Accounting for Disregarded Transactions Between a Qualified Business Unit and Its Owner

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-117213-24]</DEPDOC> <RIN>RIN 1545-BR37</RIN> <SUBJECT>Accounting for Disregarded Transactions Between a Qualified Business Unit and Its Owner</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations relating to the determination of taxable income or loss and foreign currency gain or loss with respect to a qualified business unit. The proposed regulations include an election that is intended to reduce the compliance burden of accounting for certain disregarded transactions between a qualified business unit and its owner. This document also includes a request for comments relating to the treatment of partnerships and controlled foreign corporations. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by March 11, 2025. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at <E T="03">https://www.regulations.gov</E> (indicate IRS and REG-117213-24) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.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 paper submissions to: CC:PA:01:PR (REG-117213-24), 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 the proposed regulations, Adam G. Province at (865) 329-4546; concerning submissions of comments, requests for a public hearing, and access to a public hearing, Publications and Regulations Section at (202) 317-6901 (not toll-free numbers) or by email to <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains proposed additions and amendments to 26 CFR part 1 (Income Tax Regulations) addressing the application of section 987 of the Internal Revenue Code (Code) and related provisions (the “proposed regulations”). The additions and amendments are issued under sections 987 and 989, pursuant to the express delegations of authority provided under those sections. The express delegations relied upon are referenced in the Background section of this preamble. The proposed regulations are also issued under the express delegation of authority under section 7805 of the Code. <HD SOURCE="HD1">Background</HD> This document contains proposed regulations under section 987 of the Code. Section 987 applies to any taxpayer that has a qualified business unit (QBU) with a functional currency other than the dollar. Section 987(1) and (2) provide rules for determining and translating taxable income or loss (“section 987 taxable income or loss”) with respect to the QBU. In addition, foreign currency gain or loss must be determined under section 987(3) (“section 987 gain or loss”), which requires proper adjustments (as prescribed by the Secretary) for transfers of property between QBUs of the taxpayer having different functional currencies. Sections 987 and 989 provide several explicit grants of regulatory authority. The statute does not specify how the proper adjustments should be made under section 987(3), but instead directs the Secretary to prescribe the proper adjustments needed to determine the taxable income of the owner of a section 987 QBU. Section 989(c) directs the Secretary to “prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subpart.”  <SU>1</SU> <FTREF/> The grants of authority in section 989(c) include regulations providing for the appropriate treatment of related party transactions (including transactions between QBUs of the same taxpayer). Section 989(c)(5). <FTNT> <SU>1</SU>  The reference to “this subpart” refers to subpart J of part III of subchapter N of chapter 1 of the Code, which includes section 987. </FTNT> Concurrently with the publication of these proposed regulations, the Treasury Department and the IRS are publishing in the rules and regulations section of this edition of the <E T="04">Federal Register</E> (RIN 1545-BO07) final regulations under sections 861, 985, 987 through 989, and 1502 of the Code (the “final regulations”). On November 14, 2023, the Treasury Department and the IRS published proposed regulations (REG-132422-17) under those same sections of the Code (the “2023 proposed regulations”) in the <E T="04">Federal Register</E> (88 FR 78134). The comments received in response to the 2023 proposed regulations, and the revisions made in response to those comments, are summarized in the Summary of Comments and Explanation of Revisions in the preamble to the final regulations. In response to certain comments, the Treasury Department and the IRS are publishing this notice of proposed rulemaking to provide additional proposed rules under section 987 and to request comments relating to the application of section 987 to partnerships and controlled foreign corporations (“CFCs”). <HD SOURCE="HD1">Explanation of Provisions</HD> The proposed regulations provide an election under which, in certain cases, taxpayers can translate a group of frequently recurring transfers between a section 987 QBU and its owner using the yearly average exchange rate (rather than the spot rate applicable on the date of each transfer). The proposed regulations also would simplify the computation of unrecognized section 987 gain or loss under § 1.987-4 for taxpayers that make this election. <HD SOURCE="HD2">I. Rules of the Final Regulations Relating to Disregarded Transactions</HD> <HD SOURCE="HD3">A. Accounting for Disregarded Transactions Between a Section 987 QBU and Its Owner</HD> Under the final regulations, an asset is treated as transferred to a section 987 QBU from its owner if, because of a disregarded transaction, the asset is reflected on the books and records of the section 987 QBU. <E T="03">See</E> § 1.987-2(c)(2)(i). Similarly, an asset is treated as transferred from a section 987 QBU to its owner if, because of a disregarded transaction, the asset ceases to be reflected on the books and records of the section 987 QBU. Thus, for example, if a section 987 QBU purchases inventory from its owner (or another eligible QBU of its owner) in a disregarded transaction, the section 987 QBU is treated as distributing cash to its owner, and the owner is treated as contributing the inventory to the section 987 QBU. Disregarded transactions, however, do not give rise to items of income, gain, deduction, or loss that are taken into account in determining section 987 taxable income or loss under § 1.987-3. <E T="03">See</E> § 1.987-2(c)(2)(iii). The final regulations provide rules for determining the basis of an asset or the amount of a liability that has been transferred by an owner to a section 987 QBU. In general, marked items are translated into the section 987 QBU's functional currency at the spot rate applicable on the date of the transfer, while historic items are translated at the applicable historic rate. <E T="03">See</E> § 1.987-2(d). Similarly, when an asset or liability is transferred from a section 987 QBU to its owner, marked items are translated into the owner's functional currency at the spot rate applicable on the date of transfer, while historic items are translated at the applicable historic rate. <E T="03">See</E> § 1.987-5(f). These rules apply to all transfers of assets and liabilities between a section 987 QBU and its owner, including transfers made in connection with ordinary course disregarded transactions (for example, sales of inventory). The definition of a marked item under the final regulations includes an asset or liability denominated in, or determined by reference to, the functional currency of the section 987 QBU that would be a section 988 transaction if it were held or entered into directly by the owner of the section 987 QBU; it also includes several other categories of assets and liabilities. <E T="03">See</E> § 1.987-1(d)(1). However, the final regulations provide an election to treat all items of a section 987 QBU as marked items (the “current rate election”). <E T="03">See</E> § 1.987-1(d)(2). <HD SOURCE="HD3">B. Determination of Unrecognized Section 987 Gain or Loss With Respect to a Section 987 QBU</HD> Section 1.987-4 provides rules for computing net unrecognized section 987 gain or loss with respect to a section 987 QBU. Under § 1.987-4(b), net unrecognized section 987 gain or loss is equal to the sum of (i) the unrecognized section 987 gain or loss for the current taxable year and (ii) net accumulated unrecognized section 987 gain or loss for all prior taxable years. Section § 1.987-4(d) provides a ten-step formula for computing unrecognized section 987 gain or loss for the current taxable year. The first step of this formula is to determine the change in owner functional currency net value (“OFCNV”) of the section 987 QBU for the taxable year, computed using end-of-year exchange rates for marked items and historic rates for historic items. <E T="03">See</E> § 1.987-4(d)(1) and (e). The other steps adjust for amounts comprising the separate components of the annual change in OFCNV (other than changes in the exchange rate). Steps 2 through 5 relate to tr ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 58k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━