The Treasury Department today released final regulations (TD 10016) under IRC Section 987 (the Final Regulations) with guidance on determining income and currency gain or loss for a qualified business unit (an IRC Section 987 QBU). Accompanying proposed regulations (REG-117213-24) (the Proposed Regulations) provide an election to simplify the computation of unrecognized IRC Section 987 gain or loss.

The Final Regulations generally maintain the structure of the proposed regulations released in 2023, including the foreign exchange exposure pool (FEEP) method, current rate election and annual recognition election. They generally apply to tax years beginning after December 31. 2024 and only to corporations and individuals. As the regulations do not generally apply to partnerships, taxpayers must apply a reasonable method consistent with IRC Section 987 to partnerships, pending future guidance.

Under the Final Regulations, taxpayers must compute pretransition gain or loss, with certain modifications. Taxpayers will be considered to have applied an eligible pretransition method even if they made certain errors when applying that method. An eligible pretransition method must have been applied on at least one tax return filed before November 9, 2023.

Taxpayers that did not apply an eligible pretransition method must determine pretransition gain or loss for tax years beginning before the transition date and beginning after September 7, 2006. The final regulations do not permit taxpayers to use the cumulative translation adjustment under US generally accepted accounting principles to determine their unrecognized IRC Section 987 gain or loss. A de minimis rule permits qualifying IRC Section 987 QBUs to be treated as having no pretransition gain or loss.

Other highlights of the Final Regulations include:

• Allowing taxpayers that make a current rate election to use certain elements of the earnings and capital method (as described in the 1991 proposed regulations) in lieu of preparing a tax basis balance sheet
• Requiring recognition of suspended IRC Section 987 losses to the extent of net IRC Section 987 gain recognized in the current year and the three preceding tax years, subject to an anti-abuse rule
• Using the asset method of Treas. Reg. Sections 1.861-9(g) and 1.861-9T(g) to generally determine the characterization of IRC Section 987 gain or loss, including by assigning IRC Section 987 gain or loss to subpart F income groups
• Allowing taxpayers to elect to treat IRC Section 987 gain or loss that would otherwise be characterized as passive foreign personal holding company income as foreign currency gain or loss that is attributable to IRC Section 988 transactions not directly related to the business needs of the controlled foreign corporation, which would permit some netting of the owner's IRC Section 987 and IRC Section 988 gains and losses
• Determining IRC Section 988 transactions and IRC Section 988 gain or loss realized by an IRC Section 987 QBU in the functional currency of the IRC Section 987 QBU, not its owner
• Retaining the consolidated group reattribution rule in the 2023 proposed regulations

The 2024 Proposed Regulations would allow taxpayers to elect to translate a group of frequently recurring transfers between an IRC Section 987 QBU and its owner using the yearly average exchange rate (rather than the spot rate applicable on the date of each transfer). Also, the Proposed Regulations would simplify the computation of unrecognized IRC Section 987 gain or loss for taxpayers making this election.

A detailed Tax Alert is forthcoming.