This morning, the IRS issued final (T.D. 9794), temporary (T.D. 9795) and proposed regulations (REG-128276-12) under Section 987. The final regulations outline how corporate and individual owners of a qualified business unit (QBU) subject to Section 987 must determine the QBU's taxable income or loss, as well as the timing, amount, character, and source of any Section 987 gain or loss. The final regulations are largely unchanged from the 2006 proposed Section 987 regulations, and require taxpayers to compute Section 987 gain or loss based on the "foreign exchange exposure pool" or balance sheet method. The temporary and proposed regulations, among other things, address the recognition and deferral of foreign currency gain or loss under Section 987 stemming from certain QBU terminations and certain other transactions involving partnerships.

Both the final and temporary regulations are generally effective for tax years beginning in 2018, but taxpayers may apply the new rules starting in 2017. The loss deferral rules apply to certain events that occur on or after December 7, 2016, if that event is undertaken with a principal purpose of recognizing a Section 987 loss.

A Tax Alert on the final, temporary and proposed regulations is forthcoming.