Reg. § 1.987-13 Suspended section 987 loss upon terminations.
(a) Overview
(1) In general This section provides rules relating to suspended section loss of an owner with respect to a section QBU or successor suspended loss QBU that terminates. of this section provides rules treating suspended section loss as recognized or attributable to a successor when a section QBU terminates. of this section provides rules treating suspended section loss as recognized or attributable to a subsequent successor when a successor suspended loss QBU terminates. of this section provides rules regarding the recognition of suspended section loss when interests in a successor suspended loss QBU owner are transferred. of this section provides rules that apply when interests in an original suspended loss QBU owner are transferred. of this section provides rules that apply when an original suspended loss QBU owner ceases to exist. of this section provides rules preventing the carryover of suspended section loss in connection with certain inbound transactions. of this section provides rules that suspend section loss in connection with certain outbound transactions. of this section is reserved. of this section provides rules relating to the termination of a successor suspended loss QBU. of this section provides an anti-abuse rule. of this section provides definitions that apply for purposes of this section. of this section provides examples illustrating the rules of this section.
(2) Ordering rule through of this section are applied after the application of (loss-to-the-extent-of-gain rule).
(b) Termination of a section 987 QBU with suspended loss If a section QBU terminates, and at the time of termination, the owner has suspended section loss with respect to the section QBU (including because the termination was an outbound loss event or because net unrecognized section loss became suspended section loss upon termination as a result of a current rate election), then either or of this section applies. However, this does not apply to a termination that occurs in connection with a transaction described in or of this section.
(1) Suspended section 987 loss becomes suspended section 987 loss with respect to a successor suspended loss QBU
(i) Successor suspended loss QBU If, immediately after the termination, a significant portion of the assets of the terminating section QBU are reflected on the books and records of an eligible QBU that carries on a trade or business of the section QBU and is owned by the owner of the section QBU or a member of its controlled group (determined immediately after the transaction), then the eligible QBU is a successor suspended loss QBU and the rules provided in of this section apply.
(ii) Attribution of suspended section 987 loss to successor suspended loss QBU A portion of the cumulative suspended section loss with respect to the terminating section QBU that is not recognized in the taxable year of the termination under becomes suspended section loss with respect to each successor suspended loss QBU. Such portion is equal to the suspended section loss described in the preceding sentence, multiplied by a fraction, the numerator of which is the aggregate adjusted basis of the gross assets transferred to the successor suspended loss QBU in connection with the termination, and the denominator of which is the aggregate adjusted basis of the gross assets transferred to all successor suspended loss QBUs in connection with the termination.
(2) Recognition of suspended section 987 loss If, immediately after the termination of the section QBU, there is no successor suspended loss QBU under of this section, then the owner recognizes the cumulative suspended section loss with respect to the section QBU that is not recognized in the taxable year of the termination under .
(c) Termination of a successor suspended loss QBU If a successor suspended loss QBU terminates (as described in of this section), then either or of this section applies. However, this does not apply to a termination that occurs in connection with a transaction described in , , or of this section.
(1) Successor to the successor suspended loss QBU
(i) Successor suspended loss QBU If, immediately after the termination, a significant portion of the assets of the terminating successor suspended loss QBU (initial successor) are reflected on the books and records of an eligible QBU (subsequent successor) that carries on a trade or business of the initial successor and is owned by the original suspended loss QBU owner or a member of its controlled group (determined immediately after the transaction), then the subsequent successor is a successor suspended loss QBU and the rules provided in of this section apply.
(ii) Attribution of suspended section 987 loss to successor suspended loss QBU A portion of the cumulative suspended section loss with respect to the initial successor that is not recognized in the taxable year of the termination under becomes suspended section loss with respect to each subsequent successor. Such portion is equal to the suspended section loss described in the preceding sentence, multiplied by a fraction, the numerator of which is the aggregate adjusted basis of the gross assets transferred to the subsequent successor in connection with the termination, and the denominator of which is the aggregate adjusted basis of the gross assets transferred to all subsequent successors in connection with the termination.
(2) Recognition of suspended section 987 loss If, immediately after the termination of the initial successor, there is no subsequent successor that is a successor suspended loss QBU under of this section, then the original suspended loss QBU owner recognizes the cumulative suspended section loss with respect to the initial successor that is not recognized in the taxable year of the termination under .
(d) Transfer of successor suspended loss QBU owner If a successor suspended loss QBU ceases to be owned by a member of the original suspended loss QBU owner's controlled group as a result of a direct or indirect transfer, or an issuance or redemption, of an ownership interest in the successor suspended loss QBU owner, then the original suspended loss QBU owner recognizes the cumulative suspended section loss with respect to the successor suspended loss QBU that is not recognized in the taxable year under .
(e) Transfer of original suspended loss QBU owner If an original suspended loss QBU owner ceases to be a member of the successor suspended loss QBU owner's controlled group as a result of a direct or indirect transfer, or an issuance or redemption, of an ownership interest in the original suspended loss QBU owner, the original suspended loss QBU owner's suspended section loss ceases to be attributable to any successor suspended loss QBU (but it continues to be suspended section loss of the original suspended loss QBU owner). As a result, the suspended section loss can be recognized by the original suspended loss QBU owner under but cannot be recognized under , , or of this section.
(f) Owner ceases to exist If the owner of a section QBU with suspended section loss or an original suspended loss QBU owner ceases to exist and there is no successor under of this section (for example, as a result of a section liquidation), then any suspended section loss of the owner that is not recognized after application of the loss-to-the-extent-of-gain rule in is eliminated and cannot be recognized.
(g) Inbound nonrecognition transactions —no carryover of suspended section loss. If an owner of a section QBU with suspended section loss, or an original suspended loss QBU owner, ceases to exist in a transaction described in (inbound section liquidation) or (inbound reorganization), then any suspended section loss of the owner or original suspended loss QBU owner that is not recognized after application of the loss-to-the-extent-of-gain rule in is eliminated and cannot be recognized. As a result, the distributee or acquiring corporation does not succeed to or take into account any suspended section loss of the owner or original suspended loss QBU owner under section .
(h) Outbound transactions —recognition or suspension of net unrecognized section loss. This applies to taxable years in which neither a current rate election nor an annual recognition election is in effect.
(1) In general Notwithstanding , if an outbound loss event occurs with respect to a section QBU (an outbound loss QBU), the original owner of the section QBU includes in taxable income in the taxable year of the outbound loss event section loss with respect to the outbound loss QBU only to the extent provided in of this section.
(2) Outbound loss event An outbound loss event means, with respect to a section QBU:
(i) Any termination of the section QBU as a result of a transfer by a U.S. person of assets of the section QBU to a foreign person that is a member of the same controlled group as the U.S. person immediately before the transaction or, if the transferee did not exist immediately before the transaction, immediately after the transaction (related foreign person), provided that the termination would result in the recognition of section loss with respect to the section QBU under but for this ; or
(ii) [Reserved]
(3) Loss recognition upon an outbound loss event In the taxable year of an outbound loss event with respect to an outbound loss QBU, the owner of the outbound loss QBU recognizes section loss as determined under and , except that, solely for purposes of applying , assets and liabilities of the outbound loss QBU that, immediately after the outbound loss event, are reflected on the books and records of an eligible QBU owned by the related foreign person described in of this section are treated as not having been transferred and therefore as remaining on the books and records of the outbound loss QBU notwithstanding the outbound loss event.
(4) Loss suspension upon outbound loss event Net unrecognized section loss or deferred section loss that, as a result of this , is not recognized in the taxable year of the outbound loss event (outbound section loss) under becomes suspended section loss.
(i) [Reserved]
(j) Termination of a successor suspended loss QBU For purposes of applying of this section, a successor suspended loss QBU terminates if it ceases to be an eligible QBU of its owner.
(k) Anti-abuse No section loss is recognized under this section, , or in connection with a transaction or series of transactions that are undertaken with a principal purpose of avoiding the purposes of this section.
(l) Definitions The following definitions apply for purposes of this section.
(1) Original suspended loss QBU owner
(i) In general An original suspended loss QBU owner is the person that was the owner of a section QBU before its termination in a transaction to which of this section applies.
(ii) Successors If an original suspended loss QBU owner is a corporation (transferor corporation) and another corporation acquires the assets of the transferor corporation in a transaction described in section , then the acquiring corporation becomes the original suspended loss QBU owner.
(2) Successor suspended loss QBU. See and of this section and for rules regarding when an eligible QBU is a successor suspended loss QBU.
(3) Successor suspended loss QBU owner A successor suspended loss QBU owner is the owner of the assets and liabilities of a successor suspended loss QBU.
(4) Ownership interests The term ownership interests means stock in a corporation and partnership interests in a partnership.
(5) Significant portion With respect to the assets of an eligible QBU, the term significant portion means a significant portion of the operating assets, determined based on all the facts and circumstances, provided that more than 30 percent of the operating assets will constitute a significant portion in all cases and less than 10 percent of the operating assets will not constitute a significant portion in all cases.
(m) Examples The following examples illustrate the application of this section. For purposes of the examples, DC1 is a domestic corporation that owns all of the interests in Entity A, a DE. Entity A conducts Business A, a section QBU that is engaged in the business of selling Product X. Business A has the euro as its functional currency.
(1) Example 1: Trade or business of a section 987 QBU ceases
(i) Facts Entity A's trade or business of selling Product X ceases, resulting in a termination of the Business A section QBU under . After the trade or business is wound up, the remaining assets are transferred to DC1 and are not used in the trade or business of selling Product X immediately following the termination. Business A has cumulative suspended section loss under of $500x.
(ii) Analysis Immediately after the termination of the Business A section QBU, a significant portion of Business A's assets is not reflected on the books and records of an eligible QBU that carries on a trade or business of Business A and is owned by DC1 or a member of its controlled group. Therefore, Business A has no successor suspended loss QBU under of this section. Consequently, DC1 recognizes the cumulative suspended section loss with respect to the Business A section QBU under of this section.
(2) Example 2: Trade or business of a section 987 QBU is sold to a third party
(i) Facts DC1 sells all the interests in Entity A to a third party for cash. Business A has cumulative suspended section loss under of $500x.
(ii) Analysis Under , the sale of the Business A assets and liabilities for cash that is reflected on the books of DC1 is treated as a transfer of all of the assets and liabilities of Business A to DC1, followed immediately by DC1's sale of those assets and liabilities. Because the deemed transfer from Business A to DC1 is a transfer of substantially all of Business A's assets to DC1, the Business A section QBU terminates under . Immediately after the termination of the Business A section QBU, a significant portion of Business A's assets is not reflected on the books and records of an eligible QBU that carries on a trade or business of Business A and is owned by DC1 or a member of its controlled group. Therefore, Business A has no successor suspended loss QBU under of this section. Consequently, DC1 recognizes the cumulative suspended section loss with respect to the Business A section QBU under of this section.
(3) Example 3: Outbound loss event
(i) Facts Entity A elects to be classified as a corporation under . As a result of the election and pursuant to , DC1 is treated as contributing all of the assets and liabilities of Business A to newly formed CFC1, which has the euro as its functional currency. Immediately after the contribution, the assets and liabilities of Business A are reflected on CFC1's books and records (which are the only books and records maintained by CFC1). CFC1 continues to use those assets in the same trade or business after the contribution (Business B). Neither a current rate election nor an annual recognition election is in effect. Business A has net unrecognized section loss of $500x.
(ii) Analysis
(A) Under , DC1's contribution of all of the assets and liabilities of Business A to CFC1 is treated as a transfer of all of the assets and liabilities of Business A to DC1, followed immediately by DC1's contribution of those assets and liabilities to CFC1. Because the deemed transfer from Business A to DC1 is a transfer of substantially all of Business A's assets to DC1, the Business A section QBU terminates under . The contribution of Business A's assets to CFC1 is not a deferral event within the meaning of because, immediately after the transaction, no assets of Business A are reflected on the books and records of a successor deferral QBU within the meaning of due to the fact that the assets of Business A are not reflected on the books and records of a section QBU immediately after the termination, as well as the fact that the requirement of is not met because Business A was owned by a U.S. person and the potential successor deferral QBU (Business B) is not owned by a U.S. person. The termination of the Business A section QBU as a result of the transfer of the assets of Business A by a U.S. person (DC1) to a foreign person (CFC1) that is a member of DC1's controlled group is an outbound loss event described in of this section.
(B) Under and of this section, in the taxable year of the outbound loss event, DC1 includes in taxable income section loss recognized with respect to Business A as determined under , except that, for purposes of applying , all assets and liabilities of Business A that are reflected on the books and records of CFC1, a related foreign person described in 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 loss with respect to Business A. DC1's outbound section loss is $500x, which is the amount of section loss that DC1 would have recognized under without regard to of this section ($500x), less the amount of section loss recognized by DC1 under of this section ($0). Under of this section, the $500x of outbound section loss becomes suspended section loss.
(C) Under of this section, Business B is a successor suspended loss QBU because, immediately after the termination of the Business A section QBU, the Business A assets are reflected on the books and records of Business B (which is the only set of books and records maintained by CFC1), Business B was an eligible QBU that continued to carry on the same trade or business as Business A did before the contribution, and Business B was owned by CFC1, a member of the same controlled group as DC (which is the original suspended loss QBU owner under of this section). See (providing that, if a corporation is solely engaged in activities that constitute a trade or business, and the corporation maintains only one set of books and records, the activities (but not the corporation) are a qualified business unit). Therefore, under of this section, all of Business A's suspended section loss (including the suspended section loss resulting from the termination of Business A) is treated as suspended section loss of DC1 with respect to Business B.
[T.D. 10016, 89 FR 100165, Dec. 11, 2024]