Reg. § 1.987-5 Recognition of section 987 gain or loss.
(a) Recognition of section 987 gain or loss by the owner of a section 987 QBU The taxable income of an owner of a section QBU includes the owner's section gain or loss recognized with respect to the section QBU for the taxable year. Except as otherwise provided in the section regulations (including , or , or or ), for any taxable year the owner's section gain or loss recognized with respect to a section QBU is equal to:
(1) The owner's net unrecognized section gain or loss with respect to the section QBU determined under on the last day of such taxable year (or, if earlier, on the day the section QBU is terminated under ); multiplied by
(2) The owner's remittance proportion for the taxable year, as determined under of this section.
(b) Remittance proportion
(1) In general Except as provided in of this section, the owner's remittance proportion with respect to a section QBU for a taxable year is equal to:
(i) The amount of the remittance, as determined under of this section, to the owner from the section QBU for such taxable year; divided by
(ii) The sum of:
(A) The aggregate adjusted basis of the gross assets that are attributable to the section QBU as of the end of the taxable year, determined in the functional currency of the section QBU; and
(B) The amount of the remittance, as determined under of this section.
(2) Annual recognition election A taxpayer may elect to recognize its net unrecognized section gain or loss with respect to the section QBU on an annual basis (annual recognition election). For any taxable year in which the annual recognition election is in effect, the owner's remittance proportion with respect to a section QBU is one. See of this section for an example illustrating this rule. Additionally, for any taxable year of an original deferral QBU owner in which an annual recognition election is in effect, the remittance proportion with respect to any successor deferral QBU is one.
(c) Remittance
(1) Definition A remittance is determined in the section QBU's functional currency and equals the excess, if any, of:
(i) The aggregate of all amounts transferred from the section QBU to the owner during the taxable year, as determined in of this section; over
(ii) The aggregate of all amounts transferred from the owner to the section QBU during the taxable year, as determined in of this section.
(2) Alternative calculation The amount of a remittance described in of this section may alternatively be determined under the following steps (each applied in the functional currency of the section QBU). If the amount determined under this is negative, the amount of the remittance is zero.
(i) Step 1: Determine the change in QBU net value The change in QBU net value is equal to the QBU net value on the date provided in of this section, less the QBU net value on the last day of the preceding taxable year. In the first taxable year in which the section QBU exists, the QBU net value on the last day of the preceding taxable year is zero.
(ii) Step 2: Adjust the amount determined in step 1 for income or loss of the section 987 QBU The amount determined in of this section is reduced (including below zero) by items of income and gain attributable to the section QBU (including tax-exempt income described in ) for the taxable year and increased by items of deduction and loss attributable to the section QBU (including non-deductible expenses described in ) for the taxable year. However, no adjustment is made under the preceding sentence for any item of income, gain, deduction, or loss described in (items that do not impact the adjusted balance sheet).
(iii) Step 3: Multiply the amount determined in step 2 by negative one The amount of a remittance is equal to the amount determined in of this section multiplied by negative one.
(3) Day when a remittance is determined An owner's remittance from a section QBU for a taxable year is determined on the last day of the taxable year (or, if earlier, on the day of the taxable year when the section QBU is terminated under ).
(4) Termination A termination of a section QBU as determined under is treated as a remittance of all the gross assets of the section QBU to the owner on the date of such termination. See . Accordingly, for purposes of of this section, the remittance proportion in the case of a termination is one.
(d) Aggregate of all amounts transferred from the section 987 QBU to the owner for the taxable year For purposes of of this section, the aggregate of all amounts transferred from the section QBU to the owner for the taxable year is the aggregate amount of functional currency and the aggregate adjusted basis of the other assets transferred (after taking into account ), determined in the section QBU's functional currency. Solely for this purpose, the amount of liabilities transferred from the owner to the section QBU (determined in the section QBU's functional currency under after taking into account ) is treated as a transfer of assets from the section QBU to the owner with an adjusted basis equal to the amount of such liabilities.
(e) Aggregate of all amounts transferred from the owner to the section 987 QBU for the taxable year For purposes of of this section, the aggregate of all amounts transferred from the owner to the section QBU for the taxable year is the aggregate amount of functional currency and the aggregate adjusted basis of the assets transferred (determined in the section QBU's functional currency under after taking into account ). Solely for this purpose, the amount of liabilities transferred from the section QBU to the owner (determined in the section QBU's functional currency after taking into account ) is treated as a transfer of assets from the owner to the section QBU with an adjusted basis equal to the amount of such liabilities.
(f) Determination of owner's adjusted basis in transferred assets and amount of transferred liabilities
(1) In general The owner's adjusted basis in an asset or the amount of a liability received in a transfer from a section QBU (whether or not such transfer is made in connection with a remittance) is determined in the owner's functional currency under the rules prescribed in and of this section.
(2) Marked items The basis of a marked asset or amount of a marked liability is the amount determined by translating the section QBU's functional currency basis of the asset or amount of the liability, after taking into account , into the owner's functional currency at the spot rate applicable to the date of transfer.
(3) Historic items The basis of a historic asset or amount of a historic liability is the amount determined by translating the section QBU's functional currency basis of the asset or amount of the liability into the owner's functional currency at the historic rate for the asset or liability.
(g) Example—Calculation of section 987 gain or loss recognized The following example illustrates the calculation of section gain or loss under this section. For purposes of this example, except as otherwise indicated, assume that no section elections are in effect. Depreciation is ignored for purposes of this example.
(1) Facts
(i) In general U.S. Corp, a domestic corporation with the dollar as its functional currency, operates in the United Kingdom through Business A, a section QBU with the pound as its functional currency. The net unrecognized section gain for Business A as determined under as of the last day of year 2 is $80.
(ii) Year 1 balance sheet At the end of year 1, the following assets are attributable to Business A: cash of £3,350; a computer with an adjusted basis of £500; and a machine with an adjusted basis of £500. Thus, the aggregate basis of Business A's assets is £4,350. Business A has no liabilities.
(iii) Transfers and income in year 2 During year 2, Business A earned income of £1,500. In addition, the following transfers took place between U.S. Corp and Business A in year 2. On January 5, year 2, U.S. Corp transferred to Business A £300 (acquired by U.S. Corp immediately before the transfer). On March 5, year 2, Business A transferred a machine (with an adjusted basis of £500) to U.S. Corp. On November 1, year 2, Business A transferred £2,300 to U.S. Corp. On December 7, year 2, U.S. Corp transferred a truck to Business A. The adjusted basis of the truck, when properly translated into pounds under , is £2,000.
(iv) Year 2 balance sheet At the end of year 2, the following assets are attributable to Business A: cash of £2,850, a computer with a pound adjusted basis of £500, and a truck with a pound adjusted basis of £2,000. Thus, the aggregate basis of Business A's assets is £5,350. Business A has no liabilities.
(2) Analysis U.S. Corp's section gain with respect to Business A is determined as follows:
(i) Computation of amount of remittance Under and of this section, U.S. Corp must determine the amount of the remittance for year 2 in the QBU's functional currency (pounds) on the last day of year 2. The amount of the remittance for year 2 is £500, determined as follows:
| Transfers from Business A to U.S. Corp in pounds | |
| Machine | £500 |
| Pounds | £2,300 |
| Aggregate transfers from Business A to U.S. Corp | £2,800 |
| Transfers from U.S. Corp to Business A in pounds | |
| Truck | £2,000 |
| Pounds | £300 |
| Aggregate transfers from U.S. Corp to Business A | £2,300 |
| Computation of amount of remittance: | |
| Aggregate transfers from Business A to U.S. Corp | £2,800 |
| Less: aggregate transfers from U.S. Corp to Business A | (£2,300) |
| Total remittance | £500 |
(ii) Alternative computation of remittance amount Under of this section, U.S. Corp can compute the amount of the remittance for year 2 using the following steps.
(A) Step 1: Change in QBU net value The change in Business A's QBU net value is equal to £1,000 (£5,350—£4,350).
(B) Step 2: Adjustment for income or loss The amount determined in step 1 (£1,000) is reduced by Business A's income for year 2 of £1,500, to negative £500.
(C) Step 3: Multiply by negative one The amount determined in step 2 (negative £500) is multiplied by negative one. The remittance for year 2 is equal to £500.
(iii) Computation of section 987 QBU gross assets plus remittance Under of this section, Business A must determine the aggregate basis of its gross assets and must increase this amount by the amount of the remittance.
| Computer | £500 |
| Pounds | £2,850 |
| Truck | £2,000 |
| Aggregate gross assets | £5,350 |
| Remittance | £500 |
| Aggregate basis of Business A's gross assets at end of year 2, increased by amount of remittance | £5,850 |
(iv) Computation of remittance proportion Under of this section, Business A must compute the remittance proportion by dividing the £500 remittance amount by the £5,850 sum of the aggregate basis of Business A's gross assets and the amount of the remittance. The resulting remittance proportion is 0.085.
(v) Computation of section 987 gain or loss The amount of U.S. Corp's section gain or loss that is recognized with respect to Business A is determined under of this section by multiplying the 0.085 remittance proportion by the $80 of net unrecognized section gain. U.S. Corp's resulting recognized section gain for year 2 is $6.80.
(3) Annual recognition election If an annual recognition election under of this section were in effect for year 2, U.S. Corp's remittance proportion would be one. Accordingly, U.S. Corp would recognize all $80 of the net unrecognized section gain with respect to Business A.
[T.D. 10016, 89 FR 100165, Dec. 11, 2024]