New section 987 regulations
Key considerations and observations
Our tax alert discusses the final and temporary regulations addressing treatment of transactions within qualified business units (QBUs) of select taxpayers.
On December 7, 2016, the Internal Revenue Service (IRS) and Department of the Treasury (“Treasury”) issued a comprehensive package of regulations that provide long-awaited guidance under section 987 and amend related existing rules under sections 861, 985, 988, and 989. The package consists of final regulations,1 which generally have a delayed effective date (the “Final Regulations”), and temporary regulations,2 which in some instances have immediate application (the “Temporary Regulations”).
The Final Regulations provide rules for determining income or loss with respect to a qualified business unit (QBU) operating in a functional currency that is different from that of its owner (“Section 987 QBU”). The Final Regulations also provide rules for determining the timing, amount, character, and source of section 987 gain or loss realized by the taxpayer with respect to such QBUs. The Final Regulations are similar to the proposed regulations issued in 20063 (the “2006 Proposed Regulations”), with several important distinctions, and generally apply to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016. However, taxpayers may elect to apply the new regulations to the first taxable year beginning after December 7, 2016. The Final Regulations exclude certain taxpayers from the scope, but the preamble provides that such taxpayers must use a reasonable approach to comply with section 987.
The Temporary Regulations establish section 987 loss deferral rules for certain transactions entered into after January 6, 2017, with immediate application to tax avoidance transactions entered into after December 6, 2016. The Temporary Regulations also provide certain elections and other rules which, subject to exceptions, track the effective date of the Final Regulations as described above.
1 TD 9794 (Dec. 8, 2016).
2 TD 9795 (Dec. 8, 2016). The Temporary Regulations are accompanied by final regulations (cross referencing the Temporary Regulations) and proposed regulations (REG-128276-12, repeating the Temporary Regulations).