Tax News Update    Email this document    Print this document  

Today, the Treasury Department released proposed regulations (REG-132422-17) under IRC Section 987 (the Proposed Regulations) with guidance on determining income and currency gain or loss with respect to a qualified business unit (an IRC Section 987 QBU).

The Proposed Regulations maintain the structure of final regulations published in 2016 (the 2016 Final Regulations) and 2019 (the 2019 Final Regulations), which generally adopted the foreign exchange exposure pool (FEEP) method. The FEEP Method generally uses a balance-sheet approach to determine IRC Section 987 gain or loss, and requires the owner of an IRC Section 987 QBU to (1) determine the items of income, gain, deduction and loss attributable to the IRC Section 987 QBU in its functional currency, and (2) translate those items into the owner's functional currency. The owner must also maintain a pool of net unrecognized IRC Section 987 gain or loss reflecting the increase or decrease to the IRC Section 987 QBU's balance sheet from foreign exchange rate fluctuations.

The Proposed Regulations retain the FEEP method of the 2016 Final Regulations, with certain modifications, as the default rule for determining IRC Section 987 taxable income or loss and net unrecognized IRC Section 987 gain or loss. The Proposed Regulations would also allow for certain simplifying elections, including:

• An election to translate all items properly reflected on the books and records of an IRC Section 987 QBU using a current rate, including items that would otherwise have been "historic items" (the Current Rate Election)
• An election to annually recognize all IRC Section 987 items for an IRC Section 987 QBU by treating it as having terminated on the last day of each tax year (the Annual Recognition Election)

To the extent a Current Rate Election is in effect, the Proposed Regulations generally would suspend recognition of an IRC Section 987 loss until a tax year in which an equal or greater amount of IRC Section 987 gain is recognized or until certain recognition events occur (the Loss-to-the-Extent-of-Gain Rule). The Annual Recognition Election would replace the annual deemed termination election of the 2016 Final Regulations. Special rules would apply to prevent the selective recognition of IRC Section 987 losses where a Current Rate Election and an Annual Recognition Election are in place.

Once finalized, the Proposed Regulations (and the parts of the final regulations that are not replaced or modified by the Proposed Regulations) would apply to tax years beginning after December 31, 2024. The Proposed Regulations would also apply currently to certain IRC Section 987 QBUs that terminate on or after November 9, 2023 (including as a result of an entity classification election that is made on or after November 9, 2023, and effective before that date). A taxpayer and each member of its consolidated group may choose to apply the Proposed Regulations in their entirety to the tax year and all subsequent tax years beginning on or before December 31, 2024. Taxpayers may choose to apply the 2016 and 2019 Final Regulations to tax years beginning after December 7, 2016, and before December 31, 2024, in certain circumstances.

A Tax Alert is forthcoming.