Guidance Regarding Elections Relating to Foreign Currency Gains and Losses

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-111629-23]</DEPDOC> <RIN>RIN 1545-BM80</RIN> <SUBJECT>Guidance Regarding Elections Relating to Foreign Currency Gains and Losses</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking; partial withdrawal of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations regarding the time for making and revoking certain elections relating to foreign currency gain or loss. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by October 18, 2024. As of August 20, 2024, proposed § 1.954-2(g)(3)(iii) and (g)(4)(iii) and proposed § 1.988-7(c) through (e), contained in the notice of proposed rulemaking published in the <E T="04">Federal Register</E> of December 19, 2017 (82 FR 60135), are withdrawn. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at <E T="03">www.regulations.gov</E> (indicate IRS and REG-111629-23) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (“Treasury Department”) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send hard copy submissions to: CC:PA:01:PR (REG-111629-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning proposed § 1.954-2(g)(3)(ii) and (iii) and (g)(4)(iii), Edward Tracy at (202) 317-6934; concerning proposed § 1.988-7(c) and (d), Shane Ward at (202) 317-6938; concerning submissions of comments or requests for a public hearing, Vivian Hayes at (202) 317-6901 (not toll free numbers) or <E T="03">publichearings@irs.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. Elections Under § 1.954-2(g)</HD> In general, section 954(c)(1)(D) of the Internal Revenue Code and § 1.954-2(g) provide that foreign personal holding company income (“FPHCI”) includes the excess of foreign currency gains over foreign currency losses attributable to any section 988 transactions. Under § 1.954-2(g)(3) and (4), two different elections are available to United States shareholders (“U.S. shareholders”) that are controlling United States shareholders (“controlling U.S. shareholders”) of a controlled foreign corporation (“CFC”) with respect to the CFC's computation of its FPHCI. First, under § 1.954-2(g)(3), controlling U.S. shareholders may elect to exclude foreign currency gain or loss otherwise includible in the CFC's FPHCI computation under § 1.954-2(g) and instead include such foreign currency gain or loss in the category (or categories) of subpart F income to which such gain or loss relates (the “§ 1.954-2(g)(3) election”). Second, § 1.954-2(g)(4) provides that controlling U.S. shareholders may elect to treat as FPHCI all foreign currency gains or losses attributable to any section 988 transaction (except those described in § 1.954-2(g)(5)) and any section 1256 contract that would be a section 988 transaction but for section 988(c)(1)(D) (the “§ 1.954-2(g)(4) election” and, together with the § 1.954-2(g)(3) election, the “§ 1.954-2(g) elections”). A § 1.954-2(g)(4) election supersedes a § 1.954-2(g)(3) election. Under § 1.954-2(g)(3)(ii) and (g)(4)(ii), controlling U.S. shareholders make either of the § 1.954-2(g) elections on behalf of the CFC by filing a statement with their original income tax return for the “taxable year of [the U.S. shareholders] ending with or within the taxable year of the [CFC]” for which the election is made, clearly indicating that the election has been made. <HD SOURCE="HD2">II. Revocations Under § 1.954-2(g)(3)(iii) and (g)(4)(iii) and Proposed § 1.954-2(g)(3)(iii) and (g)(4)(iii)</HD> Under § 1.954-2(g)(3)(iii) and (g)(4)(iii), a CFC's controlling U.S. shareholders may revoke a § 1.954-2(g) election by or with the consent of the Commissioner. As part of the 2017 notice of proposed rulemaking in respect of § 1.988-7 (the “2017 proposed regulations”) (described further in sections III and IV of this Background section of the preamble), revisions were proposed to the rules for revoking § 1.954-2(g) elections. 82 FR 60135, 60142-60143. Under the 2017 proposed regulations, a CFC's controlling U.S. shareholders would be permitted to revoke the CFC's § 1.954-2(g) election at any time. Proposed § 1.954-2(g)(3)(iii) and (g)(4)(iii). Further, the 2017 proposed regulations would provide that if the election is revoked, a new election cannot be made until the sixth taxable year following the year in which the previous election was revoked, and the subsequent election cannot be revoked until the sixth taxable year following the year in which the subsequent election was made. <E T="03">Id.</E> Similar to the procedure for making § 1.954-2(g) elections, a CFC's controlling U.S. shareholders would revoke § 1.954-2(g) elections on behalf of the CFC under the 2017 proposed regulations by filing a statement that clearly indicates that the election has been revoked with their original or amended income tax returns for “the taxable year of [the U.S. shareholders] ending with or within the taxable year of the [CFC] for which the election is revoked.” <E T="03">Id.</E> The 2017 proposed regulations permitted taxpayers to rely on proposed § 1.954-2(g)(3)(iii) and (g)(4)(iii) to revoke § 1.954-2(g) elections for taxable years ending on or after December 19, 2017, subject to a consistency requirement. 82 FR 60135, 60141. <HD SOURCE="HD2">III. Election Under Proposed § 1.988-7(c)</HD> Under the 2017 proposed regulations, a taxpayer, including a CFC, would be permitted to elect to use a mark-to-market method of accounting for section 988 gain or loss with respect to certain section 988 transactions (the “proposed § 1.988-7 election”). Proposed § 1.988-7(a). Under proposed § 1.988-7(c) of the 2017 proposed regulations, a taxpayer makes a proposed § 1.988-7 election by filing a statement that clearly indicates that the election has been made with its timely-filed original Federal income tax return for the taxable year for which the election is made. In the case of a CFC, the controlling U.S. shareholders make the proposed § 1.988-7 election on behalf of the CFC by filing a statement that clearly indicates that the election has been made with their timely-filed, original Federal income tax returns for the “taxable year of [the U.S. shareholders] ending with or within the taxable year of the [CFC] for which the election is made.” The preamble to the 2017 proposed regulations stated that taxpayers are permitted to rely on proposed § 1.988-7(c) to make a proposed § 1.988-7 election for taxable years ending on or after December 19, 2017, subject to a consistency requirement. 82 FR 60135, 60141. <HD SOURCE="HD2">IV. Revocation Under Proposed § 1.988-7(d)</HD> Under the 2017 proposed regulations, a taxpayer, including a CFC, would be permitted to revoke its proposed § 1.988-7 election at any time. Proposed § 1.988-7(d). Further, the 2017 proposed regulations provided that if a proposed § 1.988-7 election has been revoked, a new proposed § 1.988-7 election cannot be made until the sixth taxable year following the year in which the previous election was revoked, and a subsequent election cannot be revoked until the sixth taxable year following the year in which the subsequent election was made. <E T="03">Id.</E> Under the 2017 proposed regulations, a taxpayer would revoke a proposed § 1.988-7 election by filing a statement that clearly indicates that the election has been revoked with its original or amended Federal income tax return for the taxable year for which the election is revoked. <E T="03">Id.</E> The preamble to the 2017 proposed regulations stated that taxpayers are permitted to rely on proposed § 1.988-7(d) to revoke a proposed § 1.988-7 election for taxable years ending on or after December 19, 2017, subject to a consistency requirement. 82 FR 60135, 60141. <HD SOURCE="HD1">Explanation of Provisions</HD> <HD SOURCE="HD2">I. Proposed Modification to § 1.954-2(g)(3)(ii) and Withdrawal and Re-Proposal of Proposed § 1.954-2(g)(3)(iii) and (g)(4)(iii)</HD> The Treasury Department and the IRS have received several inquiries regarding the procedure for making § 1.954-2(g) elections. Specifically, practitioners have noted that the language of § 1.954-2(g)(3)(ii) is inconsistent with other filing requirements with respect to CFCs, which generally must be filed by U.S. shareholders for the taxable year of a CFC that ends with or within the taxable year of the U.S. shareholders. <E T="03">See, e.g.,</E> §§ 1.964-1(c)(3)(ii) and 1.951A-2(c)(7)(viii)(A)( <E T="03">1</E> )( <E T="03">i</E> ). Additionally, the practitioners noted that under § 1.954-2(g)(3)(ii), inconsistencies in treatment can arise between a controlling U.S. shareholder that owns a CFC with a matching taxable year and a controlling U.S. shareholder that owns a CFC with a short year or whose taxable year differs from the controlling U.S. shareholder's taxable year. With respect to CFCs with short years, a controlling U.S. shareholder will be prevented from making § 1.954-2(g) elections for those years if no year of the controlling U.S. shareholder ends with or within the CFC's short year. To address the issues raised by practitioners' inquiries, and to promote consistency with other filing requirements with respect to CFCs, these proposed regulatio ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 38k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━