Reg. § 1.987-0 Table of contents.
This section lists the headings for through .
§ 1.987-1 Scope, definitions and special rules.
(a) In general.
(b) Scope of section and certain rules relating to QBUs.
(1) Persons subject to section .
(i) In general.
(ii) Inapplicability to certain entities.
(2) Application of the section regulations to earnings and profits.
(i) In general.
(ii) Timing.
(3) Definition of a section QBU.
(i) In general.
(ii) Section QBU grouping election.
(4) Definition of an eligible QBU.
(i) In general.
(ii) Qualified business unit.
(5) Definition of an owner.
(i) Direct ownership.
(ii) [Reserved]
(6) [Reserved]
(7) Examples illustrating of this section.
(i) Example 1: Owner owns an eligible QBU and a DE holding company.
(ii) Example 2: Owner owns eligible QBUs through DEs.
(iii) Example 3: Section grouping election.
(c) Exchange rates.
(1) Spot rate.
(i) In general.
(ii) Election to use a spot rate convention.
(2) Yearly average exchange rate.
(3) Historic rate.
(i) In general.
(ii) Date placed in service for depreciable or amortizable property.
(iii) Changed functional currency.
(d) Marked item.
(1) In general.
(2) Current rate election.
(e) Historic item.
(f) Example: Identification of marked and historic items.
(1) Facts.
(2) Analysis.
(g) Elections.
(1) Persons making the election.
(i) United States persons.
(ii) CFCs.
(iii) Consolidated groups.
(iv) Partnerships.
(2) Consistency rules.
(i) Consolidated groups.
(ii) CFCs and foreign partnerships.
(iii) Section transactions.
(3) Manner of making or revoking elections.
(i) Statement must be attached to a return.
(ii) Election requirements.
(iii) Elections made under the 2016 and 2019 section regulations.
(4) No change in method of accounting.
(5) Principles of applicable to section elections.
(h) Definitions.
§ 1.987-2 Attribution of items to eligible QBUs; definition of a transfer and related rules.
(a) In general.
(b) Attribution of items to an eligible QBU.
(1) General rules.
(2) Exceptions for non-portfolio stock, interests in partnerships, and certain acquisition indebtedness.
(i) In general.
(ii) Separate account assets.
(3) Adjustments to items reflected on the books and records.
(i) General rule.
(ii) Factors indicating no tax avoidance.
(iii) Factors indicating tax avoidance.
(iv) Section transactions.
(c) Transfers to and from section QBUs.
(1) In general.
(2) Disregarded transactions.
(i) General rule.
(ii) Definition of a disregarded transaction.
(iii) Items derived from disregarded transactions ignored.
(3) through (6) [Reserved]
(7) Application of general tax law principles.
(8) Interaction with .
(9) Certain disregarded transactions not treated as transfers.
(i) Combinations of section QBUs.
(ii) Change in functional currency from a combination.
(iii) Separation of section QBUs.
(iv) Special rules for successor suspended loss QBUs.
(10) Examples.
(i) Example 1: Loan to a section QBU.
(ii) Example 2: Transfer between section QBUs.
(iii) Example 3: Sale of property between two section QBUs.
(iv) through (ix) [Reserved]
(x) Example 10: Contribution of a section QBU's assets to a corporation.
(xi) Example 11: Circular transfers.
(xii) Example 12: Transfers without substance.
(xiii) Example 13: Offsetting positions in section QBUs
(xiv) Example 14: Offsetting positions with respect to a section QBU and a section transaction.
(xv) Example 15: Offsetting positions with respect to a section QBU and a section transaction.
(xvi) Example 16: Borrowing by section QBU followed by immediate distribution to owner.
(xvii) Example 17: Payment of interest by section QBU on obligation of owner.
(xviii) Example 18: Sale of the interests in a DE.
(d) Translation of items transferred to a section QBU.
(1) Marked items.
(2) Historic items.
(e) Cross-reference.
§ 1.987-3 Determination of section 987 taxable income or loss of an owner of a section 987 QBU.
(a) In general.
(b) Determination of each item of income, gain, deduction, or loss in the section QBU's functional currency.
(1) In general.
(2) Translation of items of income, gain, deduction, or loss that are denominated in a nonfunctional currency.
(3) [Reserved]
(4) Section transactions.
(i) In general.
(ii) Section mark-to-market election.
(c) Translation of items of income, gain, deduction, or loss of a section QBU into the owner's functional currency.
(1) In general.
(2) Exceptions.
(i) Recovery of basis with respect to historic assets.
(ii) through (iii) [Reserved]
(iv) Cost of goods sold computation.
(v) Translation of income to account for certain foreign income tax claimed as a credit.
(3) Adjustments to COGS required under the simplified inventory method.
(i) In general.
(ii) Adjustment for cost recovery deductions included in inventoriable costs.
(iii) Adjustment for beginning inventory for non-LIFO inventory.
(iv) Adjustment for year of LIFO liquidation.
(d) [Reserved]
(e) Examples.
(1) Example 1: Item of income denominated in nonfunctional currency.
(2) Example 2: Asset sold for nonfunctional currency.
(3) Example 3: Historic inventory method.
(i) Facts.
(ii) Analysis.
(4) Example 4: Simplified inventory method.
(i) Facts.
(ii) Analysis.
(5) Example 5: Depreciation expense that is not an inventoriable cost.
(6) Example 6: Translation of depreciation expense that is an inventoriable cost (historic inventory method).
(7) Example 7: Sale of land.
(8) Example 8: Current rate election.
(9) through (12) [Reserved]
(13) Example 13: Section transaction.
(i) Facts.
(ii) Analysis.
(14) Example 14: Payment of foreign income tax.
(i) Facts.
(ii) Analysis.
§ 1.987-4 Determination of net unrecognized section 987 gain or loss of a section 987 QBU.
(a) In general.
(b) Calculation of net unrecognized section gain or loss.
(c) Net accumulated unrecognized section gain or loss for all prior taxable years.
(1) In general.
(2) Additional adjustments for certain taxable years beginning on or before December 31, 2024.
(d) Calculation of unrecognized section gain or loss for a taxable year.
(1) Step 1: Determine the change in the owner functional currency net value of the section QBU for the taxable year.
(i) In general.
(ii) Year section QBU is terminated.
(iii) First taxable year of a section QBU.
(iv) First year in which an election is in effect or ceases to be in effect.
(2) Step 2: Increase the amount determined in step 1 by the amount of assets transferred from the section QBU to the owner.
(i) In general.
(ii) Assets transferred from the section QBU to the owner during the taxable year.
(3) Step 3: Decrease the amount determined in steps 1 and 2 by the amount of assets transferred from the owner to the section QBU.
(i) In general.
(ii) Assets transferred from the owner to the section QBU during the taxable year.
(4) Step 4: Decrease the amount determined in steps 1 through 3 by the amount of liabilities transferred from the section QBU to the owner.
(i) In general.
(ii) Liabilities transferred from the owner to the section QBU during the taxable year.
(5) Step 5: Increase the amount determined in steps 1 through 4 by the amount of liabilities transferred from the owner to the section QBU.
(6) Step 6: Decrease or increase the amount determined in steps 1 through 5 by the section taxable income or loss, respectively, of the section QBU for the taxable year.
(7) Step 7: Increase the amount determined in steps 1 through 6 by certain expenses or losses that are not deductible in computing the section taxable income or loss of the section QBU for the taxable year.
(8) Step 8: Decrease the amount determined in steps 1 through 7 by the amount of certain income or gain that is not included in taxable income in computing the section taxable income or loss of the section QBU for the taxable year.
(9) Step 9: Increase or decrease the amount determined in steps 1 through 8 by any income or gain, or any deduction or loss, respectively, that does not impact the adjusted balance sheet.
(10) Step 10: Decrease or increase the amount determined in steps 1 through 9 by any increase or decrease, respectively, to the section QBU's net assets that is not previously taken into account under steps 2 through 9.
(i) In general.
(ii) Determining the residual increase or decrease to net assets.
(iii) Modifications for taxable years to which a current rate election or an annual recognition election applies.
(e) Determination of the owner functional currency net value of a section QBU.
(1) In general.
(i) Marked item.
(ii) Historic item.
(2) Current rate election.
(i) In general.
(ii) QBU net value.
(iii) Alternative calculation of QBU net value.
(f) Combinations and separations.
(1) Combinations.
(2) Separations.
(3) Examples.
(i) Example 1: Combination of two section QBUs that have the same owner.
(ii) Example 2: Separation of two section QBUs that have the same owner.
(g) Examples.
(1) Example 1: Determination of net unrecognized section gain or loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Determination of net unrecognized section gain or loss if a current rate election in effect.
(i) Facts.
(ii) Analysis.
(iii) Alternative computation of QBU net value.
(3) Example 3: Determination of net unrecognized section gain or loss when a current rate election is revoked.
(i) Facts.
(ii) Analysis.
§ 1.987-5 Recognition of section 987 gain or loss.
(a) Recognition of section gain or loss by the owner of a section QBU.
(b) Remittance proportion.
(1) In general.
(2) Annual recognition election.
(c) Remittance.
(1) Definition.
(2) Alternative calculation.
(i) Step 1: Determine the change in QBU net value.
(ii) Step 2: Adjust the amount determined in step 1 for income or loss of the section QBU.
(iii) Step 3: Multiply the amount determined in step 2 by negative one.
(3) Day when a remittance is determined.
(4) Termination.
(d) Aggregate of all amounts transferred from the section QBU to the owner for the taxable year.
(e) Aggregate of all amounts transferred from the owner to the section QBU for the taxable year.
(f) Determination of owner's adjusted basis in transferred assets and amount of transferred liabilities.
(1) In general.
(2) Marked items.
(3) Historic items.
(g) Example—Calculation of section gain or loss recognized.
(1) Facts.
(i) In general.
(ii) Year 1 balance sheet.
(iii) Transfers and income in year 2.
(iv) Year 2 balance sheet.
(2) Analysis.
(i) Computation of amount of remittance.
(ii) Alternative computation of remittance amount.
(iii) Computation of section QBU gross assets plus remittance.
(iv) Computation of remittance proportion.
(v) Computation of section gain or loss.
(3) Annual recognition election.
§ 1.987-6 Character and source of section 987 gain or loss.
(a) Ordinary income or loss.
(b) Character and source of section gain or loss.
(1) Timing of source and character determination.
(2) Method for determining the character and source section gain or loss.
(i) Initial assignment
(ii) Reassignment of section gain or loss.
(iii) Special rule for the application of the GILTI high-tax exclusion to section gain or loss.
(3) Allocation and apportionment of foreign income tax to section items under section .
(i) The foreign gross income is an item of foreign currency gain or loss.
(ii) The same event or events give rise to both the foreign gross income and the section gain or loss.
(c) Examples.
(1) Example 1: Initial assignment and reassignment of section gain or loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Effect of GILTI high-tax exclusion.
(i) Facts.
(ii) Analysis.
(3) Example 3: Section gain or loss treated as attributable to section transactions.
(i) Facts.
(ii) Analysis.
(4) Example 4: Section gain or loss assigned to passive foreign personal holding company income.
(i) Facts.
(ii) Analysis.
§ 1.987-7 Application of the section 987 regulations to partnerships and S corporations.
(a) Overview.
(b) Section regulations generally do not apply to partnerships.
(c) Provisions of the section regulations that apply to partnerships.
(1) In general.
(i) Eligible QBU.
(ii) Partnership.
(2) Applicable provisions.
(i) In general.
(ii) Annual recognition election.
(iii) Section mark-to-market election.
(3) Modifications to applicable provisions.
(i) In general.
(ii) Controlled group.
(4) Terminating QBUs.
(d) Suspended section loss.
(1) In general.
(i) Rules of and do not apply.
(ii) Suspension of section loss.
(2) Exceptions.
(i) Method under which historic items do not give rise to section gain or loss.
(ii) Annual recognition election.
(iii) De minimis rule.
(3) Recognition of suspended section loss.
(i) In general.
(ii) Partnership that is not engaged in a trade or business.
(iii) Application of the loss-to-the-extent-of-gain rule.
(e) Adjustments to the basis of a partner's interest in the partnership.
(f) S corporations treated as partnerships.
(g) Examples.
(1) Example 1: Aggregate approach to section .
(i) Facts.
(ii) Analysis.
(2) Example 2: Entity approach to section .
(i) Facts.
(ii) Analysis.
§ 1.987-8 Termination of a section 987 QBU.
(a) Scope.
(b) In general.
(1) Trade or business ceases.
(2) Substantially all assets transferred.
(3) Owner no longer a CFC.
(4) Owner ceases to exist.
(5) Section QBU ceases to be an eligible QBU with a functional currency different from its owner.
(6) Change in form of ownership.
(c) Transactions described in section .
(1) Liquidations.
(2) Reorganizations.
(d) [Reserved]
(e) Effect of terminations.
(f) Examples.
(1) Example 1: Cessation of operations.
(i) Facts.
(ii) Analysis.
(2) Example 2: Transfer of a section QBU to a member of a consolidated group.
(i) Facts.
(ii) Analysis.
(3) Example 3: Cessation of controlled foreign corporation status.
(i) Facts.
(ii) Analysis.
(4) Example 4: Section liquidation.
(i) Facts.
(ii) Analysis.
(5) [Reserved]
(6) Example 6: Deemed transfers to a CFC upon a check-the-box election.
(i) Facts.
(ii) Analysis.
(7) Example 7: Sale of a section QBU to a member of a consolidated group.
(i) Facts.
(ii) Analysis.
§ 1.987-9 Recordkeeping requirements.
(a) In general.
(b) Supplemental information.
(c) Retention of records.
(d) Information on a dedicated section form.
§ 1.987-10 Transition rules.
(a) Overview.
(1) In general.
(2) Terms defined under prior .
(b) Scope.
(1) Owner of a section QBU.
(2) Deferral QBU owner and owner of outbound loss QBU.
(c) Transition date.
(1) In general.
(2) Terminating QBU.
(i) In general.
(ii) Ordering rule.
(d) Application of the section regulations after the transition date.
(1) Owner functional currency net value on the last day of the preceding taxable year.
(2) Determination of historic rate.
(3) Transition exchange rate.
(i) In general.
(ii) Earnings only method.
(e) Pretransition gain or loss.
(1) In general.
(2) Amount of pretransition gain or loss for an owner that applied an eligible pretransition method.
(i) Owner of a section QBU
(ii) Deferral QBU owner.
(iii) Owner of an outbound loss QBU.
(3) Amount of pretransition gain or loss for an owner that did not apply an eligible pretransition method.
(i) In general.
(ii) Computation of pretransition gain or loss.
(iii) Annual unrecognized section gain or loss.
(iv) Deferral QBU owner.
(v) Owner of an outbound loss QBU.
(4) Eligible pretransition method.
(i) Earnings and capital method.
(ii) Other reasonable methods.
(iii) Other earnings only methods.
(iv) Error in the application of a section method.
(v) Certain consistent practices not treated as errors.
(vi) Deferral of section gain or loss until termination is not reasonable.
(vii) Anti-abuse rule.
(5) Recognition of pretransition gain or loss.
(i) In general.
(ii) Election to recognize pretransition section gain or loss ratably over the transition period.
(6) Predecessor of an owner.
(i) In general.
(ii) Predecessor.
(7) Small business election.
(i) Scope.
(ii) Owner threshold.
(iii) QBU threshold.
(iv) Small business election.
(f) QBUs to which the fresh start transition method was applied.
(1) In general.
(2) Application of the section regulations after the transition date.
(i) Owner functional currency net value on the last day of the preceding taxable year.
(ii) Determination of historic rate.
(iii) Unrecognized section gain or loss.
(3) Taxpayers that are required to transition using the fresh start transition method.
(g) [Reserved]
(h) Determination of source and character.
(1) In general.
(2) Deferral QBU or outbound loss QBU.
(i) [Reserved]
(j) Adjustments to avoid double counting or omissions.
(k) Reporting.
(1) In general.
(2) QBUs for which reporting is required.
(i) In general.
(ii) QBUs to which the fresh start transition method was applied.
(3) Attachments not required where information is reported on a form.
(4) No change in method of accounting.
(l) Examples.
(1) Example 1: Earnings and capital method.
(i) Facts.
(ii) Analysis.
(2) Example 2: Earnings only method described in of this section.
(i) Facts.
(ii) Analysis.
(3) Example 3: Earnings only method described in of this section.
(i) Facts.
(ii) Analysis.
(4) Example 4: Owner did not apply section .
(i) Facts.
(ii) Analysis.
(5) Example 5: Error in application of method.
(i) Facts.
(ii) Analysis.
(6) Example 6: Consistent practice not treated as an error.
(i) Facts.
(ii) Analysis.
§ 1.987-11 Suspended section 987 loss relating to certain elections; loss to the extent of gain rule.
(a) In general.
(b) Cumulative suspended section loss in a recognition grouping.
(1) In general.
(2) Combined QBU.
(3) Separated QBU.
(c) Suspension of section loss for taxable years in which a current rate election is in effect and an annual recognition election is not in effect.
(1) In general.
(2) De minimis rule.
(3) Taxable year of controlled group members.
(i) In general.
(ii) Owner is a CFC.
(d) Suspension of net unrecognized section loss upon making or revoking certain elections.
(1) Making an annual recognition election.
(2) Revoking a current rate election.
(e) Loss-to-the-extent of gain rule.
(1) In general.
(2) Separate determination for each recognition grouping.
(3) Amount of suspended section loss recognized.
(i) Current year gain amount.
(ii) Lookback gain amount.
(iii) Suspended section loss not taken into account.
(iv) Lookback period.
(v) Anti-abuse rule.
(4) Suspended section loss recognized with respect to each section QBU and suspended section loss QBU.
(5) Section transactions.
(i) In general.
(ii) Limitation for inbound section transactions.
(6) Consolidated group members.
(i) In general.
(ii) Suspended section losses arising in separate return limitation years.
(f) Recognition groupings.
(1) Sourcing and section category.
(2) Statutory and residual groupings for CFC owners.
(g) Examples.
(1) Example 1: Suspension of section loss and recognition of suspended section loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Recognition of suspended section loss by reason of gain recognized during the lookback period.
(i) Facts.
(ii) Analysis.
(iii) Alternative facts.
(iv) Analysis of alternative facts.
(3) Example 3: Suspension of section loss when a current rate election is revoked.
(i) Facts.
(ii) Analysis.
§ 1.987-12 Deferral of section 987 gain or loss.
(a) Overview.
(1) Scope.
(2) Exceptions.
(i) Annual recognition election.
(ii) De minimis rule.
(b) Treatment of section gain and loss in connection with a deferral event.
(1) Gain or loss recognized (or suspended) in the taxable year of a deferral event.
(2) Deferred section gain or loss.
(i) In general.
(ii) Deferred section gain or loss attributable to a successor deferral QBU.
(c) Recognition (or suspension) of deferred section gain or loss following a deferral event.
(1) Recognition upon a subsequent remittance.
(i) In general.
(ii) Amount.
(iii) Deemed remittance by a successor deferral QBU.
(2) Deferral events and outbound loss events with respect to a successor deferral QBU.
(d) Successor deferral QBU becomes a successor suspended loss QBU.
(e) Anti-abuse rule.
(f) Combinations and separations of successor deferral QBUs.
(1) Combined QBU.
(2) Separated QBU.
(g) Definitions.
(1) Deferral event.
(i) Events.
(ii) Assets on books of successor deferral QBU.
(2) Successor deferral QBU.
(3) Original deferral QBU owner.
(4) Qualified successor.
(h) Examples.
(1) Example 1: Contribution of a section QBU with net unrecognized section gain to a member of the controlled group.
(i) Facts.
(ii) Analysis.
(2) Example 2: Contribution of a section QBU with net unrecognized section loss to a member of the controlled group when a current rate election is in effect.
(i) Facts.
(ii) Analysis.
(3) Example 3: Election to be classified as a corporation.
(i) Facts.
(ii) Analysis.
(4) Example 4: Partial recognition of deferred gain or loss.
(i) Facts.
(ii) Analysis.
§ 1.987-13 Suspended section 987 loss upon terminations.
(a) Overview.
(1) In general.
(2) Ordering rule.
(b) Termination of a section QBU with suspended loss.
(1) Suspended section loss becomes suspended section loss with respect to a successor suspended loss QBU.
(i) Successor suspended loss QBU.
(ii) Attribution of suspended section loss to successor suspended loss QBU.
(2) Recognition of suspended section loss.
(c) Termination of a successor suspended loss QBU.
(1) Successor to the successor suspended loss QBU.
(i) Successor suspended loss QBU.
(ii) Attribution of suspended section loss to successor suspended loss QBU.
(2) Recognition of suspended section loss.
(d) Transfer of successor suspended loss QBU owner.
(e) Transfer of original suspended loss QBU owner.
(f) Owner ceases to exist.
(g) Inbound nonrecognition transactions-no carryover of suspended section loss.
(h) Outbound transactions-recognition or suspension of net unrecognized section loss.
(1) In general.
(2) Outbound loss event.
(3) Loss recognition upon an outbound loss event
(4) Loss suspension upon outbound loss event.
(i) [Reserved]
(j) Termination of a successor suspended loss QBU.
(k) Anti-abuse.
(l) Definitions.
(1) Original suspended loss QBU owner.
(i) In general.
(ii) Successors.
(2) Successor suspended loss QBU.
(3) Successor suspended loss QBU owner.
(4) Ownership interests.
(5) Significant portion.
(m) Examples.
(1) Example 1: Trade or business of a section QBU ceases.
(i) Facts.
(ii) Analysis.
(2) Example 2: Trade or business of a section QBU is sold to a third party.
(i) Facts.
(ii) Analysis.
(3) Example 3: Outbound loss event.
(i) Facts.
(ii) Analysis.
§ 1.987-14 Section 987 hedging transactions.
(a) Overview.
(b) Section hedging transaction.
(1) In general.
(2) Requirements.
(i) Identification.
(ii) Current rate election.
(iii) Mark-to-market method of accounting.
(iv) Treatment under U.S. generally accepted accounting principles.
(v) Hedge entered into by owner of the hedged QBU.
(3) Anti-abuse rule.
(4) Partial termination of a section hedging transaction.
(c) Identification requirements.
(1) In general.
(2) Inadvertent error.
(d) Taxation of section hedging transactions.
(1) Hedging gain or loss with respect to a hedged QBU.
(2) Adjustment to unrecognized section gain or loss for the taxable year.
(i) Hedging loss.
(ii) Hedging gain.
(3) Termination of a hedged QBU.
(e) Examples.
(1) Example 1: Section hedging transaction.
(i) Facts.
(ii) Analysis.
(2) Example 2: Excess hedging gain from a section hedging transaction.
(i) Facts.
(ii) Analysis.
§ 1.987-15 Applicability date.
(a) Applicability date of section regulations.
(1) In general.
(2) Applicability date for a terminating QBU.
(b) Application of the section regulations to taxable years beginning on or before December 31, 2024, and ending after November 9, 2023.
(c) Application of the 2016 and 2019 section regulations.
(1) In general.
(2) Application to section QBUs not owned on the transition date.
(3) Modifications of defined terms for purposes of this .
(i) Application of in lieu of prior .
(ii) Partnerships not included in section electing group.
(iii) Transition date.
(d) Prior .
[T.D. 10016, 89 FR 100165, Dec. 11, 2024]