Reg. § 1.987-7 Application of the section 987 regulations to partnerships and S corporations.
(a) Overview This section provides rules relating to the application of the section regulations to partnerships and S corporations. of this section provides the general rule that the section regulations do not apply to partnerships. of this section identifies certain provisions of the section regulations that are applicable to partnerships, subject to certain modifications. of this section provides special rules relating to suspended section loss. of this section provides rules for adjusting a partner's basis in its partnership interest. of this section provides that S corporations are treated in the same manner as partnerships for purposes of the section regulations. of this section provides examples that illustrate the rules of this section.
(b) Section 987 regulations generally do not apply to partnerships Except as otherwise provided in this section, the section regulations do not apply to a partnership, and the section regulations do not apply to an eligible QBU if a partnership is the owner for Federal income tax purposes of the eligible QBU's assets and liabilities. However, a taxpayer must apply sections and to partnerships and eligible QBUs of partnerships in a reasonable manner using a method that is applied consistently from year to year with respect to a particular partnership or eligible QBU. In addition, all members of the same controlled group must apply the same method consistently with respect to a particular partnership or eligible QBU.
(c) Provisions of the section 987 regulations that apply to partnerships
(1) In general
(i) Eligible QBU The rules described in of this section apply to an eligible QBU if a partnership is the owner for Federal income tax purposes of the eligible QBU's assets and liabilities and either—
(A) The partnership (or a partner) treats the eligible QBU as a qualified business unit of the partnership that is subject to section (for example, under an entity approach); or
(B) A partner in the partnership treats all or a portion of the eligible QBU as a qualified business unit of the partner that is subject to section (for example, under an aggregate approach).
(ii) Partnership The rules described in of this section apply to a partnership if a partner in the partnership treats the partnership itself (or an interest in the partnership) as a qualified business unit that is subject to section (for example, under an entity approach).
(2) Applicable provisions
(i) In general Sections (character and source of section gain or loss), 1.987-9(d) (information on a dedicated section form), through (suspended section loss, deferral of section gain or loss, and suspended section loss upon terminations, respectively), and (applicability dates) apply to a QBU described in of this section, subject to the modifications described in this and in of this section.
(ii) Annual recognition election An annual recognition election under applies to a QBU described in of this section, subject to the modifications described in this . In each taxable year of the owner of a QBU described in of this section in which an annual recognition election is in effect, the owner recognizes any unrecognized gain or loss with respect to the QBU under section (other than suspended section loss) as though the QBU terminated on the last day of the taxable year. Appropriate adjustments must be made to prevent the gain or loss from being taken into account again after it is recognized under this (for example, in the case of a taxpayer applying the 1991 proposed regulations, by adjusting the equity and basis pools to reflect the gain or loss recognized). The rules of apply with respect to an annual recognition election that is made by or for an owner of a QBU described in of this section.
(iii) Section 988 mark-to-market election A section mark-to-market election under applies to a QBU described in of this section. The rules of apply with respect to a section mark-to-market election that is made by or for an owner of a QBU described in of this section.
(3) Modifications to applicable provisions
(i) In general An owner of a QBU described in of this section must adapt the rules described in of this section as necessary to recognize section gain or loss in a manner that is consistent with the principles of those rules. For purposes of applying this section and the rules described in of this section to a QBU described in of this section, the definitions provided in the section regulations apply with appropriate modifications. For example, in the case of a QBU described in of this section, the term section gain or loss means gain or loss recognized under section , the term owner means the person that recognizes gain or loss under section , and the term section QBU means any qualified business unit subject to section (including a QBU described in of this section). In addition, references to other rules of the section regulations must be adapted as necessary to apply section in a manner that is consistent with the principles of this section and the rules described in of this section. For example, references to the recognition of section gain or loss under encompass any recognition of gain or loss under section .
(ii) Controlled group For purposes of applying and , if a partner in a partnership is treated as the owner of an eligible QBU described in of this section (for example, under an aggregate approach) before the QBU terminates, each member of the partnership's controlled group is treated as a member of the partner's controlled group at any time that the partner (or any member of the partner's controlled group, determined without regard to this ) continues to be a direct or indirect partner in the partnership. This does not apply for purposes of the de minimis rule in .
(4) Terminating QBUs In the case of a terminating QBU described in of this section, the rules of this section and the rules described in of this section apply immediately before the termination, but does not apply because is not applicable to a QBU described in of this section.
(d) Suspended section 987 loss
(1) In general
(i) Rules of § 1.987-11(c) and (d)(2) do not apply The rules of and do not apply to a QBU described in of this section.
(ii) Suspension of section 987 loss Except as provided in of this section, any loss that would otherwise be recognized under section (after applying ) with respect to a QBU described in or of this section is not recognized and becomes suspended section loss.
(A) Eligible QBU This applies to an eligible QBU described in of this section.
(B) Partnership This applies to a partnership (or a partnership interest) described in of this section if at least 95 percent of the interests in partnership capital and profits are owned, directly or indirectly, by persons related to each other within the meaning of section or section . For this purpose, ownership of an interest in partnership capital or profits is determined in accordance with the rules for constructive ownership provided in section , other than section .
(2) Exceptions
(i) Method under which historic items do not give rise to section 987 gain or loss of this section does not apply to an eligible QBU described in of this section if section is consistently applied to the QBU using a method under which historic items of the QBU do not give rise to section gain or loss (for example, a method that follows the principles of through ).
(ii) Annual recognition election of this section does not apply in a taxable year in which an annual recognition election is in effect.
(iii) De minimis rule of this section does not apply in a taxable year described in .
(3) Recognition of suspended section 987 loss
(i) In general Except as provided in of this section, suspended section loss with respect to a QBU described in or of this section is recognized under the rules of and -13.
(ii) Partnership that is not engaged in a trade or business In the case of a partnership described in of this section that is not engaged in a trade or business, suspended section loss cannot be recognized under through (and thus can only be recognized under ).
(iii) Application of the loss-to-the-extent-of-gain rule If a partner in a partnership is the owner of a section QBU described in of this section and also owns one or more section QBUs that are not described in of this section, the loss-to-the-extent-of-gain rule of is applied by taking into account all of the owner's section gain and suspended section loss in each recognition grouping with respect to all of its section QBUs (whether or not they are described in of this section).
(e) Adjustments to the basis of a partner's interest in the partnership When, and to the extent that, a partner recognizes section gain or loss, defers section gain or loss, or suspends section loss at the partner level with respect to a partnership described in of this section or an eligible QBU of the partnership described in of this section, the principles of sections and apply as though the item of income or loss was part of the partner's distributive share of partnership items. Thus, proper adjustments must be made to the partner's adjusted basis in the partnership under the principles of section , taking into account the principles of section .
(f) S corporations treated as partnerships For purposes of the section regulations, S corporations are treated in the same manner as partnerships and shareholders of S corporations are treated in the same manner as partners of partnerships.
(g) Examples The following examples illustrate the principles of this section. For purposes of these examples, DC1 and DC2 are domestic corporations, and P is a foreign partnership. P is also the owner for Federal income tax purposes of the assets and liabilities of Business A, an eligible QBU that has the pound as its functional currency. DC1 and DC2 each own 50% of the capital and profits interests in P. If P is treated as a qualified business unit under section , P would have the euro as its functional currency due to activities unrelated to Business A.
(1) Example 1: Aggregate approach to section 987
(i) Facts DC1 and DC2 each apply section using an aggregate approach, under which each partner's indirect interest in Business A is treated as a section QBU of the partner. DC1 and DC2 each use the earnings and capital method described in the 1991 proposed regulations to apply section with respect to Business A. Neither DC1 nor DC2 has made an annual recognition election. Under the earnings and capital method, but for the application of of this section, DC1 and DC2 each would recognize section loss of $10 million in year 1 with respect to Business A.
(ii) Analysis
(A) Application of loss suspension rule to Business A Business A is an eligible QBU described in of this section because a partnership (P) is the owner of Business A's assets and liabilities for federal income tax purposes and P's partners treat Business A as a section QBU. Therefore, under of this section, the section loss of DC1 and DC2 that would otherwise be recognized in year 1 becomes suspended section loss, which DC1 and DC2 may recognize in year 1 or in future taxable years under and -13(b) through (d).
(B) Annual recognition election If DC1 and DC2 were subject to an annual recognition election in year 1, they would recognize section gain or loss with respect to Business A as though Business A terminated at the end of year 1, and the loss suspension rule of of this section would not apply.
(C) FEEP method If DC1 and DC2 applied section to Business A under the principles of through , such that historic items of Business A did not give rise to section gain or loss, the loss suspension rule of of this section would not apply.
(2) Example 2: Entity approach to section 987
(i) Facts P applies section to Business A using an entity approach, under which Business A is treated as a section QBU of P. P is treated as a qualified business unit under section and uses the euro as its functional currency. P uses the earnings and capital method described in the 1991 proposed regulations to apply section with respect to Business A. Under the earnings and capital method, but for the application of of this section, P would recognize section loss of $10 million in year 1 with respect to Business A. In addition, DC1 and DC2 apply section to P using an entity approach, treating each partner's interest in P as a section QBU. DC1 and DC2 each use the earnings and capital method described in the 1991 proposed regulations to apply section with respect to P. Under the earnings and capital method, but for the application of of this section, DC1 and DC2 each would recognize section loss of $10 million in year 1 with respect to P. Neither DC1 nor DC2 has made an annual recognition election.
(ii) Analysis
(A) Business A treated as a QBU subject to section 987 Business A is an eligible QBU described in of this section because a partnership (P) is the owner of Business A's assets and liabilities for Federal income tax purposes, and P treats Business A as a QBU subject to section . Therefore, the loss suspension rule in of this section applies to suspend P's recognition of section loss with respect to Business A.
(B) Treatment of P as a section 987 QBU P is a partnership described in of this section because DC1 and DC2 each treat their interest in P as a section QBU. Under of this section, if DC1 and DC2 are related within the meaning of section or section , the loss suspension rule in of this section applies to suspend DC1's and DC2's recognition of section loss with respect to their interest in P. However, if DC1 and DC2 are unrelated, the loss suspension rule in of this section does not apply.
[T.D. 10016, 89 FR 100165, Dec. 11, 2024]