International Tax Alert - October 2017

October 2017

Applicability Date for Section 987 Regulations Extended by One Year

Summary

In Notice 2017-57 (the “Notice”), the Department of the Treasury and the Internal Revenue Service (collectively, “Treasury), announced the intention to amend the regulations under IRC §987 to defer the applicability date of the final regulations under IRC §987, as well as certain provisions of the temporary regulations under IRC §987, by one year.    
 

Details

On January 9, 2017, Treasury published Treasury Decision 9794, which contains final regulations relating to the determination of the taxable income or loss of a taxpayer with respect to a qualified business unit (“QBU”) subject to IRC §987 (a “§987 QBU”); the timing, amount, character, and source of any §987 gain or loss; and other regulations (the “Final Regulations”). On the same date, Treasury also published Treasury Decision 9795, which contains temporary regulations under §987 (the “Temporary Regulations”). For a discussion of the Final and Temporary Regulations, see our December 2016 Tax Alert
 
The Final Regulations under §987 were identified in Notice 2017-38, as significant tax regulations requiring additional review pursuant to Executive Order 13789, a directive designed to reduce tax regulatory burdens. For a discussion of Notice 2017-38 see our July 2017 Tax Alert. As part of that review, the Notice states that Treasury is considering changes to the Final Regulations that would allow taxpayers to elect to apply alternative rules for transitioning to the Final Regulations and alternative rules for determining §987 gain or loss.
 
The Final and Temporary Regulations were effective on December 7, 2016. Treas. Reg. §1.987-11(a) provides that, except as otherwise provided in §1.987-11, §1.987-1 through 1.987-10 apply to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016 (i.e., 2018 for calendar year taxpayers). Corresponding provisions under §§ 861, 985, 988 and 989 also apply to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016.[1]
 
Similarly, Temp. Reg. §1.987-1T (other than Temp. Reg. §§ 1.987-1T(g)(2)(i)(B) and (g)(3)(i)(H)) through 1.987-4T, 1.987-6T, 1.987-7T, and 1.988-1T (the “Related Temporary Regulations”) apply to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016.[2]  All other provisions in the Temporary Regulations, including the provisions relating to the deferral of section 987 gain or loss and the temporary section 988 regulations, are subject to different applicability dates.[3] 
 
A taxpayer may apply the Final Regulations and the Related Temporary Regulations to taxable years beginning after December 7, 2016 (i.e., 2017 for calendar year taxpayers), provided the taxpayer consistently applies those regulations to such taxable years with respect to all §987 QBUs directly or indirectly owned by the taxpayer on the transition date, as well as all §987 QBUs directly or indirectly owned on the transition date by members that file a consolidated return with the taxpayer or by any controlled foreign corporation, as defined in IRC §957, in which a member owns more than 50 percent of the voting power or stock value, as determined under IRC §958(a).[4] The transition date is the first day of the first taxable year to which the §§ 1.987-1 through 1.987-10 are applicable with respect to a taxpayer under § 1.987-11.[5]
 
In the Notice, Treasury stated their intention to amend §§ 1.861-9T, 1.985-5, 1.987-11, 1.987-1T through 1.987-4T, 1.987-6T, 1.987-7T, 1.988-1, 1.988-1T, 1.988-4, and 1.989(a)-1 to provide that the Final Regulations and the Related Temporary Regulations will apply to taxable years beginning on or after two years after the first date of the first taxable year following December 7, 2016. Thus, for a taxpayer whose first taxable year after December 7, 2016, begins on January 1, 2017, the Final Regulations and the Related Temporary Regulations will apply for the taxable year beginning on January 1, 2019.
 
A taxpayer may, however, elect under § 1.987-11(b) to apply the Final Regulations and the Related Temporary Regulations to taxable years beginning after December 7, 2016 (subject to the conditions in § 1.987-11(b)), including taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016 (the original applicability date in § 1.987-11(a)).
 
The intended amendments would not affect the applicability date of the Temporary Regulations other than the Related Temporary Regulations.
 

BDO Insights

The delay in the applicability date for the Final and Related Temporary Regulations provides taxpayers additional time to gather the required information to transition to such rules, if required. In addition, the delay provides Treasury additional time to consider changes to the Final and Related Temporary Regulations in response to comments received on the §987 regulations, including comments related to the transition rule in the Final Regulations and the method prescribed by the Final Regulations for calculating foreign currency gain or loss.  
 

For more information, please contact one of the following practice leaders:
 
Monika Loving
International Tax Services
Partner and National Practice Leader
     Chip Morgan
Partner
International Tax Services

 
Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office
  Robert Pedersen
Partner
International Tax Services

 
Sean Dokko
Senior Manager
National Tax Office
  William F. Roth III
Partner
National Tax Office

 
Annie Lee
Partner
International Tax Services
  Jerry Seade
Principal
International Tax Services

 
Natallia Shapel
Partner
International Tax Services
 
[1] See §§1.861-9T(g)(2)(vi); 1.985-5(g); 1.988-1(i);1.988-4(b)(2)(ii); 1.989(a)-1(b)(4); 1.989(a)-1(d)(4).
[2] See §§ 1.987-1T(h); 1.987-2T(e); 1.987-3T(f); 1.987-4T(h); 1.987-6T(d); 1.987-7T(d); 1.988-1T(j).
[3] See §§ 1.987-1T(h) (concerning §§ 1.987-1T(g)(2)(i)(B) and (g)(3)(i)(H)); 1.987-8T(g); 1.987-12T(j); 1.988-2T(j).
[4] Sections 1.987-11(b); 1.987-1T(h); 1.987-2T(e); 1.987-3T(f); 1.987-4T(h); 1.987-6T(d); 1.987-7T(d).
[5] Section 1.987-11(c).