Treasury Spins 987 into a Frenzy...Again
The Tornado of Section 987
Few areas of the law have had more changes to its regulatory interpretation than Section 987. In keeping with their long-standing tradition of trying to thread the needle on this complex topic, Treasury has once again issued Proposed Regulations. The Proposed Regulations were published in the Federal Register on November 14, 2023 (Prop Reg REG-132422-17)
Follow the Yellow Brick Road
The regulatory history of Section 987 has been long and winding, and we’re not in Kansas anymore. The preamble to the Proposed Regulations provides a somewhat lengthy review of this history and uses it to compare prior versions with these Proposed Regulations.
Here is an overview of the history:
– September 1991, Proposed Regulations – Equity and pool method
– Notice 2000-20 – Introduced “The Earnings Only Method”
– September 2006, Proposed Regulations – Withdrew 1991 Regulations, introduced foreign exchange exposure pool (FEEP) method
– December 2016, Finalized 2006 Regulations with minor revisions and issued Temp Regs
– April 2017, Executive Order (EO) 13789 – Instructed Treasury to review all regulations issued on or after January 1, 2016, for “undue financial burden on U.S. taxpayers or add undue complexity.”
– 2017 through 2021 – The 2016 Regs were deferred every year since they were released
– May 2019 – Certain provisions of the 2016 Temp Regs were finalized
– August 2022 – Notice 2022-34 – Announced further delay of the applicability date of the 2016 Final Regulations and certain related provisions of the 2019 Final Regulations until years beginning subsequent to December 7, 2023
The Wizard of QBUs
This brings us to the most recent set of regulations. Let’s pull back the curtain on this most recent “wizard” of the QBU world. The effective date of the regulations is not immediate. While they can be applied earlier, the effective date is for tax years beginning subsequent to December 31, 2024. In the meantime, Treasury has asked for comments through February 12, 2024.
The general framework of the FEEP method was retained with some notable changes.
– The mechanical framework is generally consistent with the 2016 Final Regulations.
– A taxpayer may elect to recognize unrecognized Section 987 gain or loss of a Section 987 QBU on an annual basis.
– New loss limitation rules may suspend the recognition of a Section 987 loss until the taxpayer recognizes an equal amount of Section 987 gain with the same source and character as the suspended loss, depending on whether one or both of these elections are in effect (and if their effective dates are aligned).
– Subject to limitations, the termination of a QBU can also trigger a suspended Section 987 loss.
– The 2023 Proposed Regulations would broaden the scope of Section 987 losses that may be deferred or suspended. In some instances, these losses may be lost completely, such as in connection with a taxable liquidation of the owner.
– The 2023 Proposed Regulations are expanded to apply to banks, insurance companies, leasing companies, finance coordination centers, RICs, and REITs.
– A new transition rule, which withdraws the “fresh start” transition of the 2016 Final Regulations, attempts to preserve historic Section 987 gains and losses.
For any questions related to the new Section 987 regulations, please contact our Global Business Services team.
Greg Lambrecht, CPA is a Principal in the firm’s Global Business Services practice and advises clients on international tax matters including understanding the consequences and opportunities associated with global tax planning decisions. He also assists clients in managing increasingly complex compliance requirements of companies with international operations.
Lambrecht joins McGuire Sponsel from the Big Four with over a decade of experience leading complex international tax projects for Fortune 150 clients and over 20 years of total experience in international tax.