Reg. § 1.987-2 Attribution of items to eligible QBUs; definition of a transfer and related rules.
(a) In general This section provides rules regarding when items are attributed to eligible QBUs and when they are treated as transferred to or from section QBUs. of this section provides rules for attributing assets and liabilities, and items of income, gain, deduction, and loss, to an eligible QBU. of this section defines a transfer to or from a section QBU. of this section provides translation rules for transfers to a section QBU. of this section provides a cross-reference relating to the treatment of section QBUs owned by consolidated groups.
(b) Attribution of items to an eligible QBU
(1) General rules Except as provided in and of this section, items are attributable to an eligible QBU to the extent they are reflected on the separate set of books and records, as defined in and , of the eligible QBU. For purposes of this section, the term item refers to any asset or liability, and any item of income, gain, deduction, or loss. Items that are attributed to an eligible QBU pursuant to this section must be adjusted to conform to Federal income tax principles. An item that is not taken into account for financial accounting purposes, and therefore is not reflected on the separate set of books and records of an eligible QBU, is treated as reflected on the separate set of books and records of an eligible QBU to the extent it would have been so reflected if the item were taken into account for financial accounting purposes. Except as provided in , these attribution rules apply solely for purposes of section . For example, the allocation and apportionment of interest expense under section is independent of these rules.
(2) Exceptions for non-portfolio stock, interests in partnerships, and certain acquisition indebtedness
(i) In general Except as provided in of this section, the following items are not considered to be on the books and records of an eligible QBU:
(A) Stock of a corporation (whether domestic or foreign), other than stock of a corporation if the owner of the eligible QBU owns less than 10 percent of the total combined voting power of all classes of stock entitled to vote and less than 10 percent of the total value of all classes of stock of such corporation. For this purpose, section (other than section ) applies in determining ownership of a controlled foreign corporation and section applies in determining ownership of other corporations, except that in applying section , the phrase “10 percent” is used instead of the phrase “50 percent.”
(B) An interest in a partnership (whether domestic or foreign).
(C) A liability that was incurred to acquire stock described in of this section or that was incurred to acquire a partnership interest described in of this section.
(D) Income, gain, deduction, or loss arising from the items described in through of this section. For example, if a dividend is received with respect to stock of a corporation described in of this section, the dividend is excluded from the income of the eligible QBU. See also of this section, treating the payment as received by the owner and contributed to the eligible QBU.
(ii) Separate account assets of this section does not apply to separate account assets, liabilities related to separate account assets, or income, gain, deduction, or loss arising from those assets and liabilities.
(3) Adjustments to items reflected on the books and records
(i) General rule If a principal purpose of recording (or not recording) an item on the books and records of an eligible QBU is the avoidance of Federal income tax under, or through the use of, section , the item must be allocated between or among the eligible QBU, the owner of such eligible QBU, and any other persons, entities (including DEs), or other QBUs within the meaning of (including eligible QBUs) in a manner that reflects the substance of the transaction. For purposes of this , relevant factors for determining whether such Federal income tax avoidance is a principal purpose of recording (or not recording) an item on the books and records of an eligible QBU include the factors set forth in and of this section. The presence or absence of any factor or factors is not determinative. The weight given to any factor (whether or not set forth in and of this section) depends on the facts and circumstances.
(ii) Factors indicating no tax avoidance For purposes of of this section, factors that may indicate that recording (or not recording) an item on the books and records of an eligible QBU did not have as a principal purpose the avoidance of Federal income tax under, or through the use of, section include the recording (or not recording) of an item:
(A) For a significant and bona fide business purpose;
(B) In a manner that is consistent with the economics of the underlying transaction;
(C) In accordance with generally accepted accounting principles (or a similar comprehensive accounting standard);
(D) In a manner that is consistent with the treatment of similar items from year to year;
(E) In accordance with accepted conditions or practices in the particular trade or business of the eligible QBU;
(F) In a manner that is consistent with an explanation of existing internal accounting policies that is evidenced by documentation contemporaneous with the timely filing of a return for the taxable year; and
(G) As a result of a transaction between legal entities (for example, the transfer of an asset or the assumption of a liability), even if such transaction is not regarded for Federal income tax purposes (for example, a transaction between a DE and its owner).
(iii) Factors indicating tax avoidance For purposes of of this section, factors that may indicate that a principal purpose of recording (or not recording) an item on the books and records of an eligible QBU is the avoidance of Federal income tax under, or through the use of, section include:
(A) The presence or absence of an item on the books and records that is the result of one or more transactions that are transitory, for example, due to a circular flow of cash or other property;
(B) The presence or absence of an item on the books and records that is the result of one or more transactions that do not have substance; and
(C) The presence or absence of an item on the books and records that results in the taxpayer (or a person related to the taxpayer within the meaning of section or section ) having offsetting positions with respect to the functional currency of a section QBU.
(iv) Section 988 transactions A section transaction that is reflected on the books and records of an eligible QBU is not attributable to an eligible QBU if the transaction was entered into or was reflected on the eligible QBU's books and records with a principal purpose of generating fully or partially offsetting amounts of section gain or loss and section gain or loss (or if the taxpayer chose to denominate the section transaction in a nonfunctional currency with such a principal purpose).
(c) Transfers to and from section 987 QBUs
(1) In general The following rules apply for purposes of determining whether there is a transfer of an asset or a liability from an owner to a section QBU, or from a section QBU to an owner. These rules apply solely for purposes of section .
(2) Disregarded transactions
(i) General rule An asset or liability is treated as transferred to a section QBU from its owner if, as a result of a disregarded transaction, such asset or liability is reflected on the books and records of (or otherwise becomes attributable to) the section QBU within the meaning of of this section. Similarly, an asset or liability is treated as transferred from a section QBU to its owner if, as a result of a disregarded transaction, such asset or liability is no longer reflected on the books and records of (or otherwise ceases to be attributable to) the section QBU within the meaning of of this section.
(ii) Definition of a disregarded transaction For purposes of this section, a disregarded transaction means a transaction that is not regarded for Federal income tax purposes (for example, any transaction between separate section QBUs of the same owner). For purposes of this , a disregarded transaction is treated as including events described in through of this section.
(A) If the recording (or not recording) of an asset or liability on the books and records of a section QBU of an owner is the result of such asset or liability being removed from (or included on) the books and records of the owner or another eligible QBU of the owner, the asset or liability is treated as transferred to (or from) the section QBU in a disregarded transaction.
(B) If an asset or liability that was previously attributable to a section QBU of an owner begins to be attributable to the owner (or another eligible QBU of the owner) as a result of the application of or of this section, the asset or liability is treated as having been transferred by the section QBU in a disregarded transaction. If an asset or liability that was previously attributable to the owner (or another eligible QBU of the owner) begins to be attributable to the section QBU as a result of the application of or of this section, the asset or liability is treated as transferred to the section QBU in a disregarded transaction.
(C) If an asset or liability that is attributable to a section QBU is sold or exchanged (including in a nonrecognition transaction, such as an exchange under section ) for an asset or liability that is not attributable to the section QBU immediately after the sale or exchange, the sold or exchanged asset or liability that was attributable to the section QBU immediately before the transaction is treated as transferred from the section QBU to its owner in a disregarded transaction immediately before the sale or exchange for purposes of section (including for purposes of recognizing section gain or loss under ) and subsequently sold or exchanged by the owner.
(D) If an asset or liability of an owner of a section QBU that is not attributable to a section QBU is sold or exchanged (including in a nonrecognition transaction, such as an exchange under section ) for an asset or liability that is attributable to the section QBU immediately after the sale or exchange, the asset or liability that is attributable to the section QBU immediately after the transaction is treated as received or assumed by the owner and transferred from the owner to the section QBU in a disregarded transaction immediately after the sale or exchange for purposes of section (including for purposes of recognizing section gain or loss under ).
(E) If an asset or liability that is attributable to a section QBU was received, transferred, assumed, or accrued in a regarded transaction (including the making or receiving of a payment) in which the related item of income, gain, deduction, or loss is not attributable to the section QBU, the asset or liability is treated as though it was received, transferred, assumed, or accrued by the owner or another eligible QBU and transferred to or from the section QBU in a disregarded transaction. Similarly, if an asset or liability that is not attributable to a section QBU was received, transferred, assumed, or accrued in a regarded transaction (including the making or receiving of a payment) in which the related item of income, gain, deduction, or loss is attributable to the section QBU, the asset or liability is treated as though it was received, transferred, assumed, or accrued by the section QBU and transferred to or from the section QBU in a disregarded transaction. For example, if a section QBU receives a dividend on an interest in stock that would be attributable to the section QBU but for of this section, the owner is treated as receiving the dividend and transferring to the section QBU the amount of the dividend in a disregarded transaction. Similarly, if a section QBU pays interest on a liability that would be attributable to the section QBU but for of this section, the section QBU is treated as transferring to the owner the amount of the interest expense and the owner is treated as paying the interest expense in a disregarded transaction. See also of this section (application of general tax law principles).
(F) In the first taxable year in which an eligible QBU is treated as a section QBU, all assets and liabilities attributable to the eligible QBU are treated as transferred from the owner to the section QBU in a disregarded transaction on the first day on which the eligible QBU is treated as a section QBU.
(iii) Items derived from disregarded transactions ignored For purposes of section , disregarded transactions do not give rise to items of income, gain, deduction, or loss that are taken into account in determining section taxable income or loss under .
(3) through (6) [Reserved]
(7) Application of general tax law principles General tax law principles, including the circular cash flow, step-transaction, economic substance, and substance-over-form doctrines, apply for purposes of determining whether there is a transfer of an asset or liability under this , including a transfer of an asset or liability pursuant to a disregarded transaction.
(8) Interaction with § 1.988-1(a)(10) See for rules regarding the treatment of an intra-taxpayer transfer of a section transaction.
(9) Certain disregarded transactions not treated as transfers
(i) Combinations of section 987 QBUs The combination (a combination) of two or more separate section QBUs (combining QBUs) that are directly owned by the same owner into one section QBU (combined QBU) does not give rise to a transfer of any combining QBU's assets or liabilities to the owner under this . In addition, transactions between the combining QBUs occurring in the taxable year of the combination do not result in a transfer of the combining QBUs' assets or liabilities to the owner under this . For this purpose, a combination occurs when the assets and liabilities that were attributable to two or more combining QBUs begin to be attributable to a combined QBU and the separate existence of the combining QBUs ceases. A combination may result from any transaction or series of transactions in which the combining QBUs become a combined QBU. A combination may also result when an owner of two or more section QBUs with the same functional currency becomes subject to a grouping election under or when a section QBU of an owner subject to a grouping election changes its functional currency to that of another section QBU of the same owner. For purposes of determining net unrecognized section gain or loss, deferred section gain or loss, and cumulative suspended section loss of a combined QBU, the combining QBUs are treated as having combined immediately before the beginning of the taxable year of combination. See , -11(b)(2), and 1.987-12(f)(1).
(ii) Change in functional currency from a combination If, following a combination of section QBUs described in of this section, the combined section QBU has a different functional currency than one or more of the combining section QBUs, any such combining section QBU is treated as changing its functional currency, and the owner of the combined section QBU must comply with the regulations under section regarding the change in functional currency. See and -5.
(iii) Separation of section 987 QBUs The separation (a separation) of a section QBU (separating QBU) into two or more section QBUs (separated QBUs) that, after the separation, are directly owned by the same owner does not result in a transfer of the separating QBU's assets or liabilities to the owner under this . Additionally, transactions that occurred between the separating QBUs in the taxable year of the separation before the completion of the separation do not result in transfers for purposes of section . For this purpose, a separation occurs when the assets and liabilities that were attributable to a separating QBU begin to be attributable to two or more separated QBUs and each of the separated QBUs continues to perform a significant portion of the separating QBU's activities immediately after the separation. A separation may result from any transaction or series of transactions in which a separating QBU becomes two or more separated QBUs described in the preceding sentence. A separation may also result when a section QBU that is subject to a grouping election under changes its functional currency or when the grouping election is revoked. For purposes of determining net unrecognized section gain or loss, deferred section gain or loss, or cumulative suspended section loss of a separated QBU, the separating QBU is treated as having separated immediately before the beginning of the taxable year of separation. See , -11(b)(3), and 1.987-12(f)(2).
(iv) Special rules for successor suspended loss QBUs For purposes of determining whether a combination or separation has occurred with respect to a successor suspended loss QBU, the rules of and of this section are applied without regard to whether any of the combining QBUs, the combined QBU, the separating QBU, or the separated QBUs are section QBUs. A combined QBU is a successor suspended loss QBU if either combining QBU was a successor suspended loss QBU, and a separated QBU is a successor suspended loss QBU if the separating QBU was a successor suspended loss QBU.
(10) Examples The following examples illustrate the principles of this . For purposes of the examples, X and Y are domestic corporations, have the U.S. dollar as their functional currencies, and use the calendar year as their taxable years. Furthermore, except as otherwise provided, Business A and Business B are eligible QBUs that have the euro and the Japanese yen, respectively, as their functional currencies, and DE1 and DE2 are DEs. For purposes of determining whether any of the transfers in these examples result in remittances, see .
(i) Example 1: Loan to a section 987 QBU
(A) Facts X owns all of the interests in DE1. DE1 owns Business A, which is a section QBU of X. X owns €100 that are not reflected on the books and records of Business A. Business A is in need of additional capital and, as a result, X lends the €100 to DE1 for use in Business A in exchange for a note.
(B) Analysis
(1) The loan from X to DE1 is not regarded for Federal income tax purposes (because it is an interbranch transaction) and therefore is a disregarded transaction (as defined in of this section). Because DE1 is a DE, the DE1 note held by X and the liability of DE1 under the note are not taken into account under this section.
(2) As a result of the disregarded transaction, the €100 is reflected on the books and records of Business A and is attributable to Business A under of this section. Therefore, X is treated as transferring €100 to its Business A section QBU for purposes of section . This transfer is taken into account in determining the amount of any remittance for the taxable year under . See for the application of section to X as a result of the transfer of nonfunctional currency to its section QBU.
(ii) Example 2: Transfer between section 987 QBUs
(A) Facts X owns Business A and Business B, both of which are section QBUs of X. X owns equipment that is used in Business A and is reflected on the books and records of Business A. Because Business A has excess manufacturing capacity and X intends to expand the manufacturing capacity of Business B, the equipment formerly used in Business A is transferred to Business B for use by Business B. As a result of the transfer, the equipment is removed from the books and records of Business A and is recorded on the books and records of Business B.
(B) Analysis The transfer of the equipment from the books and records of Business A to the books and records of Business B is not regarded for Federal income tax purposes (because it is an interbranch transaction) and therefore is a disregarded transaction (as defined in of this section). Therefore, for purposes of section , the Business A section QBU is treated as transferring the equipment to X, and X is subsequently treated as transferring the equipment to the Business B section QBU. These transfers are taken into account in determining the amount of any remittance for the taxable year under .
(iii) Example 3: Sale of property between two section 987 QBUs
(A) Facts X owns all of the interests in DE1 and DE2. DE1 and DE2 own Business A and Business B, respectively, both of which are section QBUs of X. DE1 owns equipment that is used in Business A and is reflected on the books and records of Business A. For business reasons, DE1 sells a portion of the equipment used in Business A to DE2 in exchange for a fair market value amount of Japanese yen. The yen used by DE2 to acquire the equipment was generated by Business B and was reflected on Business B's books and records. Following the sale, the yen and the equipment will be used in Business A and Business B, respectively. As a result of such sale, the equipment is removed from the books and records of Business A and is recorded on the books and records of Business B. Similarly, as a result of the sale, the yen is removed from the books and records of Business B and is recorded on the books and records of Business A.
(B) Analysis
(1) The sale of equipment between DE1 and DE2 is a transaction that is not regarded for Federal income tax purposes (because it is an interbranch transaction) and therefore the transaction is a disregarded transaction (as defined in of this section). Pursuant to of this section, the sale does not give rise to an item of income, gain, deduction, or loss for purposes of determining section taxable income or loss under . However, the yen and equipment exchanged by DE1 and DE2 in connection with the sale must be taken into account as a transfer under of this section.
(2) As a result of the disregarded transaction, the equipment ceases to be reflected on the books and records of Business A and becomes reflected on the books and records of Business B. Therefore, the Business A section QBU is treated as transferring the equipment to X, and X is subsequently treated as transferring the equipment to the Business B section QBU.
(3) Additionally, as a result of the disregarded transaction, the yen currency ceases to be reflected on the books and records of Business B and becomes reflected on the books and records of Business A. Therefore, the Business B section QBU is treated as transferring the yen to X, and X is subsequently treated as transferring the yen from X to the Business A section QBU. The transfers among Business A, Business B and X are taken into account in determining the amount of any remittance for the taxable year under .
(iv) through (ix) [Reserved]
(x) Example 10: Contribution of a section 987 QBU's assets to a corporation
(A) Facts X owns Business A. X forms Z, a domestic corporation, contributing 50 percent of its Business A assets and liabilities to Z in exchange for all of the stock of Z. X and Z do not file a consolidated tax return.
(B) Analysis Pursuant to of this section, the Z stock received in exchange for 50 percent of Business A's assets and liabilities is not reflected on the books and records of, and therefore is not attributable to, Business A for purposes of section immediately after the exchange. As a result, pursuant to and of this section, 50 percent of the assets and liabilities of Business A are treated as transferred from Business A to X in a disregarded transaction immediately before the exchange. See if X and Z file a consolidated return.
(xi) Example 11: Circular transfers
(A) Facts X owns Business A. On December 30, year 1, Business A purports to transfer €100 to X. On January 2, year 2, X purports to transfer €50 to Business A. On January 4, year 2, X purports to transfer another €50 to Business A. As of the end of year 1, X has net unrecognized section loss with respect to Business A, such that a remittance, if respected, would result in recognition of a foreign currency loss under section .
(B) Analysis Because the transfer by Business A to X is offset by the transfers from X to Business A that occurred in close temporal proximity, the purported transfers to and from Business A may be disregarded for purposes of section pursuant to general tax principles under of this section.
(xii) Example 12: Transfers without substance
(A) Facts X owns Business A and Business B. On January 1, year 1, Business A purports to transfer €100 to X. On January 4, year 1, X purports to transfer €100 to Business B. The account in which Business B deposited the €100 is used to pay the operating expenses and other costs of Business A. As of the end of year 1, X has net unrecognized section loss with respect to Business A, such that a remittance, if respected, would result in recognition of a foreign currency loss under section .
(B) Analysis Because Business A continues to have use of the transferred property, the €100 purported transfer from Business A to X may be disregarded for purposes of section pursuant to general tax principles under of this section.
(xiii) Example 13: Offsetting positions in section 987 QBUs
(A) Facts X owns Business A and Business B. Business A and Business B each have the euro as their functional currency. X has not made a grouping election under . On January 1, year 1, X borrows €1,000 from a third-party lender, records the liability with respect to the borrowing on the books and records of Business A, and records the borrowed €1,000 on the books and records of Business B. On December 31, year 2, when Business A has $100 of net unrecognized section loss and Business B has $100 of net unrecognized section gain resulting from the change in exchange rates with respect to the liability and the €1,000, X terminates the Business A section QBU.
(B) Analysis Under of this section, the fact that Business A and Business B have offsetting positions in the euro is a factor indicating that a principal purpose of recording the euro-denominated liability on the books and records of Business A and the borrowed euros on the books and records of Business B was the avoidance of tax under section . If such a principal purpose is present, the items must be reallocated (that is, the euros and the euro-denominated liability) between Business A, Business B, and X under of this section to reflect the substance of the transaction.
(xiv) Example 14: Offsetting positions with respect to a section 987 QBU and a section 988 transaction
(A) Facts X owns all of the interests in DE1, and DE1 owns Business A. On January 1, year 1, X borrows €1,000 from a third-party lender and records the liability with respect to the borrowing on its books and records. X contributes the €1,000 loan proceeds to DE1 and the €1,000 are reflected on the books and records of Business A. On December 31, year 2, when Business A has $100 of net unrecognized section loss resulting from the change in exchange rates with respect to the €1,000 received from the borrowing, and when the euro-denominated borrowing, if repaid, would result in $100 of gain under section , X terminates the Business A section QBU.
(B) Analysis Under of this section, the fact that X and Business A have offsetting positions in the euro is a factor indicating that a principal purpose of recording the borrowed euros on the books and records of Business A, or not recording the corresponding euro-denominated liability on the books and records of Business A, was the avoidance of tax under section . If such a principal purpose is present, the items (that is, the euros and the euro-denominated liability) must be reallocated between Business A and X under of this section to reflect the substance of the transaction.
(xv) Example 15: Offsetting positions with respect to a section 987 QBU and a section 988 transaction
(A) Facts X owns all of the stock of Y and all of the interests in DE1. DE1 owns Business A. X and Y do not file a consolidated return. On January 1, year 1, DE1 lends €1,000 to Y. X records the receivable with respect to the loan on Business A's books and records. On December 31, year 2, when Business A has $100 of net unrecognized section gain resulting from the loan, Y repays the €1,000 liability. The repayment of the euro-denominated borrowing results in $100 of loss to Y under section . Business A does not make any remittances to X in year 2, so the offsetting gain with respect to the loan receivable has not been recognized by X.
(B) Analysis Under of this section, the fact that Y (a related party to X) and Business A have offsetting positions in the euro is a factor indicating that a principal purpose of recording the euro-denominated receivable on the books and records of Business A, rather than on the books and records of X, was to avoid Federal income tax under, or through the use of, section . If such a principal purpose is present, the euro-denominated receivable must be reallocated between Business A and X under of this section to reflect the substance of the transaction. Other provisions (for example, section ) may also apply to defer or disallow the loss. See if X and Y file a consolidated return.
(xvi) Example 16: Borrowing by section 987 QBU followed by immediate distribution to owner
(A) Facts X owns all of the interests in DE1. DE1 owns Business A. On January 1, year 1, Business A borrows €1,000 from a bank. On January 2, year 1, Business A distributes the €1,000 it received from the bank to X. There are no other transfers between X and Business A during the year. At the end of the year, X has net unrecognized section loss with respect to Business A such that a remittance would result in the recognition of foreign currency loss under section .
(B) Analysis Under of this section, if a principal purpose of recording of the loan on the books and records of Business A, rather than on the books and records of X, was to avoid Federal income tax under, or through the use of, section , the items must be reallocated to reflect the substance of the transaction (for example, by moving the loan onto the books of X, resulting in the transfer not being taken into account for purposes of section ).
(xvii) Example 17: Payment of interest by section 987 QBU on obligation of owner
(A) Facts X owns all of the interests in DE1. DE1 owns Business A. On January 1, X borrows €1,000 from a bank. On July 1, DE1 pays €20 in interest on X's €1,000 obligation to the bank, which is treated as a payment by Business A.
(B) Analysis Under general tax law principles as provided in of this section, on July 1, year 1, Business A is treated for purposes of section as making a transfer of €20 to X, and X is treated as making a €20 interest payment to the bank. See also of this section for interest payments on loans that are not attributable to a section QBU pursuant to or of this section.
(xviii) Example 18: Sale of the interests in a DE
(A) Facts X owns all of the interests in DE1, a disregarded entity. DE1 owns Business A, which is a section QBU of X. X has made a current rate election under but not an annual recognition election under . On December 31, year 1, X sells all of the interests in DE1 to FC, an unrelated foreign corporation, for $150,000, when the exchange rate is €1 = $1.2. The sale proceeds are reflected on X's books and records after the sale. At the time of the sale, all of DE1's assets are used in Business A and are reflected on the books and records of Business A. The assets have a basis of €100,000 and Business A has no liabilities. In year 1, X has net unrecognized section gain with respect to Business A of $20,000.
(B) Analysis
(1) Under of this section, if an asset that is attributable to a section QBU is sold or exchanged for an asset that is not attributable to the section QBU immediately after the sale or exchange, the sold or exchanged asset is treated as transferred from the section QBU to its owner in a disregarded transaction immediately before the sale or exchange and subsequently sold or exchanged by the owner. The sale of DE1 is treated as a sale of the assets of Business A in exchange for cash that is not reflected on the books and records of the Business A section QBU. Therefore, the assets of Business A are treated as transferred from the Business A section QBU to X, and X is treated as selling the assets to FC.
(2) The deemed transfer of all of Business A's assets to X results in a termination of the Business A section QBU under (substantially all assets transferred). Under and , a termination of a section QBU is treated as a remittance of all the gross assets of the section QBU to the owner on the date of the termination. Therefore, the owner's remittance proportion is one, and X recognizes all of its net unrecognized section gain with respect to Business A, or $20,000.
(3) Because a current rate election was in effect, all of the assets of Business A are marked items. Therefore, under , X's basis in the assets transferred from Business A is determined by translating Business A's functional currency basis in the assets into X's functional currency at the spot rate applicable to the date of the transfer, €1 = $1.2. Consequently, immediately before the sale of the interests in DE1, X's functional currency basis in Business A's assets (which Business A held with a basis of €100,000) is $120,000. X recognizes $30,000 of gain under section on the sale of DE1.
(d) Translation of items transferred to a section 987 QBU
(1) Marked items The adjusted basis of a marked asset, or the amount of a marked liability, transferred to a section QBU is translated into the section QBU's functional currency at the spot rate applicable to the date of transfer. If, and to the extent that, exchange gain or loss is recognized on the asset or liability transferred under , the adjusted basis of the marked asset, or the amount of the marked liability, is adjusted to take into account the exchange gain or loss recognized.
(2) Historic items The adjusted basis of a historic asset, or the amount of a historic liability, transferred to a section QBU is translated into the section QBU's functional currency at the rate provided in .
(e) Cross-reference. See also regarding the treatment of intercompany transactions involving section QBUs owned by a member of a consolidated group.
[T.D. 10016, 89 FR 100165, Dec. 11, 2024; 90 FR 5607, Jan. 17, 2025]