third currency is
determined in, and by reference to, the functional currency of the
owner of the section 987 QBU, and section 988 gain or loss generally is
not determined with respect to specified owner functional currency
transactions described in Part 4.B of this Explanation of Provisions.
Thus, in order to determine the appropriate amount of ECI from
transactions of a dollar QBU for which an election to apply section 987
is in effect, Sec. 1.987-1T(b)(6)(iii)(B) provides that, solely for
purposes of determining the amount of section 988 gain or loss that is
ECI, any section 988 gain or loss that would be determined under
section 988 as a result of the acquisition or accrual of any item and
treated as ECI under Sec. 1.988-4(c) if the item were treated as
properly reflected on the books and records of the dollar QBU is
determined by treating the item as properly reflected on the books and
records of the dollar QBU. Consequently, solely for that purpose, such
section 988 gain or loss is determined by reference to the U.S. dollar.
For purposes of determining the amount of section 988 gain or loss for
other purposes, including to determine the earnings and profits of the
CFC, the rules in Sec. 1.987-3T(b)(4)(i) and (ii) continue to apply.
As is the case for a CFC that has not made the election to apply
section 987 in lieu of section 988, a transaction to which the special
rule applies could generate both ECI and subpart F income.

6. Combinations and Separations of QBUs

A. Combinations and Separations Do Not Give Rise to Transfers
Under Sec. 1.987-2(c), an asset or liability is treated as
transferred to a section 987 QBU from its owner if, as a result of a
disregarded transaction, the asset or liability is reflected on the
books and records of the section 987 QBU. Similarly, an asset or
liability is treated as transferred from a section 987 QBU to its owner
if, as a result of a disregarded transaction, the asset or liability is
no longer reflected on the books and records of the section 987 QBU.
For this purpose, a disregarded transaction generally means a

[[Page 88865]]

transaction that is not regarded for Federal income tax purposes.
Absent a special rule, the combination of multiple section 987 QBUs
that have the same owner, or the separation of a section 987 QBU into
two or more section 987 QBUs that have the same owner, would give rise
to a transfer between an owner and one or more section 987 QBUs under
the final regulations.
Consistent with the policy of deferring section 987 gain or loss
under Sec. 1.987-12T when assets of a section 987 QBU are reflected on
the books and records of another section 987 QBU in the same controlled
group as a result of certain transactions that result in deemed
transfers, the Treasury Department and the IRS have determined that it
would not be appropriate for combinations or separations of section 987
QBUs of the same owner to give rise to transfers to or from the section
987 QBUs. Accordingly, under the temporary regulations, section 987
gain or loss generally is not recognized when two or more section 987
QBUs (combining QBUs) with the same owner combine into a single section
987 QBU (combined QBU) or when a section 987 QBU (separating QBU)
separates into multiple section 987 QBUs (each, a separated QBU).
Specifically, notwithstanding the general rule of the final
regulations, Sec. 1.987-2T(c)(9)(i) provides that the combination of
two or more combining QBUs that have the same owner into a combined QBU
does not give rise to a transfer of any combining QBU's assets or
liabilities to the owner. In addition, Sec. 1.987-2T(c)(9)(i) provides
that transactions between the combining QBUs occurring in the taxable
year of the combination, which otherwise would give rise to transfers,
do not result in a transfer of the combining QBUs' assets or
liabilities to the owner under Sec. 1.987-2(c). For this purpose, a
combination occurs when the assets and liabilities that are properly
reflected on the books and records of two or more combining QBUs begin
to be properly reflected on the books and records of a combined QBU and
the separate existence of the combining QBUs ceases. A combination may
result from any transaction or series of transactions in which
combining QBUs become a combined QBU.
Similarly, Sec. 1.987-2T(c)(9)(iii) provides that the separation
of a separating QBU into two or more separated QBUs that have the same
owner after the separation does not give rise to a transfer of any of
the separating QBU's assets or liabilities to the owner. For this
purpose, a separation occurs when assets and liabilities that are
properly reflected on the books and records of a separating QBU begin
to be properly reflected on the books and records of two or more
separated QBUs. A separation may result from any transaction or series
of transactions in which the separating QBU becomes two or more
separated QBUs.
B. Determination of Net Unrecognized Section 987 Gain or Loss of
Combined QBUs and Separated QBUs
The temporary regulations generally require combining the aggregate
net unrecognized section 987 gain or loss of combining QBUs for
purposes of determining net unrecognized section 987 gain or loss of
the combined QBU and require apportioning the net unrecognized section
987 gain or loss of a separating QBU among separated QBUs in proportion
to their respective shares of the aggregate adjusted basis of the
separating QBU's gross assets. Specifically, Sec. 1.987-4T(f)(1)
provides that the net unrecognized section 987 gain or loss of a
combined QBU for a taxable year is determined by taking into account
the net accumulated unrecognized section 987 gain or loss of each
combining QBU for all prior taxable years for which the final
regulations apply and treating the combining QBUs as having combined
immediately prior to the beginning of the taxable year of combination.
Additionally, Sec. 1.987-4T(f)(2) provides that the net unrecognized
section 987 gain or loss of a separated QBU for a taxable year is
determined by taking into account the separated QBU's share of the net
accumulated unrecognized section 987 gain or loss of the separating QBU
for all prior taxable years for which the final regulations apply and
treating the separating QBU as having separated immediately prior to
the beginning of the taxable year of separation. No transactions are
deemed to occur between the separating QBUs in the taxable year of
separation prior to the completion of the separation. A separated QBU's
share of the separating QBU's net accumulated unrecognized section 987
gain or loss for all prior taxable years is determined by apportioning
the separating QBU's net accumulated unrecognized section 987 gain or
loss for all prior taxable years to each separated QBU in proportion to
the aggregate adjusted basis of the gross assets properly reflected on
the books and records of each separated QBU immediately after the
separation.
The temporary regulations also clarify at Sec. 1.987-2T(c)(9)(ii)
that, if a combining section 987 QBU has a different functional
currency than the combined QBU, the combining section 987 QBU will be
deemed to have automatically changed its functional currency to the
functional currency of the combined section 987 QBU immediately prior
to the combination. A combining section 987 QBU that is deemed to
change its functional currency under this paragraph must make the
adjustments described in Sec. 1.985-5.

7. Translation of Foreign Taxes Claimed as a Foreign Tax Credit and
Related Income

Under the general rule of Sec. 1.987-3(c)(1), the owner of a
section 987 QBU uses the yearly average exchange rate (as defined in
Sec. 1.987-1(c)(2)) to translate an item of income, gain, deduction,
or loss of a section 987 QBU into the owner's functional currency.
Alternatively, the owner of a section 987 QBU may elect to use the spot
rate (as defined in Sec. 1.987-1(c)(1)) for the day each item is taken
into account.
Under section 986(a)(1)(A), for purposes of determining the amount
of its foreign tax credit, a taxpayer that takes foreign income taxes
into account when accrued generally translates the amount of any
foreign income taxes (and any adjustments thereto) into dollars using
the average exchange rate for the taxable year to which such taxes
relate. However, sections 986(a)(1)(B) and (C) contain exceptions to
this general rule, including for taxes that are not paid within two
years of the close of the taxable year to which the taxes relate (two-
year rule). In addition, section 986(a)(1)(D) provides that a taxpayer
may elect to translate foreign income taxes denominated in a functional
currency other than the taxpayer's functional currency using a spot
rate in lieu of using the yearly average exchange rate. Section
986(a)(2)(A) generally provides that, for purposes of determining the
amount of the foreign tax credit with respect to any foreign income
taxes not subject to section 986(a)(1)(A) (or section 986(a)(1)(E),
which provides a special rule for regulated investment companies),
including by reason of the two-year rule or an election under section
986(a)(1)(D), the taxes are translated into dollars using the spot rate
on the date such taxes were paid. Adjustments to such taxes are subject
to the same rule, except that any refund or credit is translated into
dollars using the exchange rate that applied to the original payment of
such foreign income taxes.
Taking into account the translation rules of Sec. 1.987-3(c) and
section 986(a),

[[Page 88866]]

a mismatch could arise between the owner functional currency value of
income used to pay foreign income taxes and the owner functional
currency value of the foreign income taxes claimed as a credit. In the
case of foreign income taxes deemed paid under section 902, section 78
generally prevents such a mismatch at the level of the domestic
shareholder claiming the credit by requiring the domestic shareholder
to include in income an amount equal to the taxes deemed paid, but
where a U.S. person claims a credit under section 901 that is not for
taxes deemed paid under section 902 or section 960, foreign income
taxes and the income used to pay those taxes could be translated at
different translation rates. To address this potential mismatch, Notice
89-74, 1989-1 C.B. 739, provides that when a U.S. taxpayer with a
foreign branch that has a functional currency other than the dollar
claims a foreign tax credit with respect to a foreign tax, the taxpayer
is required to translate a functional currency amount equal to the
foreign taxes paid on branch income using the exchange rate at the time
of payment of such taxes.
Consistent with Notice 89-74, Sec. 1.987-3T(c)(2)(v) includes a
special translation rule providing that income in an amount equal to
the functional currency amount of the section 987 QBU's foreign income
taxes claimed as a credit must be translated at the same rate used to
translate the taxes. This translation rule applies to the owner of a
section 987 QBU claiming a credit under section 901 for foreign income
taxes, other than income taxes deemed paid under section 902 or section
960, that are properly reflected on the books of the section 987 QBU.
Mechanically, this rule requires the owner to reduce the amount of
section 987 taxable income or loss that otherwise would be determined
under Sec. 1.987-3 by an amount equal to the creditable tax amount,
translated into U.S. dollars at the yearly average exchange rate for
the taxable year in which the creditable tax is accrued, and then to
increase the resulting amount by an amount equal to the creditable tax
amount translated into U.S. dollars at the same exchange rate used to
translate the creditable taxes into U.S. dollars under section 986(a).
If the foreign taxes and the income are both translated at the same
rate (that is, the same yearly average exchange rate), no adjustment is
necessary under Sec. 1.987-3T(c)(2)(v).

8. Determination of a Partner's Share of Assets and Liabilities of a
Section 987 Aggregate Partnership

As discussed in the preamble to the final regulations, the final
regulations apply an aggregate approach with respect to section 987
aggregate partnerships, which are defined in Sec. 1.987-1(b)(5) as
partnerships for which all of the capital and profits interests are
owned, directly or indirectly, by persons that are related within the
meaning of section 267(b) or section 707(b). This approach is
consistent with the aggregate approach to partnerships reflected in the
2006 proposed regulations, but the 2006 proposed regulations would have
applied to all partnerships. Under the aggregate approach, assets and
liabilities reflected on the books and records of an eligible QBU of a
partnership are allocated to each partner, which is considered an
indirect owner of the eligible QBU. If the eligible QBU has a different
functional currency than its indirect owner, then the assets and
liabilities of the eligible QBU that are allocated to the partner are
treated as a section 987 QBU of the indirect owner.
The 2006 proposed regulations provided a rule for determining a
partner's share of the assets and liabilities of an eligible QBU that
is owned indirectly through a section 987 aggregate partnership.
Specifically, proposed Sec. 1.987-7(b) provided that a partner's share
of assets and liabilities reflected on the books and records of an
eligible QBU owned through a section 987 aggregate partnership must be
determined in a manner consistent with how the partners have agreed to
share the economic benefits and burdens corresponding to partnership
assets and liabilities, taking into account the rules and principles of
subchapter K. One comment noted that this rule for allocating assets
and liabilities to a partner's indirectly owned section 987 QBU was
ambiguous and that the rules and principles of subchapter K do not
provide sufficient guidance in this regard.
The Treasury Department and the IRS acknowledge the ambiguity in
the 2006 proposed regulations regarding the manner in which assets and
liabilities of a partnership are allocated to a partner's indirectly
owned section 987 QBU under the aggregate approach. Accordingly, the
temporary regulations provide more specific rules for determining a
partner's share of the assets and liabilities reflected on the books
and records of an eligible QBU owned indirectly through a section 987
aggregate partnership. Specifically, Sec. 1.987-7T(b) provides that,
in any taxable year, a partner's share of each asset and liability of a
section 987 aggregate partnership is proportional to the partner's
liquidation value percentage with respect to the aggregate partnership.
A partner's liquidation value percentage is defined as the ratio of the
liquidation value of the partner's interest in the partnership to the
aggregate liquidation value of all the partners' interests in the
partnership. The liquidation value of the partner's interest in the
partnership is the amount of cash the partner would receive with
respect to its interest if, immediately following the applicable
determination date, the partnership sold all of its assets for cash
equal to the fair market value of such assets (taking into account
section 7701(g)), satisfied all of its liabilities (other than those
described in Sec. 1.752-7), paid an unrelated third party to assume
all of its Sec. 1.752-7 liabilities in a fully taxable transaction,
and then liquidated.
In general, the temporary regulations provide that the
determination date for determining a partner's liquidation value
percentage is the date of the most recent event described in Sec.
1.704-1(b)(2)(iv)(f)(5) or Sec. 1.704-1(b)(2)(iv)(s)(1) (a revaluation
event), irrespective of whether the capital accounts of the partners
are adjusted under Sec. 1.704-1(b)(2)(iv)(f), or, if there has been no
revaluation event, the date of the formation of the partnership.
However, if a partnership agreement provides for the allocation of any
item of income, gain, deduction, or loss from partnership property to a
partner other than in accordance with the partner's liquidation value
percentage in a particular taxable year, the determination date is the
last day of the partner's taxable year, or, if the partner's section
987 QBU owned indirectly through a section 987 aggregate partnership
terminates during the partner's taxable year, the date such section 987
QBU is terminated. Without this requirement to redetermine liquidation
value percentages at year-end when such an allocation is in effect, the
allocation could result in section 987 taxable income or loss, which
necessarily would reflect the allocation, being taken into account in
determining section 987 gain or loss under Sec. 1.987-4 even though
the allocation was not taken into account in computing the owner
functional currency value of the section 987 QBU, such that distortions
would arise in the computation of section 987 gain or loss.
The Treasury Department and the IRS have determined that the
liquidation value percentage methodology reflected

[[Page 88867]]

in Sec. 1.987-7T(b) reflects an administrable approach to allocating
assets and liabilities of a section 987 aggregate partnership to
eligible QBUs of its partners in a manner consistent with the partners'
economic interests in the assets and liabilities of the partnership.
The Treasury Department and the IRS request comments on the application
of the liquidation value percentage approach reflected in the temporary
regulations, including whether any alternative measure could better
satisfy the criteria of administrability and consistency with the
economics of the partners' arrangement.

9. Deferral of Certain Section 988 Loss Realized by a Debtor With
Respect to a Related-Party Loan

Section 267(a)(1) provides that no deduction is allowed in respect
of any loss from the sale or exchange of property, directly or
indirectly, between persons who have a relationship described in
section 267(b). Section 267(f)(2) modifies the general rule of section
267(a)(1) in the case of a sale or exchange of property between
corporations that are members of the same controlled group (as defined
in section 267(f)(1)), generally providing that a loss realized upon
such a sale or exchange is deferred until the property is transferred
outside the group such that there would be recognition of loss under
consolidated return principles. Section 267(f)(3)(C) provides that, to
the extent provided in regulations, section 267(a)(1) does not apply to
any loss sustained by a member of a controlled group on the repayment
of a loan made to another member of such controlled group if such loan
is payable or denominated in a foreign currency and attributable to a
reduction in the value of that foreign currency. Section 1.267(f)-1(e)
provides that section 267(a) generally does not apply to an exchange
loss realized with respect to a loan of nonfunctional currency to
another controlled group member if the transaction that causes the
realization of the loss does not have as a significant purpose the
avoidance of Federal income tax. Additionally, Sec. 1.267(f)-1(h)
provides that if a transaction is engaged in with a principal purpose
to avoid the purposes of Sec. 1.267(f)-1, including by distorting the
timing of losses, adjustments may be made to carry out such purposes.
Section 1.988-2(b)(16)(i) cross-references the regulations under
section 267 regarding the coordination of sections 267 and 988 with
respect to the treatment of a creditor under a debt instrument, but
Sec. 1.988-2(b)(16)(ii) is reserved with respect to the treatment of a
debtor. The temporary regulations correct the cross-reference in Sec.
1.988-2(b)(16)(i) to refer to Sec. 1.267(f)-1(e) rather than Sec.
1.267(f)-1(h).
The Treasury Department and the IRS have determined that the policy
considerations underlying section 267(f)(3)(C) and Sec. 1.267(f)-1(e)
with respect to creditors on loans to related persons also apply with
respect to debtors on such loans and that there is no reason to
distinguish between a creditor and debtor with regard to the
application of an anti-avoidance rule to the same transaction.
Accordingly, pursuant to the authority granted to the Secretary in
section 989(c)(5) to prescribe regulations providing for the
appropriate treatment of related-party transactions, Sec. 1.988-
2T(b)(16)(ii) provides that exchange loss of a debtor with respect to a
loan (original loan) from a person with whom the debtor has a
relationship described in section 267(b) or section 707(b) is deferred
if the transaction resulting in realization of the loss has a principal
purpose of avoiding Federal income tax. Such deferred loss will be
recognized at the end of the term of the original loan.

Special Analyses

Certain IRS regulations, including these, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory assessment is not
required. For applicability of the Regulatory Flexibility Act (5 U.S.C.
chapter 6), please refer to the Special Analyses section in the
preamble to the cross-referenced notice of proposed rulemaking in the
Proposed Rules section of this issue of the Federal Register. Pursuant
to section 7805(f) of the Internal Revenue Code, these regulations have
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Mark E. Erwin of the
Office of Associate Chief Counsel (International). However, other
personnel from the IRS and the Treasury Department participated in
their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Amendment to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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

Authority: 26 U.S.C. 985, 987, 989(c) and 7805 * * *

0
Par. 2. Section 1.987-0 is amended by adding entries for Sec. Sec.
1.987-6(b)(4) and 1.987-12(a) through (h) to read as follows:


Sec. 1.987-0 Section 987; table of contents.

* * * * *


Sec. 1.987-6 Character and source of section 987 gain or loss.

* * * * *
(b) * * *
(4) [Reserved].
* * * * *


Sec. 1.987-12 Deferral of section 987 gain or loss.

(a) through (h) [Reserved].

0
Par. 3. Section 1.987-1 is amended by adding paragraphs (b)(1)(iii),
(b)(6), (c)(1)(ii)(B), (c)(3)(i)(E), (d)(3), (f), (g)(2)(i)(B) and (C),
and (g)(3)(i)(E) through (H) to read as follows:


Sec. 1.987-1 Scope, definitions, and special rules.

* * * * *
(b) * * *
(1) * * *
(iii) [Reserved]. For further guidance, see Sec. 1.987-
1T(b)(1)(iii).
* * * * *
(b) * * *
(6) [Reserved]. For further guidance, see Sec. 1.987-1T(b)(6).
* * * * *
(c) * * *
(1) * * *
(ii) * * *
(B) [Reserved]. For further guidance, see Sec. 1.987-
1T(c)(1)(ii)(B).
* * * * *
(c) * * *
(3) * * *
(i) * * *
(E) [Reserved]. For further guidance, see Sec. 1.987-
1T(c)(3)(i)(E).
* * * * *
(d) * * *
(3) [Reserved]. For further guidance, see Sec. 1.987-1T(d)(3).
* * * * *
(f) [Reserved]. For further guidance, see Sec. 1.987-1T(f).
* * * * *
(g) * * *
(2) * * *
(i) * * *
(B) through (C) [Reserved]. For further guidance, see Sec. 1.987-
1T(g)(2)(i)(B) through (C).
* * * * *

[[Page 88868]]

(g) * * *
(3) * * *
(i) * * *
(E) through (H) [Reserved]. For further guidance, see Sec. 1.987-
1T(g)(3)(i)(E) through (H).
* * * * *

0
Par. 4. Section 1.987-1T is added to read as follows:


Sec. 1.987-1T Scope, definitions, and special rules (temporary).

(a) through (b)(1)(ii) [Reserved]. For further guidance, see Sec.
1.987-1(a) through (b)(1)(ii).
(iii) Certain provisions applicable to all taxpayers.
Notwithstanding Sec. 1.987-1(b)(1)(ii), paragraphs (b)(6) and
(g)(3)(i)(E) of this section and Sec. 1.987-6T(b)(4) apply to any
taxpayer that is an owner of a dollar QBU (as defined in paragraph
(b)(6) of this section), and paragraphs (g)(2)(i)(B) and (g)(3)(i)(H)
of this section and Sec. Sec. 1.987-8T(d) and 1.987-12T apply to any
taxpayer that is an owner of an eligible QBU (determined without regard
to Sec. 1.987-1(b)(3)(ii)) that is subject to section 987.
(b)(2) through (b)(5) [Reserved]. For further guidance, see Sec.
1.987-1(b)(2) through (b)(5).
(6) Dollar QBUs--(i) In general. Except as provided in paragraphs
(b)(1)(iii) and (b)(6)(iii) of this section, section 987 and the
regulations thereunder do not apply with respect to an eligible QBU
(determined without regard to Sec. 1.987-1(b)(3)(ii)) that has the
U.S. dollar as its functional currency and that would be subject to
section 987 if it had a functional currency other than the dollar
(dollar QBU). This paragraph (b)(6) applies to all taxpayers, including
entities described in Sec. 1.987-1(b)(1)(ii).
(ii) Application of section 988 to a dollar QBU--(A) In general.
Except as provided in paragraphs (b)(6)(ii)(B) and (b)(6)(iii) of this
section, a controlled foreign corporation (as defined in section
957(a)) (CFC) that is the owner of a dollar QBU applies section 988
with respect to any item that is properly reflected on the books and
records of the dollar QBU and that would give rise to a section 988
transaction if such item were acquired, accrued, or entered into
directly by the owner of the dollar QBU. Except as provided in
paragraph (b)(6)(ii)(B) of this section, for purposes of determining
the amount of section 988 gain or loss of the CFC, any item that is
properly reflected on the books and records of the dollar QBU and that
would give rise to a section 988 transaction if such item were
acquired, accrued, or entered into directly by the owner of the dollar
QBU is treated as properly reflected on the books and records of the
owner of the dollar QBU, such that the amount of section 988 gain or
loss with respect to such item is determined by reference to the
owner's functional currency.
(B) Section 988 gain or loss characterized as effectively connected
income. Solely for the purpose of determining the amount of section 988
gain or loss of a CFC described in paragraph (b)(6)(ii)(A) of this
section that is effectively connected with the conduct of a trade or
business within the United States (ECI), any section 988 gain or loss
that would be determined under section 988 as a result of the
acquisition or accrual of any item and treated as ECI under Sec.
1.988-4(c) if the item were treated as properly reflected on the books
and records of the dollar QBU is determined by treating such item as
properly reflected on the books and records of the dollar QBU.
Consequently, solely for that purpose, such section 988 gain or loss is
determined by reference to the U.S. dollar.
(iii) Election for a CFC to apply section 987 to a dollar QBU--(A)
In general. A CFC that is the owner of a dollar QBU may elect to apply
section 987 and the regulations thereunder with respect to the dollar
QBU in lieu of applying section 988 pursuant to paragraph (b)(6)(ii) of
this section. If the dollar QBU or CFC is described in Sec. 1.987-
1(b)(1)(ii), however, the CFC must apply section 987 to the dollar QBU
using the method it applied to the dollar QBU immediately prior to the
effective date of this paragraph (b)(6) as provided in paragraph (h) of
this section, provided such method was a reasonable interpretation of
section 987, or, if no such method exists, a reasonable method.
(B) Section 988 gain or loss characterized as effectively connected
income. Solely for the purpose of determining the amount of section 988
gain or loss of a dollar QBU that is the subject of an election
described in paragraph (b)(6)(iii)(A) of this section that is ECI,
Sec. 1.987-3T(b)(4)(i) and (ii) do not apply, and any section 988 gain
or loss that would be determined under section 988 as a result of the
acquisition or accrual of any item and treated as ECI under Sec.
1.988-4(c) if the item were treated as properly reflected on the books
and records of the dollar QBU is determined by treating such item as
properly reflected on the books and records of the dollar QBU.
Consequently, solely for that purpose, such section 988 gain or loss is
determined by reference to the U.S. dollar. See Sec. 1.987-6T(b)(4)
for rules regarding the source of section 987 gain or loss with respect
to a dollar QBU for which the CFC owner has made the election described
in this paragraph.
(b)(7) through (c)(1)(ii)(A) [Reserved]. For further guidance, see
Sec. 1.987-1(b)(7) through (c)(1)(ii)(A).
(B) Election inapplicable with respect to certain amounts. Except
as provided in this paragraph (c)(1)(ii)(B), the election provided in
Sec. 1.987-1(c)(1)(ii)(A) does not apply for purposes of determining
section 987 taxable income or loss (as defined in Sec. 1.987-3(a))
with respect to a historic item (as defined in Sec. 1.987-1(e)) if
acquiring, accruing, or entering into such item gives rise to a section
988 transaction or specified owner functional currency transaction.
However, the election provided in Sec. 1.987-1(c)(1)(ii)(A) does apply
for purposes of determining section 987 taxable income or loss with
respect to a payable or receivable described in Sec. 1.988-1(d)(3)
under the circumstances described in Sec. 1.988-1(d)(3).
(c)(2) through (c)(3)(i)(D) [Reserved]. For further guidance, see
Sec. 1.987-1(c)(2) through (c)(3)(i)(D).
(E) Section 988 transactions and specified owner functional
currency transactions. If acquiring, accruing, or entering into a
historic item gives rise to a section 988 transaction of a section 987
QBU or a specified owner functional currency transaction described in
Sec. 1.987-3T(b)(4)(ii), the historic rate is the spot rate (as
defined in paragraph (c)(1) of this section) on the date such item is
acquired, accrued, or entered into. For this purpose, use of a spot
rate convention under Sec. 1.987-1(c)(1)(ii) is permitted only with
respect to a payable or receivable described in Sec. 1.988-1(d)(3) and
only to the extent provided therein.
(c)(3)(ii) through (d)(2) [Reserved]. For further guidance, see
Sec. 1.987-1(c)(3)(ii) through (d)(2).
(3) Gives rise to a qualified short-term section 988 transaction
(as defined in Sec. 1.987-3T(b)(4)(iii)(B)) of the section 987 QBU,
whether denominated in the functional currency of the owner or other
nonfunctional currency with respect to the section 987 QBU, for which
section 988 gain or loss is determined under Sec. 1.987-
3T(b)(4)(iii)(A) in, and by reference to, the functional currency of
the section 987 QBU.
(e) [Reserved]. For further guidance, see Sec. 1.987-1(e).
(f) Examples. The following examples illustrate the application of
Sec. 1.987-1(d) and (e).

Example 1. U.S. Corp is a domestic corporation with the U.S.
dollar as its

[[Page 88869]]

functional currency and is the owner of Business A, a section 987
QBU that has the pound as its functional currency. Assume all
transactions of Business A are entered into in the ordinary course
of its business. U.S. Corp has not made an election under Sec.
1.987-3T(b)(4)(iii)(C) to adopt a foreign currency mark-to-market
method of accounting for qualified short-term section 988
transactions. Items reflected on Business A's balance sheet include
[pound]10,000, $1,000, a building with a basis of [pound]100,000, a
light general purpose truck with a basis of [pound]30,000, a
computer with a basis of [pound]1,000, a 60-day receivable for
[yen]15,000, an account payable of [pound]5,000, and a foreign
currency contract within the meaning of section 1256(g)(2) that
requires Business A to exchange [pound]100 for $125 in 90 days.
Under paragraph (d) of this section, the [pound]10,000, the
[pound]5,000 account payable and the [pound]/$ section 1256 foreign
currency contract are marked items. The other items are historic
items under this paragraph (e) of this section.
Example 2. The facts are the same as Example 1 except that U.S.
Corp has elected under Sec. 1.987-3T(b)(4)(iii)(C) to adopt the
foreign currency mark-to-market method of accounting for qualified
short-term section 988 transactions of Business A. Under paragraphs
(d) and (e) of this section, the [pound]10,000, the $1,000, the
[yen]15,000 receivable, the [pound]5,000 account payable, and the
[pound]/$ section 1256 foreign currency contract are marked items.

(g)(1) through (g)(2)(i)(A) [Reserved]. For further guidance, see
Sec. 1.987-1(g)(1) through (g)(2)(i)(A).
(B) Annual deemed termination election--(1) In general. Except as
provided in paragraph (g)(2)(i)(B)(2) of this section, an election
under Sec. 1.987-8T(d) (annual deemed termination election) applies to
all section 987 QBUs owned by the taxpayer, as well as to all section
987 QBUs owned by any person that has a relationship to the taxpayer
described in section 267(b) or section 707(b) (substituting ``and the
profits interest'' for ``or the profits interest'' in section
707(b)(1)(A) and substituting ``and profits interests'' for ``or
profits interests'' in section 707(b)(1)(B)) on the last day of the
first taxable year for which the election applies (a related person).
If a taxpayer makes the election under Sec. 1.987-8T(d), the first
taxable year of a related person for which the election applies is the
first taxable year that ends with or within a taxable year of the
taxpayer for which the taxpayer's election applies. An election under
Sec. 1.987-8T(d) may not be revoked.
(i) Fresh start taxpayers. A taxpayer to which Sec. 1.987-10
applies that is required under Sec. 1.987-10(a) to apply the fresh
start transition method described in Sec. 1.987-10(b) (fresh start
taxpayer) may make the election under Sec. 1.987-8T(d) only if the
first taxable year for which the election would apply to the taxpayer
is either the first taxable year beginning on or after the transition
date (as defined in Sec. 1.987-11(c)) in which the election is
relevant or a subsequent taxable year in which the taxpayer's
controlled group aggregate section 987 loss, if any, does not exceed $5
million. For purposes of this paragraph (g)(2)(i)(B), a taxpayer's
controlled group aggregate section 987 loss means the aggregate net
amount of section 987 loss that would be recognized pursuant to the
election by the taxpayer and all other persons to whom the taxpayer's
election would apply in the first taxable year of each person for which
the election would apply.
(ii) Other taxpayers. Other taxpayers, including taxpayers
described in Sec. 1.987-1(b)(1)(ii) and taxpayers described in Sec.
1.987-10(c), must follow the election rules provided in paragraph
(g)(2)(i)(B)(1)(i) of this section if any related party is a fresh
start taxpayer. If no related party is a fresh start taxpayer, the
election under Sec. 1.987-8T(d) may be made only if the first taxable
year for which the election would apply to the taxpayer is either the
first taxable year beginning on or after December 7, 2016, in which the
election is relevant or a subsequent taxable year in which the
taxpayer's controlled group aggregate section 987 loss, if any, does
not exceed $5 million.
(2) QBU-by-QBU elections in certain circumstances. Notwithstanding
paragraph (g)(2)(i)(B)(1) of this section, a taxpayer may make a
separate election under Sec. 1.987-8T(d) with respect to any section
987 QBU owned by the taxpayer if the first taxable year for which the
election would apply to the taxpayer with respect to the section 987
QBU is a taxable year in which there is a section 987 gain recognized
with respect to the section 987 QBU pursuant to the election, or is a
taxable year in which there is a section 987 loss of $1 million or less
that would be recognized with respect to the section 987 QBU pursuant
to the election
(C) Election to translate all items at the yearly average exchange
rate. An election under Sec. 1.987-3T(d) (election to translate all
items at the yearly average exchange rate) may be made with respect to
a section 987 QBU only if the first taxable year for which the election
would apply is the first taxable year for which an election under Sec.
1.987-8T(d) (annual deemed termination election) applies with respect
to the section 987 QBU.
(g)(2)(ii) through (g)(3)(i)(D) [Reserved]. For further guidance,
see Sec. 1.987-1(g)(2)(ii) through (g)(3)(i)(D).
(E) Election for a CFC to apply section 987 to a dollar QBU. An
election under Sec. 1.987-1T(b)(6)(iii) for a CFC to apply section 987
to a dollar QBU must be titled ``Section 987 Election for a CFC to
Apply Section 987 to a Dollar QBU Under Sec. 1.987-1T(b)(6)(iii)'' and
must provide the name and address of each QBU for which the election is
being made.
(F) Election to apply the foreign currency mark-to-market method of
accounting for qualified short-term section 988 transactions. An
election under Sec. 1.987-3T(b)(4)(iii)(C) to apply the foreign
currency mark-to-market method of accounting for qualified short-term
section 988 transactions must be titled ``Section 987 Election to Use
Foreign Currency Mark-to-Market Method of Accounting for Qualified
Short-Term Section 988 Transactions Under Sec. 1.987-
3(b)T(4)(iii)(C)'' and must provide the name and address of each
section 987 QBU for which the election is being made.
(G) Election to translate all items at the yearly average exchange
rate. An election under Sec. 1.987-3T(d) to translate all items at the
yearly average exchange rate must be titled ``Section 987 Election to
Translate All Items at the Yearly Average Exchange Rate Under Sec.
1.987-3T(d)'' and must provide the name and address of each section 987
QBU for which the election is being made.
(H) Annual deemed termination election. An election under Sec.
1.987-8T(d) for an owner to deem all of its section 987 QBUs to
terminate on the last day of each taxable year must be titled ``Section
987 Annual Deemed Termination Election Under Sec. 1.987-8T(d)'' and
must provide the name and address of each section 987 QBU to which the
election applies, including a section 987 QBU owned by a related person
(within the meaning of paragraph (g)(2)(i)(B)(1) of this section).
(g)(4) through (6) [Reserved]. For further guidance, see Sec.
1.987-1(g)(4) through (6).
(h) Effective/applicability date. Paragraphs (g)(2)(i)(B) and
(g)(3)(i)(H) of this section apply to the first taxable year beginning
on or after December 7, 2016. Paragraphs (b)(1)(iii), (b)(6),
(c)(1)(ii)(B), (c)(3)(i)(E), (d)(3), (f), (g)(2)(i)(C), and
(g)(3)(i)(E) through (G) of this section apply to taxable years
beginning one year after the first day of the first taxable year
following December 7, 2016. Notwithstanding the preceding sentence, if
a taxpayer makes an election under Sec. 1.987-11(b), then paragraphs
(b)(1)(iii), (b)(6), (c)(1)(ii)(B), (c)(3)(i)(E), (d)(3), (f),
(g)(2)(i)(C), and (g)(3)(i)(E) through (G) of this section apply to
taxable years to which Sec. Sec. 1.987-1 through 1.987-10 apply as a
result of such election.

[[Page 88870]]

(i) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 5. Section 1.987-2 is amended by adding paragraph (c)(9) to read
as follows:


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

* * * * *
(c) * * *
(9) [Reserved]. For further guidance, see Sec. 1.987-2T(c)(9).
* * * * *

0
Par. 6. Section 1.987-2T is added to read as follows:


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

(a) through (c)(8) [Reserved]. For further guidance, see Sec.
1.987-2(a) through (c)(8).
(9) Certain disregarded transactions not treated as transfers--(i)
Combinations of section 987 QBUs. The combination of two or more
separate section 987 QBUs (combining QBUs) that are directly owned by
the same owner, or that are indirectly owned by the same partner
through a single section 987 aggregate partnership, into one section
987 QBU (combined QBU) does not give rise to a transfer of any
combining QBU's assets or liabilities to the owner under Sec. 1.987-
2(c). In addition, transactions between the combining QBUs occurring in
the taxable year of the combination do not result in a transfer of the
combining QBUs' assets or liabilities to the owner under Sec. 1.987-
2(c). For this purpose, a combination occurs when the assets and
liabilities that are properly reflected on the books and records of two
or more combining QBUs begin to be properly reflected on the books and
records of a combined QBU and the separate existence of the combining
QBUs ceases. A combination may result from any transaction or series of
transactions in which the combining QBUs become a combined QBU. For
rules regarding the determination of net unrecognized section 987 gain
or loss of a combined QBU, see Sec. 1.987-4T(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 Sec. Sec. 1.985-1(c)(6) and 1.985-5.
(iii) Separation of section 987 QBUs. The separation of a section
987 QBU (separating QBU) into two or more section 987 QBUs (separated
QBUs) that, after the separation, are directly owned by the same owner,
or that are indirectly owned by the same partner through a single
section 987 aggregate partnership, does not give rise to a transfer of
the separating QBU's assets or liabilities to the owner under Sec.
1.987-2(c). Additionally, transactions that occurred between the
separating QBUs in the taxable year of the separation prior to the
completion of the separation do not give rise to transfers for purposes
of section 987. For this purpose, a separation occurs when the assets
and liabilities that are properly reflected on the books and records of
a separating QBU begin to be properly reflected on the books and
records of two or more separated QBUs. A separation may result from any
transaction or series of transactions in which a separating QBU becomes
two or more separated QBUs. A separation may also result when a section
987 QBU that is subject to a grouping election under Sec. 1.987-
1(b)(2)(ii)(A) changes its functional currency. For rules regarding the
determination of net unrecognized section 987 gain or loss of a
separated QBU, see Sec. 1.987-4T(f)(2).
(c)(10) through (d) [Reserved]. For further guidance see Sec.
1.987-2(c)(10) through (d).
(e) Effective/applicability date. This section applies to taxable
years beginning on or after one year after the first day of the first
taxable year following December 7, 2016. Notwithstanding the preceding
sentence, if a taxpayer makes an election under Sec. 1.987-11(b), then
this section applies to taxable years to which Sec. Sec. 1.987-1
through 1.987-10 apply as a result of such election.
(f) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 7. Section 1.987-3 is amended by adding paragraphs (b)(2)(ii),
(b)(4), (c)(2)(ii) and (v), and (d), and Example 9 through Example 14
at the end of paragraph (e) to read as follows:


Sec. 1.987-3 Determination of section 987 taxable income or loss of
an owner of a section 987 QBU.

* * * * *
(b) * * *
(2) * * *
(ii) [Reserved]. For further guidance, see Sec. 1.987-
3T(b)(2)(ii).
* * * * *
(b) * * *
(4) [Reserved]. For further guidance, see Sec. 1.987-3T(b)(4).
* * * * *
(c) * * *
(2) * * *
(ii) [Reserved]. For further guidance, see Sec. 1.987-
3T(c)(2)(ii).
* * * * *
(c) * * *
(2) * * *
(v) through (d) [Reserved]. For further guidance, see Sec. 1.987-
3T(c)(2)(v) through (d).
(e) Examples. * * *
Example 9 through Example 14 [Reserved]. For further guidance, see
Sec. 1.987-3T(e), Example 9 through Example 14.

0
Par. 8. Section 1.987-3T is added to read as follows:


Sec. 1.987-3T Determination of section 987 taxable income or loss of
an owner of a section 987 QBU (temporary).

(a) through (b)(2)(i) [Reserved]. For further guidance, see Sec.
1.987-3(a) through (b)(2)(i).
(ii) No translation of basis or amount realized with respect to a
specified owner functional currency transaction treated as a historic
asset. If the acquisition of a historic asset gives rise to a specified
owner functional currency transaction described in paragraph (b)(4)(ii)
of this section, the basis of the historic asset, and any amount
realized on a disposition of the historic asset, is not translated if
the amount is denominated in the owner's functional currency.
(3) [Reserved]. For further guidance, see Sec. 1.987-3(b)(3).
(4) Special rule for section 988 transactions--(i) In general.
Section 988 and the regulations thereunder apply to section 988
transactions of a section 987 QBU. For this purpose, whether a
transaction is a section 988 transaction is determined by reference to
the functional currency of the section 987 QBU. (But see paragraph
(b)(4)(ii) of this section, providing that specified owner functional
currency transactions are not treated as section 988 transactions.)
However, except as provided in paragraph (b)(4)(iii)(A) of this
section, section 988 gain or loss is determined in, and by reference
to, the functional currency of the owner of the section 987 QBU rather
than the functional currency of the section 987 QBU. Accordingly, in
determining section 988 gain or loss of a section 987 QBU with respect
to a section 988 transaction of the section 987 QBU, the amounts
required under section 988 and the regulations thereunder to be
translated on the

[[Page 88871]]

applicable booking date or payment date with respect to the section 988
transaction are translated into the owner's functional currency at the
rate required under section 988 and the regulations thereunder.
(ii) Specified owner functional currency transactions not treated
as section 988 transactions. Transactions of a section 987 QBU
described in sections 988(c)(1)(B)(i), 988(c)(1)(B)(ii), and
988(c)(1)(C) (including the acquisition of nonfunctional currency as
described in Sec. 1.988-1(a)(1)), other than transactions described in
paragraph (b)(4)(iii)(A) of this section, that are denominated in (or
determined by reference to) the owner's functional currency (specified
owner functional currency transactions) are not treated as section 988
transactions. Thus, no currency gain or loss is recognized by a section
987 QBU under section 988 with respect to such transactions.
(iii) Determination of section 988 gain or loss for qualified
short-term section 988 transactions--(A) Determination by reference to
the section 987 QBU's functional currency for certain transactions
subject to a mark-to-market method of accounting. Section 988 gain or
loss with respect to section 988 transactions described in paragraph
(b)(4)(iii)(B) of this section that are accounted for under a mark-to-
market method of accounting for Federal income tax purposes or under
the foreign currency mark-to-market method of accounting described in
paragraph (b)(4)(iii)(C) of this section, and any hedges entered into
to manage risk with respect to such transactions within the meaning of
Sec. 1.1221-2(c)(4) (related hedges), must be determined in, and by
reference to, the functional currency of the section 987 QBU (rather
than the functional currency of its owner).
(B) Qualified short-term section 988 transaction. A qualified
short-term section 988 transaction is a section 988 transaction that
occurs in the ordinary course of a section 987 QBU's business and has
an original term of one year or less on the date the transaction is
entered into by the section 987 QBU. The holding of currency that is
nonfunctional currency (within the meaning of section 988(c)(1)(C)(ii))
to the section 987 QBU in the ordinary course of a section 987 QBU's
trade or business also is treated as a qualified short-term section 988
transaction. Any transaction that is denominated in, or determined by
reference to, a hyperinflationary currency, including the holding of
hyperinflationary currency, is not considered a qualified short-term
section 988 transaction. See Sec. Sec. 1.988-2(b)(15), 1.988-2(d)(5),
and 1.988-2(e)(7) for rules relating to transactions denominated in, or
determined by reference to, a hyperinflationary currency.
(C) Election to use a foreign currency mark-to-market method of
accounting. A taxpayer may elect under this paragraph (b)(4)(iii)(C) to
apply the foreign currency mark-to-market method of accounting
described in this paragraph for all qualified short-term section 988
transactions described in paragraph (b)(4)(iii)(B) of this section, and
any related hedges, that are properly attributable to a section 987 QBU
on or after the effective date of the election and that are not
otherwise accounted for under a mark-to-market method of accounting
under section 475 or section 1256. Under the foreign currency mark-to-
market method of accounting, the timing of section 988 gain or loss on
section 988 transactions is determined under the principles of section
1256(a)(1). Thus, 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 under section 988 or another
provision of the Code or regulations. A section 988 transaction subject
to this election is not subject to the ``netting rule'' of section
988(b) and Sec. 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 prior to the taxable year in which section 988 gain or loss would
be recognized with respect to such section 988 transaction but for this
election.
(iv) Examples. Examples 10 through 13 of paragraph (e) of this
section illustrate the application of this paragraph (b)(4).
(c)(1) through (c)(2)(i) [Reserved]. For further guidance, see
Sec. 1.987-3(c)(1) through (c)(2)(i).
(ii) Amount realized with respect to historic assets that are
section 988 transactions. If the acquisition of a historic asset gave
rise to a section 988 transaction described in paragraph (b)(4)(i) of
this section, then in computing the total gain or loss on a disposition
of the historic asset (some or all of which total gain or loss may be
section 988 gain or loss described in section 988(b) and paragraph
(b)(4)(i) of this section), the amount realized (determined, if
necessary, under Sec. 1.987-3(b)(2)(i)) is translated into the owner's
functional currency using the spot rate on the date such item is
properly taken into account, subject to the limitation under Sec.
1.987-1T(c)(1)(ii)(B) regarding the use of a spot rate convention.
(iii) through (iv) [Reserved]. For further guidance, see Sec.
1.987-3(c)(2)(iii) through (iv).
(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 902 or 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).
See Example 14 of paragraph (e) of this section,, for an illustration
of this rule.
(d) Election to translate all items at the yearly average exchange
rate. Notwithstanding Sec. 1.987-3(c), a taxpayer that has made the
annual deemed termination election described in Sec. 1.987-8T(d) may
elect under this paragraph (d) to translate all items of income, gain,
deduction, and loss with respect to a section 987 QBU determined under
Sec. 1.987-3(b) in the functional currency of the section 987 QBU into
the owner's functional currency, if necessary, at the yearly average
exchange rate for the taxable year. Example 9 of paragraph (e) of this
section illustrates the application of this election.
(e) Example 1 through Example 8 [Reserved]. For further guidance,
see Sec. 1.987-3(e), Example 1 through Example 8.

Example 9. The facts are the same as in Example 7, except that
U.S. Corp properly elects under paragraph (d) of this section to
translate all items of income, gain, deduction, and loss with
respect to Business A at the yearly average exchange rate.
Accordingly, Business A's [euro]2,000 gain on the sale of the land
is translated at the yearly average exchange rate for 2021 of
[euro]1 = $1.05, and the amount of gain reported by U.S. Corp on the
sale of the land is $2,100.
Example 10. Business A acquires [pound]100 on August 27, 2021,
for [euro]120 and sells the pounds on November 17, 2021, for
[euro]125. The dollar-pound spot rate (without the use of a spot
rate convention) is [pound]1 = $1 on August

[[Page 88872]]

27, 2021, and [pound]1 = $1.10 on November 17, 2021. The disposition
of the pounds is a section 988 transaction of Business A under
paragraph (b)(4)(i) of this section, and the pounds are a historic
asset under Sec. 1.987-1(e). Section 988 gain or loss with respect
to the disposition of the pounds is determined under paragraph
(b)(4)(i) of this section and Sec. 1.988-2(a)(2) by reference to
the dollar functional currency of Business A's owner. The dollar
amount realized for the pounds is determined under paragraph
(c)(2)(ii) of this section by translating [pound]100 into $110 using
the dollar-pound spot rate on November 17, 2021, without the use of
a spot rate convention. The dollar basis in the pounds is determined
under Sec. 1.987-3(c)(2)(i) by translating [pound]100 into $100
using the historic rate described in Sec. 1.987-1T(c)(3)(i)(E),
which is the dollar-pound spot rate on August 27, 2021, without the
use of a spot rate convention. Thus, U.S. Corp takes into account
$10 of section 988 gain with respect to Business A's disposition of
[pound]100.
Example 11. (i) Business A purchases a [pound]100 2-year note
for [euro]75 on October 1, 2021, and receives a [pound]100 repayment
of principal with respect to the note on December 31, 2021. At the
spot rates on October 1, 2021 (as defined in Sec. 1.987-1(c)(1)),
without the use of a spot rate convention, Business A's [euro]75
purchase price translates into [pound]80 and $95. At the spot rates
on December 31, 2021, without the use of a spot rate convention, the
[pound]100 principal amount on the note translates into [euro]90 and
$130, and [pound]80 translates into $104.
(ii) The acquisition of the note is a section 988 transaction of
Business A under paragraph (b)(4)(i) of this section, and the note
is a historic asset under Sec. 1.987-1(e). To determine its section
987 taxable income or loss with respect to Business A, U.S. Corp
must determine Business A's total gain or loss on the disposition of
the note in U.S. Corp's dollar functional currency. Consistent with
Sec. 1.988-2(b)(8), U.S. Corp also must determine whether some or
all of that gain or loss constitutes section 987 gain or loss
described in section 988(b).
(iii) To determine Business A's total gain or loss on the
disposition of the note, Business A's basis and amount realized on
the note must be determined in euros under Sec. 1.987-3(b), if
necessary, and translated into dollars under Sec. 1.987-3(c).
Business A has a [euro]75 basis in the note that is translated into
$95 under Sec. 1.987-3(c)(2)(i) at the historic rate described in
Sec. 1.987-1T(c)(3)(i)(E), which is the spot rate on the date the
note was acquired without the use of a spot rate convention.
Business A's [pound]100 amount realized on the note is translated
into [euro]90 under Sec. 1.987-3(b)(2)(i) using the spot rate on
December 31, 2021, without the use of a spot rate convention. That
[euro]90 amount realized is then translated into $130 under
paragraph (c)(2)(ii) of this section using the spot rate on December
31, 2021, without the use of a spot rate convention. Accordingly,
the total gain with respect to the disposition of the note that is
included in section 987 taxable income is $35 ($130 less $95).
(iv) U.S. Corp must determine whether some or all of the $35
total gain with respect to the note constitutes section 988 gain.
The amount of section 988 gain realized with respect to the note is
determined under Sec. 1.988-2(b)(5), which requires a comparison of
the functional currency value of the principal amount of the note on
the booking date and payment date spot rates, respectively, and
defines the principal amount of the note as Business A's purchase
price in units of nonfunctional currency, which is [pound]80. Under
paragraph (b)(4)(i) of this section, section 988 gain or loss with
respect to the note is determined by reference to U.S. Corp's dollar
functional currency, such that the amounts required under section
988 to be translated on the booking date and payment date are
translated into the dollars at the booking date and payment date
spot rates. Accordingly, Business A's [pound]80 principal amount
with respect to the note is translated at the booking date and
payment date spots rates into $95 and $104, respectively. Thus, $9
($104 less $95) of the $35 total gain taken into account by U.S.
Corp as section 987 taxable income with respect to the note is
section 988 gain. The remaining $26 of gain, which may be
attributable to credit risk or another factor unrelated to currency
fluctuations, is sourced and characterized without regard to section
988.
Example 12. The facts are the same as in Example 11, except that
Business A is owned by a foreign corporation with a pound functional
currency. Under paragraph (b)(4)(ii) of this section, the
acquisition of the [pound]100 2-year note is a specified owner
functional currency transaction that is not treated as a section 988
transaction of Business A. Because the note is a historic asset
under Sec. 1.987-1(e), Business A's [euro]75 basis in the note
translates into [pound]80 at the historic rate described in Sec.
1.987-1T(c)(3)(i)(E), which provides that the historic rate is the
spot rate for the date the note was acquired without the use of a
spot rate convention. (If, instead, Business A had purchased the 5-
year note for [pound]80 rather than [euro]75, then pursuant to
paragraph (b)(2)(ii) of this section, Business A's basis in the note
would have been determined without translating the [pound]80
purchase price because it is denominated in the owner's functional
currency.) Under paragraph (b)(2)(ii) of this section, the
[pound]100 amount realized with respect to the note is not
translated because it is denominated in the owner's functional
currency. Thus, the owner takes into account [pound]20 ([pound]100
less [pound]80) of section 987 taxable income in 2021 with respect
to the note.
Example 13. (i) 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. dollar-denominated demand
deposit at a bank on December 31, 2021. U.S. Corp has elected under
paragraph (b)(4)(iii)(C) of this section to use the foreign currency
mark-to-market method of accounting for qualified short-term section
988 transactions entered into by Business A. The euro-dollar spot
rate without the use of a spot rate convention is [euro]1 = $1 on
January 1, 2021, and [euro]1 = $2 on December 31, 2021, and the
yearly average exchange rate for 2021 is [euro]1 = $1.50.
(ii) Under Sec. 1.987-3(b)(2)(i), the $100 earned by Business A
is translated into [euro]100 at the spot rate on January 1, 2021, as
defined in Sec. 1.987-1(c)(1) without the use of a spot rate
convention. In determining U.S. Corp's taxable income, the [euro]100
of service income is translated into $150 at the yearly average
exchange rate for 2021, as provided in Sec. 1.987-3(c)(1).
(iii) The $100 demand deposit constitutes a qualified short-term
section 988 transaction under paragraph (b)(4)(iii)(B) of this
section because the demand deposit is treated as nonfunctional
currency within the meaning of section 988(c)(1)(C)(ii). Because
Business A uses the foreign currency mark-to-market method of
accounting for qualified short-term section 988 transactions, under
paragraph (b)(4)(iii)(A) of this section, section 988 gain or loss
for such transactions is determined in, and by reference to, euros,
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 Sec. 1.988-
2(a)(2), Business A is treated as having an amount realized of
[euro]50 when the $100 is marked to market at the end of 2021 under
paragraph (b)(4)(iii)(C) of this section. Marking the dollars to
market gives rise to a section 988 loss of [euro]50 ([euro]50 amount
realized, less Business A's [euro]100 basis in the $100). In
determining U.S. Corp's taxable income, that [euro]50 loss is
translated into a $75 loss at the yearly average exchange rate for
2021, as provided in Sec. 1.987-3(c)(1).
Example 14. (i) Facts. Business A earns [euro]100 of revenue
from the provision of services and incurs [euro]30 of general
expenses and [euro]10 of depreciation expense during 2021. Except as
otherwise provided, U.S. Corp uses the yearly average exchange rate
described in Sec. 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 [euro]1 = $1.50. The historic rate used to
translate the depreciation expense is [euro]1 = $1.00. The spot rate
on the date that Business A paid its foreign income taxes was
[euro]1 = $1.60.
(ii) Analysis. Because U.S. Corp has elected to translate
foreign income taxes 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 by reducing the section 987 taxable income or loss that
otherwise would be determined under this section by [euro]15,
translated into U.S. dollars at the yearly average exchange rate
([euro]1 = $1.50), and increasing the resulting amount by [euro]15,
translated using the same exchange rate that is used to translate
the creditable taxes into U.S. dollars under section 986(a) ([euro]1
= $1.60). Following these adjustments, Business A's section 987
taxable income for 2021 is $96.50, computed as follows:

[[Page 88873]]



----------------------------------------------------------------------------------------------------------------
Amount in Translation
[euro] rate Amount in $
----------------------------------------------------------------------------------------------------------------
Revenue......................................................... [euro]100 [euro]1 = $150.00
$1.50
General Expenses................................................ (30) [euro]1 = (45.00)
$1.50
Depreciation.................................................... (10) [euro]1 = (10.00)
$1.00
-----------------------------------------------
Tentative section 987 taxable income............................ [euro]60 .............. $95.00
Adjustments under paragraph (c)(2)(v) of this section:
Decrease by [euro]15 tax translated at yearly average .............. .............. ($22.50)
exchange rate ([euro]1 = $1.50)............................
Increase by [euro]15 tax translated at spot rate on payment .............. .............. 24.00
date ([euro]1 = $1.60).....................................
-----------------------------------------------
Section 987 taxable income...................................... .............. .............. $96.50
----------------------------------------------------------------------------------------------------------------

(f) Effective/applicability date. This section applies to taxable
years beginning on or after one year after the first day of the first
taxable year following December 7, 2016. Notwithstanding the preceding
sentence, if a taxpayer makes an election under Sec. 1.987-11(b), then
this section applies to taxable years to which Sec. Sec. 1.987-1
through 1.987-10 apply as a result of such election.
(g) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 9. Section 1.987-4 is amended by adding paragraphs (c)(2) and (f)
to read as follows:


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

* * * * *
(c) * * *
(2) [Reserved]. For further guidance, see Sec. 1.987-4T(c)(2).
* * * * *
(f) [Reserved]. For further guidance, see Sec. 1.987-4T(f).
* * * * *

0
Par. 10. Section 1.987-4T is added to read as follows:


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

(a) through (c)(1) [Reserved]. For further guidance, see Sec.
1.987-4(a) through (c)(1).
(2) Coordination with Sec. 1.987-12T. For purposes of paragraph
(c)(1) of this section, amounts taken into account under Sec. 1.987-5
are determined without regard to Sec. 1.987-12T.
(d) through (e) [Reserved]. For further guidance, see Sec. 1.987-
4(d) through (e).
(f) Combinations and separations--(1) Combinations. The net
unrecognized section 987 gain or loss of a combined QBU (as defined in
Sec. 1.987-2T(c)(9)(i)) for a taxable year is determined under Sec.
1.987-4(b) by taking into account the net accumulated unrecognized
section 987 gain or loss of each combining QBU (as defined in Sec.
1.987-2T(c)(9)(i)) for all prior taxable years to which the regulations
under section 987 apply, as determined under Sec. 1.987-4(c), and by
treating the combining QBUs as having combined immediately prior to the
beginning of the taxable year of combination.
(2) Separations. The net unrecognized section 987 gain or loss of a
separated QBU (as defined in Sec. 1.987-2T(c)(9)(iii)) for a taxable
year is determined under Sec. 1.987-4(b) by taking into account the
separated QBU's share of the net accumulated unrecognized section 987
gain or loss of the separating QBU (as defined in Sec. 1.987-
2T(c)(9)(iii)) for all prior taxable years to which the regulations
under section 987 apply, as determined under Sec. 1.987-4(c), and by
treating the separating QBU as having separated immediately prior to
the beginning of the taxable year of separation. A separated QBU's
share of the separating QBU's net accumulated unrecognized section 987
gain or loss for all such prior taxable years is determined by
apportioning the separating QBU's net accumulated unrecognized section
987 gain or loss for all such prior taxable years to each separated QBU
in proportion to the aggregate adjusted basis of the gross assets
properly reflected on the books and records of each separated QBU
immediately after the separation. For purposes of determining the owner
functional currency net value of the separated QBUs on the last day of
the taxable year preceding the taxable year of separation under Sec.
1.987-5(d)(1)(B) and (e), the balance sheets of the separated QBUs on
that day will be deemed to reflect the assets and liabilities reflected
on the balance sheet of the separating QBU on that day, apportioned
between the separated QBUs in a reasonable manner that takes into
account the assets and liabilities reflected on the balance sheets of
the separated QBUs immediately after the separation.
(3) Examples. The following examples illustrate the rules of
paragraphs (f)(1) and (2) of this section.

Example 1. Combination of two section 987 QBUs that have the
same owner. (i) Facts. DC1, a domestic corporation, owns Entity A, a
DE. Entity A conducts a business in France that constitutes a
section 987 QBU (French QBU) that has the euro as its functional
currency. French QBU has a net accumulated unrecognized section 987
loss from all prior taxable years to which the regulations under
section 987 apply of $100. DC1 also owns Entity B, a DE. Entity B
conducts a business in Germany that constitutes a section 987 QBU
(German QBU) that has the euro as its functional currency. German
QBU has a net accumulated unrecognized section 987 gain from all
prior taxable years to which the regulations under section 987 apply
of $110. During the taxable year, Entity A and Entity B merge under
local law. As a result, the books and records of French QBU and
German QBU are combined into a new single set of books and records.
The combined entity has the euro as its functional currency.
(ii) Analysis. Pursuant to Sec. 1.987-2T(c)(9)(i), French QBU
and German 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 Sec. 1.987-5(c)). For
purposes of computing net unrecognized section 987 gain or loss
under Sec. 1.987-4 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 Sec. 1.987-4(d)(1)(B) takes into account items
reflected on the balance sheets of both French QBU and German QBU at
that time. Additionally, any transactions between French QBU and
German QBU occurring during the year of the merger will not result
in transfers to or from a section 987 QBU. Pursuant to paragraph
(f)(1) of this section, the combined QBU will have a net accumulated
unrecognized section 987 gain from all prior taxable years of $10
(the $100 loss from French QBU plus the $110 gain from German QBU).
Example 2. Separation of two section 987 QBUs that have the same
owner. (i) 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 [euro]1,000. In Year 2, the

[[Page 88874]]

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 Sec. 1.987-1(b)(2) (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 [euro]600 and the aggregate
adjusted basis of scooter QBU's assets is [euro]400. Each section
987 QBU continues to have the euro as its functional currency.
(ii) Analysis. Pursuant to Sec. 1.987-2T(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 (as defined in
Sec. 1.987-5(c)). For purposes of computing net unrecognized
section 987 gain or loss under Sec. 1.987-4 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, bicycle QBU will have a net accumulated unrecognized
section 987 loss of $120 ([euro]600/[euro]1,000 x $200), and scooter
QBU will have a net accumulated unrecognized section 987 loss of $80
([euro]400/[euro]1,000 x $200).

(g) [Reserved]. For further guidance, see Sec. 1.987-4(g).
(h) Effective/applicability date. This section applies to taxable
years beginning on or after one year after the first day of the first
taxable year following December 7, 2016. Notwithstanding the preceding
sentence, if a taxpayer makes an election under Sec. 1.987-11(b), then
this section applies to taxable years to which Sec. Sec. 1.987-1
through 1.987-10 apply as a result of such election.
(i) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 11. Section 1.987-6 is amended by adding paragraph (b)(4) to read
as follows:


Sec. 1.987-6 Character and source of section 987 gain or loss.

* * * * *
(b) * * *
(4) [Reserved]. For further guidance, see Sec. 1.987-6T(b)(4).
* * * * *

0
Par. 12. Section 1.987-6T is added to read as follows:


Sec. 1.987-6T Character and source of section 987 gain or loss
(temporary)

(a) through (b)(3) [Reserved]. For further guidance, see Sec.
1.987-6(a) through (b)(3).
(4) Source of section 987 gain or loss with respect to a dollar
QBU. The source of section 987 gain or loss with respect to a dollar
QBU (as defined in Sec. 1.987-1T(b)(6)(i)) for which the CFC owner has
elected under Sec. 1.987-1T(b)(6)(iii) to apply section 987 is
determined by reference to the residence of the CFC owner. This
paragraph (b)(4) applies to any CFC that has made the election under
Sec. 1.987-1T(b)(6)(iii), including a CFC described in Sec. 1.987-
1(b)(1)(ii).
(c) [Reserved]. For further guidance, see Sec. 1.987-6(c).
(d) Effective/applicability date. This section applies to taxable
years beginning on or after one year after the first day of the first
taxable year following December 7, 2016. Notwithstanding the preceding
sentence, if a taxpayer makes an election under Sec. 1.987-11(b), then
this section applies to taxable years to which Sec. Sec. 1.987-1
through 1.987-10 apply as a result of such election.
(e) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 13. Section 1.987-7 is amended by adding paragraph (b) to read as
follows:


Sec. 1.987-7 Section 987 aggregate partnerships.

* * * * *
(b) [Reserved]. For further guidance, see Sec. 1.987-7T(b).
* * * * *

0
Par. 14. Section 1.987-7T is added to read as follows:


Sec. 1.987-7T Section 987 aggregate partnerships (temporary).

(a) [Reserved]. For further guidance, see Sec. 1.987-7(a).
(b) Liquidation value percentage methodology--(1) In general. In
any taxable year, a partner's share of each asset, including its basis
in each asset, and the amount of each liability reflected under Sec.
1.987-2(b) on the books and records of an eligible QBU owned indirectly
through a section 987 aggregate partnership is proportional to the
partner's liquidation value percentage with respect to the aggregate
partnership for that taxable year, as determined under paragraph (b)(2)
of this section.
(2) Liquidation value percentage--(i) In general. For purposes of
this paragraph (b), a partner's liquidation value percentage is the
ratio (expressed as a percentage) of the liquidation value of the
partner's interest in the partnership to the aggregate liquidation
value of all of the partners' interests in the partnership. The
liquidation value of a partner's interest in a partnership is the
amount of cash the partner would receive with respect to the interest
if, immediately following the applicable determination date, the
partnership sold all of its assets for cash equal to the fair market
value of such assets (taking into account section 7701(g)), satisfied
all of its liabilities (other than those described in Sec. 1.752-7),
paid an unrelated third party to assume all of its Sec. 1.752-7
liabilities in a fully taxable transaction, and then liquidated.
(ii) Determination date.--(A) In general. Except as provided in
paragraph (b)(2)(ii)(B) of this section, the determination date is the
date of the most recent event described in Sec. 1.704-
1(b)(2)(iv)(f)(5) or Sec. 1.704-1(b)(2)(iv)(s)(1) (a revaluation
event), irrespective of whether the capital accounts of the partners
are adjusted under Sec. 1.704-1(b)(2)(iv)(f), or, if there has been no
revaluation event, the date of the formation of the partnership.
(B) Allocations not in accordance with liquidation value
percentage. If a partnership agreement provides for the allocation of
any item of income, gain, deduction, or loss from partnership property
to a partner other than in accordance with the partner's liquidation
value percentage, the determination date is the last day of the
partner's taxable year, or, if the partner's section 987 QBU owned
indirectly through a section 987 aggregate partnership terminates
during the partner's taxable year, the date such section 987 QBU is
terminated.
(3) Example. The following example illustrates the rule of this
paragraph (b).

Example. (i) Facts. DC, a domestic corporation, owns all of the
stock of FS, a controlled foreign corporation (as defined in section
957(a)) with the U.S. dollar as its functional currency. FS owns a
capital and profits interest in FPRS, a foreign partnership. The
remaining capital and profits interest in FPRS is owned by DC. FPRS
is a section 987 aggregate partnership with the euro as its
functional currency. The balance sheet of FPRS reflects one asset
(Asset A) with a basis of [euro]60x and a fair market value of
[euro]100x, another asset (Asset B) with a basis of [euro]100x and a
fair market value of [euro]200x, and a liability (Liability) of
[euro]50x. At the end of year 1, the liquidation value percentage,
as determined under paragraph (b)(2) of this section, of DC with
respect to FPRS is 75 percent, and the liquidation value percentage
of FS with respect to FPRS is 25 percent.
(ii) Result. Under Sec. 1.987-1(b)(4), DC and FS are each
treated as indirectly owning an eligible QBU with a balance sheet
that reflects their respective shares of any assets and liabilities
of FPRS. Under paragraph (b)(1) of this section, DC and FS's shares
of FPRS's assets and liabilities are determined in accordance with
DC and FS's respective liquidation value percentages. Accordingly,
because DC has a liquidation value percentage of 75 percent with
respect to FPRS, [euro]75x of Asset A (with a [euro]45x basis),
[euro]150x of Asset B (with a [euro]75x basis), and

[[Page 88875]]

[euro]37.50x of Liability will be attributed to the DC-FPRS QBU.
Additionally, because FS has a liquidation value percentage of 25
percent with respect to FPRS, [euro]25x of Asset A (with a [euro]15x
basis), [euro]50x of Asset B (with a [euro]25x basis), and
[euro]12.50x of Liability will be attributed to the FS-FPRS QBU.

(c) [Reserved]. For further guidance, see Sec. 1.987-7(c).
(d) Effective/applicability date. This section applies to taxable
years beginning on or after one year after the first day of the first
taxable year following December 7, 2016. Notwithstanding the preceding
sentence, if a taxpayer makes an election under Sec. 1.987-11(b), then
this section applies to taxable years to which Sec. Sec. 1.987-1
through 1.987-10 apply as a result of such election.
(e) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 15. Section 1.987-8 is amended by adding paragraph (d) to read as
follows:


Sec. 1.987-8 Termination of a section 987 QBU.

* * * * *
(d) [Reserved]. For further guidance, see Sec. 1.987-8T(d).
* * * * *

0
Par. 16. Section 1.987-8T is added to read as follows


Sec. 1.987-8T Termination of a section 987 QBU (temporary).

(a) through (c) [Reserved]. For further guidance, see Sec. 1.987-
8(a) through (c).
(d) Annual deemed termination election. A taxpayer, including a
taxpayer described in Sec. 1.987-1(b)(1)(ii) to which Sec. Sec.
1.987-1 through 1.987-11 generally do not apply, may elect under this
paragraph (d) to deem all of the section 987 QBUs of which it is an
owner to terminate on the last day of each taxable year for which the
election is in effect. See Sec. 1.987-8(e) regarding the effect of
such a deemed termination. The owner of a section 987 QBU that is
deemed to terminate under this paragraph is treated as having
transferred all of the assets and liabilities attributable to such
section 987 QBU to a new section 987 QBU on the first day of the
following taxable year.
(e) through (f) [Reserved]. For further guidance, see Sec. 1.987-
8(e) through (f).
(g) Effective/applicability date. This section applies to taxable
years beginning on or after December 7, 2016.
(h) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 17. Section 1.987-12 is added to read as follows:


Sec. 1.987-12 Deferral of section 987 gain or loss.

(a) through (h) [Reserved]. For further guidance, see Sec. 1.987-
12T(a) through (h).

0
Par. 18. Section 1.987-12T is added to read as follows:


Sec. 1.987-12T Deferral of section 987 gain or loss (temporary).

(a) In general--(1) Overview. This section provides rules that
defer the recognition of section 987 gain or loss that, but for this
section, would be recognized in connection with certain QBU
terminations and certain other transactions involving partnerships.
This paragraph (a) provides an overview of this section and describes
the section's scope of application, including with respect to QBUs
subject to section 987 but to which Sec. Sec. 1.987-1 through 1.987-11
generally do not apply. Paragraph (b) of this section describes the
extent to which section 987 gain or loss is recognized under Sec.
1.987-5 or similar principles in the taxable year of a deferral event
(as defined in paragraph (b)(2) of this section) with respect to a QBU.
Paragraph (c) of this section describes the extent to which section 987
gain or loss that, as a result of paragraph (b), is not recognized
under Sec. 1.987-5 or similar principles is recognized upon the
occurrence of subsequent events. Paragraph (d) of this section
describes the extent to which section 987 loss is recognized under
Sec. 1.987-5 or similar principles in the taxable year of an outbound
loss event (as defined in paragraph (d)(2) of this section) with
respect to a QBU. Paragraph (e) of this section provides rules for
determining the source and character of gains and losses that, as a
result of this section, are not recognized under Sec. 1.987-5 or
similar principles in the taxable year of a deferral event or outbound
loss event. Paragraph (f) of this section defines controlled group and
qualified successor for purposes of this section. Paragraph (g) of this
section provides an anti-abuse rule. Paragraph (h) of this section
provides examples illustrating the rules described in this section.
(2) Scope. This section applies to any foreign currency gain or
loss realized under section 987(3), including foreign currency gain or
loss of an entity described in Sec. 1.987-1(b)(1)(ii). References in
this section to section 987 gain or loss refer to any foreign currency
gain or loss realized under section 987(3), references to a section 987
QBU refer to any eligible QBU (as defined in Sec. 1.987-1(b)(3)(i),
but without regard to Sec. 1.987-1(b)(3)(ii)) that is subject to
section 987, and references to a section 987 aggregate partnership
refer to any partnership for which the acquisition or disposition of a
partnership interest could give rise to foreign currency gain or loss
realized under section 987(3). Additionally, references to recognition
of section 987 gain or loss under Sec. 1.987-5 encompass any
determination and recognition of gain or loss under section 987(3) that
would occur but for this section. Accordingly, the principles of this
section apply to a QBU subject to section 987 regardless of whether the
QBU otherwise is subject to Sec. Sec. 1.987-1 through 1.987-11. An
owner of a QBU that is not subject to Sec. 1.987-5 must adapt the
rules set forth in this section as necessary to recognize section 987
gains or losses that are subject to this section consistent with the
principles of this section.
(3) Exceptions--(i) Annual deemed termination elections. This
section does not apply to section 987 gain or loss of a section 987 QBU
with respect to which the annual deemed termination election described
in Sec. 1.987-8T(d) is in effect.
(ii) De minimis exception. This section does not apply to a section
987 QBU for a taxable year if the net unrecognized section 987 gain or
loss of the section 987 QBU that, as a result of this section, would
not be recognized under Sec. 1.987-5 in the taxable year does not
exceed $5 million.
(b) Gain and loss recognition in connection with a deferral event--
(1) In general. Notwithstanding Sec. 1.987-5, the owner of a section
987 QBU with respect to which a deferral event occurs (a deferral QBU)
includes in taxable income section 987 gain or loss in connection with
the deferral event only to the extent provided in paragraphs (b)(3) and
(c) of this section. However, if the deferral event also constitutes an
outbound loss event described in paragraph (d) of this section, the
amount of loss recognized by the owner may be further limited under
that paragraph.
(2) Deferral event--(i) In general. A deferral event with respect
to a section 987 QBU means any transaction or series of transactions
that satisfy the conditions described in paragraphs (b)(2)(ii) and
(b)(2)(iii) of this section.
(ii) Transactions. The transaction or series of transactions
include either:
(A) A termination of the section 987 QBU other than any of the
following terminations: a termination described in Sec. 1.987-8(b)(3),
a termination described in Sec. 1.987-8(c), or a termination described
solely in Sec. 1.987-8(b)(1); or
(B) A disposition of part of an interest in a section 987 aggregate
partnership or DE through which the section 987 QBU is owned or any
contribution by another

[[Page 88876]]

person to such a partnership or DE of assets that, immediately after
the contribution, are not considered to be included on the books and
records of an eligible QBU, provided that the contribution gives rise
to a deemed transfer from the section 987 QBU to the owner.
(iii) Assets on books of successor 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 QBU (as defined
in paragraph (b)(4) of this section).
(3) Gain or loss recognized under Sec. 1.987-5 in the taxable year
of a deferral event. In the taxable year of a deferral event with
respect to a deferral QBU, the owner of the deferral QBU recognizes
section 987 gain or loss as determined under Sec. 1.987-5, except
that, solely for purposes of applying Sec. 1.987-5, all assets and
liabilities of the deferral QBU that, immediately after the deferral
event, are reflected on the books and records of a successor QBU are
treated as not having been transferred and therefore as remaining on
the books and records of the deferral QBU notwithstanding the deferral
event.
(4) Successor QBU. For purposes of this section, a section 987 QBU
(potential successor QBU) is a successor QBU with respect to a section
987 QBU referred to in paragraph (b)(2)(ii) of this section if,
immediately after the transaction or series of transactions described
in that paragraph, the potential successor QBU satisfies all of the
conditions described in paragraphs (b)(4)(i) through (b)(4)(iii) of
this section.
(i) The books and records of the potential successor QBU reflect
assets that, immediately before the transaction or series of
transactions described in paragraph (b)(2)(ii) of this section, were
reflected on the books and records of the section 987 QBU referred to
in that paragraph.
(ii) The owner of the potential successor QBU and the owner of the
section 987 QBU referred to in paragraph (b)(2)(ii) of this section
immediately before the transaction or series of transactions described
in that paragraph are members of the same controlled group.
(iii) In the case of a section 987 QBU referred to in paragraph
(b)(2)(ii)(A) of this section, if the owner of the section 987 QBU
immediately before the transaction or series of transactions described
in that paragraph was a U.S. person, the potential successor QBU is
owned by a U.S. person.
(c) Recognition of deferred section 987 gain or loss in the taxable
year of a deferral event and in subsequent taxable years--(1) In
general--(i) Deferred section 987 gain or loss. A deferral QBU owner
(as defined in paragraph (c)(1)(ii) of this section) recognizes section
987 gain or loss attributable to the deferral QBU that, as a result of
paragraph (b) of this section, is not recognized in the taxable year of
the deferral event under Sec. 1.987-5 (deferred section 987 gain or
loss) in the taxable year of the deferral event and in subsequent
taxable years as provided in paragraphs (c)(2) through (4) of this
section.
(ii) Deferral QBU owner. For purposes of this paragraph (c), a
deferral QBU owner means, with respect to a deferral QBU, the owner of
the deferral QBU immediately before the deferral event, or the owner's
qualified successor.
(2) Recognition upon a subsequent remittance--(i) In general.
Except as provided in paragraph (c)(3) of this section, a 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 QBU to the owner of the successor QBU (successor QBU
owner) in the amount described in paragraph (c)(2)(ii) of this section.
(ii) Amount. The amount of deferred section 987 gain or loss that
is recognized pursuant to this paragraph (c)(2) in a taxable year of
the deferral QBU owner is the outstanding deferred section 987 gain or
loss (that is, the amount of deferred section 987 gain or loss not
previously recognized) multiplied by the remittance proportion of the
successor QBU owner with respect to the successor QBU for the taxable
year ending with or within the taxable year of the deferral QBU owner,
as determined under Sec. 1.987-5(b) (and, to the extent relevant,
paragraphs (b) and (c)(2)(iii) of this section) without regard to any
election under Sec. 1.987-8T(d). For purposes of computing this
remittance proportion, multiple successor QBUs of the same deferral QBU
are treated as a single successor QBU.
(iii) Deemed remittance when a successor QBU ceases to be owned by
a member of the deferral QBU owner's controlled group. For purposes of
this paragraph (c)(2), in a taxable year of the deferral QBU owner in
which a successor QBU ceases to be owned by a member of a controlled
group that includes the deferral QBU owner, the successor QBU owner is
treated as having a remittance proportion of 1. Accordingly, if there
is only one successor QBU with respect to a deferral QBU and that
successor QBU ceases to be owned by a member of the controlled group
that includes the deferral QBU owner, all outstanding deferred section
987 gain or loss with respect to that deferral QBU will be recognized.
This paragraph (c)(2)(iii) does not affect the application of
Sec. Sec. 1.987-1 through 1.987-11 to the successor QBU owner with
respect to its ownership of the successor QBU.
(3) Recognition of deferred section 987 loss in certain outbound
successor QBU terminations. Notwithstanding paragraph (c)(2) of this
section, if assets of the successor QBU (transferred assets) are
transferred (or deemed transferred) in a transaction that would
constitute an outbound loss event if the successor QBU had a net
accumulated section 987 loss at the time of the exchange, then the
deferral QBU owner recognizes outstanding deferred section 987 loss, if
any, to the extent it would recognize loss under paragraph (d)(1) of
this section if (i) the deferral QBU owner owned the successor QBU,
(ii) the deferral QBU owner had net unrecognized section 987 loss with
respect to the successor QBU equal to its outstanding deferred section
987 loss with respect to the deferral QBU, and (iii) the transferred
assets were transferred (or deemed transferred) in an outbound loss
event. Any outstanding deferred section 987 loss with respect to the
deferral QBU that is not recognized as a result of the preceding
sentence is recognized by the deferral QBU owner in the first taxable
year in which the deferral QBU owner (including any qualified
successor) ceases to be a member of a controlled group that includes
the acquirer of the transferred assets or any qualified successor of
such acquirer.
(4) Special rules regarding successor QBUs--(i) Successor QBU with
respect to a deferral QBU that is a successor QBU. If a section 987 QBU
is a successor QBU with respect to a deferral QBU that is a successor
QBU with respect to another deferral QBU, the first-mentioned section
987 QBU is considered a successor QBU with respect to the second-
mentioned deferral QBU. For example, if QBU A is a successor QBU with
respect to QBU B, and QBU B is a successor QBU with respect to QBU C,
then QBU A is a successor QBU with respect to QBU C.
(ii) Separation of a successor QBU. If a successor QBU with respect
to a deferral QBU separates into two or more separated QBUs (as defined
in Sec. 1.987-2T(c)(9)(iii)), each separated QBU is considered a
successor QBU with respect to the deferral QBU.
(iii) Combination of a successor QBU. If a successor QBU with
respect to a deferral QBU combines with another

[[Page 88877]]

section 987 QBU of the same owner, resulting in a combined QBU (as
defined in Sec. 1.987-2T(c)(9)(i)), the combined QBU is considered a
successor QBU with respect to the deferral QBU.
(d) Loss recognition upon an outbound loss event--(1) In general.
Notwithstanding Sec. 1.987-5, the owner of a section 987 QBU with
respect to which an outbound loss event occurs (an outbound loss QBU)
includes in taxable income in the taxable year of an outbound loss
event section 987 loss with respect to that section 987 QBU only to the
extent provided in paragraph (d)(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 in connection with 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.
transferor 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 Sec. 1.987-5 and paragraph (b) of this section
but for this paragraph (d);
(ii) Any transfer by a U.S. person of part of an interest in a
section 987 aggregate partnership or DE through which the U.S. person
owns the section 987 QBU to a related foreign person that has the same
functional currency as the section 987 QBU, or any contribution by such
a related foreign person to such a partnership or DE of assets that,
immediately after the contribution, are not considered to be included
on the books and records of an eligible QBU, provided that the transfer
would result in the recognition of section 987 loss with respect to the
section 987 QBU under Sec. 1.987-5 and paragraph (b) of this section
but for this paragraph (d).
(3) Loss recognized 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 Sec. 1.987-5 and paragraphs (b) and (c) of this
section, except that, solely for purposes of applying Sec. 1.987-5,
the following assets and liabilities of the outbound loss QBU 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:
(i) In the case of an outbound loss event described in paragraph
(d)(2)(i) of this section, assets and liabilities that, immediately
after the outbound loss event, are reflected on the books and records
of the related foreign person described in that paragraph or of a
section 987 QBU owned by such related foreign person; and
(ii) In the case of an outbound loss event described in paragraph
(d)(2)(ii) of this section, assets and liabilities that, immediately
after the outbound loss event, are reflected on the books and records
of the eligible QBU from which the assets and liabilities of the
outbound loss QBU are allocated and not on the books and records of a
section 987 QBU.
(4) Adjustment of basis of stock received in certain nonrecognition
transactions. If an outbound loss event results from the transfer of
assets of the outbound loss QBU in a transaction described in section
351 or section 361, the basis of the stock that is received in the
transaction is increased by an amount equal to the section 987 loss
that, as a result of this paragraph (d), is not recognized with respect
to the outbound loss QBU in the taxable year of the outbound loss event
(outbound section 987 loss).
(5) Recognition of outbound section 987 loss that is not converted
into stock basis. Outbound section 987 loss attributable to an outbound
loss event that is not described in paragraph (d)(4) of this section is
recognized by the owner of the outbound loss QBU in the first taxable
year in which the owner or any qualified successor of the owner ceases
to be a member of a controlled group that includes the related foreign
person referred to in paragraph (d)(2)(i) or (ii) of this section, or
any qualified successor of such person.
(e) Source and character--(1) Deferred section 987 gain or loss and
certain outbound section 987 loss. The source and character of deferred
section 987 gain or loss recognized pursuant to paragraph (c) of this
section, and of outbound section 987 loss recognized pursuant to
paragraph (d)(5) of this section, is determined under Sec. 1.987-6 as
if such deferred section 987 gain or loss were recognized pursuant to
Sec. 1.987-5 without regard to this section on the date of the related
deferral event or outbound loss event.
(2) Outbound section 987 loss reflected in stock basis. If loss is
recognized on the sale or exchange of stock described in paragraph
(d)(4) of this section within two years of the outbound loss event
described in that paragraph, then, to the extent of the outbound
section 987 loss, the source and character of the loss recognized on
the sale or exchange is determined under Sec. 1.987-6 as if such loss
were section 987 loss recognized pursuant to Sec. 1.987-5 without
regard to this section on the date of the outbound loss event.
(f) Definitions--(1) Controlled group. For purposes of this
section, a controlled group means all persons with the relationships to
each other specified in sections 267(b) or 707(b).
(2) Qualified successor. For purposes of this section, a qualified
successor with respect to a corporation (transferor corporation) means
another corporation (acquiring corporation) that acquires the assets of
the transferor corporation in a transaction described in section
381(a), but only if (A) the acquiring corporation is a domestic
corporation and the transferor corporation was a domestic corporation,
or (B) the acquiring corporation is a controlled foreign corporation
(as defined in section 957(a)) (CFC) and the transferor corporation was
a CFC. A qualified successor of a corporation includes the qualified
successor of a qualified successor of the corporation.
(g) Anti-abuse. No section 987 loss is recognized under Sec.
1.987-5 or this section in connection with a transaction or series of
transactions that are undertaken with a principal purpose of avoiding
the purposes of this section.
(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 and CFC2 are CFCs. In addition, DC1, DC2, CFC1,
and CFC2 are members of a controlled group as defined in paragraph
(f)(1) of this section, and the de minimis rule of paragraph (a)(3)(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.

Example 1. Contribution of a section 987 QBU to a member of the
controlled group. (i) Facts. DC1 owns all of the interests in
Business A. The balance sheet of Business A reflects assets with an
aggregate adjusted basis of [euro]1,000x and no liabilities. DC1
contributes [euro]900x of Business A's assets to DC2 in an exchange
to which section 351 applies. Immediately after the contribution,
the remaining [euro]100x of Business A's assets are no longer
reflected on the books and records of a section 987 QBU. DC2, which
has the U.S. dollar as its functional currency, uses the former
Business A assets in a business (Business B) that constitutes a
section 987 QBU. At the time of the contribution, Business A has net
accumulated unrecognized section 987 gain of $100x.
(ii) Analysis. (A) Under Sec. 1.987-2(c)(2)(ii), DC1's
contribution of [euro]900x of Business A's

[[Page 88878]]

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
[euro]900x of Business A's assets to DC2. The contribution of
Business A's assets is a deferral event within the meaning of
paragraph (b)(2) 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 Business A under Sec.
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 QBU within the meaning of paragraph (b)(4) of this
section. Accordingly, Business A is a deferral QBU within the
meaning of paragraph (b)(1) of this section, and DC1 is a deferral
QBU owner of Business A within the meaning of paragraph (c)(1)(ii)
of this section.
(B) Under paragraph (b)(3) 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 Sec.
1.987-5, except that, for purposes of applying Sec. 1.987-5, all
assets and liabilities 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 Sec. 1.987-8(e)).
Accordingly, in the taxable year of the deferral event, DC1 is
treated as making a remittance of [euro]100x, corresponding to the
assets of Business A that are no longer reflected on the books and
records of a section 987 QBU, and is treated as having a remittance
proportion with respect to Business A of 0.1, determined by dividing
the [euro]100x remittance by the sum of the remittance and the
[euro]900x aggregate adjusted basis of the gross assets deemed to
remain on Business A's books at the end of the year. Thus, DC1
recognizes $10x of section 987 gain in the taxable year of the
deferral event. DC1's deferred section 987 gain equals $90x, which
is the amount of section 987 gain that, but for the application of
paragraph (b) of this section, DC1 would have recognized under Sec.
1.987-5 ($100x), less the amount of section 987 gain recognized by
DC1 under Sec. 1.987-5 and this section ($10x).
Example 2. 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 accumulated unrecognized section
987 gain of $500x. Entity A elects to be classified as a corporation
under Sec. 301.7701-3(a). As a result of the election and pursuant
to Sec. 301.7701-3(g)(1)(iv), DC1 is treated as contributing all of
the assets and liabilities of Business A to newly-formed CFC1, which
has the euro as its functional currency. Immediately after the
contribution, the assets and liabilities of Business A are reflected
on CFC1's balance sheet.
(ii) Analysis. Under Sec. 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 QBU terminates under
Sec. 1.987-8(b)(2). The contribution of Business A's assets is not
a deferral event within the meaning of paragraph (b)(2) of this
section because, immediately after the transaction, no assets of
Business A are reflected on the books and records of a successor QBU
within the meaning of paragraph (b)(4) of this section due to the
fact that the assets of Business A are not reflected on a section
987 QBU immediately after the termination as well as the fact that
the requirement of paragraph (b)(4)(iii) of this section is not met.
Accordingly, DC1 recognizes section 987 gain with respect to
Business A under Sec. 1.987-5 without regard to this section.
Because the requirement of paragraph (b)(4)(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.
Example 3. Outbound loss event. (i) Facts. The facts are the
same as in Example 2, except that Business A has net accumulated
unrecognized section 987 loss of $500x rather than net accumulated
unrecognized section 987 gain of $500x.
(ii) Analysis. (A) The analysis of the transactions under
Sec. Sec. 1.987-2(c)(2)(ii), 1.987-8(b)(2), and paragraph (b) of
this section is the same as in Example 2. However, the termination
of Business A 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 (d)(2) of this section.
(B) Under paragraphs (d)(1) and (d)(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 Sec. 1.987-5, except that, for purposes of
applying Sec. 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 (d)(2) of this section, are
treated as not having been transferred. Accordingly, DC1's
remittance proportion with respect to Business A is 0, and DC1
recognizes no section 987 loss with respect to Business A. DC1's
outbound section 987 loss is $500x, which is the amount of section
987 loss that DC1 would have recognized under Sec. 1.987-5 ($500x)
without regard to paragraph (d) of this section, less the amount of
section 987 loss recognized by DC1 under paragraph (d)(3) of this
section ($0). Under paragraph (d)(4) of this section, DC1 must
increase its basis in its CFC1 shares by the amount of the outbound
section 987 loss ($500x).
Example 4. Conversion of a DE to a partnership. (i) Facts. DC1
owns all of the interests in Entity A, a DE that conducts Business
A. On the last day of Year 1, DC1 sells 50 percent of its interest
in Entity A to DC2 (the Entity A sale).
(ii) Analysis. (A) For Federal income tax purposes, Entity A is
converted to a partnership when DC2 purchases the 50 percent
interest in Entity A. DC2's purchase is treated as the purchase of
50 percent of the assets of Entity A (that is, the assets of
Business A), which, prior to the purchase, were treated as held
directly by DC1 for Federal income tax purposes. Immediately after
DC2's deemed purchase of 50 percent of Business A assets, DC1 and
DC2 are treated as contributing their respective interests in
Business A assets to a partnership. See Rev. Rul. 99-5 (1999-1 CB
434) (situation 1). These deemed transactions are not taken into
account for purposes of this section, but the Entity A sale and
resulting existence of a partnership have consequences under section
987 and this section, as described in paragraphs (ii)(B) through (D)
of this Example 4.
(B) Immediately after the Entity A sale, Entity A is a section
987 aggregate partnership within the meaning of Sec. 1.987-1(b)(5)
because DC1 and DC2 own all the interests in partnership capital and
profits, DC1 and DC2 are related within the meaning of section
267(b), and the partnership has an eligible QBU (Business A) that
would be a section 987 QBU with respect to a partner if owned by the
partner directly. As a result of the Entity A sale, 50 percent of
the assets and liabilities of Business A ceased to be reflected on
the books and records of DC1's Business A section 987 QBU. As a
result, such assets and liabilities are treated as if they were
transferred from DC1's Business A section 987 QBU to DC1.
Additionally, following DC2's acquisition of 50 percent of the
interest in Entity A, DC2 is allocated 50 percent of the assets and
liabilities of Business A under Sec. Sec. 1.987-2(b), 1.987-7(a),
and 1.987-7T(b). Because DC2 and Business A have different
functional currencies, DC2's portion of the Business A assets and
liabilities constitutes a section 987 QBU. Accordingly, 50 percent
of the assets and liabilities of Business A are treated as
transferred by DC2 to DC2's Business A section 987 QBU.
(C) The Entity A sale is a deferral event described in paragraph
(b)(2) of this section because: (1) The sale constitutes the
disposition of part of an interest in a DE; and (2) immediately
after the transaction, assets of DC1's Business A section 987 QBU
are reflected on the books and records of DC1's Business A section
987 QBU and DC2's Business A section 987 QBU, each of which is a
successor QBU with respect to DC1's Business A section 987 QBU
within the meaning of paragraph (b)(4) of this section. Accordingly,
DC1's Business A section 987 QBU is a deferral QBU within the
meaning of paragraph (b)(1) of this section, and DC1 is a deferral
QBU owner within the meaning of paragraph (c)(1)(ii) of this
section. Under paragraph (b)(1) of this section, DC1 includes in
taxable income section 987 gain or loss with respect to Business A
in connection with the deferral event to the extent provided in
paragraphs (b)(3) and (c) of this section.
(D) Under paragraph (b) of this section, in the taxable year of
the Entity A sale, DC1 includes in taxable income section 987 gain
or loss with respect to Business A as determined under Sec. 1.987-
5, except that, for purposes of applying Sec. 1.987-5, all assets
and liabilities of Business A that, immediately

[[Page 88879]]

after the Entity A sale, are reflected on the books and records of
successor QBUs are treated as though they were not transferred and
therefore as remaining on the books and records of DC1's Business A
section 987 QBU notwithstanding the Entity A sale. Accordingly,
DC1's remittance amount under Sec. 1.987-5 is $0, and DC1
recognizes no section 987 gain or loss with respect to Business A.
Example 5. 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
accumulated unrecognized section 987 gain of $100x. After the
contribution, Entity A continues to conduct business in Country X
(Business B). In Year 3, as a result of a net transfer of property
from Business B to DC2, DC2's remittance proportion with respect to
Business B, as determined under Sec. 1.987-5, is 0.25.
(ii) Analysis. (A) For the reasons described in Example 1, the
contribution of Entity A by DC1 to DC2 results in a termination of
Business A and a deferral event with respect to Business A, a
deferral QBU; DC1 is a deferral QBU owner within the meaning of
paragraph (c)(1)(ii) of this section; Business B is a successor QBU
with respect to Business A; DC2 is a successor QBU owner; and the
$100x of net accumulated unrecognized section 987 gain with respect
to Business A becomes deferred section 987 gain as a result of the
deferral event.
(B) Under paragraph (c)(1) of this section, DC1 recognizes
deferred section 987 gain with respect to Business A in accordance
with paragraphs (c)(2) through (4) of this section. Under paragraph
(c)(2)(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)(2)(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 or loss ($100x) with respect
to Business A multiplied by the remittance proportion (0.25) of DC2
with respect to Business B for the taxable year as determined under
Sec. 1.987-5(b).

(i) Coordination with fresh start transition method--(1) In
general. If a taxpayer is a deferral QBU owner, or is or was the owner
of an outbound loss QBU, and the taxpayer is required under Sec.
1.987-10(a) to apply the fresh start transition method described in
Sec. 1.987-10(b) to the deferral QBU or outbound loss QBU, or would
have been so required if the taxpayer had owned the deferral QBU or
outbound loss QBU on the transition date (as defined in Sec. 1.987-
11(c)), the adjustments described in paragraphs (i)(2) and (i)(3) of
this section, as applicable, must be made on the transition date.
(2) Adjustment to deferred section 987 gain or loss. The amount of
any outstanding deferred section 987 gain or loss of a deferral QBU
owner with respect to a deferral QBU described in paragraph (i)(1) of
this section must be adjusted to equal the amount of outstanding
deferred section 987 gain or loss that the deferral QBU owner would
have had with respect to the deferral QBU on the transition date if,
immediately before the deferral event, the deferral QBU had
transitioned to the method prescribed by Sec. Sec. 1.987-1 through
1.987-10 pursuant to the fresh start transition method.
(3) Adjustments in the case of an outbound loss event. The basis of
any stock described in paragraph (d)(4) of this section that was
received in connection with the transfer (or deemed transfer) of assets
of an outbound loss QBU described in paragraph (i)(1) of this section
and that is held on the transition date must be adjusted to equal the
basis that such stock would have had on the transition date if,
immediately prior to the outbound loss event, the outbound loss QBU had
transitioned to the method prescribed by Sec. Sec. 1.987-1 through
1.987-10 pursuant to the fresh start transition method. If no such
stock was received, the amount of any outbound section 987 loss with
respect to the outbound loss QBU that may be recognized on or after the
transition date pursuant to paragraph (d)(5) of this section must be
adjusted to equal the amount of such loss that would be outstanding and
that may be recognized pursuant to that paragraph if, immediately
before the outbound loss event, the outbound loss QBU had transitioned
to the method prescribed by Sec. Sec. 1.987-1 through 1.987-10
pursuant to the fresh start transition method.
(j) Effective/applicability date--(1) In general. Except as
described in paragraph (j)(2) of this section, this section applies to
any deferral event or outbound loss event that occurs on or after
January 6, 2017.
(2) Exception. This section applies to any deferral event or
outbound loss event that occurs on or after December 7, 2016, if such
deferral event or outbound loss event is undertaken with a principal
purpose of recognizing section 987 loss.
(k) Expiration date. The applicability of this section expires
December 6, 2019.

0
Par. 19. Section 1.988-0 is amended by revising the entry for Sec.
1.988-2(b)(16) and adding an entry for Sec. 1.988-2(i) to read as
follows:


Sec. 1.988-0 Taxation of gain or loss from a section 988
transaction; Table of contents.

* * * * *


Sec. 1.988-2 Recognition and computation of exchange gain or loss.

* * * * *
(b) * * *
(16) [Reserved].
* * * * *
(i) [Reserved].

0
Par. 20. Section 1.988-1 is amended by adding paragraph (a)(3) to read
as follows:


Sec. 1.988-1 Certain definitions and special rules.

* * * * *
(a) * * *
(3) [Reserved]. For further guidance, see Sec. 1.988-1T(a)(3).
* * * * *

0
Par. 21. Section 1.988-1T is added to read as follows:


Sec. 1.988-1T Certain definitions and special rules (temporary).

(a)(1) through (a)(2) [Reserved]. For further guidance, see Sec.
1.988-1(a)(1) through (2).
(3) Specified owner functional currency transactions of a section
987 QBU not treated as section 988 transactions. Specified owner
functional currency transactions, as defined in Sec. 1.987-
3T(b)(4)(ii), held by a section 987 QBU are not treated as section 988
transactions. Thus, no currency gain or loss shall be recognized by a
section 987 QBU under section 988 with respect to such transactions.
(4) through (i) [Reserved]. For further guidance, see Sec. 1.988-
1(a)(4) through (i).
(j) Effective/applicability date. This section applies to taxable
years beginning on or after one year after the first day of the first
taxable year following December 7, 2016. Notwithstanding the preceding
sentence, if a taxpayer makes an election under Sec. 1.987-11(b), then
this section applies to taxable years to which Sec. Sec. 1.987-1
through 1.987-10 apply as a result of such election.
(k) Expiration date. The applicability of this section expires on
December 6, 2019.

0
Par. 22. Section 1.988-2 is amended by revising paragraph (b)(16) and
adding paragraph (i) to read as follows:


Sec. 1.988-2 Recognition and computation of exchange gain or loss.

* * * * *
(b) * * *
(16) [Reserved]. For further guidance, see Sec. 1.988-2T(b)(16).
* * * * *
(i) [Reserved]. For further guidance, see Sec. 1.988-2T(i).

0
Par. 23. Section 1.988-2T is added to read as follows:

[[Page 88880]]

Sec. 1.988-2T Recognition and computation of exchange gain or loss
(temporary).

(a) through (b)(15) [Reserved]. For further guidance, see Sec.
1.988-2(a) through (b)(15).
(16) Deferral of loss on certain related-party debt instruments.--
(i) Treatment of creditor. For rules applicable to a corporation
included in a controlled group that is a creditor under a debt
instrument see Sec. 1.267(f)-1(e).
(ii) Treatment of debtor--(A) In general. Exchange loss realized
under Sec. 1.988-2(b)(4) or (b)(6) is deferred if--
(1) The loss is realized by a debtor with respect to a loan from a
person that has a relationship to the debtor described in section
267(b) or section 707(b); and
(2) The transaction resulting in the realization of exchange loss
has as a principal purpose the avoidance of Federal income tax.
(B) Recognition of deferred loss. Any exchange loss that is
deferred under paragraph (b)(16)(ii)(A) of this section is deferred
until the end of the term of the loan, determined immediately prior to
the transaction.
(17) through (h) [Reserved]. For further guidance, see Sec. 1.988-
2(b)(17) through (h).
(i) Special rules for section 988 transactions of a section 987
QBU. For rules regarding section 988 transactions of a section 987 QBU,
see Sec. 1.987-3T(b)(4) for section 987 QBUs in general and Sec.
1.987-1T(b)(6) for dollar QBUs.
(j) Effective/applicability date. Paragraph (b)(16) of this section
applies to any exchange loss realized on or after December 7, 2016.
Paragraph (i) of this section applies to taxable years beginning on or
after one year after the first day of the first taxable year following
December 7, 2016. Notwithstanding the preceding sentence, if a taxpayer
makes an election under Sec. 1.987-11(b), then paragraph (i) of this
section applies to taxable years to which Sec. Sec. 1.987-1 through
1.987-10 apply as a result of such election.
(k) Expiration date. The applicability of this section expires on
December 6, 2019.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: November 14, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-28380 Filed 12-7-16; 8:45 am]
BILLING CODE 4830-01-P



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