Reg. § 1.987-8 Termination of a section 987 QBU.
(a) Scope This section provides rules regarding the termination of a section QBU. of this section provides general rules for determining when a termination occurs. of this section provides exceptions to the general termination rules for certain transactions described in section . of this section is reserved. of this section describes certain effects of terminations. of this section contains examples that illustrate the principles of this section.
(b) In general Except as provided in of this section, a section QBU terminates if the conditions described in any one of through of this section are satisfied.
(1) Trade or business ceases A section QBU ceases its trade or business. When a section QBU ceases its trade or business is determined based on all the facts and circumstances, provided that an owner may continue to treat a section QBU as a section QBU for a reasonable period during the winding up of such trade or business, which period may in no event exceed two years from the date on which such QBU ceases its activities carried on for profit. See of this section (Example 1).
(2) Substantially all assets transferred The section QBU transfers substantially all (within the meaning of section ) of its assets to its owner. For purposes of this , the amount of assets transferred from the section QBU to its owner as a result of a transaction is reduced by the amount of assets transferred from the owner to the section QBU pursuant to the same transaction. See , , and of this section (Examples 2, 6, and 7).
(3) Owner no longer a CFC A foreign corporation that is a controlled foreign corporation that is the owner of a section QBU ceases to be a controlled foreign corporation as a result of a transaction or series of transactions after which persons that were related to the corporation within the meaning of section immediately before the transaction or series of transactions collectively own sufficient interests in the corporation such that the corporation would continue to be considered a controlled foreign corporation if such persons were United States shareholders within the meaning of section . See of this section (Example 3).
(4) Owner ceases to exist The owner of the section QBU ceases to exist (including in connection with a transaction described in section ). See of this section (Example 4).
(5) Section 987 QBU ceases to be an eligible QBU with a functional currency different from its owner The section QBU ceases to be an eligible QBU that has a functional currency different from its owner. See and (providing that a termination resulting from a change in functional currency occurs on the last day of the last taxable year ending before the year of change).
(6) Change in form of ownership An individual or corporation that was the direct owner of a section QBU ceases to be the direct owner of the section QBU (for example, because the assets of the section QBU are transferred to a partnership).
(c) Transactions described in section 381(a)
(1) Liquidations Notwithstanding of this section, a termination does not occur when the owner (distributor) of a section QBU ceases to exist in a liquidation described in section pursuant to which it transfers the section QBU to another corporation (distributee), except in the following cases:
(i) The distributor is a domestic corporation and the distributee is a foreign corporation.
(ii) The distributor is a foreign corporation and the distributee is a domestic corporation.
(iii) The distributor and the distributee are both foreign corporations and the functional currency of the distributee is the same as the functional currency of the distributor's section QBU.
(2) Reorganizations Notwithstanding of this section, a termination does not occur when the owner (transferor) of the section QBU ceases to exist in a reorganization described in section pursuant to which it transfers the section QBU to another corporation (acquiring corporation), except in the following cases:
(i) The transferor is a domestic corporation and the acquiring corporation is a foreign corporation.
(ii) The transferor is a foreign corporation and the acquiring corporation is a domestic corporation.
(iii) The transferor is a controlled foreign corporation immediately before the transfer, the acquiring corporation is a foreign corporation that is not a controlled foreign corporation immediately after the transfer, and the acquiring corporation was related to the transferor within the meaning of section immediately before the transfer.
(iv) The transferor and the acquiring corporation are foreign corporations and the functional currency of the acquiring corporation is the same as the functional currency of the transferor's section QBU.
(d) [Reserved]
(e) Effect of terminations A termination of a section QBU as determined in this section is treated as a remittance of all the gross assets of the section QBU to its owner immediately before the section QBU terminates. Thus, except as otherwise provided in the section regulations, a termination generally results in the recognition of any net unrecognized section gain or loss of the section QBU (unless it is treated as deferred section gain or loss or suspended section loss). See (generally recognizing section gain or loss on a termination) and through (suspending section gain or loss and deferring section loss in certain instances).
(f) Examples The following examples illustrate the principles of this section. Except as otherwise provided, U.S. Corp is a domestic corporation that has the U.S. dollar as its functional currency, and Business A is a section QBU.
(1) Example 1: Cessation of operations
(i) Facts U.S. Corp is the owner of Business A, a sales office of U.S. Corp in Country X. Business A ceases sales activities on December 31, year 1. During year 2, Business A sells all of the assets used in its sales activities and winds up its business, settling outstanding accounts.
(ii) Analysis Business A's trade or business ceases on December 31, year 1. The cessation of Business A's trade or business causes a termination of the Business A section QBU under of this section on December 31, year 1, unless U.S. Corp chooses to continue to treat Business A as a section QBU until completion of the wind-up activities in year 2. If U.S. Corp chooses to continue to treat Business A as a section QBU during the wind-up of Business A, the Business A section QBU would terminate under of this section upon completion of the wind-up in year 2.
(2) Example 2: Transfer of a section 987 QBU to a member of a consolidated group
(i) Facts U.S. Corp, the owner of Business A, transfers all the assets and liabilities of Business A to DS, a domestic corporation all of the stock of which is owned by U.S. Corp, in a transaction qualifying under section . U.S. Corp and DS are members of the same consolidated group.
(ii) Analysis Pursuant to and , as a result of the deemed exchange of the assets and liabilities of Business A for DS stock in a section transaction, Business A is treated as transferring its assets and liabilities to U.S. Corp immediately before the transfer by U.S. Corp of the assets and liabilities to DS. Because a section transaction is not a transaction described in section , the transfer of all of the assets of Business A to U.S. Corp causes a termination of the Business A section QBU under of this section.
(3) Example 3: Cessation of controlled foreign corporation status
(i) Facts Foreign parent (FP) is a foreign corporation that owns all the stock of U.S. Corp, a domestic corporation. U.S. Corp owns all of the stock of FC, a controlled foreign corporation as defined in section . FC is the owner of Business A. U.S. Corp liquidates into FP. FC no longer constitutes a controlled foreign corporation after the liquidation.
(ii) Analysis Because FC ceases to qualify as a controlled foreign corporation as a result of a transaction after which persons that were related to FC within the meaning of section immediately before the transaction collectively own sufficient interests in FC such that FC would continue to be considered a controlled foreign corporation if such persons were United States shareholders within the meaning of section , the Business A section QBU terminates pursuant to of this section.
(4) Example 4: Section 332 liquidation
(i) Facts U.S. Corp owns all of the stock of FC, a foreign corporation. FC is the owner of Business A. Pursuant to a liquidation described in section , FC distributes all of its assets and liabilities to U.S. Corp.
(ii) Analysis FC's liquidation causes a termination of the Business A section QBU as provided in of this section because FC ceases to exist as a result of the liquidation. The exception for certain section liquidations provided under of this section does not apply because U.S. Corp is a domestic corporation and FC is a foreign corporation. See of this section.
(5) [Reserved]
(6) Example 6: Deemed transfers to a CFC upon a check-the-box election
(i) Facts In year 1, U.S. Corp forms an entity in a foreign country, Entity A. Entity A owns Business A, which has the pound as its functional currency. Entity A forms Entity B in another foreign country. Entity B owns Business B, a section QBU that has the euro as its functional currency. At the time of formation, Entity A and Entity B elect to be DEs. In year 6, Entity A files an election on Form 8832 to be classified as a corporation under and becomes a CFC (FC) owned directly by U.S. Corp. FC has the pound as its functional currency.
(ii) Analysis
(A) Under , U.S. Corp is the owner of Business A and Business B. In year 6, when Entity A elects to be classified as a corporation, U.S. Corp is deemed to contribute the assets and liabilities of Business A and Business B to FC under section in exchange for FC stock. Pursuant to and , as a result of the deemed exchange of the assets and liabilities of Business A and Business B for FC stock in a section transaction, Business A and Business B are each treated as transferring their assets and liabilities to U.S. Corp immediately before U.S. Corp's transfer of such assets and liabilities to FC. The transfer of assets from Business A and Business B to U.S. Corp causes terminations of those section QBUs under of this section. The assets and liabilities of Business A and Business B are now owned by FC, but because FC and Business A have the same functional currency, only Business B qualifies as a section QBU to which section applies.
(B) Terminations also would have occurred in year 6 if U.S. Corp had contributed Entity A and Entity B to an existing foreign corporation owned by U.S. Corp or to a newly created foreign corporation owned by U.S. Corp pursuant to a section exchange because the transfer of all of the assets of Business A and Business B would cause terminations of those section QBUs under of this section.
(7) Example 7: Sale of a section 987 QBU to a member of a consolidated group
(i) Facts U.S. Corp, the owner of Business A, sells all of the assets and liabilities of Business A to DS, a domestic corporation, in exchange for cash. U.S. Corp and DS are members of the same consolidated group. The cash received on the sale is recorded on the books of U.S. Corp.
(ii) Analysis Pursuant to and , Business A is treated as transferring all of its assets and liabilities to U.S. Corp immediately before the sale by U.S. Corp to DS. As a result of this deemed transfer from Business A to U.S. Corp, the Business A section QBU terminates under of this section.
[T.D. 10016, 89 FR 100165, Dec. 11, 2024]