Taxable Income or Loss and Currency Gain or Loss With Respect to a Qualified Business Unit

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10016]</DEPDOC> <RIN>RIN 1545-BO07</RIN> <SUBJECT>Taxable Income or Loss and Currency Gain or Loss With Respect to a Qualified Business Unit</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations relating to the determination of taxable income or loss and foreign currency gain or loss with respect to a qualified business unit. These final regulations include an election to treat all items of a qualified business unit as marked items (subject to a loss suspension rule), an election to recognize all foreign currency gain or loss with respect to a qualified business unit on an annual basis, and a new transition rule. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> The final regulations are effective December 10, 2024. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> § 1.987-15. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the final regulations generally, Adam G. Province at (865) 329-4546; concerning the character and source of section 987 gain or loss, Larry Pounders at (202) 317-5465; concerning consolidated groups, Jeremy Aron-Dine at (202) 317-6847 (not toll-free numbers). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains 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 “final regulations”). The additions and amendments are issued under sections 987, 989, and 1502, 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 and in the Summary of Comments and Explanation of Revisions describing the individual sections of the final regulations. The final regulations are also issued under the express delegation of authority under section 7805 of the Code. <HD SOURCE="HD1">Background</HD> This document contains final regulations under section 987 of the Code and related provisions under sections 861, 985 through 989, and 1502 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. Section 987(3) directs the Secretary to prescribe the proper adjustments needed to determine the taxable income of the owner of a section 987 QBU. Those adjustments include (but are not limited to) rules for sourcing section 987 gain or loss recognized under section 987(3)(B). Similarly, section 987(2) provides that the income of a QBU is translated at the “appropriate” exchange rate. Section 989(b)(4) provides that the appropriate exchange rate generally is the average rate for the taxable year, “except as provided in regulations.” 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 grant of authority in section 989(c) includes regulations limiting the recognition of foreign currency loss on certain remittances from QBUs, providing for the appropriate treatment of related party transactions (including transactions between QBUs of the same taxpayer), and setting forth procedures for determining the average exchange rate for any period. Section 989(c)(2), (5), and (6). <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> On December 8, 2016, the Department of the Treasury (“Treasury Department”) and the Internal Revenue Service (“IRS”) published Treasury Decision 9794, which contained final regulations under sections 861, 985, 987, 988, and 989 (the “2016 final regulations”), in the <E T="04">Federal Register</E> (81 FR 88806). The same day, the Treasury Department and the IRS published Treasury Decision 9795, which contained temporary regulations under sections 987 and 988 (the “2016 temporary regulations”), in the <E T="04">Federal Register</E> (81 FR 88854) and published a notice of proposed rulemaking (REG-128276-12, 81 FR 88882) (the “2016 proposed regulations”) in the <E T="04">Federal Register</E> by cross-reference to the temporary regulations. On May 13, 2019, the Treasury Department and the IRS published Treasury Decision 9857, which contained final regulations under section 987 (the “2019 final regulations”), in the <E T="04">Federal Register</E> (84 FR 20790). On November 14, 2023, the Treasury Department and the IRS published proposed regulations (REG-132422-17) under sections 861, 985, 987, 988, 989, and 1502 of the Code (the “2023 proposed regulations”) in the <E T="04">Federal Register</E> (88 FR 78134). The same day, the Treasury Department and the IRS also published a notice in the <E T="04">Federal Register</E> (88 FR 77921) that reopened the comment period for the 2016 proposed regulations. All written comments received in response to the 2016 proposed regulations and the 2023 proposed regulations are available at <E T="03">https://www.regulations.gov</E> or upon request. A public hearing on the 2023 proposed regulations was not held because there were no requests to speak. Concurrently with the publication of the final regulations, the Treasury Department and the IRS are publishing in the proposed rule section of this edition of the <E T="04">Federal Register</E> (RIN 1545-BR37) a notice of proposed rulemaking providing additional proposed regulations under section 987 (REG-117213-24) (the “2024 proposed regulations”). <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> <HD SOURCE="HD1">I. Overview</HD> The Treasury Department and the IRS received a number of written comments in response to the 2016 proposed regulations and the 2023 proposed regulations. The comments, and the revisions made in response to those comments, are summarized in this Summary of Comments and Explanation of Revisions. The final regulations retain the basic approach and structure of the 2023 proposed regulations, with the revisions described in this Summary of Comments and Explanation of Revisions. <HD SOURCE="HD1">II. Comments and Changes to Proposed § 1.987-1: Scope, Definitions, and Special Rules</HD> Proposed § 1.987-1 would provide rules regarding the scope of the regulations under section 987 (“section 987 regulations”), including which entities are subject to the regulations, rules relating to elections under section 987, and other rules. <HD SOURCE="HD2">A. Scope</HD> Under proposed § 1.987-1(b)(1), the section 987 regulations would apply to all taxpayers, subject to a de minimis rule for pass-through entities with minimal U.S. ownership, but they would not apply to foreign individuals or foreign corporations that either are not controlled foreign corporations (“CFCs”) or are CFCs in which no United States shareholders (“U.S. shareholders”) own (within the meaning of section 958(a)) stock. In contrast to the 2016 final regulations, the 2023 proposed regulations would not provide an exception for banks, insurance companies, leasing companies, finance coordination centers, regulated investment companies, or real estate investment trusts (“specified entities”). The preamble to the 2023 proposed regulations explains that the current rate election and annual recognition election are expected to provide additional flexibility for specified entities to apply the section 987 regulations. 88 FR 78145. Taxpayers that make a current rate election would treat all assets and liabilities attributable to a section 987 QBU as marked items, and thus would not be required to track historic exchange rates. Taxpayers that make an annual recognition election would recognize all unrecognized section 987 gain or loss on an annual basis and would not be required to calculate the amount of a remittance with respect to a section 987 QBU under § 1.987-5. <E T="03">See</E> parts II and IV of the Explanation of Provisions in the preamble to the 2023 proposed regulations. 88 FR 78138 through 78139, 78141 through 78143. In addition, including specified entities in the scope of the section 987 regulations is necessary to provide these entities with sufficient guidance under section 987 and to provide a consistent set of rules applicable to all taxpayers. <HD SOURCE="HD3">1. Specified Entities</HD> Comments recommended that specified entities be excluded from the application of the section 987 regulations. The comments asserted that additional rules are needed to facilitate the application of the section 987 regulations to these entities. For example, according to the comments, it is unclear whether insurance reserves should be treated as marked items or historic items. A comment also noted that bank branches often engage in high volumes of intercompany transactions that could be difficult to account for under the section 987 regulations. The Treasury Department and the IRS have determined that the final regulations can be appli ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 686k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━