Treasury and the IRS announce simplifications and new elections for businesses operated in a different currency

• Allow an equity and basis pool method election for determining section 987 gain or loss and section 987 income or loss, which is similar to the 1991 proposed regulations, but with annual rather than daily remittance calculations.
• Modify rules for recognition of suspended section 987 losses, so that limits apply only if either the remittance for the year exceeds 5% of the grossed-up equity pool, or the loss that would otherwise be recognized exceeds $5 million.
• Provide an election for CFCs not to recognize section 987 gain or loss, except in respect of certain inbound transactions.

Taxpayers are permitted to rely on the Notice for the 2025 tax year, except for the rules relating to the CFC election. The Proposed Regulations addressing the CFC election are to be released in time for taxpayers to rely on them in filing their 2025 tax returns (with extensions).

Background

Section 987 generally applies to taxpayers that own a qualified business unit (QBU) with a functional currency that differs from the functional currency of the QBU's owner (987 QBU). Section 987 provides rules for determining and translating taxable income or loss with respect to a section 987 QBU and requires that taxpayers make proper adjustments for transfers of property between QBUs with different functional currencies. Generally, an owner of a section 987 QBU recognizes foreign currency gain or loss when there is a remittance by a section 987 QBU. 

Over the years there have been various sets of regulations issued under section 987, some of which have never been finalized, but each set of regulations has been criticized as overly complicated and burdensome. With each set of regulations that has been promulgated, some commentators have argued that taxpayers should be entitled to rely on the method that was originally included in the 1991 proposed regulations. Under those regulations, section 987 income or loss was translated to the taxpayer’s functional currency using the average yearly exchange rate. Taxpayers maintained two pools that would each be adjusted for income/loss and contributions/remittances: (1) an equity pool in the 987 QBU’s functional currency, and (2) a basis pool in the taxpayer’s functional currency. Remittances were computed daily and the taxpayer would recognize section 987 gain/loss equal to the difference between the value of the remittance in the taxpayer’s functional currency (translated at the spot rate) and the portion of the basis pool attributable to such remittance. 

Key Proposals in the Notice

In response to feedback regarding the complexity of the current section 987 regulations, the Notice indicates that the IRS and Treasury will issue Proposed Regulations that will permit taxpayers to elect to apply a method similar to the equity and basis pool method in the 1991 proposed regulations. Unlike the daily netting in the 1991 proposed regulations, the Proposed Regulations will provide a single annual computation of the net remittance, reducing the compliance and administrative burden (along with the potential for manipulation). Also like the 1991 proposed regulations, taxpayers would translate section 987 gain/loss at the yearly average exchange rate. The equity and basis pool election would only be available in a taxable year for which a current rate election under the 2024 final regulations is in effect.

In addition, the Notice announces the intent to issue Proposed Regulations that would allow taxpayers to elect out of computing section 987 gain or loss with respect to a QBU of a CFC, except in the case of certain inbound transactions. The rules for computing the section 987 QBU’s taxable income and the CFC’s E&P would still apply. The Notice indicates that guidance providing for this election will be issued in the near future so that taxpayers will have sufficient time to determine whether to make the CFC election for their 2025 taxable year on an originally filed return.

The forthcoming Proposed Regulations are also expected to modify the loss limitation rules under section 987, generally permitting taxpayers to recognize section 987 loss in connection with certain ordinary course remittances. This change is intended to reduce the compliance burden of tracking suspended section 987 losses. In addition, the Proposed Regulations will limit the number of recognition groupings used for purposes of the loss-to-the-extent-of-gain rule (including to a single grouping for US taxpayers that directly own section 987 QBUs).

Finally, the Proposed Regulations are expected to expand the definition of section 987 hedging transactions to cover certain hedges that currently fail to qualify because they do not meet the GAAP hedging requirement included in the 2024 final regulations.

Reliance

Taxpayers may rely on the rules described in the Notice other than those related to the CFC election for taxable years that end before the Proposed Regulations are published and to which the 2024 final regulations apply, as long as the taxpayer and all members of its section 987 electing group apply those rules completely and consistently for that year and all subsequent taxable years until the Proposed Regulations are published. The reliance provision does not extend to the CFC election rules, which will be addressed separately in future guidance.

Comments

Treasury and the IRS request comments on the rules in the Notice by April 26, 2026.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.