These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2025–3

January 13, 2025

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

INCOME TAX

Announcement 2025-1, page 431.

Notice 2025-4, page 419.

The Office of Professional Responsibility (OPR) announces

recent disciplinary sanctions involving attorneys, certified

public accountants, enrolled agents, enrolled actuaries,

enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice

before the Internal Revenue Service (IRS), which are set out in

Title 31, Code of Federal Regulations, Part 10, and which are

published in pamphlet form as Treasury Department Circular

No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary

sanctions for violating the regulations.

Notice 2025-2, page 418.

This notice provides relief from certain penalties imposed

solely for failure of a partnership with unrealized receivables

or inventory items to furnish Part IV of Form 8308, Report

of a Sale or Exchange of Certain Partnership Interests, by

January 31, 2025, to the transferor and transferee in certain

transfers of partnership interests occurring in calendar year

2024.

EMPLOYEE PLANS

Notice 2025-1, page 415.

This notice sets forth updates on the corporate bond

monthly yield curve, the corresponding spot segment rates

for November 2024 used under § 417(e)(3)(D), the 24-month

average segment rates applicable for December 2024, and

the 30-year Treasury rates, as reflected by the application of

§ 430(h)(2)(C)(iv).

Rev. Rul. 2025-2, page 309.

This revenue ruling provides tables of covered compensation

under § 401(l)(5)(E) of the Internal Revenue Code and the

Treasury Regulations thereunder, effective January 1, 2025.

Finding Lists begin on page ii.

The purpose of this notice is to announce that the Department

of the Treasury (“Treasury Department”) and the Internal Revenue Service (“IRS”) intend to issue proposed regulations that,

for purposes of applying section 482, provide a new simplified and streamlined approach (“SSA”) for pricing certain controlled transactions involving baseline marketing and distribution activities. This notice also provides guidance concerning

application of the SSA to in-scope transactions undertaken by

parties subject to U.S. tax with respect to those transactions

before issuance of those proposed regulations.

Notice 2025-5, page 426.

This notice provides the optional 2025 standard mileage

rates for taxpayers to use in computing the deductible costs

of operating an automobile for business, charitable, medical,

or moving expense purposes. This notice also provides the

amount taxpayers must use in calculating reductions to basis

for depreciation taken under the business standard mileage

rate, and the maximum standard automobile cost that may

be used in computing the allowance under a fixed and variable rate plan. Additionally, this notice provides the maximum

fair market value of employer-provided automobiles first

made available to employees for personal use in calendar

year 2025 for which employers may use the fleet-average

valuation rule in § 1.61-21(d)(5)(v) or the vehicle cents-permile valuation rule in § 1.61-21(e).

REG-117213-24, page 433.

Taxpayers are required to recognize taxable income or loss

and foreign currency gain or loss with respect to a qualified business unit that has a functional currency other than

the dollar. 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 partner-

ships and controlled foreign corporations. REG-117213-24.

Published on December 11, 2024.

Rev. Proc. 2025-8, page 427.

This revenue procedure modifies section 7 of Rev. Proc.

2024-23, 2024-23 I.R.B. 1334, to modify the procedures

under § 446 of the Internal Revenue Code and § 1.446-1(e) of

the Income Tax Regulations for obtaining automatic consent

of the Commissioner of Internal Revenue to change methods

of accounting for research or experimental expenditures paid

or incurred in taxable years beginning after December 31,

2021. The revenue procedure expands the waiver of the eligibility rules in section 5.01(1)(d) and (f) of Rev. Proc. 201513 to accounting method changes described in section 7.01

of Rev. Proc. 2024-23 that are made for any taxable year

beginning in 2022, 2023, or 2024. This revenue procedure

also permits a taxpayer to make a change under section

7.01 of Rev. Proc. 2024-23 regardless of whether the taxpayer made a change for the same item for any other taxable

year beginning in 2022, 2023, or 2024.

Rev. Rul. 2025-1, page 307.

Federal rates; adjusted federal rates; adjusted federal longterm rate, and the long-term tax exempt rate. For purposes

of sections 382, 1274, 1288, 7872 and other sections of

the Code, tables set forth the rates for January 2025.

T.D 10016, page 313.

Taxpayers are required to recognize taxable income or loss

and foreign currency gain or loss with respect to a qualified

business unit that has a functional currency other than the

dollar. The final regulations provide 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, a new transition rule, and certain other

rules. TD 10016 (REG-132422-17). Published on December

11, 2024.

T.D 10020, page 408.

This Treasury Decision adds final regulations under section

150 that address when tax-exempt bonds are treated as

retired for purposes of sections 103 and 141 through150

(relating to requirements on tax-exempt bonds) and amends

regulations under section 1001 of the Internal Revenue

Code. Also, the Treasury Decision provides special rules on

retirement of qualified tender option bonds and acquisition of

tax-exempt bonds by guarantors of, or liquidity providers for,

such bonds.

INCOME TAX, TAX CONVENTIONS

Announcement 2025-5, page 433.

The announcement confirms the suspension of the operation of paragraph 1, subparagraph (g), of Article III of the

Convention between the United States of America and the

Union of Soviet Socialist Republics on Matters of Taxation,

with related letters, signed at Washington June 20, 1973, as

it relates to Belarus, by mutual agreement.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 13, 2025 

Bulletin No. 2025–3

Part I

Section 1274.—

Determination of Issue

Price in the Case of Certain

Debt Instruments Issued for

Property

(Also Sections 42, 280G, 382, 467, 468, 482, 483,

1288, 7520, 7702, 7872.)

Rev. Rul. 2025-1

This revenue ruling provides various

prescribed rates for federal income tax

purposes for January 2025 (the current

month). Table 1 contains the short-term,

mid-term, and long-term applicable fed-

Annual

AFR

110% AFR

120% AFR

130% AFR

4.33%

4.77%

5.21%

5.64%

AFR

110% AFR

120% AFR

130% AFR

150% AFR

175% AFR

4.24%

4.67%

5.10%

5.53%

6.40%

7.49%

AFR

110% AFR

120% AFR

130% AFR

4.53%

4.99%

5.45%

5.90%

Short-term adjusted AFR

Mid-term adjusted AFR

Long-term adjusted AFR

Bulletin No. 2025–3

eral rates (AFR) for the current month

for purposes of section 1274(d) of the

Internal Revenue Code. Table 2 contains

the short-term, mid-term, and long-term

adjusted applicable federal rates (adjusted

AFR) for the current month for purposes

of section 1288(b). Table 3 sets forth

the adjusted federal long-term rate and

the long-term tax-exempt rate described

in section 382(f). Table 4 contains the

appropriate percentages for determining

the low-income housing credit described

in section 42(b)(1) for buildings placed in

service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after

July 30, 2008, shall not be less than 9%.

Table 5 contains the federal rate for determining the present value of an annuity, an

interest for life or for a term of years, or

a remainder or a reversionary interest for

purposes of section 7520. Table 6 contains

the deemed rate of return for transfers

made during calendar year 2025 to pooled

income funds described in section 642(c)

(5) that have been in existence for less

than 3 taxable years immediately preceding the taxable year in which the transfer

was made. Finally, Table 7 contains the

average of the applicable federal mid-term

rates (based on annual compounding) for

the 60-month period ending December 31,

2024, for purposes of section 7702(f)(11).

REV. RUL. 2025-1 TABLE 1

Applicable Federal Rates (AFR) for January 2025

Period for Compounding

Semiannual

Quarterly

Short-term

4.28%

4.26%

4.71%

4.68%

5.14%

5.11%

5.56%

5.52%

Mid-term

4.20%

4.18%

4.62%

4.59%

5.04%

5.01%

5.46%

5.42%

6.30%

6.25%

7.35%

7.28%

Long-term

4.48%

4.46%

4.93%

4.90%

5.38%

5.34%

5.82%

5.78%

Annual

3.28%

3.22%

3.43%

REV. RUL. 2025-1 TABLE 2

Adjusted AFR for January 2025

Period for Compounding

Semiannual

3.25%

3.19%

3.40%

307

Quarterly

3.24%

3.18%

3.39%

Monthly

4.24%

4.66%

5.09%

5.50%

4.16%

4.58%

4.99%

5.40%

6.22%

7.24%

4.44%

4.88%

5.32%

5.75%

Monthly

3.23%

3.17%

3.38%

January 13, 2025

REV. RUL. 2025-1 TABLE 3

Rates Under Section 382 for January 2025

Adjusted federal long-term rate for the current month

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal

long-term rates for the current month and the prior two months.)

3.43%

3.43%

REV. RUL. 2025-1 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for January 2025

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after

July 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit

8.02%

Appropriate percentage for the 30% present value low-income housing credit

3.44%

REV. RUL. 2025-1 TABLE 5

Rate Under Section 7520 for January 2025

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a

remainder or reversionary interest

REV. RUL. 2025-1 TABLE 6

Deemed Rate for Transfers to New Pooled Income Funds During 2025

Deemed rate of return for transfers during 2025 to pooled income funds that have been in existence for

less than 3 taxable years

5.2%

4.0%

REV. RUL. 2025-1 TABLE 7

Average of the Applicable Federal Mid-Term Rates for 2024

For purposes of section 7702(f)(11), the average of the applicable federal mid-term rates (based on annual compounding) for the

60-month period ending December 31, 2024, is 2.53% rounded to 3%.

Section 42.—Low-Income

Housing Credit

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2025. See Rev. Rul. 2025-1, page 307.

Section 280G.—Golden

Parachute Payments

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2025. See Rev. Rul. 2025-1, page 307.

Section 382.—Limitation

on Net Operating Loss

Carryforwards and Certain

Built-In Losses Following

Ownership Change

The adjusted applicable federal long-term rate

is set forth for the month of January 2025. See Rev.

Rul. 2025-1, page 307.

Section 467.—Certain

Payments for the Use of

Property or Services

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2025. See Rev. Rul. 2025-1, page 307.

January 13, 2025

308

Section 468.—Special

Rules for Mining and Solid

Waste Reclamation and

Closing Costs

The applicable federal short-term rates are set

forth for the month of January 2025. See Rev. Rul.

2025-1, page 307.

Section 482.—Allocation

of Income and Deductions

Among Taxpayers

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2025. See Rev. Rul. 2025-1, page 307.

Bulletin No. 2025–3

Section 483.—Interest on

Certain Deferred Payments

Section 7520.—Valuation

Tables

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2025. See Rev. Rul. 2025-1, page 307.

The applicable federal mid-term rates are set

forth for the month of January 2025. See Rev. Rul.

2025-1, page 307.

Section 1288.—Treatment

of Original Issue Discount

on Tax-Exempt Obligations

Section 7702.—Life

Insurance Contract

Defined

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for the

month of January 2025. See Rev. Rul. 2025-1,

page 307.

The average of the applicable federal mid-term

rates for the 60-month period ending December 31,

2024, for purposes of section 7702(f)(11). See Rev.

Rul. 2025-1, page 307.

Section 401. — Qualified

Pension, Profit-Sharing,

and Stock Bonus Plans

preceding the year in which the employee

attains Social Security retirement age

shall be made by assuming that there is

no increase in covered compensation after

the determination year and before the

employee attains Social Security retirement age.

Treas. Reg. § 1.401(l)-1(c)(34) defines

the taxable wage base as the contribution

and benefit base under section 230 of the

Act.

Section 1.401(l)-1(c)(7)(i) defines covered compensation for an employee as the

average (without indexing) of the taxable

wage bases in effect for each calendar year

during the 35-year period ending with the

last day of the calendar year in which the

employee attains (or will attain) Social

Security retirement age. A 35‑year period

is used for all individuals regardless of the

year of birth of the individual. In determining an employee’s covered compensation for a plan year, the taxable wage

base for all calendar years beginning after

the first day of the plan year is assumed to

be the same as the taxable wage base in

26 CFR 1.401(l)-1: Permitted disparity in employer-provided contributions or benefits

Rev. Rul. 2025-2

This revenue ruling provides tables of

covered compensation under § 401(l)(5)

(E) of the Internal Revenue Code (“Code”)

and the Treasury Regulations thereunder,

for the 2025 plan year.

Section 401(l)(5)(E)(i) defines covered

compensation with respect to an employee

as the average of the contribution and benefit bases in effect under section 230 of

the Social Security Act (“Act”) for each

year in the 35‑year period ending with the

year in which the employee attains Social

Security retirement age.

Section 401(l)(5)(E)(ii) of the Code

states that the determination for any year

Bulletin No. 2025–3

309

Section 7872.—Treatment

of Loans With BelowMarket Interest Rates

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2025. See Rev. Rul. 2025-1, page 307.

effect as of the beginning of the plan year.

An employee’s covered compensation for

a plan year beginning after the 35-year

period applicable under § 1.401(l)‑1(c)

(7)(i) is the employee’s covered compensation for a plan year during which the

35-year period ends. An employee’s covered compensation for a plan year beginning before the 35-year period applicable

under § 1.401(l)-1(c)(7)(i) is the taxable

wage base in effect as of the beginning of

the plan year.

Section 1.401(l)-1(c)(7)(ii) provides

that, for purposes of determining the

amount of an employee’s covered compensation under § 1.401(l)-1(c)(7)(i), a

plan may use tables, provided by the Commissioner, that are developed by rounding

the actual amounts of covered compensation for different years of birth.

For purposes of determining covered

compensation for the 2025 plan year, the

taxable wage base is $176,100.

The following tables provide covered

compensation for 2025.

January 13, 2025

ATTACHMENT I

2025 UNROUNDED COVERED COMPENSATION TABLE

CALENDAR

YEAR OF

BIRTH

1907

1908

1909

1910

1911

1912

1913

1914

1915

1916

1917

1918

1919

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

January 13, 2025

CALENDAR YEAR OF

SOCIAL SECURITY

RETIREMENT AGE

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

310

2025 COVERED

COMPENSATION

UNROUNDED

$ 4,488

4,704

5,004

5,316

5,664

6,060

6,480

7,044

7,692

8,460

9,300

10,236

11,232

12,276

13,368

14,520

15,708

16,968

18,312

19,728

21,192

22,716

24,312

25,920

27,576

29,304

31,128

33,060

35,100

37,212

39,444

43,992

46,344

48,816

51,348

53,952

56,628

59,268

61,884

64,560

67,308

Bulletin No. 2025–3

CALENDAR

YEAR OF

BIRTH

1948

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992 and Later

Bulletin No. 2025–3

CALENDAR YEAR OF

SOCIAL SECURITY

RETIREMENT AGE

2014

2015

2016

2017

2018

2019

2020

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

2045

2046

2047

2048

2049

2050

2051

2052

2053

2054

2055

2056

2057

2058

2059 and Later

311

2025 COVERED

COMPENSATION

UNROUNDED

69,996

72,636

75,180

77,880

80,532

83,244

86,052

91,884

95,172

98,616

102,180

105,684

109,140

112,524

115,824

119,100

122,340

125,508

128,580

131,544

134,400

137,124

139,740

142,284

144,804

147,264

149,604

151,848

153,960

155,940

157,920

159,900

161,784

163,572

165,264

166,908

168,552

169,944

171,312

172,548

173,640

174,600

175,428

175,884

176,100

January 13, 2025

ATTACHMENT II

2025 ROUNDED COVERED COMPENSATION TABLE

January 13, 2025

CALENDAR

YEAR OF

BIRTH

1937

1938 – 1939

1940

1941

1942

1943

1944

1945

1946 – 1947

1948

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

2025 COVERED

COMPENSATION

ROUNDED

$ 39,000

45,000

48,000

51,000

54,000

57,000

60,000

63,000

66,000

69,000

72,000

75,000

78,000

81,000

84,000

87,000

93,000

96,000

99,000

102,000

105,000

108,000

114,000

117,000

120,000

123,000

1965

1966

1967

1968

1969

1970 – 1971

1972

1973

1974

1975 – 1976

1977

1978 – 1979

1980

126,000

129,000

132,000

135,000

138,000

141,000

144,000

147,000

150,000

153,000

156,000

159,000

162,000

312

Bulletin No. 2025–3

CALENDAR

YEAR OF

BIRTH

1981 – 1982

1983 – 1984

1985 – 1986

1987 – 1989

1990 and Later

DRAFTING INFORMATION

The principal author of this revenue ruling is Tom Morgan of the Office of Associate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes). However, other personnel from

the IRS participated in the development

of this guidance. For further information

regarding this revenue ruling, contact Mr.

Morgan at 202-317-6700 (not a toll-free

number).

26 CFR 1.987-0 through 26 CFR 1.987-15

T.D. 10016

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Taxable Income or Loss

and Currency Gain or Loss

with Respect to a Qualified

Business Unit

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final rule.

SUMMARY: 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

1

2025 COVERED

COMPENSATION

ROUNDED

165,000

168,000

171,000

174,000

176,100

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.

DATES: Effective date: The final regulations are effective December 10, 2024.

Applicability dates: For dates of applicability, see §1.987-15.

FOR FURTHER INFORMATION

CONTACT: 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 tollfree numbers).

SUPPLEMENTARY INFORMATION:

Authority

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.

Background

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.”1 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

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.

Bulletin No. 2025–3

313

January 13, 2025

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).

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 Federal Register (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 Federal Register (81 FR 88854) and published a notice

of proposed rulemaking (REG-12827612, 81 FR 88882) (the “2016 proposed

regulations”) in the Federal Register

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 Federal Register (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 Federal Register (88

FR 78134). The same day, the Treasury

Department and the IRS also published

a notice in the Federal Register (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 https://www.regulations.gov

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 Federal Register (RIN 1545-BR37)

a notice of proposed rulemaking providing additional proposed regulations under

section 987 (REG-117213-24) (the “2024

proposed regulations”).

January 13, 2025

Summary of Comments and

Explanation of Revisions

I. Overview

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.

II. Comments and Changes to

Proposed §1.987-1: Scope, Definitions,

and Special Rules

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.

A. Scope

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

314

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. See 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.

1. Specified entities

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 applied by specified entities in an

administrable manner and that excluding

specified entities from the scope of the

section 987 regulations would not provide

sufficient guidance to ensure that these

entities are using an appropriate method

to apply section 987. Moreover, section

987 and its legislative history give no indication that Congress intended for banks,

insurance companies, and other specified

entities to be treated differently from other

taxpayers for this purpose. Accordingly,

specified entities are subject to the final

regulations. However, the final regulations contain modifications intended to

facilitate application of the section 987

regulations to these entities. See parts II.B

(rules relating to insurance companies),

Bulletin No. 2025–3

V.B (hedging transactions), and VI (modifications to annual remittance rules to

reduce the burden of tracking disregarded

transfers) of this Summary of Comments

and Explanation of Revisions.

2. Partnerships and certain other entities

One comment was received relating to

the application of section 987 to partnerships, and the Treasury Department and

the IRS continue to study this issue. The

Treasury Department and the IRS have

determined that, without additional guidance, the section 987 regulations in their

entirety could not be applied to partnerships in an administrable way. Accordingly, the final regulations generally apply

only with respect to corporations and

individuals. However, as discussed in part

VIII of this Summary of Comments and

Explanation of Revisions, certain parts of

the section 987 regulations (including the

rules relating to suspension of section 987

loss and recognition of suspended section

987 loss) are applicable to partnerships

and S corporations.

The section 987 regulations do not

apply to trusts or estates (though trusts

and estates can be subject to section 987)

because additional guidance may be

needed to apply section 987 to these entities. In particular, the Treasury Department and the IRS are studying whether

specific rules are needed to address the

apportionment of section 987 gain or loss

between the estate or non-grantor trust

and the beneficiaries or whether existing

rules under section 643(a) (defining distributable net income of an estate or trust)

sufficiently address this issue. In addition,

specific rules may be needed to address a

beneficiary’s application of section 987

with respect to an estate or non-grantor

trust that uses a different functional currency (which creates a separate layer of

currency exposure). The Treasury Department and the IRS anticipate providing

rules applicable to trusts and estates in

future guidance.

3. Application to CFCs

The final regulations apply to individuals and corporations that are United States

persons (“U.S. persons”) and to CFCs

in which U.S. shareholders own stock

Bulletin No. 2025–3

(directly or indirectly within the meaning

of section 958(a)). See §1.987-1(b)(1). As

explained in parts II.A.2 and VIII of this

Summary of Comments and Explanation

of Revisions, the Treasury Department

and the IRS are continuing to study the

appropriate rules for applying section 987

to partnerships.

A comment recommended that the

scope of the section 987 regulations be

limited to section 987 QBUs owned

directly by U.S. persons or by partnerships with partners that are U.S. persons.

According to the comment, this would

reduce the compliance burden on taxpayers and prevent the selective recognition

of section 987 losses. The comment further asserted that, based on the legislative history of section 987(3), the statute

primarily was intended to address section

987 QBUs owned by U.S. persons.

The comment suggested that simplified

mechanics under section 986(c) could be

used to account for currency gain or loss

arising between the time earnings are generated by a section 987 QBU and the time

of distribution, but the comment did not

explain how those mechanics would operate. Section 986(c) requires a U.S. shareholder to recognize foreign currency gain

or loss with respect to distributions of previously taxed earnings and profits attributable to movements in exchange rates

between the date of the income inclusion

giving rise to the previously taxed earnings and profits and the distribution of the

previously taxed earnings and profits.

The final regulations do not adopt the

recommendations made by the comment.

It is necessary to apply section 987(1)

and (2) to foreign entities because many

aspects of the income tax rules effectively

require that the determination of a taxpayer’s items of income, gain, deduction,

and loss be made in a single currency. In

addition, it is not clear how a rule similar

to section 986(c) could be applied to section 987 QBUs in lieu of section 987(3).

Because a CFC’s earnings and profits are

determined in the CFC’s functional currency under section 986(b), currency gain

or loss on previously taxed earnings and

profits arises under section 986(c) when a

CFC’s functional currency appreciates or

depreciates against the U.S. dollar between

the time the inclusion is computed and the

time the CFC distributes the previously

315

taxed earnings and profits. However, section 986(c) would not account for changes

in value of a section 987 QBU’s functional

currency (measured against the functional

currency of its CFC-owner or the U.S.

shareholder) because earnings and profits

are not tracked in the section 987 QBU’s

functional currency.

However, the Treasury Department

and the IRS are studying whether there

are instances in which it would be possible to simplify the application of section

987 by modifying the application of section 987(3) (and the related regulations,

including §§1.987-4 through 1.987-6,

1.987-8, and 1.987-11 through 1.987-13)

to certain entities. See part II.B of the

Comments and Request for Public Hearing section in the preamble to the 2024

proposed regulations.

B. Special Rules for Insurance

Companies

1. Insurance reserves

A comment requested clarification as

to whether insurance reserves are treated

as marked items. The comment noted that

the definition of a marked item under the

proposed regulations is tied to the treatment of an asset or liability under section

988 and that the application of section

988 to insurance reserves is not clear. The

Treasury Department and the IRS agree

that treating insurance reserves as marked

items would facilitate the application of

section 987 to insurance companies and

would be consistent with the treatment of

liabilities outside the insurance context.

Accordingly, §1.987-1(d)(1)(iv) includes

insurance reserves in the definition of

marked items.

2. Assets that support variable contracts

a. Background on variable contracts

In general, variable contracts are life

insurance and annuity contracts under

which the amount of the insurance company’s obligation depends, at least in part,

on the value of the assets held in a separate

account that is segregated from the general asset accounts of the insurance company. Provided certain requirements are

met, under section 817(c), an insurance

January 13, 2025

company that issues variable contracts (as

defined in section 817(d)) must separately

account for the various income, exclusion,

deduction, asset, reserve, and other liability items properly attributable to such

variable contracts.

As a general matter, section 807 provides that increases in the life insurance

reserves of a life insurance company are

deductible and decreases in the life insurance reserves are includible in income.

However, section 817(a) provides that for

purposes of determining the net decrease

or increase in reserves under section

807(a) or (b), amounts subtracted from

or added to separate account reserves by

reason of the depreciation or appreciation

of separate account assets (whether or not

realized) are disregarded. Under section

817(a), deductions for items described in

section 805(a)(1) and (6), which include

claims and benefits accrued and losses

incurred during the taxable year on insurance and annuity contracts, are similarly

adjusted for the depreciation or appreciation of separate account assets. Additionally, section 817(b) provides that the

basis of each separate account asset is

decreased by the amount of depreciation,

or increased by the amount of appreciation, of separate account assets (whether

or not realized), to the extent separate

account reserves are adjusted for such

depreciation or appreciation under section

817(a). Generally, the result is a permanent elimination of any effects on company-level taxable income that would otherwise result from the change in the value of

the separate account assets.

Sometimes, however, an insurance

company may provide guarantees with

respect to variable contracts with separate

accounts that could require reserves to

be held in a company’s general account.

Section 817(d)(3) recognizes this situation and states that “obligations under

such guarantee which exceed obligations

under the contract without regard to such

guarantee shall be accounted for as part

of the company’s general account.” Such

guarantees might involve a limit on losses

or guarantees of minimum crediting rates.

These amounts are not liabilities of the

separate account.

Similarly, CFCs generally must follow the Code and subchapter L rules in

determining their insurance income, with

January 13, 2025

minor modifications for determining: (i)

whether a contract is a life insurance or

annuity contract, and (ii) the amount of

insurance reserves. For example, U.S. tax

requirements in sections 72(s), 101(f),

817(h), and 7702 do not apply so long

as no policyholder, annuitant, insured, or

beneficiary under the contract is a United

States person and the contract is regulated

as a life insurance or annuity contract in

the issuer’s home country. In addition,

section 954(i) modifies the subchapter L

computation of insurance reserves and its

application to insurance contracts issued

by CFCs. See also section 953(b)(3).

b. Treatment of assets that support

variable contracts for purposes of section

987

A comment recommended that assets

which support variable annuity and life

insurance contracts be treated as marked

items. The comment explained that these

assets are required by law to be segregated

from the general asset accounts of the

insurance company in a separate account,

and the related contracts reflect the investment return and market value of the separate account assets.

The comment asserted that both the

separate account assets and the related

insurance reserves should be treated as

marked items in order to align the treatment of these assets and liabilities for purposes of section 987. Similarly, the comment recommended that these assets and

liabilities should be treated as attributable

to an eligible QBU if they are reflected on

the books and records of the eligible QBU,

even if they would otherwise be excluded

under §1.987-2(b)(2) (for example, if the

separate account assets consist of stock or

partnership interests).

The final regulations provide that separate account assets are treated as marked

items. See §1.987-1(d)(1)(v). In addition,

the final regulations carve out separate

account assets from the exclusions in

§1.987-2(b)(2), so that separate account

assets reflected on the books and records

of an eligible QBU generally will be attributable to the eligible QBU. See §1.9872(b)(2)(ii). These rules are expected to

facilitate matching treatment of separate

account assets and the related insurance

contracts, consistent with the treatment

316

of these items for statutory and financial

accounting purposes and the nature of the

issuer’s economic obligations.

The final regulations define a separate

account asset as an asset that is reflected

on the books and records of an eligible

QBU and is held in a separate account

with respect to a separate account insurance contract. See §1.987-1(h). A separate

account insurance contract generally is

defined as a contract that would be treated

as an insurance contract for Federal income

tax purposes for which the assets supporting the insurance reserves are required to

be held in a separate account under the

local insurance regulatory rules. In addition, the contract generally must qualify as

a variable contract under section 817(d).

However, if the contract does not qualify

as a variable contract under section 817(d)

solely because it fails to meet one or

more of the requirements in section 72(s),

101(f), 817(h), or 7702, the contract will

be treated as a separate account insurance

contract if it is regulated as a life insurance or annuity contract under foreign

law, the contract reserves are computed

or estimated on the basis of recognized

mortality or morbidity tables and assumed

rates of interest (treating the reflection

of the investment return and the market

value of assets in the separate account as

an assumed rate of interest), and no policyholder, annuitant, insured, or beneficiary under the contract is a United States

person. These requirements are consistent

with the requirements for life insurance or

annuity contracts issued by CFCs.

3. Assets of an insurance company that

produce financial services income

A comment recommended that assets of

an insurance company that produce financial services income (within the meaning

of section 904(d)(2)(D)(ii)(II) and (III))

should be treated as marked items. The

comment asserted that the assets insurance companies hold to support insurance

obligations are closely matched to those

obligations and that concerns related to

the selective recognition of large noneconomic losses under section 987 are not

present for insurance companies.

The final regulations do not treat all

assets that produce financial services

income as marked assets. As a result,

Bulletin No. 2025–3

those assets are classified as marked or

historic under the general rules of §1.9871(d) or (e). The definition of a marked

item under §1.987-1(d)(1) is intended to

identify those items of a section 987 QBU

that are directly exposed to changes in the

value of a section 987 QBU’s functional

currency. This definition is designed to

ensure that, in the absence of a current rate

election, section 987 gain or loss recognized by the owner of a section 987 QBU

represents bona fide economic gain or

loss. To the extent that a section 987 QBU

of an insurance company holds assets that

are not directly exposed to exchange rate

fluctuations (for example, publicly traded

stock), and a current rate election is not in

effect, those assets are properly characterized as historic items even if they generate

financial services income.

4. Deferred acquisition costs

A comment recommended that the

unamortized portion of specified policy

acquisition expenses (as defined in section 848) should be treated as marked

items. These specified policy acquisition

expenses are generally a specified portion of general deductions and represent

deferred acquisition costs. The comment

noted that specified policy acquisition

expenses are akin to prepaid expenses

and the amount and timing of the related

deductions are determined under insurance-specific tax rules.

The final regulations do not treat the

unamortized portion of specified policy

acquisition expenses as marked items.

Although certain prepaid expenses are

treated as marked items under §1.987-1(d)

(1)(ii), that rule applies only to prepaid

expenses with an original term of one year

or less. The preamble to the 2016 final regulations explains that, because these prepaid expenses have a short duration and

often are small in amount, treating them as

marked items promotes administrability

without creating significant distortions. 81

FR 88810. By contrast, specified policy

acquisition expenses under section 848

generally are amortized over a period of

15 years and can be substantial in magnitude. Thus, if specified policy acquisition

expenses were treated as marked items,

they could give rise to significant amounts

of non-economic section 987 gain or loss.

Bulletin No. 2025–3

C. Elections

The 2023 proposed regulations would

provide that a current rate election or an

annual recognition election may not be

revoked without consent for any taxable

year beginning within 60 months of the

first day of the taxable year for which it

was made. Proposed §1.987-1(g)(3)(ii)

(B). Once revoked, a new current rate

election or annual recognition election

may not be made without consent for any

taxable year beginning within 60 months

of the first day of the taxable year for

which it was revoked. Id.

A comment recommended that, during

the first five years in which the section

987 regulations are applicable, taxpayers

should be allowed to make or revoke a

current rate election without waiting 60

months or requesting consent. The comment noted that taxpayers may need more

flexibility to reassess their elections during

this initial period because they do not yet

have sufficient information or experience

regarding the impact of making (or not

making) a current rate election.

The final regulations retain the

60-month limitation for taxpayers that

make a current rate election or an annual

recognition election and apply a similar

limitation for purposes of the section 988

mark-to-market election (see part IV.C.1

of this Summary of Comments and Explanation of Revisions). Permitting taxpayers

to make or revoke elections on a more

frequent basis could increase the potential for manipulation and abuse. However, taxpayers that wish to change their

elections without waiting 60 months can

do so by requesting the Commissioner’s

consent, and the Commissioner may consider the need for additional flexibility on

a case-by-case basis.

D. No Change in Method of Accounting

Proposed §1.987-1(g)(4) provides that

elections under section 987 are not governed by the general rules concerning

changes in methods of accounting. In

addition, the final regulations clarify that

an election under section 987 is not treated

as a method of accounting for purposes of

section 446 or 481. See §1.987-1(g)(4).

Similarly, the final regulations provide

that application of the transition rules

317

under §1.987-10 is not treated as a change

in method of accounting. See §1.98710(k)(4). No inference is intended as to

whether a change in section 987 methodology is considered a change in method

of accounting before the final regulations

become applicable (or with respect to

partnerships or other entities that are not

generally subject to the section 987 regulations).

III. Comments and Changes to

Proposed §1.987-2: Attribution

of Items of an Eligible QBU, the

Definition of a Transfer, and Related

Rules

Proposed §1.987-2 provides rules for

attributing items to eligible QBUs and

rules relating to transfers of assets or liabilities to or from eligible QBUs.

A. Attribution of Items to an Eligible

QBU

Under the proposed regulations, items

are attributable to an eligible QBU to the

extent they are reflected on the eligible

QBU’s separate set of books and records.

Proposed §1.987-2(b)(1). The final regulations clarify that an item that is not taken

into account for financial accounting purposes is attributed to an eligible QBU to

the extent it would have been reflected

on the eligible QBU’s books and records

if it were taken into account for financial

accounting purposes (for example, amortization attributable to an item of intangible property that is recognized and taken

into account for tax purposes due to a section 338 election, but is not recognized or

taken into account for financial reporting

purposes). See §1.987-2(b)(1). Similarly,

in preparing an adjusted balance sheet for

a section 987 QBU, the owner must make

adjustments to reflect items that were not

reflected on the section 987 QBU’s books

and records for the taxable year but should

be so reflected under United States tax

accounting principles. See §1.987-1(h).

No inference should be drawn from this

clarification with respect to other similar

rules that attribute items based on books

and records including under §1.904-4(f)

(foreign branch category income) or

§1.1503(d)-5(c) (income or dual consolidated loss of a separate unit).

January 13, 2025

B. Disregarded Transactions

Under proposed §1.987-2(c)(2)(i),

an asset is treated as transferred to a

section 987 QBU from its owner if, as

a result of a disregarded transaction,

the asset is reflected on the books and

records of (or attributable to) the section

987 QBU. Similarly, an asset is treated

as transferred from a section 987 QBU

to its owner if, as a result of a disregarded transaction, the asset ceases to

be reflected on (or attributable to) the

books and records of the section 987

QBU. However, disregarded transactions 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.

Proposed §1.987-2(c)(2)(iii).

A comment recommended that interbranch loans made by banks and other

regulated financial institutions should

not be treated as transfers for purposes

of determining the amount of a remittance under §1.987-5(c). The comment

asserted that an interbranch loan is not a

permanent transfer because the borrower

has an obligation to repay the lender.

Another comment requested that the

final regulations conform the treatment

of disregarded transactions for purposes

of section 987 with the reattribution rules

provided in §1.904-4(f)(2)(vi). Under this

approach, disregarded payments would

result in the reattribution of items of gross

income between a section 987 QBU and

its owner and between separate 987 QBUs

of the same owner, and they would not

be treated as transfers giving rise to the

recognition of section 987 gain or loss.

The comment noted that, under proposed

§1.987-2(c)(2), a disregarded payment for

services or a sale of inventory (including

a payment from one section 987 QBU

to a different section 987 QBU with the

same functional currency) could give rise

to a remittance even though there is no

net economic transfer of value. Further,

because disregarded transactions do not

give rise to section 987 taxable income or

loss under proposed §1.987-2(c)(2)(iii),

the comment asserted that the amount of

section 987 taxable income or loss may be

different from the amount of income that

is economically attributable to the section

987 QBU.

January 13, 2025

The final regulations retain the disregarded transaction rules of proposed

§1.987-2(c). See §1.987-2(c). These

rules are needed to properly account for

the effect of a disregarded transaction on

the balance sheet of a section 987 QBU

for purposes of determining the owner’s

net unrecognized section 987 gain or loss

under §1.987-4, the amount of a remittance under §1.987-5(c), and to properly

determine the owner’s basis in transferred

assets under §1.987-5(f).

In the case of a disregarded lending

transaction in which a section 987 QBU

lends money to its owner, although the

owner remains obligated to repay the

borrowed funds, the disregarded loan

is not an asset that can be attributed to

the QBU for tax purposes. Accordingly,

for tax purposes, the QBU-lender’s balance sheet is diminished by the amount

of the loan in the same way as any other

transfer from the QBU to its owner. To

the extent the loan is funded and repaid

within the same taxable year, the two

transfers will offset in computing the

remittance amount under §1.987-5(c).

However, when a disregarded loan spans

multiple taxable years, the owner must

account for the effect of the transaction

on the net equity of the section 987 QBU

(as regarded for tax purposes).

In addition, the final regulations do

not provide for reattribution of gross

income between a section 987 QBU and

its owner or between section 987 QBUs

of the same owner for purposes of section

987. When a section 987 QBU makes a

disregarded payment to its owner, the

payment properly triggers the recognition of section 987 gain or loss because

the transferred asset has been withdrawn

from the QBU and is no longer accounted

for in the section 987 QBU’s functional

currency. Even if the transaction does not

reduce the economic value of the section

987 QBU on a net basis (for example,

because the disregarded payment is made

in exchange for services of equal value),

it nonetheless results in a net withdrawal

of asset basis from the functional currency environment of the section 987

QBU and is therefore properly treated as

a remittance for purposes of section 987.

Moreover, a rule determining the amount

of a remittance based on the value of

property transferred from a section 987

318

QBU would be difficult to administer and

prone to manipulation.

Similarly, because disregarded transactions do not give rise to taxable income

or loss under general tax principles, they

are not taken into account in determining

section 987 taxable income or loss. See

§1.987-2(c)(2)(iii). Instead, the regarded

income of an owner that is properly

reflected on the books and records of (or

attributable to) a section 987 QBU under

§1.987-2(b) is determined in the functional currency of the section 987 QBU

and translated into the owner’s functional

currency under the rules of §1.987-3. Disregarded payments do not serve to reattribute gross income between a section 987

QBU and its owner for purposes of determining section 987 taxable income or

loss. Such a reattribution rule would add

complexity to the section 987 regulations

(for example, when income is reattributed

in a taxable year following the taxable

year in which the disregarded payment is

made), and it would not serve any necessary function.

However, the final regulations contain

targeted modifications that are intended to

reduce the compliance burden of accounting for certain transfers between a section

987 QBU and its owner. See part VI of this

Summary of Comments and Explanation

of Revisions (describing modifications

to the annual remittance rules to reduce

the burden of tracking and translating

disregarded transfers). Additionally, if an

owner elects to group section 987 QBUs

with the same functional currency under

§1.987-1(b)(3)(ii), transactions between

the section 987 QBUs will not be treated

as transfers between the section 987

QBUs and their owner for purposes of

section 987.

IV. Comments and Changes to

Proposed §1.987-3: Determination of

Section 987 Taxable Income or Loss of

an Owner of a Section 987 QBU

Proposed §1.987-3 would provide rules

for determining taxable income or loss of

a section 987 QBU, including section 988

transactions of a section 987 QBU. Additional rules relating to section 988 transactions would be provided in §1.987-3 of the

2016 proposed regulations, for which the

comment period was reopened in 2023.

Bulletin No. 2025–3

A. Treatment of Section 988 Transactions

Under the 2016 Proposed Regulations

The 2016 proposed regulations provide

that the determination of whether a transaction is a section 988 transaction is made

by reference to the section 987 QBU’s

functional currency. Thus, a transaction

otherwise within the scope of section 988

that is denominated in a functional currency other than the section 987 QBU’s

functional currency generally would be

treated as a section 988 transaction. See

§1.987-3(b)(4)(i) of the 2016 proposed

regulations. However, section 988 transactions of a section 987 QBU denominated

in, or determined by reference to, the owner’s functional currency (“specified owner

functional currency transactions”) would

not be treated as section 988 transactions

of the section 987 QBU. See §1.987-3(b)

(4)(ii) of the 2016 proposed regulations.

The 2016 proposed regulations would

further provide that section 988 gain or

loss of a section 987 QBU generally is

determined by reference to the owner’s

functional currency. See §1.987-3(b)

(4)(i) of the 2016 proposed regulations.

However, section 988 gain or loss with

respect to certain short-term section 988

transactions (“qualified short-term section

988 transactions”) accounted for under

a mark-to-market method of accounting

would be determined in the functional

currency of the section 987 QBU, and not

the functional currency of its owner. See

§1.987-3(b)(4)(iii) of the 2016 proposed

regulations. The 2016 proposed regulations would provide an election under

which taxpayers can apply a mark-to-market method of accounting with respect to

all qualified short-term section 988 transactions. See §1.987-3(b)(4)(iii)(C) of the

2016 proposed regulations.

Under the 2016 final regulations (and

the 2023 proposed regulations), a transaction denominated in a currency other

than the section 987 QBU’s functional

currency is treated as a historic item. See

§1.987-1(d) and (e). However, the 2016

proposed regulations provide an exception

under which a qualified short-term section

988 transaction for which section 988 gain

or loss is determined by reference to the

functional currency of the section 987

QBU is a marked item. See §1.987-1(d)

(3) of the 2016 proposed regulations.

Bulletin No. 2025–3

The preamble to the 2023 proposed

regulations requested comments as to

whether section 988 gain or loss on nonfunctional currency transactions of a section 987 QBU (including specified owner

functional currency transactions) should

be determined in the functional currency

of the section 987 QBU when a current

rate election or annual recognition election is in effect. 88 FR 78154. The preamble expressed concern that, if such a rule

were adopted, specified owner functional

currency transactions would give rise to

offsetting positions in the functional currency of the section 987 QBU; this could

create opportunities for taxpayers to recognize losses while deferring the offsetting gains. Id. For example, if a section 987

QBU held assets denominated in its owner’s functional currency, and the section

987 QBU’s functional currency weakened

against that of its owner, the section 987

QBU would have unrecognized section

988 gain and the owner would have an

inverse amount of unrecognized section

987 loss. The owner could cause the QBU

to make a remittance triggering the recognition of section 987 loss, while deferring

the section 988 gain.

B. Comments on the 2023 Proposed

Regulations Regarding Section 988

Transactions of Section 987 QBUs

Comments asserted that the section 988

rules of the 2016 proposed regulations

would impose a substantial compliance

burden on taxpayers. The comments noted

that for financial accounting purposes,

foreign currency gain or loss on nonfunctional currency transactions of a QBU is

measured by reference to the functional

currency of the QBU. In addition, taxpayers typically hedge their exposure to nonfunctional currency transactions of a QBU

by reference to the QBU’s functional currency. One comment noted that it is common for section 987 QBUs of insurance

companies to hold assets denominated in

U.S. dollars for commercial reasons and

that treating these assets as historic items

would increase the compliance burden on

insurance companies.

Comments suggested that the rules of

the 2016 proposed regulations be modified

to provide that: (i) section 988 gain or loss

on nonfunctional currency transactions of

319

a section 987 QBU is determined by reference to the functional currency of the section 987 QBU, (ii) specified owner functional currency transactions are treated as

section 988 transactions, and (iii) section

988 transactions of a section 987 QBU

are treated as marked items. Alternatively,

comments requested that (if the default

rules of the 2016 proposed regulations are

retained) taxpayers should be permitted to

elect this modified treatment.

According to the comments, the recommended modifications would achieve

greater consistency with financial accounting standards and would ease the compliance burden on taxpayers. One comment

stated that such an approach would also be

more consistent with the statutory requirement to determine a section 987 QBU’s

taxable income or loss in the QBU’s functional currency under sections 985 and

987. Comments noted that the opportunity for selective recognition of losses is

limited to the extent the taxpayer makes a

current rate election (because section 987

losses will be subject to suspension) or an

annual recognition election (because section 987 gain or loss is recognized annually without regard to whether a remittance is made). One comment asserted

that, even if neither of these elections is

in effect, it is difficult to selectively recognize material section 987 losses attributable to section 988 transactions because

the remittance proportion under §1.987-5

is determined with respect to all the assets

of the section 987 QBU.

Other comments recommended providing an election under which taxpayers

could recognize section 988 gain or loss

with respect to all section 988 transactions

of a section 987 QBU on a mark-to-market basis (effectively expanding the special rule for qualified short-term section

988 transactions to cover all section 988

transactions of a QBU). For example, one

comment requested mark-to-market timing for section 988 transactions of a section 987 QBU that is subject to an annual

recognition election. According to this

comment, because mark-to-market timing would apply to both section 988 and

section 987 gains and losses on a current

basis, the potential for abuse or selective

loss recognition would be limited. Another

comment requested that the definition of a

qualified short-term section 988 transac-

January 13, 2025

tion under proposed §1.987-3(b)(4)(iii)

(B) be expanded to include long-term

transactions that have been properly identified as a hedge for U.S. tax purposes.

Finally, a comment recommended that,

if the rules of the 2016 proposed regulations relating to section 988 transactions

are retained in the final regulations, the

applicability date of the final regulations

should be deferred until taxable years

beginning after December 31, 2026, so

that taxpayers have adequate time to

update their internal accounting systems.

C. Treatment of Section 988 Transactions

Under the Final Regulations

1. Section 988 mark-to-market election

The final regulations provide that a taxpayer may elect to recognize section 988

gain or loss with respect to section 988

transactions of a section 987 QBU under

a mark-to-market method of accounting (a

“section 988 mark-to-market election”).

See §1.987-3(b)(4)(ii). This election is

expected to result in consistent treatment

of section 988 transactions for tax and

financial reporting purposes and to reduce

the potential for selective recognition of

losses relating to these transactions, as

indicated by the comments. The section

988 mark-to-market election is subject to

the same timing and consistency requirements as a current rate election or an

annual recognition election. See §1.9871(g).

The section 988 mark-to-market election does not apply to a section 988 transaction that is contributed to a section 987

QBU with a built-in loss if the section 988

transaction was not subject to a mark-tomarket method of accounting in the hands

of the transferor. See §1.987-3(b)(4)(ii)

(B). This rule is intended to prevent taxpayers from accelerating the recognition

of section 988 loss by contributing a section 988 transaction with a built-in loss to

a section 987 QBU that is subject to the

section 988 mark-to-market election.

2. Treatment of section 988 transactions

of a section 987 QBU under the final

regulations

The final regulations provide new rules

for applying section 988 with respect to

January 13, 2025

nonfunctional currency transactions of a

section 987 QBU. In response to the comments summarized in part IV.B of this

Summary of Comments and Explanation

of Revisions, the Treasury Department

and the IRS have determined that a different framework is appropriate in order to

reduce the compliance burden and complexity of the section 987 regulations.

Under the final regulations, whether an

asset or liability of a section 987 QBU is

a section 988 transaction is determined by

reference to the functional currency of the

section 987 QBU (instead of the owner’s

functional currency). See §1.987-3(b)(4)

(i). The final regulations further provide

that section 988 gain or loss with respect

to section 988 transactions of a section

987 QBU (including transactions denominated in the owner’s functional currency)

is determined in the functional currency

of the section 987 QBU, and section 988

transactions are treated as marked items.

See §§1.987-1(d)(1)(iii) and 1.987-3(b)(4)

(i). The final regulations do not provide an

exception for specified owner functional

currency transactions; thus, such transactions are treated as section 988 transactions of the section 987 QBU.

However, the final regulations provide

an anti-abuse rule to prevent taxpayers

from entering into section 988 transactions through an eligible QBU for the purpose of generating offsetting amounts of

gain and loss that can selectively be recognized or deferred. Under §1.987-2(b)(3)

(iv), section 988 transactions will not be

treated as attributable to an eligible QBU

if they are entered into (or reflected on the

eligible QBU’s books and records) with a

principal purpose of generating offsetting

amounts of section 988 gain and section

987 loss or offsetting amounts of section

988 loss and section 987 gain. Section 988

transactions also are subject to the general

anti-avoidance rules of §1.987-2(b)(3)(i)

through (iii).

V. Comments and Changes to Proposed

§1.987-4: Determination of Net

Unrecognized Section 987 Gain or Loss

of a Section 987 QBU

Proposed §1.987-4 provides rules for

computing net unrecognized section 987

gain or loss with respect to a section 987

QBU. In particular, proposed §1.987-4(d)

320

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 compute the change

in owner functional currency net value

(“OFCNV”) for the taxable year. Proposed §1.987-4(d)(1). The other steps

make adjustments for changes to OFCNV

that are not attributable to changes in the

exchange rate. Steps 2 through 5 relate to

transfers of assets and liabilities between

a section 987 QBU and its owner, and

steps 6 through 9 relate to income or loss

of the section 987 QBU. Proposed §1.9874(d)(2) through (9). Step 10 is a residual

adjustment for any increase or decrease to

the section 987 QBU’s balance sheet that

is not otherwise accounted for. Proposed

§1.987-4(d)(10). If a current rate election

is in effect, taxpayers are required to apply

only steps 1 through 5 and step 10.

Under proposed §1.987-4(e), OFCNV

is determined by preparing a tax basis balance sheet reflecting the section 987 QBU’s

assets and liabilities. The basis of each

asset and the amount of each liability is

then translated into the owner’s functional

currency at the appropriate exchange rate.

Under the default rules, marked items are

translated at the year-end spot rate, while

historic items are translated at the applicable historic rate. However, taxpayers that

make a current rate election under §1.9871(d)(2) translate all items on the year-end

balance sheet at the year-end spot rate.

A. Mechanics for Calculating

Unrecognized Section 987 Gain or Loss

for the Current Taxable Year

1. Earnings and capital method

The preamble to the 2023 proposed

regulations notes that, under a current

rate election, the total amount of section

987 gain or loss recognized by an owner

with respect to a section 987 QBU would

be similar to the amount computed under

the earnings and capital method, which

was described in proposed regulations

published in the Federal Register in 1991

(56 FR 48457, September 25, 1991) (the

“1991 proposed regulations”). 88 FR

78138 through 78139. Under the earnings

and capital method, the owner of a section 987 QBU computes section 987 gain

or loss by maintaining an equity pool in

Bulletin No. 2025–3

the QBU’s functional currency and a basis

pool in the owner’s functional currency.

The equity and basis pools are increased

by income of the section 987 QBU and

contributions from the owner, and they

are decreased by losses of the section 987

QBU and distributions from the section

987 QBU to the owner. The preamble to

the 1991 proposed regulations explains

that the equity pool generally represents

the amount of branch equity (adjusted

basis of assets net of liabilities), and the

basis pool represents the owner’s basis in

branch equity. 56 FR 48458.

Comments requested that the final regulations include an election to apply the

earnings and capital method of the 1991

proposed regulations in lieu of the current rate election. These comments indicated that, even if a current rate election

is in effect, proposed §1.987-4 imposes a

heightened compliance burden (as compared to the earnings and capital method)

because it requires taxpayers to prepare

tax basis balance sheets for each of their

section 987 QBUs on an annual basis.

In addition, the comments asserted that

taxpayers are already familiar with the

earnings and capital method and would

be less likely to make errors in applying that method because taxpayers track

book-to-tax adjustments in computing

taxable income but do not make book-totax adjustments to their balance sheets.

One comment recommended allowing

taxpayers to use the earnings and capital

method only if a current rate election and

an annual recognition election are both in

effect.

The final regulations do not permit

taxpayers to use the earnings and capital

method. As explained in the preamble to

the 2023 proposed regulations, such an

election would allow different taxpayers

to apply section 987 using fundamentally

different methodologies, which would

increase the overall complexity of the

section 987 regulations and make them

more difficult to administer. 88 FR 78138.

For example, it would be difficult for taxpayers to transition from one method to

another in an administrable way. Moreover, under the earnings and capital

method, the amount of section 987 gain

2

or loss recognized is determined based on

the percentage of a section 987 QBU’s net

equity remitted (rather than the percentage of gross assets remitted, as required

under §1.987-5), which can inappropriately accelerate the recognition of section

987 gain or loss. If a section 987 QBU has

negative net equity, section 987 gain or

loss cannot be recognized under the earnings and capital method until the section

987 QBU terminates, which is inconsistent with the statutory requirement to recognize currency gain or loss on transfers

of property from the section 987 QBU.

However, the final regulations modify the existing framework of §1.987-4

to allow taxpayers that make a current

rate election to use certain elements of

the earnings and capital method in lieu

of preparing a tax basis balance sheet.2

These modifications are expected to minimize the compliance burden of transitioning from the 1991 proposed regulations to the final regulations. Under the

final regulations, if a current rate election

is in effect, OFCNV is computed by determining the aggregate basis of the QBU’s

assets, net of the QBU’s liabilities, in the

functional currency of the section 987

QBU (“QBU net value”) and translating

the QBU net value into the owner’s functional currency at the year-end spot rate.

See §1.987-4(e)(2)(i) and (ii). The final

regulations provide that QBU net value

can be computed without a tax basis balance sheet using the formula provided in

§1.987-4(e)(2)(iii).

The formula provided in §1.987-4(e)

(2)(iii) is modeled on the formula used

to track the equity pool under the 1991

proposed regulations, with certain modifications. Under this formula, the QBU net

value on the last day of the taxable year

is equal to the QBU net value at the end

of the preceding taxable year, adjusted by

transfers of assets and liabilities between

the section 987 QBU and its owner and

by income or loss of the section 987 QBU

(each determined in the section 987 QBU’s

functional currency). If a taxpayer determines QBU net value under §1.987-4(e)

(2)(iii), the taxpayer must retain the information used to determine QBU net value

for each taxable year in lieu of retaining

adjusted balance sheets. See §1.987-9(b)

(2).

2. Cumulative translation adjustment

Comments requested that taxpayers

be permitted to use the cumulative translation adjustment (“CTA”) determined

under U.S. generally accepted accounting principles (“U.S. GAAP”) to compute their unrecognized section 987 gain

or loss. Alternatively, some comments

recommended that taxpayers should be

allowed to use the CTA for this purpose

only with respect to small QBUs and subject to certain tax adjustments. One comment suggested that section 987 gain or

loss with respect to small QBUs should be

recognized when the CTA is included in

income from continuing operations under

U.S. GAAP.

The final regulations do not permit

taxpayers to use the CTA to determine

their net unrecognized section 987 gain or

loss. As explained in the preamble to the

2023 proposed regulations, section 987(3)

requires currency gain or loss to be recognized at the time of a remittance, rather

than when the CTA is included in income

for U.S. GAAP purposes. 88 FR 78141.

Moreover, the Treasury Department and

the IRS have determined that significant

differences may arise between the computation of the CTA for financial accounting purposes and the determination of

unrecognized section 987 gain or loss

under §1.987-4(d). For example, the CTA

is unlikely to reflect the correct amount

of currency gain or loss for tax purposes

because of book-to-tax differences in the

basis of assets or because certain items are

disregarded for tax purposes but regarded

for financial accounting purposes. If the

comment’s recommended approach were

adopted, complex rules would be needed

to adjust the CTA amount in order to

derive the correct amount to be recognized for tax purposes.

3. Simplified accounting for disregarded

transactions

A comment recommended that taxpayers that make a current rate elec-

Taxpayers would still need to track the gross assets of a section 987 QBU for other purposes, including the denominator of the remittance proportion under §1.987-5.

Bulletin No. 2025–3

321

January 13, 2025

tion should be permitted to determine

unrecognized section 987 gain or loss

for the taxable year by applying only

two steps: step 1 (determining the

change in OFCNV) and step 10 (reducing the amount determined in step 1 by

the change in QBU net value, translated

into the owner’s functional currency

at the yearly average exchange rate).

The recommended rule would have

the effect of accounting for all transfers between the owner and the section

987 QBU (which would otherwise be

accounted for under steps 2 through 5)

as part of step 10; consequently, the net

amount of all transfers would be translated at the yearly average exchange

rate. The comment posited that this

approach would simplify the computations for taxpayers with a high volume

of disregarded intercompany transactions.

The final regulations retain the

requirement to apply steps 2 through 5

when a current rate election is in effect.

Under these steps, transfers of marked

assets and liabilities between a section

987 QBU and its owner generally are

translated at the spot rate applicable on

the date of transfer. Because the applicable spot rate may differ significantly

from the yearly average exchange rate,

it would not be appropriate to account

for all transfers between a section 987

QBU and its owner by translating them

at the yearly average exchange rate

under step 10. The Treasury Department

and the IRS continue to study possible simplifications of §1.987-4 relating

to disregarded transactions between a

section 987 QBU and its owner, including whether, in certain circumstances,

unrecognized section 987 gain or loss

for a taxable year could be computed

using only steps 1 and 10. See §1.9872(f) of the 2024 proposed regulations

for proposed rules containing an election under which certain disregarded

transactions between a section 987 QBU

and its owner would not be taken into

account in computing unrecognized section 987 gain or loss.

B. Hedging Transactions

1. Comment on matching source and

character of section 988 gain or loss from

a hedging transaction with the source and

character of section 987 gain or loss

A comment recommended adoption of

a hedging rule under which a taxpayer that

hedges exchange rate risk with respect to

its net investment in a section 987 QBU

could match the source and character of

the section 988 gain or loss arising from

the hedging transaction with that of the

section 987 gain or loss attributable to the

hedged section 987 QBU. Alternatively,

the comment suggested that the hedging

transaction could be integrated with the

section 987 QBU, such that section 988

gain or loss with respect to the hedging

transaction would directly offset the section 987 QBU’s unrecognized section

987 gain or loss. The comment asserted

that implementing either of these recommended rules would mitigate the potential

for adverse consequences (or windfalls)

under section 987 when the owner’s foreign currency exposure is economically

hedged. The comment noted that these

rules would be particularly beneficial for

taxpayers that make a current rate election

and an annual recognition election (and

thus recognize section 987 gain or loss

whether or not there is a remittance).

2. Treatment of section 987 hedging

transactions under the final regulations

The Treasury Department and the IRS

agree with the comment that it would be

appropriate to permit symmetrical treatment of currency gain or loss with respect

to a net investment hedge and the hedged

section 987 QBU.3 Accordingly, §1.98714 of the final regulations provides new

rules that apply to certain identified hedging transactions entered into by the owner

of a section 987 QBU (“section 987 hedging transactions”).

Under §1.987-14(d), section 988 gain

or loss that would otherwise be recognized on a section 987 hedging transac-

tion (“hedging gain or loss”) is instead

taken into account in adjusting the owner’s unrecognized section 987 gain or loss

for the taxable year (as determined under

§1.987-4(d)). For example, if the owner

has unrecognized section 987 gain for the

taxable year under §1.987-4(d), the owner’s hedging loss reduces the unrecognized section 987 gain. However, hedging

loss cannot reduce unrecognized section

987 gain for the taxable year below zero,

and hedging gain cannot reduce unrecognized section 987 loss for the taxable year

below zero. This limitation ensures that

hedging gain or loss in excess of the currency exposure generated by the section

987 QBU for the taxable year is not taken

into account under section 987.

3. Requirements to qualify as a section

987 hedging transaction

A section 987 hedging transaction generally is defined as a financial instrument

(a “hedge”) entered into by the owner of a

section 987 QBU for the purpose of managing exchange rate risk with respect to

the owner’s net investment in the section

987 QBU as part of the normal course of

the owner’s trade or business. The hedge

may be entered into with an unrelated

counterparty or with a related person. For

example, a CFC that owns a section 987

QBU may enter into a hedge with its U.S.

parent, which has entered into a similar,

offsetting, transaction with a third party.

Several requirements must be met in

order for a hedge to qualify as a section

987 hedging transaction. First, the hedge

must be identified as a section 987 hedging transaction with respect to the hedged

QBU on or before the day the owner

enters into the hedge. See §1.987-14(b)

(2)(i) and (c). A hedge cannot be identified as a section 987 hedging transaction

with respect to more than one section 987

QBU. However, if a grouping election is

in effect under §1.987-1(b)(3)(ii), all section 987 QBUs that have the same functional currency will be treated as a single

section 987 QBU. The final regulations

also provide a special rule for cases in

The Treasury Department and the IRS previously published proposed regulations in the Federal Register on December 19, 2017 (82 FR 60135), which contained proposed rules relating to

the treatment of a net investment hedge for purposes of the business needs exception to the definition of foreign personal holding company income under section 954(c)(1)(D) and §1.954-2(g)

(2)(ii). Those proposed regulations would apply only for purposes of the business needs exception and do not address the potential for mismatches in other contexts.

3

January 13, 2025

322

Bulletin No. 2025–3

which a taxpayer fails to properly identify a hedge due to inadvertent error. See

§1.987-14(c)(2).

Second, a current rate election must be

in effect for the taxable year. See §1.98714(b)(2)(ii). In the absence of a current

rate election, gain or loss on a net investment hedge is unlikely to be comparable

in amount to the owner’s unrecognized

section 987 gain or loss, and thus the

rules of §1.987-14 would not serve their

intended function.

Third, the owner (and any members

of the same controlled group that are parties to the hedge) must account for section 988 gain or loss with respect to the

hedge under a mark-to-market method of

accounting (for example, under section

1256 or in reliance on proposed §1.9887). See §1.987-14(b)(2)(iii). As a result of

this requirement, foreign currency gain

or loss on the hedge will be taken into

account in the taxable year in which the

related currency gain or loss is determined

under §1.987-4(d).

Fourth, under U.S. GAAP, foreign currency gain or loss on the hedge must be

properly accounted for as a cumulative

foreign currency translation adjustment

to shareholders’ equity. See §1.987-14(b)

(2)(iv). This requirement helps to ensure

that the hedge is economically related to

the owner’s net investment in the section

987 QBU.

Fifth, the hedge must be entered into

by the owner of the section 987 QBU, and

not by a section 987 QBU of the owner

(that is, the hedge cannot itself be an asset

attributable to a section 987 QBU). See

§1.987-14(b)(2)(v).

Finally, an anti-abuse rule provides

that a hedge does not qualify as a section

987 hedging transaction if the hedge or a

related transaction is entered into with a

principal purpose of converting section

987 gain or loss into section 988 gain or

loss. See §1.987-14(b)(3). For example,

a taxpayer that owns a section 987 QBU

might enter into a hedging transaction

with a related party without hedging the

related party’s resulting exchange rate risk

(effectively shifting the exchange rate risk

without reducing the group’s overall foreign currency exposure) for the purpose of

taking the related foreign currency gain or

loss into account under section 988 (rather

than section 987). Under the anti-abuse

Bulletin No. 2025–3

rule, the net investment hedge would not

be treated as a section 987 hedging transaction.

4. Consolidated groups

With regard to consolidated groups (as

defined in §1.1502-1(h)), §1.987-14(b)(2)

(v) of the final regulations requires that

the same corporation be the owner of the

QBU and enter into the section 987 hedging transaction with respect to that QBU

(similar requirements apply when a member of a consolidated group engages in a

section 988(d) hedging transaction under

§1.988-5(a)(5)(v) or (b)(2)(i)(F)). The

Treasury Department and the IRS continue to study whether it would be possible to treat consolidated group members

as a single corporation for purposes of

§1.987-14 and the section 988(d) hedging

transaction rules without inappropriately

shifting income among members of the

group. See also TD 8400, 57 FR 9172,

9176 (soliciting comments on whether to

permit the rules of §1.988-5 to be applied

by treating consolidated group members

as a single corporation).

VI. Comments and Changes to

Proposed §1.987-5: Recognition of

Section 987 Gain or Loss

Proposed §1.987-5 provides rules for

determining the amount of section 987

gain or loss recognized by the owner of a

section 987 QBU.

Under proposed §1.987-5(a), when a

section 987 QBU makes a remittance, the

owner recognizes section 987 gain or loss.

In general, the amount recognized equals

the section 987 QBU’s net unrecognized

section 987 gain or loss multiplied by the

owner’s remittance proportion. The remittance proportion is determined in the owner’s functional currency; it is equal to the

amount of the remittance for the taxable

year, divided by the aggregate basis of the

section 987 QBU’s gross assets reflected

on its year-end balance sheet (without

reduction for the remittance). Proposed

§1.987-5(b). For a taxable year, the

amount of a remittance equals the excess

of (i) the aggregate of all amounts transferred from the section 987 QBU to the

owner during the taxable year; over (ii)

the aggregate of all amounts transferred

323

from the owner to the section 987 QBU

during the taxable year (each determined

in the owner’s functional currency). Proposed §1.987-5(c).

A comment noted that, for taxpayers with a high volume of disregarded

intercompany transactions, it can be difficult to track the amount of each transfer between the section 987 QBU and its

owner and to translate the transfer into

the owner’s functional currency at the

appropriate exchange rate. The comment

recommended that the amount of a remittance should be deemed to be equal to the

change in the QBU’s net value (if negative) for the taxable year.

Despite compliance and administrative

burdens that may result in certain cases

from tracking disregarded transfers for

purposes of determining the amount of a

remittance, it would not be appropriate to

determine the remittance amount based

solely on the negative change in net value

of a section 987 QBU. Such an approach

would not properly account for distributions out of a section 987 QBU’s current

year earnings. For example, if a section

987 QBU distributed an amount exactly

equal to its current year earnings, there

would be no change in the QBU’s net

value (and thus, no remittance) under the

comment’s recommended approach, even

if the QBU made a substantial distribution.

Section 987(3) and its legislative history

indicate that Congress intended for gain

or loss to be recognized on any remittance

from a section 987 QBU, without regard

to whether the remittance is sourced from

current year earnings, prior year earnings,

or capital contributions.

Nonetheless, the final regulations provide two modifications that are intended

to reduce the burden of tracking disregarded transfers for purposes of §1.987-5

while preserving consistency with the text

and purpose of section 987. First, the final

regulations provide an alternative formula

for computing the annual remittance that

is based on the comment’s recommended

approach (and does not require tracking

of individual transfers) but contains an

adjustment to account for remittances

out of current-year income. Under this

formula, the remittance amount is equal

to the negative change in net value of

the section 987 QBU (determined in the

QBU’s functional currency), adjusted for

January 13, 2025

income and loss of the section 987 QBU.

See §1.987-5(c)(2). Mathematically, this

formula will produce an amount that is

equal to the aggregate net transfer from

the section 987 QBU to its owner for the

taxable year.

Second, §1.987-5(b) and (c) provide

that the numerator and denominator of the

remittance proportion (that is, the amount

of the remittance and the section 987

QBU’s gross assets) are determined in the

section 987 QBU’s functional currency,

rather than the owner’s functional currency.

As a result, it is not necessary to separately

translate each transfer for purposes of

determining the annual remittance.

VII. Comments and Changes to

Proposed §1.987-6: Character and

Source of Section 987 Gain or Loss

A. Determining the Character and Source

of Section 987 Gain or Loss.

1. In general

Under proposed §1.987-6, section 987

gain or loss is assigned to the statutory

and residual groupings in two steps: an

initial assignment under proposed §1.9876(b)(2)(i), followed by a reassignment

described in proposed §1.987-6(b)(2)

(ii). The initial assignment is made using

the asset method under §§1.861-9(g) and

1.861-9T(g). It is made after the application of the income attribution rules of

§1.904-4(f)(2)(vi) or §1.951A-2(c)(7), but

before expenses are allocated and apportioned to gross income and before the

application of provisions that require a net

income computation. Section 987 gain or

loss may be reassigned if required after

the application of provisions that require

a net income computation. For example,

if an item of section 987 gain is initially

assigned to tentative tested income, it will

be reassigned to tested income or residual

income depending on whether the taxpayer has made the GILTI high-tax exclusion election and, if so, whether the item

(described in proposed §1.987-6(b)(2)

(iii)) is subject to a high rate of tax.

2. Asset method

The asset method under §§1.861-9 and

1.861-9T is intended to serve as an admin-

January 13, 2025

istrable proxy for a section 987 QBU’s historical earnings, in line with the statutory

requirement of section 987(3)(B) (which

provides that section 987 gain or loss is

sourced by reference to the source of the

income giving rise to post-1986 accumulated earnings). As explained in the preamble to the 2016 final regulations, it would

be complex and burdensome to source and

characterize section 987 gain or loss with

direct reference to post-1986 accumulated

earnings, and the gross assets of a section

987 QBU provide a reasonable proxy for

historical earnings that is relatively easy

to administer. 81 FR 88814.

A comment recommended that CFCs

which apportion interest expense using the

modified gross income method be permitted to use the same method to determine

the character and source of section 987

gain or loss (rather than using the asset

method under §§1.861-9(g) and 1.8619T(g)). According to the comment, the

asset method may not accurately reflect

the income earned by the CFC for the

taxable year, and section 987 losses often

could be allocated to a subpart F income

group in excess of the income recognized

in that group for the taxable year. The

comment noted that the use of the modified gross income method would be more

administrable and would more readily

allow section 987 losses to be used against

gross income recognized in the current

year, since the source and character of the

section 987 loss would be determined by

reference to the section 987 QBU’s gross

income for the current year.

The final regulations do not permit

CFCs to use the modified gross income

method to source and characterize section

987 gain or loss because the source and

character of a section 987 QBU’s gross

income may vary significantly from year

to year, including by reason of extraordinary events or as a result of tax planning.

Accordingly, the gross income earned in

a single year is not a sufficiently reliable

proxy for historical earnings for purposes

of section 987(3)(B).

3. Timing of source and character

determination

The 2023 proposed regulations provide that the initial assignment of section

987 gain or loss would generally be made

324

in the taxable year in which the section

987 gain or loss is treated as recognized,

deferred, or suspended. Proposed §1.9876(b)(1).

Comments requested that the character

and source of suspended section 987 loss

and deferred section 987 gain or loss be

determined in the year in which it is recognized, rather than in the year in which

it becomes suspended or deferred. The

comments noted that the proposed rules

would require extensive tracking of the

source and character of section 987 gain

or loss in multiple categories over multiple years. Comments also posited that the

potential for distortion due to changes in

the basis of a QBU’s assets or shifts in the

character of its income would be present

whether the section 987 gain or loss is

characterized in the taxable year in which

it becomes suspended or deferred or in the

taxable year in which it is recognized.

The final regulations retain the rules

of proposed §1.987-6(b)(1)(ii) and (iii),

under which suspended section 987 loss

and deferred section 987 gain or loss are

characterized in the year of suspension

and deferral, respectively, for several reasons.

First, making an initial assignment in

the taxable year of deferral or suspension

provides parity in the timing of the characterization of gains and losses (that is, both

gains and losses are characterized in the

year of a remittance or termination).

Second, this rule is expected to produce source and character determinations

that more closely align with the historical

income of the section 987 QBU during

the period in which the relevant section

987 gain or loss arose. Making an initial

assignment in the taxable year of deferral or suspension means that source and

character are determined by reference to

the assets of the section 987 QBU contemporaneously with the remittance or termination, while the affected assets are still

taken into account for purposes of applying the asset method under §§1.861-9 and

1.861-9T. By contrast, waiting until the

year of recognition would require deferred

section 987 gain or loss and (in some

cases) suspended section 987 loss to be

characterized after the section 987 QBU

has been terminated and its assets have

been transferred to a related party, which

could result in substantial distortions.

Bulletin No. 2025–3

Third, the timing rule of §1.987-6(b)

(1)(ii) is needed to facilitate the separate

application of the loss-to-the-extent-ofgain rule under §1.987-11(e) to section

987 gain or loss in each recognition

grouping. As explained in part X.B.3 of

this Summary of Comments and Explanation of Revisions, in order to prevent

taxpayers from avoiding the loss limitation through the selective recognition of

section 987 gains that are subject to a low

rate of tax (or are not subject to U.S. tax),

§1.987-11(e) provides that suspended section 987 loss in a recognition grouping

is not recognized until section 987 gain

in the same recognition grouping is recognized. For this rule to achieve its policy objective, suspended section 987 loss

must be sourced and characterized before

determining whether it can be recognized

under §1.987-11(e). If suspended section

987 loss were not characterized until the

year of recognition, there would be no

administrable way to identify suspended

section 987 loss in the relevant recognition grouping for purposes of §1.98711(e) because the source and character of

the suspended section 987 loss would not

yet have been determined.

Finally, in response to comments

regarding compliance burden generally,

the final regulations include a number of

new rules intended to simplify the tracking

of suspended section 987 loss or deferred

section 987 gain or loss. For instance, the

new de minimis rule (described in part

X.A.1 of this Summary of Comments and

Explanation of Revisions) is expected to

reduce the burden of tracking suspended

section 987 loss because section 987 loss

will be suspended only if it exceeds the

de minimis threshold (the lesser of $3

million or two percent of gross income).

See §1.987-11(c)(2). In addition, taxpayers that make the annual recognition election generally would not be subject to the

deferral and loss suspension rules (and

thus would not need to track deferred section 987 gain or loss or suspended section

987 loss). The lookback rule (described in

part X.B.1 of this Summary of Comments

and Explanation of Revisions) will permit

suspended section 987 loss to be recognized in the year of a remittance to the

extent of gain recognized during the lookback period, which will limit the amount

of suspended section 987 loss carried

Bulletin No. 2025–3

forward to future years. Additionally, the

new rules relating to the characterization

of section 987 gain or loss for purposes of

subpart F (described in part VII.B of this

Summary of Comments and Explanation

of Revisions) provide taxpayers more

flexibility in characterizing their section

987 gain and loss relating to subpart F

income groups, including an election that

will limit the number of subpart F income

groups for which tracking is required.

B. Characterization of Section 987 Gain

or Loss for Purposes of Subpart F

1. In general

Under proposed §1.987-6(b)(2)(i)(C),

section 987 gain or loss assigned to a subpart F income group is treated as foreign

currency gain or loss attributable to section 988 transactions not directly related

to the business needs of the CFC for purposes of section 954(c)(1)(D).

Some comments recommended that,

for subpart F purposes, section 987 gain

or loss should instead be assigned to the

same subpart F income groups as the

income generated by the section 987

QBU’s assets. The comments noted

that the recommended rule would better

align the characterization of section 987

gain or loss with the underlying assets

and income of the section 987 QBU and

would permit broader utilization of section 987 loss because the loss could be

netted against income in the same subpart

F income groups. One comment asserted

that the recommended rule would be more

consistent with section 987(3)(B), which

requires section 987 gain or loss to be

sourced by reference to the source of the

income giving rise to post-1986 accumulated earnings.

Other comments stated that section

987 gain or loss should not be treated as

foreign personal holding company income

described in section 954(c)(1)(D) because

section 954(c)(1)(D) refers to foreign currency gains or losses under section 988

and makes no reference to gain or loss recognized under section 987(3). One comment questioned whether section 987 gain

or loss should be assigned to any subpart

F income group because section 954 does

not explicitly identify section 987 gain as

a category of subpart F income.

325

Another comment requested that, if

proposed §1.987-6(b)(2)(i)(C) is retained

for taxpayers applying the default rules, a

different rule should be provided for taxpayers that make a current rate election

(under which all assets and liabilities of

a section 987 QBU give rise to currency

gain or loss). A comment also recommended that, if proposed §1.987-6(b)(2)

(i)(C) is retained, the final regulations

should clarify that, for taxpayers predominantly engaged in the active conduct of

a banking, insurance, financing, or similar

business, section 987 gain or loss that is

assigned to a subpart F income group is

treated as financial services income within

the meaning of section 904(d)(2)(C).

Other comments requested that, if section 987 gain or loss is treated as gain or

loss from section 988 transactions not

directly related to the business needs of

the CFC, taxpayers should be permitted to

use the elections available under §1.9542(g)(3) (characterizing section 988 gain or

loss that arises from a specific category of

subpart F income as gain or loss in that

category) and §1.954-2(g)(4) (treating all

section 988 gain or loss as foreign personal

holding company income). One comment

recommended that, for purposes of the

election under §1.954-2(g)(3), section 987

gain or loss should be allocated to categories of foreign base company income

on a proportionate basis without requiring

direct tracing of section 987 gain or loss to

specific transactions or assets.

The final regulations retain the

approach in the 2023 proposed regulations and treat section 987 gain or loss

as subpart F income to the extent that the

assets of the section 987 QBU generate

subpart F income under the asset method

of §§1.861-9(g) and 1.861-9T(g). See

§1.987-6(b)(2)(i)(A). However, the Treasury Department and the IRS agree with

the comments that assigning section 987

gain or loss to the same subpart F income

groups as the income generated by the

section 987 QBU’s assets is most consistent with the principles of section 987(3)

(B) and is therefore the most appropriate

exercise of authority under sections 987(3)

and 989(c). Accordingly, under the final

regulations, the characterization of section

987 gain or loss is determined under the

general rule of §1.987-6 using the asset

method of §§1.861-9(g) and 1.861-9T(g),

January 13, 2025

including by assigning section 987 gain or

loss to subpart F income groups. Thus, for

example, if a QBU’s assets generate foreign base company sales income, the section 987 gain or loss will be characterized

as foreign base company sales income.

The Treasury Department and the IRS

do not agree with the suggestion that section 987 gain or loss cannot give rise to

subpart F income merely because section

954 does not explicitly identify section

987 gain as a separate category of subpart

F income. Section 987(3) requires “proper

adjustments (as prescribed by the Secretary)” to taxable income of the owner of

a section 987 QBU. Further regulatory

authority is provided in section 989(c).

The adjustments required under section

987(3) include sourcing gain or loss recognized on a remittance by reference to

the QBU’s historical earnings under section 987(3)(B). This sourcing rule serves

to characterize the adjustments to income

under section 987(3) in the same way

as the QBU’s underlying income. Similarly, when a QBU’s income is taken into

account in determining the owner’s subpart F income, proper adjustments must

necessarily include adjustments to that

type of income. Therefore, section 987

gain or loss must be characterized as foreign personal holding company income or

other types of income described in section

952(a), in appropriate circumstances, to

effectuate the intent of Congress reflected

in the broader statutory scheme.

2. Election to treat certain section

987 gain or loss as foreign currency

gain or loss attributable to section 988

transactions

In the case of section 987 gain or loss

that would otherwise be characterized as

passive foreign personal holding company income, the final regulations provide an election to treat the section 987

gain or loss as foreign currency gain or

loss of the CFC-owner that is attributable

to section 988 transactions not directly

related to the business needs of the CFC

(the “section 988 characterization election”). See §1.987-6(b)(2)(i)(C)(1). This

election is intended to benefit taxpayers

because it would generally allow section

987 gains and losses assigned to passive

foreign personal holding company income

groups, which would otherwise be treated

as separate items (or as allocable to separate items) of passive foreign personal

holding company income under the rules

in §1.954-1(c)(1)(iii)(B), to be treated as

part of (or allocable to) a single item of

income. This would generally facilitate

some netting of the CFC-owner’s section

987 gains and losses (because they would

be assigned to the same item of income)

and would also generally permit a CFCowner to net its foreign currency gains and

losses from section 988 transactions with

the section 987 gain or loss from its QBUs

(to the extent both comprise passive foreign personal holding company income).

Similarly, the section 988 characterization

election should, in many cases, reduce the

number of recognition groupings under

§1.987-11(f), thereby simplifying the

application of the loss-to-the-extent-ofgain rule and minimizing the tracking burden with respect to any suspended losses.

Section 987 gain or loss subject to the

section 988 characterization election is

not eligible for the business needs exception under §1.954-2(g)(2) because this

election applies only to section 987 gain

or loss that would otherwise be characterized by reference to assets that give rise to

passive foreign personal holding company

income. The business needs exception is

available only for foreign currency gain or

loss arising from a transaction or property

that does not give rise to subpart F income

(which includes foreign personal holding

company income). See §1.954-1(g)(2)(ii)

(B)(1)(ii).

Similarly, section 987 gain or loss subject to the section 988 characterization

election is not eligible for the election in

§1.954-2(g)(3) (election to characterize

foreign currency gain or loss that arises

from a specific category of subpart F

income as gain or loss in that category).

The §1.954-2(g)(3) election applies only

to gain or loss that is related to income

categories described in the foreign base

company income groups of §1.954-1(c)

(1)(iii)(A)(1) or (2) or the other subpart

F income categories described in section

952(a); it does not apply to gain or loss

related to passive foreign personal holding

company income.4 By contrast, the section 988 characterization election applies

only to section 987 gain or loss that would

otherwise be characterized by reference

to assets that give rise to passive foreign

personal holding company income. Thus,

the two elections are mutually exclusive

by their terms.

Finally, section 987 gain or loss subject

to the section 988 characterization election

is not eligible for the election in §1.9542(g)(4) (election to treat all foreign currency gains or losses as foreign personal

holding company income). Extending the

§1.954-2(g)(4) election to section 987

gain or loss could permit inappropriate

use of section 987 losses and would be

inconsistent with the limited purpose of

the section 988 characterization election.

Therefore, if an election is in effect under

§1.954-2(g)(3) or (4), the foreign currency

gain or loss to which the election applies

is simply determined without regard to the

section 987 gain or loss treated as foreign

currency gain or loss attributable to a section 988 transaction by reason of the section 988 characterization election.

C. GILTI High-Tax Exclusion

Under the 2023 proposed regulations,

for purposes of applying the high-tax

exclusion in §1.951A-2(c)(7) (the “GILTI

HTE”), all section 987 gain and loss in a

tentative tested income group that is recognized by a CFC in a taxable year is

treated as a single tentative tested income

item that is treated as recognized by a

tested unit separate from the CFC’s other

tested units. Proposed §1.987-6(b)(2)(iii).

As a result, section 987 gain or loss is not

taken into account in applying the GILTI

HTE with respect to the CFC’s other

items of tentative tested income. Instead,

the GILTI HTE is applied separately to

section 987 gain and loss and, as a result,

section 987 gain or loss generally will not

be eligible for the GILTI HTE unless the

CFC is subject to foreign tax on currency

gain recognized with respect to its interest

in the QBU under the applicable foreign

tax rules. See proposed §1.987-6(b)(3).

While §1.954-1(c)(1)(iii)(A)(1) includes categories of foreign personal holding company income, it expressly excludes passive foreign personal holding company income, which is described

in §1.954-1(c)(1)(iii)(B). Therefore, the two elections apply to mutually exclusive income groups.

4

January 13, 2025

326

Bulletin No. 2025–3

Some comments noted that these rules

would preclude the application of the

GILTI HTE with respect to section 987

gain of a CFC even if the CFC’s section

987 QBUs are operating in jurisdictions

subject to a high foreign tax rate. Another

comment noted that the proposed rules

would treat section 987 gain or loss differently from currency gain or loss recognized under section 988 (for example,

section 988 gain or loss on a net investment hedge with respect to the section

987 QBU) and would make it difficult to

project a taxpayer’s effective tax rate due

to the unpredictability of exchange rate

fluctuations. This comment recommended

that proposed §1.987-6(b)(2)(iii) be modified to provide that (i) section 987 gain

and loss is taken into account in determining the effective tax rate under §1.951A2(c)(7)(vi) and (ii) section 987 gain or loss

associated with highly taxed tested units is

excluded from the computation of tested

income.

The final regulations retain the rule

that section 987 gain or loss is treated as

a single tentative tested income item that

is separate from the CFC’s other tested

units. See §1.987-6(b)(2)(iii). Although

section 987 gain or loss is characterized

by reference to the historical earnings of

the section 987 QBU, which may correspond to one or more tested units, it is

not equivalent to current year income or

loss attributable to a tested unit. Section

987 gain or loss is not properly attributable to the tested unit that corresponds to

the section 987 QBU or to the CFC tested

unit, because in most cases neither the

tested unit’s country of residence nor the

CFC’s country of residence will take the

section 987 gain or loss into account in

determining foreign gross income. Therefore, attributing section 987 gain or loss

to either tested unit would tend to be distortive and generally would not further the

goals of the high-tax exclusion.5

In addition, treating section 987 gain

or loss as a single item of tentative tested

income, as if it were attributable to a separate tested unit (distinct from the section

987 QBU), is consistent with the determination that a branch comprises a separate tested unit, even if it is not a tax resident of the foreign country in which it is

located, if the income of the branch is subject to an exclusion, exemption, or other

similar relief (such as a preferential rate)

in the CFC’s country of tax residence. See

§1.951A-2(c)(7)(iv)(A)(3). Section 987

gain or loss is currency gain or loss of the

owner of the QBU, and these gains and

losses are generally not subjected to residency-based taxation in either the country of the QBU or the country in which

the CFC is a resident. Therefore, the section 987 gains and losses of the CFC are

functionally equivalent to gain or loss of

a branch that is not a tax resident in any

country and whose income is not subject

to residency-based taxation in the CFC’s

country of tax residence.

Accordingly, it is appropriate to test

the effective rate of foreign tax on section

987 gains and losses as a separate item of

tentative tested income. The alternative

approach recommended by a comment

(which would incorporate section 987

gain or loss in the tested units that correspond to the section 987 QBU) would distort the effective tax rate computation with

respect to a CFC’s other income because

section 987 gain or loss typically is not

subject to foreign tax. These distortions

could be favorable or unfavorable to taxpayers, depending on the circumstances.

Moreover, the comment’s recommended

approach would complicate the ordering

rules and mechanics needed to apply the

loss-to-the-extent-of-gain rule of §1.98711(e) with respect to section 987 gain or

loss assigned to a tested income group,

which would increase the administrative

and compliance burden of the section 987

regulations.

The approach set forth in the proposed

regulations is also most consistent with

the policy underlying the determination

of an appropriate “item” of income for

purposes of applying the high-tax exception under section 954(b)(4) as is reflected

in the legislative history to that section,

which directs the Treasury Department

and the IRS to allow reasonable groupings

of items of income that are substantially

taxed at the same rate in a single country. See H.R. Rept. No. 99–426, at 400–

01 (1985) (‘‘Although this rule applies

separately with respect to each ‘item of

income’ received by a [CFC], the committee expects that the Secretary will provide

rules permitting reasonable groupings of

items of income that bear substantially

equal effective rates of tax in a given

country. For example, all interest income

received by a [CFC] from sources within

its country of incorporation may reasonably be treated as a single item of income

for purposes of this rule, if such interest

is subject to uniform taxing rules in that

country.’’). The Treasury Department and

the IRS have determined that section 987

gains and losses are likely to be taxed at

a different rate of tax than other income

generally subject to tax either in the country of the tested unit or in the country of

residence of the CFC and therefore should

reasonably be grouped and tested as a separate “item” of income for this purpose.

As noted in a comment, for purposes of

the GILTI HTE, the final regulations treat

section 987 gain or loss differently from

section 988 gain or loss on a net investment hedge. However, the new hedging

rule in §1.987-14 will enable taxpayers to

account for the hedge as an adjustment to

unrecognized section 987 gain or loss, as

described in part V.B of this Summary of

Comments and Explanation of Revisions.

VIII. Comments and Changes to

Proposed §§1.987-7A, 1.987-7B, and

1.987-7C— Partnerships

A. Partnership Rules Under the 2023

Proposed Regulations

The 2023 proposed regulations (and

the 2016 final regulations) generally

would apply aggregate theory to partnerships wholly owned by related persons

(“section 987 aggregate partnerships”).

See proposed §1.987-7B. Under pro-

While the legislative history relating to the GILTI high-tax exclusion indicates that high-taxed income does not present base erosion concerns, the policy rationale underlying that view does

not extend to excluding low-taxed income from GILTI merely because it may be earned by an entity that also earns high-taxed income. See S. Comm. on the Budget, Reconciliation Recommendations Pursuant to H. Con. Res. 71, S. Print. No. 115–20, at 371 (2017) (‘‘The Committee believes that certain items of income earned by CFCs should be excluded from the GILTI

[regime], either because they should be exempt from U.S. tax—as they are generally not the type of income that is the source of the base erosion concerns—or are already taxed currently by

the United States. Items of income excluded from GILTI because they are exempt from U.S. tax under the bill include foreign oil and gas extraction income (which is generally immobile)

and income subject to high levels of foreign tax.’’).

5

Bulletin No. 2025–3

327

January 13, 2025

posed §1.987-1(b)(5)(ii), each partner

in a section 987 aggregate partnership

would be treated as an indirect owner of

the partnership’s eligible QBUs (and a

section 987 aggregate partnership is not

itself a QBU under section 989(a)). Thus,

exchange gain or loss under section 987

would be measured from the perspective

of the partners (rather than the partnership). The aggregate approach would

serve to prevent a group of related parties

from holding an eligible QBU through

a partnership (rather than owning it

directly) in order to change the section

987 treatment of the eligible QBU without meaningfully altering the group’s

economic position.

The 2023 proposed regulations would

provide a different set of rules for partnerships that are not wholly owned by related

partners. See proposed §1.987-7A. For

these partnerships, the 2023 proposed regulations would apply a hybrid approach to

entity theory, under which unrecognized

section 987 gain or loss of the partnership’s eligible QBUs for a taxable year

is determined at the partnership level and

then allocated to the partners for purposes

of computing the pool of net unrecognized

section 987 gain or loss. Any section 987

gain or loss would be recognized and

taken into account at the partner level.

The preamble to the 2023 proposed

regulations notes that the Treasury Department and the IRS considered whether it

would be appropriate to apply a hybrid

approach to all partnerships, regardless

of whether the partners are related. 88

FR 78147 through 78148. The preamble explains that such an approach might

reduce the complexity and compliance

burden of the section 987 regulations, but

that it could permit taxpayers to manipulate the application of section 987 by holding a section 987 QBU through a partnership rather than holding it directly. Id. at

78148.

The 2023 proposed regulations would

not provide rules relating to a partner’s

application of section 987 with respect to

a partnership that uses a different functional currency (which creates a separate

layer of currency exposure). However, the

preamble to the 2023 proposed regulations discusses alternative methodologies

under which the partners could determine

and recognize section 987 gain or loss

January 13, 2025

with respect to their partnership interests.

88 FR 78148 through 78149.

B. Partnership Rules in the Final

Regulations

1. In general

The Treasury Department and the

IRS continue to study the appropriate

treatment of partnerships for purposes

of section 987 and, accordingly, the final

regulations do not provide detailed rules

concerning the determination of section

987 taxable income or loss and section

987 gain or loss in the case of a partnership. The final regulations also reserve on

the treatment of a partnership as a QBU

under section 989(a) and §1.989(a)-1(b)

(2)(i). See §1.989(a)-1(b)(2)(i)(C).

Only one comment regarding partnerships was received in response to the 2023

proposed regulations. The portions of the

comment that relate to partnership rules

that are not included in the final regulations have not been adopted because they

are outside the scope of these regulations.

The Treasury Department and the IRS

expect to address these issues in future

guidance.

Pending future guidance, taxpayers

must apply sections 987 and 989(a) with

respect to partnerships using a reasonable

method consistent with the statute. For

example, if a domestic corporation owns

an interest in a foreign partnership (which

would use the euro as its functional currency if it is treated as a QBU under section 989(a)), and the partnership owns an

eligible QBU that uses the Swiss franc as

its functional currency, the domestic corporation may apply section 987 to the eligible QBU under an aggregate approach.

Alternatively, under an entity approach,

the partnership could be treated as a section 987 QBU of the domestic corporation,

and the eligible QBU could be treated as

a section 987 QBU of the partnership. The

domestic corporation could also apply a

hybrid approach under the principles of

the 2023 proposed regulations. However,

taxpayers will not be considered to have

applied a reasonable method unless they

apply the same method consistently from

year to year with respect to a particular

partnership or eligible QBU. Members

of a controlled group that are partners in

328

the same partnership must apply the same

method with respect to a particular partnership or eligible QBU, but unrelated

partners are not subject to a consistency

requirement. See §1.987-7(b).

2. Application of the final regulations to

partnerships

Although section 987 applies to partnerships, only certain parts of the final

regulations apply to partnerships. See

§1.987-7(b) and (c). In particular, the rules

relating to suspended section 987 loss in

§§1.987-11 and 1.987-13 apply to partnerships, and the deferral rules of §1.987-12

continue to apply to partnerships, with

certain modifications. See §1.987-7(c)(2)

(i) and (d). These rules are needed to prevent the selective recognition of losses.

In addition, the final regulations provide

that an annual recognition election and a

section 988 mark-to-market election can

be made with respect to a partnership

(whether an aggregate or entity approach

is applied). See §1.987-7(c)(2)(ii) and (iii).

These elections are expected to reduce the

compliance burden of applying section

987 in the partnership context.

Similarly, the rules for determining the

source and character of section 987 gain

or loss under §1.987-6 apply to partnerships, in order to facilitate application of

the loss-to-the-extent-of-gain rule. See

§1.987-7(c)(2)(i). A comment suggested

that special rules should apply to determine the source and character of section

987 gain or loss recognized in connection

with the sale or redemption of a partnership interest under the principles of

§1.864(c)(8)-1. The final regulations do

not adopt this approach because it would

be inconsistent with section 987(3)(B)

(under which section 987 gain or loss is

sourced by reference to historical earnings) and could allow taxpayers to manipulate the source and character of section

987 gain or loss.

Because the section 987 regulations

generally do not apply to partnerships,

the general rules of the section 987 regulations must be adapted as necessary to

apply §1.987-7 and the other applicable

provisions to partnerships. See §1.9877(c)(3). The rules must also be applied in

this manner to an S corporation, which is

treated the same way as a partnership for

Bulletin No. 2025–3

purposes of the section 987 regulations.

See §1.987-7(f).

with the scope of the loss suspension rule

in §1.987-11(c)(1).

or loss (including the effects of section

704(d)).

3. Loss suspension rule

4. Adjustments to the basis of a partner’s

interest in the partnership

5. Other special rules for partnerships

Under the final regulations, the general loss suspension rule in §1.987-11(c)

(1) does not apply to partnerships. See

§1.987-7(d)(1)(i). Instead, section 987

loss generally will be suspended in the

taxable year in which it would otherwise

be recognized under the method used by

the taxpayer to apply section 987 with

respect to the partnership. See §1.987-7(d)

(1)(ii). The loss suspension rule of §1.9877(d)(1)(ii) applies to an eligible QBU that

is directly owned by a partnership, regardless of whether an aggregate approach, an

entity approach, or a hybrid approach is

applied. See §1.987-7(d)(1)(ii)(A). However, if a partnership is itself treated as a

section 987 QBU of its partners under an

entity approach, the loss suspension rule

applies only if at least 95% of the capital and profits interests in the partnership

are owned by related persons. See §1.9877(d)(1)(ii)(B). This limitation is intended

to reduce the complexity and compliance

burden of the section 987 regulations for

partnerships owned by unrelated persons.

The final regulations provide several

other exceptions to the loss suspension

rule of §1.987-7(d)(1)(ii). First, section

987 loss with respect to an eligible QBU

owned by a partnership is not suspended

if section 987 is consistently applied using

a method under which section 987 gain or

loss does not arise with respect to historic

items (for example, a method that follows

the principles of §§1.987-3 through 1.9875, under which historic items are assigned

a historic rate, such that their balance

sheet value does not change in response

to changes in the value of the section 987

QBU’s functional currency). See §1.9877(d)(2)(i). Second, section 987 loss is not

suspended if an annual recognition election is in effect. See §1.987-7(d)(2)(ii).

Finally, section 987 loss is not suspended

if the de minimis rule in §1.987-11(c)(2)

applies (that is, if the amount of section

987 loss subject to suspension does not

exceed the lesser of $3 million or two percent of gross income, as described in part

X.A.1 of this Summary of Comments and

Explanation of Revisions). See §1.9877(d)(2)(iii). These rules generally align

Bulletin No. 2025–3

The proposed regulations would provide that a partner’s basis in a partnership

is adjusted when the partner recognizes

section 987 gain or loss, defers section

987 gain or loss, or suspends section 987

loss attributable to the partnership. Proposed §1.987-7A(e). This rule is intended

to avoid duplication of section 987 gain

or loss (for example, when the partnership interest is sold). The final regulations

retain this rule for taxpayers that apply

section 987 using a method that results in

recognition, deferral, or suspension of section 987 gain or loss at the partner level.

Under §1.987-7(e), the partner’s basis in

its partnership interest is adjusted under

the principles of section 705 as though the

section 987 gain or loss was part of the

partner’s distributive share of partnership

items. See §1.987-7(e).

A commenter requested clarification

concerning the interaction of this basis

adjustment rule with section 704(d). Section 704(d)(1) provides that a partner’s

distributive share of partnership loss

(including capital loss) shall be allowed

only to the extent of the basis of that partner’s interest in the partnership at the end

of the partnership year in which such loss

occurred. Section 704(d)(2) provides for

the carryover of the excess of any loss

over such basis to the next taxable year. To

the extent that basis is available in the next

taxable year, the partner is able to take the

loss into account. Relatedly, the partner

will decrease the adjusted basis in its partnership interest to the extent that any loss

carryover is taken into account within the

taxable year. See section 705(a)(2).

The final regulations clarify that the

principles of section 704(d) are applied as

though items of section 987 loss, deferred

section 987 loss, or suspended section

987 loss were part of the partner’s distributive share of partnership items. See

§1.987-7(e). The basis adjustment rule

in §1.987-7(e) is intended to replicate

the basis adjustments that would occur if

the relevant section 987 gain or loss was

taken into account as part of the partner’s

distributive share of partnership income

329

The final regulations contain several

other rules that facilitate the application of

section 987 to partnerships. If a partner in a

partnership is treated as the owner of a section 987 QBU directly owned by the partnership (for example, under an aggregate

approach), §1.987-7(c)(3)(ii) provides a

special rule that is used to determine the

members of the owner’s controlled group

for purposes of §§1.987-12 and 1.98713. Under this rule, any member of the

partnership’s controlled group is treated

as a member of the partner’s controlled

group so long as the partner continues to

be a partner in the partnership. Thus, for

example, if the partnership contributes

the section 987 QBU’s assets to a wholly

owned subsidiary of the partnership, the

subsidiary will be treated as a member of

the partner’s controlled group and the contribution may be treated as a deferral event

for purposes of §1.987-12.

When a partnership is itself treated as a

QBU of a partner that is subject to section

987, and the partnership is not engaged in

any trade or business (for example, a partnership that functions as a holding company), the rules of §1.987-13(b) through

(d) do not apply. Those rules are designed

to attribute suspended section 987 loss to a

successor suspended loss QBU if the assets

of a section 987 QBU continue to be used

in the same trade or business by a member

of the controlled group, and they trigger

the recognition of suspended section 987

loss if the section 987 QBU terminates

without a successor. However, when a

QBU that has suspended section 987 loss

is not engaged in any trade or business, the

rules of §1.987-13(b) through (d) would

not result in the appropriate recognition of

suspended section 987 loss and could be

prone to manipulation. Accordingly, the

suspended section 987 loss can be recognized only under the loss-to-the-extent-ofgain rule of §1.987-11(e).

The transition rules in §1.987-10 do

not apply to partnerships. Instead, the

applicable rules of the section 987 regulations take effect on the transition date with

respect to section 987 gain or loss determined and recognized under the taxpay-

January 13, 2025

er’s existing method. In addition, taxpayers may not apply the fresh start transition

method with respect to a partnership. As

explained in the preamble to the 2023 proposed regulations, the fresh start transition

method is no longer available because

that method results in the elimination of

pretransition gain or loss, and (if it were

available) it could be opportunistically

used by taxpayers to eliminate their pretransition gain. 88 FR 78150 and 78156.

The final regulations also clarify that

the rule in §1.988-1(a)(10)(i), which provides that transactions between a taxpayer

and its QBU generally are not section 988

transactions, applies only to disregarded

transactions. Thus, a nonfunctional currency transaction between a partner and a

partnership could be treated as a section

988 transaction even though the partnership is treated as a QBU subject to section

987.

IX. Comments and Changes to

Proposed §1.987-10: Transition Rules

Proposed §1.987-10 would provide

transition rules for the first year in which

the section 987 regulations are applicable. In particular, proposed §1.987-10(e)

would provide rules for determining and

recognizing pretransition gain or loss with

respect to each of a taxpayer’s QBUs.

A. Computation of Pretransition Gain or

Loss

1. Taxpayers that applied section 987

using an eligible pretransition method

Under the 2023 proposed regulations,

the computation of pretransition gain or

loss would differ depending on how the

taxpayer applied section 987 before the

transition date. If the taxpayer applied

section 987 to a section 987 QBU using

an eligible pretransition method (as

described in part IX.B of this Summary

of Comments and Explanation of Revisions), the owner would use that method

to compute pretransition gain or loss.

Proposed §1.987-10(e)(2). The owner’s

pretransition gain or loss would be equal

to the amount of section 987 gain or loss

that it would have recognized under the

eligible pretransition method if the QBU

terminated on the day before the transition

January 13, 2025

date, with certain adjustments. Proposed

§1.987-10(e)(2)(i)(A).

Under proposed §1.987-10(e)(2)(i)

(B), the amount of pretransition gain or

loss would be increased or reduced by

the owner functional currency net value

adjustment (“OFCNV adjustment”),

which reflects any change to the basis of

the section 987 QBU’s assets (net of liabilities) that occurs as a result of the transition. For example, if a taxpayer applied

an earnings only method under which

currency gain or loss on the QBU’s capital was not recognized at the time of a

remittance but was separately tracked and

accounted for in determining the basis of

distributed assets, the currency gain or

loss on capital would be accounted for as

part of the OFCNV adjustment.

Two comments were received relating

to the OFCNV adjustment. One comment requested that taxpayers be permitted to use the CTA prepared for financial

accounting purposes rather than making

the OFCNV adjustment. The comment

asserted that taxpayers applying an earnings only method might not have the information necessary to compute the OFCNV

adjustment.

The final regulations do not permit taxpayers to use the CTA in lieu of making

the OFCNV adjustment. As explained

in part V.A.2 of this Summary of Comments and Explanation of Revisions, the

CTA amount may be substantially different from the amount of section 987 gain

or loss that is properly taken into account

for tax purposes. Moreover, it should not

be unduly burdensome for a taxpayer to

compute the OFCNV adjustment because

the relevant information is already needed

to apply the taxpayer’s existing pretransition method.

Another comment recommended that,

in the case of taxpayers applying an earnings only method, currency gain or loss

with respect to the QBU’s capital should

not be taken into account in determining

pretransition gain or loss (which is ultimately recognized as section 987 gain

or loss after the transition date). The

comment noted that taxpayers may have

adopted the earnings only method to

reduce the size of their section 987 gain

or loss pools and that the earnings only

method serves to mitigate the potential for

selective recognition of large section 987

330

losses. Therefore, the comment requested

that the OFCNV adjustment instead be

taken into account as an adjustment to

asset basis.

The Treasury Department and the

IRS agree that, for taxpayers applying an

earnings only method, accounting for the

OFCNV adjustment in determining the

basis of a section 987 QBU’s assets would

produce a reasonable result that is consistent with these taxpayers’ pretransition

method. Accordingly, under the final regulations, if a taxpayer applied an earnings

only method before the transition date and

does not make a current rate election for

the taxable year beginning on the transition date, the historic rate assigned to the

section 987 QBU’s historic assets (other

than inventory) is equal to the exchange

rate that would have been used to translate

those assets if they had been distributed to

the owner on the day before the transition

date (the “pretransition translation rate”).

See §1.987-10(d)(3)(ii). As a result, no

OFCNV adjustment is made with respect

to those assets, but currency gain or loss

related to those assets will be accounted

for as the assets are sold or depreciated

under §1.987-3. For taxpayers that make

a current rate election (and thus will not

take historic rates into account under

§1.987-3), currency gain or loss on the

QBU’s capital must be accounted for in

determining pretransition gain or loss. See

§1.987-10(d)(3)(i) and (e)(2)(i)(B).

A comment raised a question as to

whether the delegation of regulatory

authority under section 987(3) is self-executing. The comment suggested that, if

section 987(3) is not self-executing, then

it might not be appropriate to attribute

pretransition gain or loss to taxpayers that

have not accounted for section 987 gain

or loss before the transition date. The

Treasury Department and the IRS have

concluded that section 987(3) is self-executing because it provides a mandatory

delegation under which the Secretary is

directed to determine how (rather than

whether) the owner of a section 987 QBU

should make proper adjustments in computing its taxable income. See, e.g., 15

W. 17th St. LLC v. Commissioner, 147

T.C. 557 (2016) (articulating standard for

determining whether a statute is self-executing in the absence of regulations);

Est. of Neumann v. Commissioner, 106

Bulletin No. 2025–3

T.C. 216 (1996) (holding delegation was

self-executing because it related to how,

rather than whether, the statute applied).

Therefore, taxpayers currently are obligated to determine section 987 gain or loss

in a reasonable manner and must account

for pretransition gain or loss once the regulations become applicable.

2. Taxpayers that did not apply section

987 using an eligible pretransition

method

Under proposed §1.987-10(e)(3),

taxpayers that did not apply an eligible

pretransition method would be required

to determine pretransition gain or loss

by applying a simplified version of the

computation described in §1.987-4(d) to

determine unrecognized section 987 gain

or loss (“annual unrecognized section 987

gain or loss”) for each taxable year since

the section 987 QBU’s inception. Proposed §1.987-10(e)(3)(iii). Pretransition

gain or loss would be reduced by any section 987 gain or loss recognized before the

transition date. Proposed §1.987-10(e)(3)

(ii)(B).

Comments asserted that the method

provided in proposed §1.987-10(e)(3)

could be burdensome to apply and difficult to administer. Some comments recommended that taxpayers should not be

required to compute annual unrecognized

section 987 gain or loss for each taxable

year since the QBU’s inception. Instead,

the comments suggested that the final regulations provide a reasonable cutoff date

before which pretransition gain or loss

would not be computed. Another comment

requested that taxpayers be permitted to

determine pretransition gain or loss using

the earnings and capital method described

in the 1991 proposed regulations, as this

would avoid the need to prepare tax basis

balance sheets. A further comment recommended adoption of a de minimis rule for

taxpayers with minimal pretransition gain

or loss.

The Treasury Department and the IRS

agree that, when a QBU has been operating for a long period, computing annual

unrecognized section 987 gain or loss for

all taxable years since the QBU’s incep-

6

tion could be burdensome. Accordingly,

the final regulations provide a cutoff date

of September 7, 2006, which is the date

on which proposed section 987 regulations were published in the Federal Register (71 FR 52876) (the “2006 proposed

regulations”). Under the final regulations,

taxpayers that did not apply an eligible

pretransition method must compute pretransition gain or loss only for taxable

years beginning on or after September 7,

2006. The publication date of the 2006

proposed regulations is an appropriate

cutoff date for this purpose because the

2006 proposed regulations contained transition rules that were conditioned on the

application of section 987 using a reasonable method. See §1.987-10(a)(2) of the

2006 proposed regulations.

The final regulations also provide a de

minimis rule to reduce the compliance

burden on small businesses that own section 987 QBUs.6 Under the de minimis

rule, a qualifying taxpayer may elect to

treat all QBUs that fall below the de minimis threshold as having no pretransition

gain or loss. To qualify for the de minimis rule, the owner of a section 987 QBU

must have gross receipts that fall below

the threshold for the small business exception in section 163(j)(3) (that is, the owner

must have gross receipts of $25 million

or less, indexed to inflation and averaged

over the prior 3-year period). If this test

is met, the de minimis rule applies to any

section 987 QBU with gross assets of less

than $10 million (averaged over the same

3-year period and taking into account the

assets of all section 987 QBUs in the same

country that are owned by the same owner

or a member of its controlled group).

The final regulations do not permit taxpayers to apply an earnings and capital

method in lieu of computing annual unrecognized section 987 gain or loss under

§1.987-10(e)(3). However, as explained

in part V.A.1 of this Summary of Comments and Explanation of Revisions, the

rules for computing unrecognized section

987 gain or loss for a taxable year under

§1.987-4(d) have been modified so that

they can be applied without the need for

tax basis balance sheets. As a result, the

method provided in §1.987-10(e)(3) can

similarly be applied without tax basis balance sheets (that is, by computing QBU

net value using the formula provided in

§1.987-4(e)(2)(iii)).

B. Definition of an Eligible Pretransition

Method

Under the 2023 proposed regulations,

an eligible pretransition method would

be defined to include a reasonable application of the earnings and capital method

described in the 1991 proposed regulations, any other reasonable method that

produces the same total amount of income

as the earnings and capital method over

the life of the owner, or an earnings only

method that does not produce the same

total amount of lifetime income as an

earnings and capital method (subject to

certain restrictions, including a consistency requirement). Proposed §1.98710(e)(4)(i) through (iii). The owner must

have applied the eligible pretransition

method with respect to each taxable year

beginning before the transition date in

which it was the owner of the section 987

QBU. Proposed §1.987-10(e)(4). For this

purpose, a method under which the owner

of a section 987 QBU defers the recognition of section 987 gain or loss until the

section 987 QBU is terminated, sold, or

liquidated is not a reasonable method.

Proposed §1.987-10(e)(4)(iv).

Comments requested clarification concerning the definition of an eligible pretransition method. The comments noted

that some taxpayers have applied the 1991

proposed regulations with modifications;

for example, some taxpayers apply an

annual netting convention to determine

the amount of a remittance or treat a group

of QBUs with the same functional currency as a single QBU. Other comments

indicated that taxpayers may not account

for frequently recurring intercompany

transactions in computing their section

987 gain or loss.

One comment suggested that taxpayers

should be treated as having applied an eligible pretransition method so long as they

made a good faith effort to apply section

987 using a reasonable method. Another

comment recommended that taxpayers

Although taxpayers that own section 987 QBUs generally are not small businesses, this rule is intended to limit the compliance burden for small businesses that may be affected.

Bulletin No. 2025–3

331

January 13, 2025

that have consistently relied on their CTA

account as an estimate of unrealized section 987 gain or loss should be considered

to have applied an eligible pretransition

method (and thus should be permitted to

use their CTA account to determine the

amount of pretransition gain or loss).

Another comment suggested that a

CFC that has consistently applied a reasonable method since the enactment of the

Tax Cuts and Jobs Act (“TCJA”), Public

Law 115-97, 131 Stat. 2054 (2017), should

be treated as having applied an eligible

pretransition method, even if the method

was not applied in previous taxable years.

In particular, the comment recommended

that an owner that began applying an

earnings only method described in proposed §1.987-10(e)(4)(iii) after the TCJA

was enacted should be deemed to meet

the consistency requirement of proposed

§1.987-10(e)(4)(iii)(B).

In response to these comments, the

final regulations clarify and expand the

definition of an eligible pretransition

method under §1.987-10(e)(4). The definition is intended broadly to include any

method that complies with the statutory

requirements of section 987 in a reasonable manner.7

section 987 QBU terminated on the day

before the transition date.

If a taxpayer consistently used a reasonable convention to apply section 987

before the transition date, the taxpayer

must use the same convention in determining pretransition gain or loss under

§1.987-10(e)(2). See §1.987-10(e)(4)

(v)(B)(1). Thus, unlike a taxpayer that

made an error in applying its pretransition

method, a taxpayer that used a reasonable convention would not be required to

recompute pretransition gain or loss without regard to the convention. Similarly,

if a taxpayer had a consistent practice

under which it did not account for frequently recurring disregarded transactions

in determining the amount of section 987

gain or loss recognized upon a remittance,

this practice is not treated as an error. See

§1.987-10(e)(4)(v)(B)(2). However, this

rule does not apply unless the taxpayer

reasonably accounted for the disregarded

transactions in determining the amount of

unrecognized section 987 gain or loss with

respect to the section 987 QBU (for example, in the case of a taxpayer applying the

1991 proposed regulations, by adjusting

the equity and basis pools to reflect the

amount of each transfer).

1. Errors made in applying a pretransition

method and certain consistent practices

that are not treated as errors

2. Timing for application of an eligible

pretransition method

The final regulations provide that a

taxpayer is treated as applying an eligible

pretransition method even if the taxpayer

made an error in the application of its

method or did not apply the method in all

taxable years in which it was the owner

of the section 987 QBU. §1.987-10(e)(4)

(iv). However, taxpayers are required to

compute pretransition gain or loss under

§1.987-10(e)(2) as though the eligible

pretransition method had been applied

without error for all prior taxable years.

Thus, for example, if a taxpayer made an

error in applying its method for a prior

year, the deemed termination amount

under §1.987-10(e)(2)(i)(A) is equal to

the amount of section 987 gain or loss the

taxpayer would have recognized on termination if it had not made the error and its

The final regulations provide that a

method of applying section 987 is not

an eligible pretransition method unless

it was applied on at least one tax return

filed before November 9, 2023 (when the

2023 proposed regulations were filed with

the Federal Register). See §1.987-10(e)

(4). Thus, a taxpayer that first adopted

a reasonable method in the first taxable

year after the TCJA was enacted would be

treated as applying an eligible pretransition method, but a method adopted after

November 9, 2023, would not qualify.

Similarly, the final regulations modify the

consistency requirement for the earnings

only method under §1.987-10(e)(4)(iii)

(B) to require consistent application for

all taxable years since the first taxable

year in which the owner applied an eligible pretransition method. As a result, an

owner that began applying the earnings

only method after the TCJA was enacted

(and did not previously apply a different

eligible pretransition method) would meet

this requirement.

3. Reliance on the CTA

Under the final regulations, a method

that relies on the CTA determined for

financial accounting purposes would

not qualify as an eligible pretransition

method; thus, taxpayers relying on CTA

computations must determine pretransition gain or loss using the method provided in §1.987-10(e)(3). As discussed in

part V.A.2 of this Summary of Comments

and Explanation of Revisions, because the

amount of the CTA can be substantially

different from the amount of section 987

gain or loss properly computed for tax

purposes, reliance on the CTA could result

in the recognition of significant amounts

of artificial pretransition gain or loss.

C. Recognition of Pretransition Gain or

Loss

In general, under the proposed regulations, pretransition gain is treated as

net unrecognized section 987 gain, while

pretransition loss is treated as suspended

section 987 loss. Proposed §1.987-10(e)

(5)(i)(A) and (B). This rule is intended to

prevent taxpayers from selectively recognizing pretransition loss while deferring pretransition gain until the year of a

remittance. Alternatively, taxpayers could

elect to amortize pretransition gain or loss

over a period of ten years beginning on the

transition date. Proposed §1.987-10(e)(5)

(ii).

A comment recommended that pretransition loss should not be treated as suspended section 987 loss in the first taxable

year in which the section 987 regulations

apply. Instead, the comment recommended

that pretransition loss should be treated as

net unrecognized section 987 loss upon

transition, which would later become suspended in the year of a remittance. The

comment noted that this would create parity between pretransition loss and pretransition gain, which is treated as net unrecog-

In certain instances, a method that does not constitute a reasonable application of section 987 is treated as an eligible pretransition method in order to reduce the compliance burden of

transitioning onto the section 987 regulations.

7

January 13, 2025

332

Bulletin No. 2025–3

nized section 987 gain in the first taxable

year in which the regulations apply.

Another comment recommended that,

instead of determining pretransition gain

or loss separately with respect to each

QBU, the total amount of pretransition

gain or loss in each category should be

aggregated and netted among all QBUs of

the same owner, with the net amounts reallocated to each QBU on a pro rata basis.

In the case of a consolidated group or a

group of related CFCs, the comment suggested further netting between all members of the consolidated group or group of

related CFCs, respectively.

With respect to the amortization election under proposed §1.987-10(e)(5)(ii), a

comment suggested that taxpayers should

be allowed to elect a shorter amortization

period in which to recognize pretransition

gain or loss (either four or five years),

which would better align with certain taxpayers’ internal forecasting and planning

windows. A comment also requested clarification as to how the amortization election

applies with respect to a terminating QBU

(that is, a section 987 QBU that terminated

after November 9, 2023, and before the

taxable year in which the section 987 regulations are generally applicable).

The final regulations provide that, if

a current rate election is in effect in the

taxable year beginning on the transition

date (and an annual recognition election

is not in effect), pretransition gain or loss

is treated as net unrecognized section 987

gain or loss. Thus, pretransition losses

are treated the same way as pretransition

gains. However, if a current rate election

is not in effect (or an annual recognition

election is in effect) in the taxable year

beginning on the transition date, pretransition loss is treated as suspended section

987 loss upon transition. This rule is necessary to prevent pretransition loss from

being recognized without limitation.

The final regulations do not permit

aggregation and netting of pretransition

gain or loss within the same category.

Absent an amortization election, the

source and character of pretransition gains

and losses generally will not be assigned

in the taxable year beginning on the transition date, so it would not be possible to net

gains and losses separately within each

recognition grouping. In addition, aggregation and netting would make the tran-

Bulletin No. 2025–3

sition rules more complicated and would

increase the burden of administering these

rules. Finally, taxpayers that make the

amortization election can, as a practical

matter, achieve the effect of netting pretransition gains and losses, because those

gains and losses will be recognized over

the same ten-year period.

The final regulations retain the ten-year

amortization period under §1.987-10(e)(5)

(ii) and do not permit taxpayers to elect a

shorter amortization period. The Treasury

Department and the IRS have determined

that a uniform amortization period should

apply to all electing taxpayers to prevent

the potential for whipsaw that could result

from taxpayers with losses electing shorter

amortization periods than taxpayers with

gains. In addition, a ten-year period is

appropriate given the expected magnitude of the pretransition gains and losses

that are subject to amortization. However,

taxpayers that do not make the amortization election will retain some control over

when gains and losses are recognized (by

choosing whether or not to make remittances). The final regulations also expand

the acceleration rule of §1.987-10(e)(5)

(ii)(B) to cover transactions entered into

with a principal purpose of avoiding the

recognition of pretransition gain that is

subject to the amortization election. See

§1.987-10(e)(5)(ii)(B)(1).

In addition, the final regulations clarify

the application of the amortization election

in the case of a terminating QBU. Under

§1.987-10(e)(5)(ii)(C), any deferred section 987 gain or suspended section 987

loss with respect to a terminating QBU

that has not been recognized before the

first taxable year in which the section 987

regulations are generally applicable is

subject to amortization beginning in that

year. However, the final regulations do

not modify the treatment of section 987

gain or loss that has already been recognized before the transition date; thus, such

section 987 gain or loss is not subject to

amortization.

X. Comments and Changes to

Proposed §1.987-11: Suspended Section

987 Loss Relating to Certain Elections;

Loss-to-the-Extent-of-Gain Rule

Proposed §1.987-11 provides rules that

suspend the recognition of section 987

333

loss in connection with certain elections

and rules under which suspended section

987 loss is recognized to the extent of recognized section 987 gain (the “loss-to-theextent-of-gain rule”).

A. Loss Suspension Rule

1. In general

Under proposed §1.987-11(c), in a taxable year in which a current rate election is

in effect (and an annual recognition election is not in effect), any section 987 loss

that would otherwise be recognized as a

result of a remittance or termination would

be treated as suspended section 987 loss.

A comment requested that the loss suspension rule of proposed §1.987-11(c) be

eliminated because it prevents taxpayers

from recognizing section 987 losses in

connection with legitimate commercial

transactions. The comment noted that the

recognition of section 987 loss often is not

the primary factor in determining whether

a taxpayer causes its branch to make a

remittance.

The final regulations retain the loss

suspension rule in §1.987-11(c). Congress

specifically authorized loss limitation

rules to address the potential for selective

recognition of losses. See section 989(c)

(2). These rules are integral to the current

rate election; without a loss limitation the

current rate election would create opportunities for abuse. Although remittances

are often made for non-tax reasons, taxpayers can cause section 987 QBUs to

make otherwise disregarded transfers for

the purpose of recognizing large section

987 losses, and taxpayers have the ability

to structure transactions in ways that defer

the recognition of section 987 gain.

However, the final regulations limit the

scope of the loss suspension rule to cover

transactions that would otherwise result in

the recognition of substantial section 987

losses. Under §1.987-11(c)(2), if a current

rate election is in effect, section 987 loss

is not suspended unless the amount of

section 987 loss subject to suspension in

the taxable year exceeds the lesser of $3

million or two percent of the controlled

group’s gross income. This threshold is

applied collectively to the section 987

loss of the owner and all members of the

owner’s controlled group. This rule is

January 13, 2025

expected to reduce the compliance burden

of tracking suspended section 987 losses,

particularly for taxpayers with small section 987 QBUs.

2. Exception for QBUs with de minimis

historic assets

Comments requested an exception

from the loss suspension rule for section

987 QBUs with minimal historic assets

(such as financial institutions and insurance companies). Alternatively, a comment recommended that the loss suspension rule should apply solely to section

987 loss associated with historic items.

The final regulations do not provide an

exception to the loss suspension rule for

taxpayers with a de minimis amount of

historic assets. Such an exception would

be difficult to administer because it would

require long-term tracking to ensure that

the de minimis threshold was met in all

prior taxable years over which the pool of

net unrecognized section 987 gain or loss

accrued. Further, for taxpayers with minimal historic assets, the compliance burden

of applying the default rules of the final

regulations (that is, the rules that apply in

the absence of a current rate election) is

expected to be more limited. A taxpayer

that does not make a current rate election

generally would not be subject to the loss

suspension rule.

Similarly, under the final regulations,

the loss suspension rule of §1.987-11(c)

is not limited to section 987 loss associated with historic items. Under §1.987-4,

the pool of net unrecognized section 987

gain or loss is determined with respect to

a section 987 QBU as a whole. Separate

computations of unrecognized section 987

loss associated with marked and historic

items, respectively, would add significant

complexity. Moreover, concerns related to

selective recognition of section 987 loss

can arise with respect to both marked and

historic items.

B. Loss-to-the-Extent-of-Gain Rule

Under proposed §1.987-11(e), an

owner of a section 987 QBU recognizes

suspended section 987 loss to the extent

that it recognizes section 987 gain in the

same recognition grouping (that is, section 987 gain that has the same source

January 13, 2025

and character as the suspended section

987 loss) in the same taxable year. As

explained in the preamble to the 2023 proposed regulations, this rule is intended to

prevent taxpayers from selectively recognizing section 987 losses when a current

rate election is in effect. 88 FR 78139.

1. Lookback rule

The 2023 proposed regulations do not

include a lookback rule under which suspended section 987 loss can be recognized

to the extent of section 987 gain recognized in previous taxable years. The preamble to the 2023 proposed regulations

expressed concern that taxpayers might

exploit a lookback rule by selectively triggering the recognition of section 987 gain

in a taxable year in which the gain could

be offset by losses or in which a taxpayer

had excess foreign tax credits. 88 FR

78139.

Several comments recommended

adoption of a lookback rule. Alternatively,

a comment recommended modifying proposed §1.987-11(e) to permit taxpayers

to carry back section 987 losses to earlier

yea

This text is long and has been trimmed here. Open the source document for the complete record.