Treasury Issues Section 987 Final Regulations and Removes Certain Temporary Regulations


Recently, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued final regulations relating to combinations and separations of qualified business units (QBUs) subject to Section 987 and the recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Section 987 in connection with certain QBU terminations and certain transactions involving partnerships. The final regulations affect taxpayers that own certain QBUs. In addition, Treasury withdrew temporary regulations regarding the allocation of assets and liabilities of certain partnerships for purposes of Section 987.



On December 8, 2016, Treasury published final regulations, Treasury Decision 9794 (T.D. 9794) in the Federal Register (81 FR 88806), providing rules relating to the determination of the taxable income or loss of a taxpayer with respect to a Section 987 QBU; the timing, amount, character, and source of any Section 987 gain or loss; and other provisions. On the same date, Treasury also published temporary regulations, T.D. 9795 in the Federal Register (81 FR 88854) and a notice of proposed rulemaking (REG-128276-12) in the Federal Register (81 FR 88882) by cross-reference to the temporary regulations. For a summary discussion of the 2016 final regulations and temporary regulations see our December 2016 alert. Also, see our July 2018 alert regarding the delayed applicability of the 2016 final regulations.



Temp. Reg. §§ 1.987-2T and 1.987-4T include rules relating to combinations and separations of QBUs. Temp. Reg. § 1.987-12T includes rules that require deferral of foreign currency gain or loss under Section 987 with respect to certain transactions defined as deferral events or outbound loss events—transactions that generally include QBU terminations and certain partnerships transactions. The 2019 final regulations adopt the temporary regulations under Temp. Reg. §§1.987-2T, 1.987-4T and 1.987-12T as final with certain clarifications.
Temp. Reg. §1.987-7T provides a liquidation value percentage methodology for allocating assets and liabilities of Section 987 aggregate partnerships (as defined in Reg. §1.987-1(b)(5) of the 2016 final regulations). As part of the same Treasury Decision as the 2019 final regulations, Treasury withdrew Temp. Reg. §1.987-7T and made a conforming change to an example in Reg. §1.987-12. Until new regulations are proposed and finalized, taxpayers may use any reasonable method to determine a partner's share of assets and liabilities reflected on the books and records of an eligible QBU held indirectly through the partnership. For this purpose, taxpayers may rely on Subchapter K principles (consistent with the 2006 proposed regulations under Section 987) or an approach similar to the liquidation value percentage method set forth in Temp. Reg. §1.987-7T. However, Treasury does not believe that it would be reasonable to apply the liquidation value percentage method without corresponding adjustments to the determination of net unrecognized Section 987 gain or loss.
For example, a taxpayer using the liquidation value percentage method may be required to adjust its determination of net unrecognized Section 987 gain or loss of a Section 987 QBU that is owned indirectly through a partnership to prevent the determination of unrecognized Section 987 gain or loss that is not attributable to fluctuations in exchange rates. These adjustments may include treating any change in a partner’s owner functional currency net value that is attributable to a change in the partner’s liquidation value percentage as resulting in a transfer to or from an indirectly owned Section 987 QBU.
For dates of applicability, see Reg. §§ 1.987-2(e), 1.987-4(h), and 1.987-12(j).

BDO Insights

As detailed in the preamble to the 2019 final regulations, Treasury believes that finalizing Temp. Reg. §§1.987-2T, 1.987-4T, and 1.987-12T, while simultaneously deferring the applicability date of the 2016 final regulations and developing guidance to mitigate the complexity and administrative challenges associated with, the 2016 final regulations, appropriately balances taxpayers’ burdens with the need to prevent abuse under the 2016 final regulations or under another method of complying with Section 987 used by a taxpayer during a period for which the 2016 final regulations are not applicable. Please contact a BDO international tax specialist for assistance in understanding and applying these rules.