Internal Revenue Bulletin 2025-3 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 2025–3
January 13, 2025
HIGHLIGHTS
OF THIS ISSUE
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
Announcement 2025-1, page 431.
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 indi-
viduals 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 restric-
tions 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.
INCOME TAX
Notice 2025-4, page 419.
The purpose of this notice is to announce that the Department
of the Treasury (“Treasury Department”) and the Internal Reve-
nue Service (“IRS”) intend to issue proposed regulations that,
for purposes of applying section 482, provide a new simpli-
fied and streamlined approach (“SSA”) for pricing certain con-
trolled transactions involving baseline marketing and distribu-
tion 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 vari-
able 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-per-
mile 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 quali-
fied 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-
Finding Lists begin on page ii.

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 eli-
gibility rules in section 5.01(1)(d) and (f) of Rev. Proc. 2015-
13 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 tax-
payer 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 long-
term 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 opera-
tion 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 offi-
cial 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 sub-
stantive 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 other-
wise indicated. Procedures relating solely to matters of inter-
nal 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 rul-
ings 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, disbar-
ment 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-
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. How-
ever, under section 42(b)(2), the applica-
ble percentage for non-federally subsi-
dized new buildings placed in service after
July 30, 2008, shall not be less than 9%.
Table 5 contains the federal rate for deter-
mining 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 preced-
ing 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
AnnualSemiannualQuarterlyMonthly
Short-term
AFR4.33%4.28%4.26%4.24%
110% AFR4.77%4.71%4.68%4.66%
120% AFR5.21%5.14%5.11%5.09%
130% AFR5.64%5.56%5.52%5.50%
Mid-term
AFR4.24%4.20%4.18%4.16%
110% AFR 4.67%4.62%4.59%4.58%
120% AFR5.10%5.04%5.01%4.99%
130% AFR5.53%5.46%5.42%5.40%
150% AFR6.40%6.30%6.25%6.22%
175% AFR7.49%7.35%7.28%7.24%
Long-term
AFR4.53%4.48%4.46%4.44%
110% AFR4.99%4.93%4.90%4.88%
120% AFR5.45%5.38%5.34%5.32%
130% AFR5.90%5.82%5.78%5.75%
REV. RUL. 2025-1 TABLE 2
Adjusted AFR for January 2025
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted AFR3.28%3.25%3.24%3.23%
Mid-term adjusted AFR3.22%3.19%3.18%3.17%
Long-term adjusted AFR3.43%3.40%3.39%3.38%
Bulletin No. 2025–3 307 January 13, 2025

REV. RUL. 2025-1 TABLE 3
Rates Under Section 382 for January 2025
Adjusted federal long-term rate for the current month3.43%
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%
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 credit8.02%
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
5.2%
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
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.
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.

January 13, 2025 308 Bulletin No. 2025–3

Bulletin No. 2025–3 309 January 13, 2025
Section 483.—Interest on
Certain Deferred 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 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
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.
Section 7520.—Valuation
Tables
The applicable federal mid-term rates are set
forth for the month of January 2025. See Rev. Rul.
2025-1, page 307.
Section 7702.—Life
Insurance Contract
Defined
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 7872.—Treatment
of Loans With Below-
Market 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.

Section 401. — Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
26 CFR 1.401(l)-1: Permitted disparity in employ-
er-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 ben-
efit 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
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 retire-
ment 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 cov-
ered 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 deter-
mining an employee’s covered compen-
sation 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
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 compen-
sation for a plan year during which the
35-year period ends. An employee’s cov-
ered compensation for a plan year begin-
ning 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 com-
pensation under § 1.401(l)-1(c)(7)(i), a
plan may use tables, provided by the Com-
missioner, that are developed by rounding
the actual amounts of covered compensa-
tion 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 310 Bulletin No. 2025–3
ATTACHMENT I
2025 UNROUNDED COVERED COMPENSATION TABLE
CALENDAR
YEAR OF
BIRTH
CALENDAR YEAR OF
SOCIAL SECURITY
RETIREMENT AGE
2025 COVERED
COMPENSATION
UNROUNDED
19071972$ 4,488
190819734,704
190919745,004
191019755,316
191119765,664
191219776,060
19131978 6,480
191419797,044
191519807,692
191619818,460
191719829,300
1918198310,236
1919198411,232
1920198512,276
1921198613,368
1922198714,520
1923198815,708
1924198916,968
1925199018,312
1926199119,728
1927199221,192
1928199322,716
1929199424,312
1930199525,920
1931199627,576
1932199729,304
1933199831,128
1934199933,060
1935200035,100
1936200137,212
1937200239,444
1938200443,992
1939200546,344
1940200648,816
1941200751,348
1942200853,952
1943200956,628
1944201059,268
1945201161,884
1946201264,560
1947201367,308

Bulletin No. 2025–3 311 January 13, 2025
CALENDAR
YEAR OF
BIRTH
CALENDAR YEAR OF
SOCIAL SECURITY
RETIREMENT AGE
2025 COVERED
COMPENSATION
UNROUNDED
1948201469,996
1949201572,636
1950201675,180
1951201777,880
1952201880,532
1953201983,244
1954202086,052
1955202291,884
1956202395,172
1957202498,616
19582025102,180
19592026105,684
19602027109,140
19612028112,524
19622029115,824
19632030119,100
19642031122,340
19652032125,508
19662033128,580
19672034131,544
19682035134,400
19692036137,124
19702037139,740
19712038142,284
19722039144,804
19732040147,264
19742041149,604
19752042151,848
19762043153,960
19772044155,940
19782045157,920
1979 2046159,900
19802047161,784
19812048163,572
19822049165,264
19832050166,908
19842051168,552
19852052169,944
19862053171,312
19872054172,548
19882055173,640
19892056174,600
19902057175,428
19912058175,884
1992 and Later2059 and Later176,100

January 13, 2025 312 Bulletin No. 2025–3
ATTACHMENT II
2025 ROUNDED COVERED COMPENSATION TABLE
CALENDAR
YEAR OF
BIRTH
2025 COVERED
COMPENSATION
ROUNDED
1937$ 39,000
1938 – 193945,000
194048,000
194151,000
194254,000
194357,000
194460,000
194563,000
1946 – 194766,000
194869,000
194972,000
195075,000
195178,000
195281,000
195384,000
195487,000
195593,000
195696,000
195799,000
1958102,000
1959105,000
1960108,000
1961114,000
1962117,000
1963120,000
1964123,000
1965126,000
1966129,000
1967132,000
1968135,000
1969138,000
1970 – 1971141,000
1972144,000
1973147,000
1974150,000
1975 – 1976153,000
1977156,000
1978 – 1979159,000
1980162,000

Bulletin No. 2025–3 313 January 13, 2025
CALENDAR
YEAR OF
BIRTH
2025 COVERED
COMPENSATION
ROUNDED
1981 – 1982165,000
1983 – 1984168,000
1985 – 1986171,000
1987 – 1989174,000
1990 and Later176,100
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Tom Morgan of the Office of Asso-
ciate 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 determi-
nation of taxable income or loss and for-
eign currency gain or loss with respect to a
qualified business unit. These final regula-
tions include 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 cur-
rency gain or loss with respect to a quali-
fied business unit on an annual basis, and
a new transition rule.
DATES: Effective date: The final regula-
tions are effective December 10, 2024.
Applicability dates: For dates of applica-
bility, see §1.987-15.
FOR FURTHER INFORMATION
CONTACT: Concerning the final reg-
ulations generally, Adam G. Province
at (865) 329-4546; concerning the char-
acter 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 toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Authority
This document contains additions and
amendments to 26 CFR part 1 (Income
Tax Regulations) addressing the applica-
tion of section 987 of the Internal Reve-
nue Code (Code) and related provisions
(the “final regulations”). The additions
and amendments are issued under sec-
tions 987, 989, and 1502, pursuant to the
express delegations of authority provided
under those sections. The express dele-
gations relied upon are referenced in the
Background section of this preamble and
in the Summary of Comments and Expla-
nation of Revisions describing the indi-
vidual 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 regula-
tions 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 tax-
able income or loss”) with respect to the
QBU. In addition, foreign currency gain
or loss must be determined under sec-
tion 987(3) (“section 987 gain or loss”),
which requires proper adjustments (as
prescribed by the Secretary) for transfers
of property between QBUs of the tax-
payer having different functional curren-
cies.
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 recog-
nized 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 gen-
erally 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 reg-
ulations limiting the recognition of for-
eign currency loss on certain remittances
from QBUs, providing for the appropriate
1
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.

January 13, 2025 314 Bulletin No. 2025–3
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 Reg-
ister (81 FR 88806). The same day, the
Treasury Department and the IRS pub-
lished Treasury Decision 9795, which
contained temporary regulations under
sections 987 and 988 (the “2016 tempo-
rary regulations”), in the Federal Regis-
ter (81 FR 88854) and published a notice
of proposed rulemaking (REG-128276-
12, 81 FR 88882) (the “2016 proposed
regulations”) in the Federal Register
by cross-reference to the temporary reg-
ulations. On May 13, 2019, the Treasury
Department and the IRS published Trea-
sury Decision 9857, which contained final
regulations under section 987 (the “2019
final regulations”), in the Federal Regis-
ter (84 FR 20790).
On November 14, 2023, the Trea-
sury 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 Depart-
ment 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 provid-
ing additional proposed regulations under
section 987 (REG-117213-24) (the “2024
proposed regulations”).
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 regula-
tions and the 2023 proposed regulations.
The comments, and the revisions made in
response to those comments, are summa-
rized in this Summary of Comments and
Explanation of Revisions.
The final regulations retain the basic
approach and structure of the 2023 pro-
posed 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 regu-
lations 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 corpo-
rations that either are not controlled for-
eign corporations (“CFCs”) or are CFCs
in which no United States shareholders
(“U.S. shareholders”) own (within the
meaning of section 958(a)) stock. In con-
trast to the 2016 final regulations, the 2023
proposed regulations would not provide
an exception for banks, insurance com-
panies, leasing companies, finance coor-
dination 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 rec-
ognition election are expected to provide
additional flexibility for specified entities
to apply the section 987 regulations. 88
FR 78145. Taxpayers that make a current
rate election would treat all assets and lia-
bilities 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 recogni-
tion election would recognize all unrec-
ognized 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 Expla-
nation 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 applica-
ble to all taxpayers.
1. Specified entities
Comments recommended that speci-
fied entities be excluded from the appli-
cation of the section 987 regulations. The
comments asserted that additional rules
are needed to facilitate the application of
the section 987 regulations to these enti-
ties. For example, according to the com-
ments, 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 indi-
cation 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 regula-
tions 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. 2025–3 315 January 13, 2025
V.B (hedging transactions), and VI (mod-
ifications 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 partner-
ships, and the Treasury Department and
the IRS continue to study this issue. The
Treasury Department and the IRS have
determined that, without additional guid-
ance, the section 987 regulations in their
entirety could not be applied to partner-
ships in an administrable way. Accord-
ingly, 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 enti-
ties. In particular, the Treasury Depart-
ment 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 dis-
tributable 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 cur-
rency (which creates a separate layer of
currency exposure). The Treasury Depart-
ment and the IRS anticipate providing
rules applicable to trusts and estates in
future guidance.
3. Application to CFCs
The final regulations apply to individu-
als and corporations that are United States
persons (“U.S. persons”) and to CFCs
in which U.S. shareholders own stock
(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 partner-
ships with partners that are U.S. persons.
According to the comment, this would
reduce the compliance burden on taxpay-
ers and prevent the selective recognition
of section 987 losses. The comment fur-
ther asserted that, based on the legisla-
tive 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 gen-
erated by a section 987 QBU and the time
of distribution, but the comment did not
explain how those mechanics would oper-
ate. Section 986(c) requires a U.S. share-
holder to recognize foreign currency gain
or loss with respect to distributions of pre-
viously taxed earnings and profits attrib-
utable to movements in exchange rates
between the date of the income inclusion
giving rise to the previously taxed earn-
ings 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 tax-
payer’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 sec-
tion 987 QBUs in lieu of section 987(3).
Because a CFC’s earnings and profits are
determined in the CFC’s functional cur-
rency 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
taxed earnings and profits. However, sec-
tion 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 possi-
ble to simplify the application of section
987 by modifying the application of sec-
tion 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 Hear-
ing 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 treat-
ment 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 com-
pany’s obligation depends, at least in part,
on the value of the assets held in a separate
account that is segregated from the gen-
eral asset accounts of the insurance com-
pany. Provided certain requirements are
met, under section 817(c), an insurance

January 13, 2025 316 Bulletin No. 2025–3
company that issues variable contracts (as
defined in section 817(d)) must separately
account for the various income, exclusion,
deduction, asset, reserve, and other lia-
bility items properly attributable to such
variable contracts.
As a general matter, section 807 pro-
vides that increases in the life insurance
reserves of a life insurance company are
deductible and decreases in the life insur-
ance 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 insur-
ance and annuity contracts, are similarly
adjusted for the depreciation or appreci-
ation of separate account assets. Addi-
tionally, 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 apprecia-
tion, 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 perma-
nent elimination of any effects on compa-
ny-level taxable income that would other-
wise 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 situ-
ation 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 fol-
low the Code and subchapter L rules in
determining their insurance income, with
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 invest-
ment return and market value of the sepa-
rate 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 treat-
ment of these assets and liabilities for pur-
poses of section 987. Similarly, the com-
ment 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 sep-
arate 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 attrib-
utable to the eligible QBU. See §1.987-
2(b)(2)(ii). These rules are expected to
facilitate matching treatment of separate
account assets and the related insurance
contracts, consistent with the treatment
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 insur-
ance 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 support-
ing the insurance reserves are required to
be held in a separate account under the
local insurance regulatory rules. In addi-
tion, 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 insur-
ance 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 pol-
icyholder, annuitant, insured, or benefi-
ciary 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 finan-
cial 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 insur-
ance companies hold to support insurance
obligations are closely matched to those
obligations and that concerns related to
the selective recognition of large noneco-
nomic 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. 2025–3 317 January 13, 2025
those assets are classified as marked or
historic under the general rules of §1.987-
1(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 recog-
nized 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 character-
ized 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 sec-
tion 848) should be treated as marked
items. These specified policy acquisition
expenses are generally a specified por-
tion 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 insur-
ance-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 reg-
ulations explains that, because these pre-
paid 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 magni-
tude. 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.
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 com-
ment 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 Expla-
nation of Revisions). Permitting taxpayers
to make or revoke elections on a more
frequent basis could increase the poten-
tial for manipulation and abuse. How-
ever, taxpayers that wish to change their
elections without waiting 60 months can
do so by requesting the Commissioner’s
consent, and the Commissioner may con-
sider 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 gov-
erned 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
under §1.987-10 is not treated as a change
in method of accounting. See §1.987-
10(k)(4). No inference is intended as to
whether a change in section 987 method-
ology 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 reg-
ulations).
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 lia-
bilities 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 regu-
lations clarify that an item that is not taken
into account for financial accounting pur-
poses 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, amor-
tization attributable to an item of intangi-
ble property that is recognized and taken
into account for tax purposes due to a sec-
tion 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 consoli-
dated loss of a separate unit).

January 13, 2025 318 Bulletin No. 2025–3
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 disre-
garded transaction, the asset ceases to
be reflected on (or attributable to) the
books and records of the section 987
QBU. However, disregarded transac-
tions 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 inter-
branch loans made by banks and other
regulated financial institutions should
not be treated as transfers for purposes
of determining the amount of a remit-
tance 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.
The final regulations retain the dis-
regarded 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 remit-
tance 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 bal-
ance 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 recogni-
tion 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 cur-
rency 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
QBU would be difficult to administer and
prone to manipulation.
Similarly, because disregarded trans-
actions 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 func-
tional currency of the section 987 QBU
and translated into the owner’s functional
currency under the rules of §1.987-3. Dis-
regarded payments do not serve to reattri-
bute gross income between a section 987
QBU and its owner for purposes of deter-
mining 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 neces-
sary function.
However, the final regulations contain
targeted modifications that are intended to
reduce the compliance burden of account-
ing 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. Addi-
tional rules relating to section 988 transac-
tions would be provided in §1.987-3 of the
2016 proposed regulations, for which the
comment period was reopened in 2023.

Bulletin No. 2025–3 319 January 13, 2025
A. Treatment of Section 988 Transactions
Under the 2016 Proposed Regulations
The 2016 proposed regulations provide
that the determination of whether a trans-
action 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 cur-
rency 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 transac-
tions of a section 987 QBU denominated
in, or determined by reference to, the own-
er’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 regula-
tions would provide an election under
which taxpayers can apply a mark-to-mar-
ket method of accounting with respect to
all qualified short-term section 988 trans-
actions. See §1.987-3(b)(4)(iii)(C) of the
2016 proposed regulations.
Under the 2016 final regulations (and
the 2023 proposed regulations), a trans-
action 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.
The preamble to the 2023 proposed
regulations requested comments as to
whether section 988 gain or loss on non-
functional currency transactions of a sec-
tion 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 elec-
tion is in effect. 88 FR 78154. The pream-
ble expressed concern that, if such a rule
were adopted, specified owner functional
currency transactions would give rise to
offsetting positions in the functional cur-
rency of the section 987 QBU; this could
create opportunities for taxpayers to rec-
ognize losses while deferring the offset-
ting gains. Id. For example, if a section 987
QBU held assets denominated in its own-
er’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 recog-
nition 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 nonfunc-
tional currency transactions of a QBU is
measured by reference to the functional
currency of the QBU. In addition, taxpay-
ers typically hedge their exposure to non-
functional currency transactions of a QBU
by reference to the QBU’s functional cur-
rency. One comment noted that it is com-
mon 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
a section 987 QBU is determined by refer-
ence to the functional currency of the sec-
tion 987 QBU, (ii) specified owner func-
tional 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 rec-
ommended modifications would achieve
greater consistency with financial account-
ing standards and would ease the compli-
ance burden on taxpayers. One comment
stated that such an approach would also be
more consistent with the statutory require-
ment to determine a section 987 QBU’s
taxable income or loss in the QBU’s func-
tional currency under sections 985 and
987. Comments noted that the opportu-
nity 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 sec-
tion 987 gain or loss is recognized annu-
ally without regard to whether a remit-
tance is made). One comment asserted
that, even if neither of these elections is
in effect, it is difficult to selectively rec-
ognize material section 987 losses attrib-
utable 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 pro-
viding 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-mar-
ket basis (effectively expanding the spe-
cial 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 tim-
ing for section 988 transactions of a sec-
tion 987 QBU that is subject to an annual
recognition election. According to this
comment, because mark-to-market tim-
ing 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 320 Bulletin No. 2025–3
tion under proposed §1.987-3(b)(4)(iii)
(B) be expanded to include long-term
transactions that have been properly iden-
tified as a hedge for U.S. tax purposes.
Finally, a comment recommended that,
if the rules of the 2016 proposed regula-
tions 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 tax-
payer 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 require-
ments as a current rate election or an
annual recognition election. See §1.987-
1(g).
The section 988 mark-to-market elec-
tion does not apply to a section 988 trans-
action that is contributed to a section 987
QBU with a built-in loss if the section 988
transaction was not subject to a mark-to-
market method of accounting in the hands
of the transferor. See §1.987-3(b)(4)(ii)
(B). This rule is intended to prevent tax-
payers from accelerating the recognition
of section 988 loss by contributing a sec-
tion 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
nonfunctional currency transactions of a
section 987 QBU. In response to the com-
ments summarized in part IV.B of this
Summary of Comments and Explanation
of Revisions, the Treasury Department
and the IRS have determined that a differ-
ent framework is appropriate in order to
reduce the compliance burden and com-
plexity 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 denom-
inated 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 transac-
tions are treated as section 988 transac-
tions of the section 987 QBU.
However, the final regulations provide
an anti-abuse rule to prevent taxpayers
from entering into section 988 transac-
tions through an eligible QBU for the pur-
pose of generating offsetting amounts of
gain and loss that can selectively be rec-
ognized 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)
provides a ten-step formula for comput-
ing 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. Pro-
posed §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 §1.987-
4(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 bal-
ance 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 applica-
ble historic rate. However, taxpayers that
make a current rate election under §1.987-
1(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 sec-
tion 987 QBU computes section 987 gain
or loss by maintaining an equity pool in

Bulletin No. 2025–3 321 January 13, 2025
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 reg-
ulations include an election to apply the
earnings and capital method of the 1991
proposed regulations in lieu of the cur-
rent rate election. These comments indi-
cated that, even if a current rate election
is in effect, proposed §1.987-4 imposes a
heightened compliance burden (as com-
pared 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 apply-
ing that method because taxpayers track
book-to-tax adjustments in computing
taxable income but do not make book-to-
tax 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 tax-
payers to transition from one method to
another in an administrable way. More-
over, under the earnings and capital
method, the amount of section 987 gain
or loss recognized is determined based on
the percentage of a section 987 QBU’s net
equity remitted (rather than the percent-
age of gross assets remitted, as required
under §1.987-5), which can inappropri-
ately 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 earn-
ings and capital method until the section
987 QBU terminates, which is inconsis-
tent with the statutory requirement to rec-
ognize currency gain or loss on transfers
of property from the section 987 QBU.
However, the final regulations mod-
ify 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 min-
imize the compliance burden of transi-
tioning from the 1991 proposed regula-
tions to the final regulations. Under the
final regulations, if a current rate election
is in effect, OFCNV is computed by deter-
mining 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 func-
tional 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 bal-
ance 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 modifi-
cations. 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 deter-
mines QBU net value under §1.987-4(e)
(2)(iii), the taxpayer must retain the infor-
mation 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 trans-
lation adjustment (“CTA”) determined
under U.S. generally accepted account-
ing principles (“U.S. GAAP”) to com-
pute 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 sub-
ject to certain tax adjustments. One com-
ment 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 rec-
ognized 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 com-
putation of the CTA for financial account-
ing 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 recog-
nized for tax purposes.
3. Simplified accounting for disregarded
transactions
A comment recommended that tax-
payers that make a current rate elec-
2
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.

January 13, 2025 322 Bulletin No. 2025–3
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 (reduc-
ing 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 trans-
fers 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 trans-
lated at the yearly average exchange
rate. The comment posited that this
approach would simplify the computa-
tions for taxpayers with a high volume
of disregarded intercompany transac-
tions.
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 appli-
cable 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 possi-
ble simplifications of §1.987-4 relating
to disregarded transactions between a
section 987 QBU and its owner, includ-
ing whether, in certain circumstances,
unrecognized section 987 gain or loss
for a taxable year could be computed
using only steps 1 and 10. See §1.987-
2(f) of the 2024 proposed regulations
for proposed rules containing an elec-
tion under which certain disregarded
transactions between a section 987 QBU
and its owner would not be taken into
account in computing unrecognized sec-
tion 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 sec-
tion 987 QBU’s unrecognized section
987 gain or loss. The comment asserted
that implementing either of these recom-
mended rules would mitigate the potential
for adverse consequences (or windfalls)
under section 987 when the owner’s for-
eign 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 treat-
ment of currency gain or loss with respect
to a net investment hedge and the hedged
section 987 QBU.
3
Accordingly, §1.987-
14 of the final regulations provides new
rules that apply to certain identified hedg-
ing transactions entered into by the owner
of a section 987 QBU (“section 987 hedg-
ing transactions”).
Under §1.987-14(d), section 988 gain
or loss that would otherwise be recog-
nized on a section 987 hedging transac-
tion (“hedging gain or loss”) is instead
taken into account in adjusting the own-
er’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 own-
er’s hedging loss reduces the unrecog-
nized section 987 gain. However, hedging
loss cannot reduce unrecognized section
987 gain for the taxable year below zero,
and hedging gain cannot reduce unrecog-
nized section 987 loss for the taxable year
below zero. This limitation ensures that
hedging gain or loss in excess of the cur-
rency 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 gen-
erally is defined as a financial instrument
(a “hedge”) entered into by the owner of a
section 987 QBU for the purpose of man-
aging 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 hedg-
ing 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 identi-
fied 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 sec-
tion 987 QBUs that have the same func-
tional currency will be treated as a single
section 987 QBU. The final regulations
also provide a special rule for cases in
3
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.

Bulletin No. 2025–3 323 January 13, 2025
which a taxpayer fails to properly iden-
tify 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 §1.987-
14(b)(2)(ii). In the absence of a current
rate election, gain or loss on a net invest-
ment 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 par-
ties to the hedge) must account for sec-
tion 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 §1.988-
7). 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 cur-
rency 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 for-
eign 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
rule, the net investment hedge would not
be treated as a section 987 hedging trans-
action.
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 hedg-
ing transaction with respect to that QBU
(similar requirements apply when a mem-
ber 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 con-
tinue to study whether it would be possi-
ble 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 remit-
tance proportion is determined in the own-
er’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 trans-
ferred from the section 987 QBU to the
owner during the taxable year; over (ii)
the aggregate of all amounts transferred
from the owner to the section 987 QBU
during the taxable year (each determined
in the owner’s functional currency). Pro-
posed §1.987-5(c).
A comment noted that, for taxpay-
ers with a high volume of disregarded
intercompany transactions, it can be dif-
ficult to track the amount of each trans-
fer 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 remit-
tance should be deemed to be equal to the
change in the QBU’s net value (if nega-
tive) 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 distribu-
tions 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 pro-
vide two modifications that are intended
to reduce the burden of tracking disre-
garded 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 324 Bulletin No. 2025–3
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 §1.987-
6(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 appli-
cation of the income attribution rules of
§1.904-4(f)(2)(vi) or §1.951A-2(c)(7), but
before expenses are allocated and appor-
tioned 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 tax-
payer has made the GILTI high-tax exclu-
sion 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-
istrable proxy for a section 987 QBU’s his-
torical 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 accumu-
lated earnings). As explained in the pream-
ble 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 permit-
ted 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 1.861-
9T(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 modi-
fied 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 extraordi-
nary 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 pro-
vide that the initial assignment of section
987 gain or loss would generally be made
in the taxable year in which the section
987 gain or loss is treated as recognized,
deferred, or suspended. Proposed §1.987-
6(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 rec-
ognized, 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 multi-
ple 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 rea-
sons.
First, making an initial assignment in
the taxable year of deferral or suspension
provides parity in the timing of the charac-
terization 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 pro-
duce 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 defer-
ral or suspension means that source and
character are determined by reference to
the assets of the section 987 QBU contem-
poraneously with the remittance or termi-
nation, while the affected assets are still
taken into account for purposes of apply-
ing 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. 2025–3 325 January 13, 2025
Third, the timing rule of §1.987-6(b)
(1)(ii) is needed to facilitate the separate
application of the loss-to-the-extent-of-
gain 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 Expla-
nation of Revisions, in order to prevent
taxpayers from avoiding the loss limita-
tion 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 sec-
tion 987 loss in a recognition grouping
is not recognized until section 987 gain
in the same recognition grouping is rec-
ognized. For this rule to achieve its pol-
icy 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 recogni-
tion grouping for purposes of §1.987-
11(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, taxpay-
ers that make the annual recognition elec-
tion generally would not be subject to the
deferral and loss suspension rules (and
thus would not need to track deferred sec-
tion 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 recog-
nized in the year of a remittance to the
extent of gain recognized during the look-
back period, which will limit the amount
of suspended section 987 loss carried
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 sub-
part F income group is treated as foreign
currency gain or loss attributable to sec-
tion 988 transactions not directly related
to the business needs of the CFC for pur-
poses 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 sec-
tion 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 accumu-
lated 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 cur-
rency gains or losses under section 988
and makes no reference to gain or loss rec-
ognized under section 987(3). One com-
ment 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.
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 tax-
payers 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 recom-
mended that, if proposed §1.987-6(b)(2)
(i)(C) is retained, the final regulations
should clarify that, for taxpayers predom-
inantly 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 sec-
tion 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 §1.954-
2(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 cate-
gories 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 regula-
tions 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 Trea-
sury 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 consis-
tent 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 326 Bulletin No. 2025–3
including by assigning section 987 gain or
loss to subpart F income groups. Thus, for
example, if a QBU’s assets generate for-
eign base company sales income, the sec-
tion 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 sec-
tion 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 Secre-
tary)” 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 rec-
ognized on a remittance by reference to
the QBU’s historical earnings under sec-
tion 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. Simi-
larly, when a QBU’s income is taken into
account in determining the owner’s sub-
part F income, proper adjustments must
necessarily include adjustments to that
type of income. Therefore, section 987
gain or loss must be characterized as for-
eign 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 com-
pany income, the final regulations pro-
vide 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 elec-
tion”). 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 sep-
arate 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 CFC-
owner 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 for-
eign 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-of-
gain rule and minimizing the tracking bur-
den 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 excep-
tion under §1.954-2(g)(2) because this
election applies only to section 987 gain
or loss that would otherwise be character-
ized 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 sub-
ject 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 sec-
tion 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 §1.954-
2(g)(4) (election to treat all foreign cur-
rency 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 sec-
tion 988 transaction by reason of the sec-
tion 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 rec-
ognized 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).
4
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.

Bulletin No. 2025–3 327 January 13, 2025
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 dif-
ferently from currency gain or loss rec-
ognized under section 988 (for example,
section 988 gain or loss on a net invest-
ment 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 mod-
ified to provide that (i) section 987 gain
and loss is taken into account in determin-
ing the effective tax rate under §1.951A-
2(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 corre-
spond 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 attribut-
able 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. There-
fore, attributing section 987 gain or loss
to either tested unit would tend to be dis-
tortive 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 sep-
arate tested unit (distinct from the section
987 QBU), is consistent with the deter-
mination that a branch comprises a sepa-
rate tested unit, even if it is not a tax res-
ident of the foreign country in which it is
located, if the income of the branch is sub-
ject 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 res-
idency-based taxation in either the coun-
try of the QBU or the country in which
the CFC is a resident. Therefore, the sec-
tion 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 corre-
spond to the section 987 QBU) would dis-
tort 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 tax-
payers, 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 §1.987-
11(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 excep-
tion 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 coun-
try. 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 commit-
tee 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 reason-
ably 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 coun-
try of the tested unit or in the country of
residence of the CFC and therefore should
reasonably be grouped and tested as a sep-
arate “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 invest-
ment 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 partner-
ships wholly owned by related persons
(“section 987 aggregate partnerships”).
See proposed §1.987-7B. Under pro-
5
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 Rec-
ommendations 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.’’).

January 13, 2025 328 Bulletin No. 2025–3
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 partner-
ship). 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 with-
out meaningfully altering the group’s
economic position.
The 2023 proposed regulations would
provide a different set of rules for partner-
ships that are not wholly owned by related
partners. See proposed §1.987-7A. For
these partnerships, the 2023 proposed reg-
ulations would apply a hybrid approach to
entity theory, under which unrecognized
section 987 gain or loss of the partner-
ship’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 Depart-
ment 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 pream-
ble explains that such an approach might
reduce the complexity and compliance
burden of the section 987 regulations, but
that it could permit taxpayers to manipu-
late the application of section 987 by hold-
ing a section 987 QBU through a partner-
ship 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 func-
tional currency (which creates a separate
layer of currency exposure). However, the
preamble to the 2023 proposed regula-
tions discusses alternative methodologies
under which the partners could determine
and recognize section 987 gain or loss
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 partner-
ship. 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 partner-
ships 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 regula-
tions 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 cur-
rency if it is treated as a QBU under sec-
tion 989(a)), and the partnership owns an
eligible QBU that uses the Swiss franc as
its functional currency, the domestic cor-
poration may apply section 987 to the eli-
gible QBU under an aggregate approach.
Alternatively, under an entity approach,
the partnership could be treated as a sec-
tion 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
the same partnership must apply the same
method with respect to a particular part-
nership 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 part-
nerships, 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 partner-
ships, 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 pre-
vent 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 partner-
ships, 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 deter-
mine the source and character of section
987 gain or loss recognized in connection
with the sale or redemption of a part-
nership 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 earn-
ings) and could allow taxpayers to manip-
ulate 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 reg-
ulations must be adapted as necessary to
apply §1.987-7 and the other applicable
provisions to partnerships. See §1.987-
7(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. 2025–3 329 January 13, 2025
purposes of the section 987 regulations.
See §1.987-7(f).
3. Loss suspension rule
Under the final regulations, the gen-
eral 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 §1.987-
7(d)(1)(ii) applies to an eligible QBU that
is directly owned by a partnership, regard-
less of whether an aggregate approach, an
entity approach, or a hybrid approach is
applied. See §1.987-7(d)(1)(ii)(A). How-
ever, 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 capi-
tal and profits interests in the partnership
are owned by related persons. See §1.987-
7(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 1.987-
5, 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 §1.987-
7(d)(2)(i). Second, section 987 loss is not
suspended if an annual recognition elec-
tion 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 per-
cent of gross income, as described in part
X.A.1 of this Summary of Comments and
Explanation of Revisions). See §1.987-
7(d)(2)(iii). These rules generally align
with the scope of the loss suspension rule
in §1.987-11(c)(1).
4. Adjustments to the basis of a partner’s
interest in the partnership
The proposed regulations would pro-
vide 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. Pro-
posed §1.987-7A(e). This rule is intended
to avoid duplication of section 987 gain
or loss (for example, when the partner-
ship 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 sec-
tion 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). Sec-
tion 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 part-
ner’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 part-
nership 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 dis-
tributive 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
or loss (including the effects of section
704(d)).
5. Other special rules for partnerships
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 sec-
tion 987 QBU directly owned by the part-
nership (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 1.987-
13. 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 con-
tribution 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 part-
nership that functions as a holding com-
pany), 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 recog-
nized only under the loss-to-the-extent-of-
gain 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 regula-
tions take effect on the transition date with
respect to section 987 gain or loss deter-
mined and recognized under the taxpay-

January 13, 2025 330 Bulletin No. 2025–3
er’s existing method. In addition, taxpay-
ers may not apply the fresh start transition
method with respect to a partnership. As
explained in the preamble to the 2023 pro-
posed 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 pre-
transition gain. 88 FR 78150 and 78156.
The final regulations also clarify that
the rule in §1.988-1(a)(10)(i), which pro-
vides that transactions between a taxpayer
and its QBU generally are not section 988
transactions, applies only to disregarded
transactions. Thus, a nonfunctional cur-
rency transaction between a partner and a
partnership could be treated as a section
988 transaction even though the partner-
ship 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 applica-
ble. 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 Revi-
sions), 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
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 lia-
bilities) that occurs as a result of the tran-
sition. For example, if a taxpayer applied
an earnings only method under which
currency gain or loss on the QBU’s cap-
ital 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 com-
ment requested that taxpayers be permit-
ted to use the CTA prepared for financial
accounting purposes rather than making
the OFCNV adjustment. The comment
asserted that taxpayers applying an earn-
ings only method might not have the infor-
mation necessary to compute the OFCNV
adjustment.
The final regulations do not permit tax-
payers to use the CTA in lieu of making
the OFCNV adjustment. As explained
in part V.A.2 of this Summary of Com-
ments and Explanation of Revisions, the
CTA amount may be substantially differ-
ent 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 pretransi-
tion method.
Another comment recommended that,
in the case of taxpayers applying an earn-
ings 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 ulti-
mately 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
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 con-
sistent with these taxpayers’ pretransition
method. Accordingly, under the final reg-
ulations, 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 transi-
tion 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-ex-
ecuting. 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-ex-
ecuting 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 com-
puting 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-ex-
ecuting in the absence of regulations);
Est. of Neumann v. Commissioner, 106

Bulletin No. 2025–3 331 January 13, 2025
T.C. 216 (1996) (holding delegation was
self-executing because it related to how,
rather than whether, the statute applied).
Therefore, taxpayers currently are obli-
gated to determine section 987 gain or loss
in a reasonable manner and must account
for pretransition gain or loss once the reg-
ulations 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. Pro-
posed §1.987-10(e)(3)(iii). Pretransition
gain or loss would be reduced by any sec-
tion 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 diffi-
cult to administer. Some comments rec-
ommended 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 reg-
ulations 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 recom-
mended 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 operat-
ing for a long period, computing annual
unrecognized section 987 gain or loss for
all taxable years since the QBU’s incep-
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 regula-
tions were published in the Federal Reg-
ister (71 FR 52876) (the “2006 proposed
regulations”). Under the final regulations,
taxpayers that did not apply an eligible
pretransition method must compute pre-
transition 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 tran-
sition rules that were conditioned on the
application of section 987 using a reason-
able 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 sec-
tion 987 QBUs.
6
Under the de minimis
rule, a qualifying taxpayer may elect to
treat all QBUs that fall below the de mini-
mis threshold as having no pretransition
gain or loss. To qualify for the de mini-
mis rule, the owner of a section 987 QBU
must have gross receipts that fall below
the threshold for the small business excep-
tion 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 tax-
payers to apply an earnings and capital
method in lieu of computing annual unrec-
ognized section 987 gain or loss under
§1.987-10(e)(3). However, as explained
in part V.A.1 of this Summary of Com-
ments 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 bal-
ance 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 appli-
cation of the earnings and capital method
described in the 1991 proposed regula-
tions, 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 consis-
tency requirement). Proposed §1.987-
10(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 recogni-
tion 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 con-
cerning the definition of an eligible pre-
transition 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 cur-
rency 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 eli-
gible pretransition method so long as they
made a good faith effort to apply section
987 using a reasonable method. Another
comment recommended that taxpayers
6
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.

January 13, 2025 332 Bulletin No. 2025–3
that have consistently relied on their CTA
account as an estimate of unrealized sec-
tion 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 rea-
sonable 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 pro-
posed §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 defi-
nition is intended broadly to include any
method that complies with the statutory
requirements of section 987 in a reason-
able manner.
7
1. Errors made in applying a pretransition
method and certain consistent practices
that are not treated as errors
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 termi-
nation if it had not made the error and its
section 987 QBU terminated on the day
before the transition date.
If a taxpayer consistently used a rea-
sonable convention to apply section 987
before the transition date, the taxpayer
must use the same convention in deter-
mining 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 reason-
able convention would not be required to
recompute pretransition gain or loss with-
out regard to the convention. Similarly,
if a taxpayer had a consistent practice
under which it did not account for fre-
quently 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 exam-
ple, 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).
2. Timing for application of an eligible
pretransition method
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 pretransi-
tion 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 eligi-
ble 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 pretransi-
tion gain or loss using the method pro-
vided 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 reg-
ulations, 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 rec-
ognizing pretransition loss while defer-
ring 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 pretran-
sition loss should not be treated as sus-
pended 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 sus-
pended in the year of a remittance. The
comment noted that this would create par-
ity between pretransition loss and pretran-
sition gain, which is treated as net unrecog-
7
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.

Bulletin No. 2025–3 333 January 13, 2025
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 real-
located to each QBU on a pro rata basis.
In the case of a consolidated group or a
group of related CFCs, the comment sug-
gested further netting between all mem-
bers of the consolidated group or group of
related CFCs, respectively.
With respect to the amortization elec-
tion 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 tax-
payers’ internal forecasting and planning
windows. A comment also requested clari-
fication 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 regu-
lations 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, pretran-
sition loss is treated as suspended section
987 loss upon transition. This rule is nec-
essary 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 transi-
tion date, so it would not be possible to net
gains and losses separately within each
recognition grouping. In addition, aggre-
gation and netting would make the tran-
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 pre-
transition 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 magni-
tude of the pretransition gains and losses
that are subject to amortization. However,
taxpayers that do not make the amortiza-
tion election will retain some control over
when gains and losses are recognized (by
choosing whether or not to make remit-
tances). 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 sec-
tion 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 recog-
nized 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
loss in connection with certain elections
and rules under which suspended section
987 loss is recognized to the extent of rec-
ognized section 987 gain (the “loss-to-the-
extent-of-gain rule”).
A. Loss Suspension Rule
1. In general
Under proposed §1.987-11(c), in a tax-
able year in which a current rate election is
in effect (and an annual recognition elec-
tion 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 sus-
pension 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 oppor-
tunities for abuse. Although remittances
are often made for non-tax reasons, tax-
payers 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 334 Bulletin No. 2025–3
expected to reduce the compliance burden
of tracking suspended section 987 losses,
particularly for taxpayers with small sec-
tion 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 insur-
ance companies). Alternatively, a com-
ment recommended that the loss suspen-
sion 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 mini-
mal 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 associ-
ated 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, sec-
tion 987 gain that has the same source
and character as the suspended section
987 loss) in the same taxable year. As
explained in the preamble to the 2023 pro-
posed regulations, this rule is intended to
prevent taxpayers from selectively recog-
nizing 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 sus-
pended section 987 loss can be recognized
to the extent of section 987 gain recog-
nized in previous taxable years. The pre-
amble to the 2023 proposed regulations
expressed concern that taxpayers might
exploit a lookback rule by selectively trig-
gering 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 pro-
posed §1.987-11(e) to permit taxpayers
to carry back section 987 losses to earlier
years. Comments posited that, even if sec-
tion 987 gain recognized in a previous year
is offset by a loss carryforward or other tax
attribute, the section 987 gain would still
have a net impact on U.S. tax because the
attribute would no longer be available to
be utilized in subsequent years. However,
the same comment expressed a minority
view that a lookback rule would afford
some potential for abuse, and suggested
consideration of an anti-abuse rule target-
ing remittances that do not have economic
effect. One comment recommended that
the lookback period for section 987 gains
should include years ending before the
transition date, while another comment
suggested that the lookback period should
include only post-transition years.
The Treasury Department and the IRS
agree that a lookback rule would allow for
more evenhanded treatment of section 987
gains and losses when section 987 gain is
recognized in an earlier taxable year and
that a lookback rule could be tailored to
prevent abuse. Accordingly, the final reg-
ulations provide that suspended section
987 loss is recognized to the extent of net
section 987 gain recognized in the cur-
rent year and the three preceding taxable
years. See §1.987-11(e)(3). Taxable years
beginning before the transition date are
not included in the lookback period, given
the substantial flexibility taxpayers have
had in determining the timing, amount,
and character of section 987 gain or loss
recognized before the applicability date of
the final regulations.
Under an anti-abuse rule, section 987
gain is disregarded for purposes of the
loss-to-the-extent-of-gain rule if it is
recognized with a principal purpose of
reducing U.S. Federal income tax liabil-
ity, including over multiple taxable years.
See §1.987-11(e)(3)(v). For example, this
rule would apply if an owner recognizes
section 987 gain in a taxable year (“year
1”) in which the section 987 gain is offset
by a tax attribute that would not otherwise
be used, the section 987 gain is recognized
with a principal purpose of releasing sus-
pended section 987 loss in a subsequent
taxable year (“year 2”), and the net effect
of recognizing both the section 987 gain
and the suspended section 987 loss would
reduce the combined U.S. Federal income
tax liability for years 1 and 2. In deter-
mining whether such a principal purpose
exists, one relevant factor is the extent
to which a remittance does not result in
a sustained economic contraction of the
section 987 QBU (over a period of at least
12 months). Thus, for example, if a sec-
tion 987 QBU makes a remittance giving
rise to the recognition of section 987 gain,
and the owner makes an offsetting contri-
bution to the section 987 QBU within 12
months of the remittance, the section 987
gain may be disregarded for purposes of
the loss-to-the-extent-of-gain rule.
The lookback period generally is lim-
ited to three years, because a longer look-
back period would require additional
tracking of section 987 gains recognized
in prior taxable years and would increase
the compliance and administrative burden
of the section 987 regulations. In addition,
this rule is consistent with other Code
provisions that limit loss carryforward or
carryback periods to a fixed number of
years. See, e.g., section 1212(a)(1) (gener-
ally permitting capital losses to be carried
forward for five years and carried back for
three years). Moreover, it may be difficult
to enforce the anti-abuse rule in §1.987-
11(e)(3)(v) with respect to transactions
occurring more than three years before the

Bulletin No. 2025–3 335 January 13, 2025
taxable year in which suspended section
987 loss is recognized.
The final regulations provide a differ-
ent lookback period for taxpayers that
make both an annual recognition election
and a current rate election. For these tax-
payers, the lookback period includes all
taxable years in which both elections are
continuously in effect. See §1.987-11(e)
(3)(iv)(B). As a result, for purposes of
applying the loss-to-the-extent-of-gain
rule, the total amount of section 987 gain
recognized under the annual recognition
election for all taxable years in which both
elections are continuously in effect is off-
set by the total amount of section 987 loss
recognized under the annual recognition
election for all taxable years in which both
elections are continuously in effect. As
explained in the preamble to the proposed
regulations, the Treasury Department and
the IRS are concerned that, in the absence
of such a rule, taxpayers would be able to
recognize net losses on a cumulative basis
for the taxable years to which the annual
recognition election applies. 88 FR 78140.
In addition, the tracking burden in this
context should be more limited because
losses generally are not suspended in tax-
able years in which an annual recognition
election is in effect.
In general, following a transaction
described in section 381(a), section 987
gain recognized by the transferor corpora-
tion in the three years preceding the trans-
action is taken into account for purposes
of the lookback rule. See §1.987-11(e)(5)
(i). However, this rule does not apply in
the case of an inbound reorganization or
liquidation. See §1.987-11(e)(5)(ii). Thus,
section 987 gain recognized by the for-
eign transferor corporation (which may
have been subject to a lower effective tax
rate) cannot be used to release suspended
section 987 loss of the domestic acquiring
corporation.
2. Application of the loss-to-the-extent-
of-gain rule at the owner level
Under proposed §1.987-11(e), the loss-
to-extent-of-gain rule is applied separately
to each owner with respect to all of its sec-
tion 987 QBUs. Comments asserted that
the loss-to-the-extent-of-gain rule could
produce harsh results when one CFC rec-
ognizes section 987 gain and a related
CFC has suspended section 987 loss. One
comment noted that concerns about selec-
tive recognition of section 987 loss should
be mitigated to the extent that a different
CFC in the same group recognizes section
987 gain.
Another comment recommended that,
with respect to section 987 gain or loss
that is characterized as tested income, the
loss-to-the-extent-of-gain rule should be
applied at the level of the U.S. shareholder
with respect to all section 987 QBUs of
CFCs owned by the U.S. shareholder, con-
sistent with the general framework of sec-
tion 951A. Under this approach, the excess
of the U.S. shareholder’s pro rata share of
section 987 losses of any CFC attributable
to a tested income group over its pro rata
share of section 987 gains attributable to
the same tested income group would be
suspended (and available for recognition
to the extent of the U.S. shareholder’s
pro rata share of section 987 gains recog-
nized in future years). Another comment
recommended that the loss-to-the-extent
of gain rule should be applied to a group
of related CFCs by treating the group as
a single owner. Under this approach, one
CFC could recognize suspended section
987 loss to the extent that another CFC
recognized section 987 gain.
The final regulations generally apply
the loss-to-the-extent of gain rule sepa-
rately to each owner, taking into account
section 987 gain or loss with respect to
all of the owner’s section 987 QBUs. The
final regulations do not apply the loss-to-
the-extent of gain rule at the level of the
U.S. shareholder. Because section 987
gain or loss is a CFC-level income item
that is taken into account in computing
each CFC’s taxable income and earn-
ings and profits, a U.S. shareholder level
loss limitation rule could reach inappro-
priate results for minority shareholders
and would be difficult to administer. For
example, if a CFC is owned by multi-
ple U.S. shareholders, application of the
loss-to-the-extent-of-gain rule at the U.S.
shareholder level would require multiple
separate computations to determine the
suspended section 987 loss recognized by
a single CFC.
Similarly, the final regulations do not
treat a group of related CFCs as a single
owner for purposes of the loss-to-the-ex-
tent-of-gain rule. A CFC grouping rule
would make the loss-to-the-extent-of-
gain-rule more complex and more diffi-
cult to administer. Moreover, under a CFC
grouping rule, a CFC could recognize
suspended section 987 loss as a result of a
different CFC’s recognition of section 987
gain in the same recognition grouping in
a taxable year in which the loss cannot be
utilized.
3. Expansion of the loss-to-the-extent-of-
gain rule
A comment recommended expansion
of the loss-to-the-extent-of-gain rule so
that suspended section 987 loss could be
recognized to the extent of any income
recognized by the owner (including but
not limited to section 987 gain) that has
the same source and character as the sus-
pended section 987 loss. Another com-
ment recommended that suspended sec-
tion 987 loss should be recognized to the
extent of any section 987 gain recognized
by the owner, even if the section 987 gain
is in a different recognition grouping. The
comment suggested that the requirement
for section 987 gain to be in the same rec-
ognition grouping as suspended section
987 loss does not serve the policy goals of
section 987, and that concerns relating to
mismatches between the source and char-
acter of section 987 gains and losses are
adequately policed by other provisions of
the Code.
The final regulations do not expand
the scope of the loss-to-the-extent of gain
rule to cover taxable income other than
section 987 gain. Taxable income other
than section 987 gain does not release sus-
pended section 987 loss under the loss-to-
the-extent-of-gain rule because this rule
is intended to target selective recognition
of section 987 loss and deferral of section
987 gain.
In addition, the final regulations retain
the rule that section 987 gain can only
release suspended section 987 loss in
the same recognition grouping. This rule
ensures that the loss-to-the-extent-of-gain
rule effectively limits selective recogni-
tion of losses pursuant to the authority
provided in section 989(c)(2). In partic-
ular, it prevents taxpayers from avoiding
the loss limitation by recognizing gains
that are subject to a low rate of tax (or are
not subject to U.S. tax).

January 13, 2025 336 Bulletin No. 2025–3
As explained in part VII.B of this Sum-
mary of Comments and Explanation of
Revisions, the final regulations allow sec-
tion 987 gain or loss to be assigned to mul-
tiple subpart F income groups. Therefore,
each separate subpart F income group (as
defined in §1.960-1(d)(2)(ii)(B)) consti-
tutes a separate recognition grouping. See
§1.987-11(f)(2)(ii). However, as explained
in part VII.B.2 of this Summary of Com-
ments and Explanation of Revisions, tax-
payers can reduce the number of subpart
F recognition groupings by making the
section 988 characterization election pro-
vided in §1.987-6(b)(2)(i)(C).
4. Application to terminating QBUs
A comment requested clarification
concerning the application of the loss-
to-the-extent-of-gain rule in the case of
a terminating QBU. The final regulations
clarify that, when a terminating QBU has
suspended section 987 loss in a taxable
year before the final regulations are gen-
erally applicable, section 987 gain with
respect to a taxpayer’s other section 987
QBUs is assigned to a recognition group-
ing under the method applied by the
taxpayer before the transition date. The
owner recognizes suspended section 987
loss with respect to a terminating QBU
only to the extent of its net section 987
gain in the same recognition grouping for
the taxable year.
5. SRLY rule relating to suspended
section 987 losses
When a corporation that is the owner
of a section 987 QBU joins a consoli-
dated group, the corporation may have
suspended section 987 losses that arose
in earlier years. As explained in the pre-
amble to the 2023 proposed regulations,
the regulations issued under the authority
of section 1502 generally limit a consoli-
dated group’s ability to use tax attributes
generated in separate return years (as
defined in §1.1502-1(e)). 88 FR 78154.
The Treasury Department and the IRS
requested comments on how rules similar
to the rules of §1.1502-21(c) (limiting the
use of net operating losses) should apply
to suspended and deferred section 987
losses. Id. No comments were received in
response to this request.
To prevent inappropriate trafficking of
section 987 losses, §1.987-11(e)(6)(ii) of
the final regulations provides that the sep-
arate return limitation year (SRLY) limita-
tion principles of §1.1502-21(c) apply to
suspended section 987 losses that arose in
separate return years. The rule in §1.987-
11(e)(6)(ii) is based on the SRLY rules for
capital loss carryovers in §1.1502-22(c).
To simplify the administration of this rule,
when a corporation that is the owner of
a section 987 QBU joins a consolidated
group, the SRLY limitation is not applied
separately to each recognition grouping
determined under §1.987-11(f), but rather
to the corporation’s section 987 losses
overall.
Because deferred section 987 losses
under §1.987-12 are not subject to a loss-
to-the-extent-of-gain rule, but rather are
treated similarly under the section 987
regulations to other unrecognized section
987 losses, the SRLY limitation in §1.987-
11(e)(6)(ii) does not apply to such losses.
XI. Comments and Changes to
Proposed §1.987-13: Suspended
Section 987 Loss Upon Terminations
Proposed §1.987-13 would provide
suspended loss rules that apply in con-
nection with certain transactions in which
a section 987 QBU or a successor sus-
pended loss QBU terminates.
A. Successor Rules
Under the 2023 proposed regulations,
if an owner has suspended section 987
loss with respect to a section 987 QBU
that terminates, an eligible QBU that holds
the assets of the section 987 QBU after the
termination would be treated as a succes-
sor suspended loss QBU if it meets three
requirements. Proposed §1.987-13(b)(1)
(i). First, a significant portion of the assets
of the terminating section 987 QBU must
be reflected on the books and records of
the eligible QBU. Second, the eligible
QBU must carry on a trade or business of
the section 987 QBU. Finally, the eligible
QBU must be owned by the owner of the
section 987 QBU or by a member of its
controlled group (the owner of the suc-
cessor is referred to as the “successor sus-
pended loss QBU owner”). Following a
termination, if the terminated section 987
QBU has a successor, suspended section
987 loss with respect to the section 987
QBU would be attributed to the successor.
Similar successor rules would apply upon
termination of a successor suspended loss
QBU. Proposed §1.987-13(c)(1)(i).
If a section 987 QBU or successor
suspended loss QBU terminates without
a successor, the owner would recognize
its cumulative suspended section 987
loss with respect to the QBU. Proposed
§1.987-13(b)(2) and (c)(2). Similarly, the
cumulative suspended section 987 loss
with respect to a successor suspended loss
QBU would be recognized if the original
suspended loss QBU owner ceases to be a
member of the same controlled group as
the successor suspended loss QBU owner
due to the transfer of an ownership inter-
est in the successor suspended loss QBU
owner. Proposed §1.987-13(d).
A comment recommended that the
definition of a successor suspended loss
QBU should be aligned with the defini-
tion of a successor deferral QBU as pro-
vided in proposed §1.987-12(g)(2), so
that the same definition would apply for
both purposes. The final regulations gen-
erally retain the definition of a successor
suspended loss QBU provided in the pro-
posed regulations because this definition
is needed to ensure that suspended section
987 loss can be recognized (in excess of
section 987 gain) only when the trade or
business of a section 987 QBU ceases
to be operated by a member of the same
controlled group. The successor rule in
§1.987-12(g)(2) (which requires the suc-
cessor to itself be a section 987 QBU)
would not serve this function, because it
would require suspended section 987 loss
to be recognized when a section 987 QBU
is transferred to a related owner that has
the same functional currency as the sec-
tion 987 QBU.
B. Elimination or Limited Recognition of
Suspended Section 987 Loss Following
Certain Transactions
Proposed §1.987-13(e), (f), and (g)
would provide rules that eliminate or
limit the recognition of suspended sec-
tion 987 loss following certain trans-
actions. First, under proposed §1.987-
13(e), if the original suspended loss
QBU owner ceases to be a member of the

Bulletin No. 2025–3 337 January 13, 2025
same controlled group as the successor
suspended loss QBU owner due to the
transfer of an ownership interest in the
original suspended loss QBU owner, the
original suspended loss QBU owner’s
suspended section 987 loss would cease
to be attributable to any section 987 QBU
or successor suspended loss QBU. After
the transaction, the owner’s suspended
section 987 loss can be recognized under
§1.987-11(e) to the extent that the owner
recognizes section 987 gain; however,
the suspended section 987 loss cannot
be recognized under proposed §1.987-
13(b)(2), (c)(2), or (d). This rule would
prevent taxpayers from transferring the
stock of the original suspended loss QBU
owner out of its controlled group for the
purpose of selectively recognizing sus-
pended section 987 loss, while retaining
the assets and activities of the section
987 QBU in the hands of a different con-
trolled group member.
Proposed §1.987-13(f) would provide
that, if an original suspended loss QBU
owner ceases to exist as a result of a
transaction in which there is no successor
described in section 381(a) (for example,
as a result of a section 331 liquidation),
then any suspended section 987 loss that
is not recognized after applying the loss-
to-the-extent-of-gain rule cannot be rec-
ognized and is eliminated. This rule is
intended to prevent taxpayers from enter-
ing into section 331 liquidations in order
to trigger the recognition of suspended
section 987 loss.
Similarly, under proposed §1.987-
13(g), if an owner of a section 987 QBU
with suspended section 987 loss, or an
original suspended loss QBU owner,
ceases to exist in an inbound section 332
liquidation or in an inbound reorganiza-
tion described in section 381(a)(2), then
any suspended section 987 loss of the
owner or original suspended loss QBU
owner that is not recognized after appli-
cation of the loss-to-the-extent-of-gain
rule under proposed §1.987-11(e) would
be eliminated. This rule would prevent
suspended section 987 loss that was gen-
erated offshore from being imported into
the United States.
Several comments requested that the
rules of proposed §1.987-13(e) through
(g) be replaced with anti-abuse rules tied
to the purpose for which a taxpayer enters
into the relevant transaction. One com-
ment noted that if a CFC liquidates into its
U.S. shareholder and a current rate elec-
tion is not in effect, the transaction results
in a termination of the CFC’s section
987 QBUs under §1.987-8, and the CFC
recognizes its net unrecognized section
987 gain or loss immediately before the
liquidation. The comment proposed that
suspended section 987 loss should simi-
larly be recognized in connection with an
inbound liquidation.
Other comments recommended that,
following a section 331 liquidation or
inbound transaction, suspended section
987 loss should be amortized over a ten-
year period or added to the acquiring
corporation’s outside stock basis. One
comment suggested that the suspended
section 987 loss should be allocated pro
rata among the U.S. shareholder’s other
foreign entities that own section 987
QBUs. Another comment requested that
§1.987-13(f) be modified to provide that
suspended section 987 loss is recognized
to the extent of the owner’s overall gain
(not limited to section 987 gain) recog-
nized in connection with the section 331
liquidation. One comment suggested that,
in connection with an inbound transac-
tion, suspended section 987 loss could be
recognized to the extent of the inbounded
section 987 gain.
The Treasury Department and the
IRS have determined that, in order
to facilitate the current rate election
(which can have the effect of enlarging
the pools of unrecognized section 987
gain or loss), effective loss limitation
rules are needed to prevent the selective
recognition of section 987 losses by, for
example, entering into a section 331
liquidation, inbound liquidation or reor-
ganization, or a transfer of the original
suspended loss QBU owner. Further, an
anti-avoidance rule tied to the taxpay-
er’s subjective purpose for entering into
a particular transaction would be dif-
ficult to administer and, consequently,
would not be an adequate safeguard
against abuse given the critical func-
tion served by the loss limitation rules.
A subjective anti-abuse rule would also
provide less certainty for taxpayers and
the IRS. Therefore, the final regulations
generally retain the rules of proposed
§1.987-13(e) through (g).
The final regulations do not permit sus-
pended section 987 loss to be amortized
by the acquiring corporation over a ten-
year period following an inbound transac-
tion or section 331 liquidation because this
would nevertheless facilitate loss impor-
tation (in the case of an inbound trans-
action), even though the benefit would
only be recognized over time, or would
allow for losses to be carried over to the
acquirer in a transaction not described in
section 381(a) (in the case of a section 331
liquidation). Similarly, reallocating losses
to foreign entities other than the acquiring
corporation would be inconsistent with
the principles of section 381 and would be
unduly complex. Adding suspended sec-
tion 987 loss of a CFC to the outside basis
of a domestic acquiring corporation’s
stock would have the same effect as loss
importation (because the increased basis
could reduce the taxable income of the
domestic corporation’s shareholders upon
a sale of stock) and would also shift losses
in a manner that is contrary to general tax
principles.
The final regulations also do not per-
mit suspended section 987 loss to be rec-
ognized to the extent of gain (other than
section 987 gain) recognized in connec-
tion with a section 331 liquidation. As
explained in part X.B.3 of this Summary
of Comments and Explanation of Revi-
sions, the loss-to-the-extent of gain rule
generally does not allow suspended sec-
tion 987 loss to be recognized in excess
of section 987 gain. If a different rule
were adopted for section 331 liquida-
tions, taxpayers could enter into a section
331 liquidation in order to step up the
basis of their assets, with any gain recog-
nized with respect to those assets being
offset by the recognition of suspended
section 987 loss.
However, consistent with the 2023
proposed regulations, the final regula-
tions permit suspended section 987 loss
to be recognized to the extent of section
987 gain recognized in connection with a
transaction described in §1.987-13(f) or
(g). Because those transactions generally
would be treated as terminations under
§1.987-8, any net unrecognized section
987 gain of the owner will be recognized
immediately before the transaction and
will be taken into account under the loss-
to-the-extent-of-gain rule.

January 13, 2025 338 Bulletin No. 2025–3
C. Clarification of §1.987-13
A comment requested clarification as
to the mechanics for recognizing sus-
pended section 987 loss following a
transaction described in §1.987-13(e), in
which an original suspended loss QBU
owner is transferred outside the con-
trolled group. The comment also sug-
gested clarifying the interaction between
the successor rules of §1.987-13(b) and
(c) and the inbound transaction rule in
proposed §1.987-13(g).
The final regulations clarify that, fol-
lowing a transaction described in §1.987-
13(e) (in which the original suspended
loss QBU owner is transferred outside the
controlled group), the original owner rec-
ognizes suspended section 987 loss to the
extent that it recognizes section 987 gain
in the same recognition grouping. Fur-
ther, in the case of a transaction described
in §1.987-13(e) (transfer of original sus-
pended loss QBU owner), §1.987-13(f)
(section 331 liquidation), or §1.987-13(g)
(inbound transaction), suspended section
987 loss is not recognized or attributed
to a successor suspended loss QBU under
§1.987-13(b) or (c). The final regulations
also clarify that the rules of §1.987-13(f)
apply to a transaction (such as a section
331 liquidation) in which the owner of
a section 987 QBU ceases to exist with-
out having a successor (that is, this rule
applies even if the section 987 QBU with
respect to which the suspended section
987 loss arose had not previously been
terminated, such that the owner was not
an original suspended loss QBU owner).
XII. Comments and Changes to
Proposed §1.987-14: Applicability Date
Proposed §1.987-14 would provide
rules relating to the applicability date of
the section 987 regulations.
In general, the 2023 proposed regu-
lations are proposed to apply to taxable
years beginning after December 31, 2024.
Proposed §1.987-14(a)(1). In the case of
a terminating QBU (that is, a section 987
QBU that terminates after November 9,
2023, but before the section 987 regula-
tions are generally applicable), the 2023
proposed regulations, as finalized, gener-
ally would apply immediately before the
termination.
A comment requested that the general
applicability date be delayed until taxable
years beginning after December 31, 2025,
to allow additional time for taxpayers to
build systems and processes to comply
with the final regulations. Another com-
ment requested a deferred applicability
date no earlier than the taxable year begin-
ning on or after one year after the first day
of the first taxable year following the date
on which the final regulations are pub-
lished.
One comment requested that the spe-
cial rule for terminating QBUs be elim-
inated. The comment asserted that the
existing deferral rules under §1.987-12 are
sufficient to prevent abuse.
Under §1.987-15, the final regulations
generally apply to taxable years begin-
ning after December 31, 2024, consistent
with the 2023 proposed regulations. See
§1.987-15(a)(1). See also §§1.861-9(g)
(2)(v), 1.985-5(g), 1.988-1(i), 1.988-4(b)
(2)(ii), 1.989(a)-1(b)(4) and (d)(4), and
1.1502-13(l)(10). The 2016 final regula-
tions originally were applicable to tax-
able years beginning on or after one year
after the first day of the first taxable year
following December 7, 2016 (thus, they
would have been applicable in 2018 for
calendar year taxpayers). Although the
applicability date of those regulations was
subsequently deferred, taxpayers have
been on notice for many years concern-
ing the general framework of the section
987 regulations. Final regulations are
necessary to provide guidance to taxpay-
ers regarding the proper determination of
section 987 taxable income or loss and
section 987 gain or loss and to provide
a consistent set of rules applicable to all
taxpayers. Accordingly, further defer-
ral would not serve the interest of sound
tax administration. The applicability date
under §1.987-15(a)(1) is consistent with
the rule under section 7805(b) of the Code
regarding retroactivity of regulations or
rulings.
In addition, the final regulations retain
the special applicability date providing
that the section 987 regulations apply to
terminating QBUs immediately before
the termination. See §1.987-15(a)(2). This
rule is needed to prevent taxpayers from
terminating a section 987 QBU before the
section 987 regulations generally become
applicable in order to avoid the rules of the
section 987 regulations, including the loss
suspension rules in §§1.987-10, 1.987-11,
and 1.987-13.
XIII. Comments and Changes to
Proposed §1.1502-13: Intercompany
Transactions
The 2023 proposed regulations would
provide a new rule applicable to certain
intercompany transactions (as defined in
§1.1502-13(b)(1)(i)) involving section
987 QBUs. See proposed §1.1502-13(j)
(9).
In general, §1.1502-13 provides rules
to clearly reflect the taxable income and
tax liability of a consolidated group as
a whole by preventing intercompany
transactions from creating, accelerating,
avoiding, or deferring consolidated tax-
able income or consolidated tax liability.
See §1.1502-13(a). Under §1.1502-13, the
selling member (S) and the buying mem-
ber (B) are treated as separate entities for
some purposes but as divisions of a sin-
gle corporation for other purposes. The
matching rule in §1.1502-13(c) is one of
the principal rules in §1.1502-13 that pro-
duces the effect of transactions between
divisions of a single corporation (single
entity treatment). See §1.1502-13(a)(6)(i).
To address potential mismatches that
make it difficult to apply the rules of
§1.1502-13 to section 987 QBUs, the
2023 proposed regulations would apply a
reattribution rule that treats all intercom-
pany transactions involving a section 987
QBU as attributable to a member’s home
office rather than to any section 987 QBU.
As a result, an intercompany transaction
between one member of a consolidated
group and a section 987 QBU of another
member of the same group is treated as a
combination of (i) an intercompany trans-
action between the consolidated group
members (that is, S and B), and (ii) trans-
fers between the section 987 QBU and
its owner as necessary to account for the
effect of the transaction on the assets and
liabilities of the section 987 QBU. This
approach would ensure that consolidated
taxable income includes the same amount
of section 987 gain or loss as would be
recognized if the members were divisions
of a single corporation.
One comment requested that the pro-
posed rule be removed, on the grounds

Bulletin No. 2025–3 339 January 13, 2025
that it would change the amount of cur-
rency gain or loss recognized by S and
B with respect to intercompany trans-
actions. For example, assume that S has
a section 987 QBU with the euro as its
functional currency, and the QBU makes
a euro-denominated loan to B. The com-
ment noted that, under the proposed
rule, B’s foreign currency exposure and
S’s foreign currency exposure offset for
Federal income tax purposes (that is, if B
recognizes any section 988 gain or loss
on the interest payments, S will recog-
nize an offsetting amount of section 988
loss or gain). The comment indicated
that, for financial accounting purposes,
B’s foreign currency exposure would
result in net income (it would not be off-
set by S’s foreign currency exposure).
According to the comment, B would
typically enter into a separate hedging
transaction (for example, a foreign cur-
rency forward contract) to hedge this
exposure. However, under the proposed
rule, because the section 988 gain or
loss of B and S with respect to the loan
will offset for tax purposes, the hedg-
ing transaction itself will generate net
section 988 gain or loss. Therefore, the
comment asserted that the proposed rule
may have the practical effect of giving
rise to income or loss for tax purposes
for consolidated groups with respect to
hedging transactions.
In other words, under the view
expressed in the comment, if the taxpayer
enters into a hedging transaction for U.S.
GAAP purposes, B would have section
988 gain or loss on the loan absent the pro-
posed rule, and such gain or loss would
be offset by loss or gain on the hedging
transaction; in contrast, under the pro-
posed rule, B’s section 988 gain or loss on
the loan would be offset by S’s section 988
loss or gain, and loss or gain on the hedg-
ing transaction would not be offset.
The comment appears to reflect the
view that, in the absence of the reattri-
bution rule in proposed §1.1502-13(j)
(9), the matching rule of §1.1502-13(c)
does not apply to transactions involving
section 987 QBUs, and as a result the
tax treatment of S and B is determined
independently. Therefore, the comment
appears to assume that the Federal income
tax treatment and the accounting treat-
ment of transactions involving section
987 QBUs would be identical without the
proposed rule.
The Treasury Department and the IRS
disagree with the comment. The intercom-
pany transaction rules in §1.1502-13 apply
to all intercompany transactions, includ-
ing those that involve section 987 QBUs,
and taxpayers must apply those rules to
achieve single entity treatment. The reat-
tribution rule of proposed §1.1502-13(j)
(9) merely reflects the application of the
intercompany transaction rules to section
987 QBUs in a simpler and more admin-
istrable manner for taxpayers and the IRS.
Therefore, removing the reattribution rule
would not address the concerns expressed
in the comment. Additionally, the approach
discussed in the comment would be fun-
damentally inconsistent with the purposes
of section 1502 and §1.1502-13: it would
not clearly reflect the income tax liabil-
ity of the consolidated group, because it
would allow intercompany transactions
to accelerate or defer currency gains and
losses. The proposed reattribution rule is
therefore finalized without change.
Comments also requested clarification
regarding Example 8 in proposed §1.1502-
13(j)(10)(viii). In response, the final regu-
lations include additional facts in Example
8 as well as two alternative fact patterns
involving (i) a member’s disposition of an
intercompany loan before its satisfaction,
and (ii) a member ceasing to be a member
of the consolidated group while an inter-
company loan remains outstanding. The
final regulations also include formatting
changes to the examples under §1.1502-
13(j) that were proposed in REG-134420-
10 (88 FR 52057).
XIV. Other Comments and Revisions
A comment recommended that the
Treasury Department and the IRS con-
sider the impact of section 987 gain or
loss on the corporate alternative minimum
tax (“CAMT”) regime. The comment did
not recommend specific rules to be imple-
mented for this purpose. The final regu-
lations do not address the application of
the CAMT regime. Accordingly, this com-
ment was not adopted because it is outside
the scope of the final regulations.
Similarly, comments requested that
information relating to section 987 should
continue to be reported on Form 8858,
Schedule C-1, with modifications for tax-
payers that do not make a current rate elec-
tion. The development or modification of
forms related to section 987 is outside the
scope of the final regulations. Therefore,
this comment was not adopted.
A comment was received in response to
the 2016 proposed regulations during the
initial comment period for those proposed
regulations. The comment requested that
the 2016 final regulations and the 2016
temporary regulations be reproposed with
a deferred applicability date, which is
consistent with the approach taken by the
2023 proposed regulations and these final
regulations.
In addition to the provisions described
in parts I through XIII of this Summary of
Comments and Explanation of Revisions,
the final regulations include other wording
changes, additions, deletions, and orga-
nizational changes to the 2023 proposed
regulations for purposes of clarification.
For example, the rules in §1.987-3(c)(3)
relating to the adjustments required under
the simplified inventory method have
been clarified, and an example has been
added to illustrate those rules. Similarly,
the rules of §1.985-5 have been modified
to update cross-references to the section
987 regulations and to clarify the example
in §1.985-5(f).
Special Analyses
I. Regulatory Planning and Review–
Economic Analysis
Pursuant to the Memorandum of
Agreement, Review of Treasury Regula-
tions under Executive Order 12866 (June
9, 2023), tax regulatory actions issued by
the IRS are not subject to the requirements
of section 6 of Executive Order 12866, as
amended. Therefore, a regulatory impact
assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520) (PRA) requires
that a Federal agency obtain the approval
of the Office of Management and Bud-
get (OMB) before collecting information
from the public, whether such collection
of information is mandatory, voluntary, or
required to obtain or retain a benefit. An

January 13, 2025 340 Bulletin No. 2025–3
agency may not conduct or sponsor, and
a person is not required to respond to, a
collection of information unless it dis-
plays a valid control number assigned by
the OMB.
The collections of information in the
final regulations with respect to section
987 are in §§1.987-1(g), 1.987-9, 1.987-
10(k), and 1.987-14(c). The likely respon-
dents are individuals who file a Form 1040
and businesses that file a Form 1065 or
Form 1120. The final regulations do not
apply to trusts and estates. See part II.A.2
of the Summary of Comments and Expla-
nation of Revisions.
The collection of information pro-
vided by §1.987-1(g) is required only
when a taxpayer makes or revokes cer-
tain elections for purposes of calculating
its section 987 taxable income or loss
and section 987 gain or loss with respect
to a section 987 QBU. In the first year
in which the section 987 regulations
apply to the taxpayer, or the taxpayer or
a member of its consolidated group or
section 987 electing group is the owner
of a section 987 QBU, the taxpayer may
make any section 987 election. Thereaf-
ter, the taxpayer may make or revoke a
current rate election, annual recognition
election, or section 988 mark-to-market
election only every five years and may
make or revoke other elections only with
the consent of the Commissioner, which
may be granted with a private letter rul-
ing. When a taxpayer makes or revokes
an election, the collection of information
is mandatory. The collection of informa-
tion required by §1.987-1(g) will be used
by the IRS for tax compliance purposes.
Section 1.987-9 is intended to spec-
ify how a taxpayer satisfies its record-
keeping obligations under section 6001
with respect to section 987. The record-
keeping requirements under §1.987-9
are considered general tax records under
§1.6001-1(e). For PRA purposes, gen-
eral tax records are already approved by
OMB under 1545-0074 for individuals
and under 1545-0123 for business entities.
The IRS intends that the information col-
lection requirements pursuant to §1.987-9
will be satisfied by the taxpayer maintain-
ing permanent books and records that are
adequate to verify its section 987 gain or
loss and section 987 taxable income or
loss with respect to its section 987 QBU.
Specifically, with respect to each sec-
tion 987 QBU, successor deferral QBU,
and successor suspended loss QBU for
a taxable year, as applicable, §1.987-9
requires taxpayers to maintain books
and records related to the amount of the
items of income, gain, deduction, or loss
attributed to the section 987 QBU in the
functional currency of the section 987
QBU and its owner; the adjusted balance
sheet of the section 987 QBU in the func-
tional currency of the section 987 QBU
and its owner (or the information used to
determine QBU net value under §1.987-
4(e)(2)(iii), as explained in part V.A.1 of
the Summary of Comments and Explana-
tion of Revisions); the exchange rates used
to translate items of income, gain, deduc-
tion, or loss of the section 987 QBU into
the owner’s functional currency and, if a
spot rate convention is used, the manner
in which the convention is determined; the
exchange rates used to translate the assets
and liabilities of the section 987 QBU into
the owner’s functional currency and, if a
spot rate convention is used, the manner
in which the convention is determined; the
amount of assets and liabilities transferred
by the section 987 QBU to the owner
determined in the functional currency of
the owner and the section 987 QBU; the
amount of the unrecognized section 987
gain or loss for the taxable year; the amount
of the net accumulated unrecognized sec-
tion 987 gain or loss for the taxable year;
the amount of the remittance and the
remittance proportion for the taxable year;
the computations required under §§1.861-
9(g) and 1.861-9T(g) for purposes of
sourcing and characterizing section 987
gain or loss, deferred section 987 gain or
loss, or suspended section 987 loss under
§1.987-6; the cumulative suspended sec-
tion 987 loss in each recognition group-
ing; the outstanding deferred section 987
gain or loss in each recognition grouping;
the transition information required to be
determined under §1.987-10(k); and the
identification required under §1.987-14(c)
with respect to a section 987 hedging
transaction. These records are required for
the IRS to validate that section 987 gain
or loss and section 987 taxable income or
loss have been properly determined.
The Treasury Department and the IRS
are adding a recordkeeping requirement
under §1.987-14(c) based on a public com-
ment on the substantive rules of the 2023
proposed regulations which requested
implementation of a section 987 hedging
election. See part V.B.1 of the Summary of
Comments and Explanation of Revisions.
Under §1.987-14(c), the final regulations
require an identification statement to be
kept in the taxpayers’ books and records
with respect to a section 987 hedging
transaction described in §1.987-14(b)(1).
The collection of information in
§1.987-10(k) is mandatory. Specifically,
§1.987-10(k) would require a taxpayer
to file a “Section 987 Transition Infor-
mation” statement with its return for the
taxable year beginning on the transition
date (as defined in §1.987-10(c)). The
statement would contain information that
is necessary for a taxpayer to transition to
the final section 987 regulations. Specif-
ically, the statement requires a taxpayer
to provide information that is relevant to
determining the taxpayer’s pretransition
gain or loss with respect to its section
987 QBUs. The collection of information
required by §1.987-10(k) will be used by
the IRS for tax compliance purposes.
The Treasury Department and the IRS
intend that the information described in
§1.987-1(g) will be collected by attaching
a statement to a taxpayer’s return (such as
the appropriate Form 1040, Form 1120,
Form 1065, or other appropriate form).
With respect to §1.987-10(k), the IRS also
intends that the collection of information
will be conducted by attaching a “Section
987 Transition Information” statement to
a return. For purposes of the PRA, the
reporting burden associated with those
collections of information with respect
to §§1.987-1(g) and 1.987-10(k) will be
reflected in the PRA submissions associ-
ated with those forms. The OMB Control
Numbers for the forms will be approved
under 1545–0074 for individuals and
under 1545–0123 for business entities.
To the extent that a taxpayer makes or
revokes an election by obtaining a private
letter ruling, the reporting burden associ-
ated with those collections of information
will be reflected in the PRA submissions
associated with revenue procedures gov-
erning private letter rulings. The OMB
Control Number for the collection of
information for those revenue procedures
is control number 1545-1522. The final
regulations would only require taxpayers

Bulletin No. 2025–3 341 January 13, 2025
to follow the procedures under Revenue
Procedure 2024-1, IRB 2024-1 (or future
revenue procedure governing private
letter rulings) and would not change the
collection requirements of the Revenue
Procedure.
The attachment to a return used for
making elections with respect to these
final regulations will be used by those tax-
payers making or revoking an election for
the taxable year. The “Section 987 Tran-
sition Information” statement attached to
a return will be used by all taxpayers, but
generally only with respect to the taxable
year in which the taxpayer transitions to
these final regulations. In certain cases, if
the taxpayer owns a QBU that terminates
after November 9, 2023, and before the
taxable year in which the taxpayer transi-
tions to the final regulations, the “Section
987 Transition Information” statement
must be filed for that taxable year too, but
the statement would only contain informa-
tion with respect to the terminating QBU.
The burden will be accounted for in 1545-
0074 for individuals and in 1545-0123 for
businesses.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any Internal
Revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby cer-
tified that this rulemaking will not have a
significant economic impact on a substan-
tial number of small entities within the
meaning of section 601(6) of the Regula-
tory Flexibility Act. The final regulations
affect taxpayers with foreign branch oper-
ations and taxpayers that own an interest
in a foreign partnership (or a partnership
with a foreign branch).
The number of small entities poten-
tially affected by the final regulations is
unknown; however, it is unlikely to be
a substantial number because taxpayers
with wholly owned foreign operations are
typically larger businesses. The Treasury
Department and the IRS estimate that the
total number of corporations (other than S
corporations) with a foreign branch sub-
ject to section 987 is approximately 2,000.
This estimate is based on the number of
corporations (other than S corporations)
that filed a Form 8858 in 2022 that showed
that the filer: (1) owned at least one disre-
garded entity or branch with a functional
currency different from the functional
currency of the owner, and (2) indicated
that the disregarded entity or branch was a
section 989 QBU. As shown in the follow-
ing table, only a small percentage of those
filers are small entities.
Total Receipts/Positive Income (2022)Percentage of Filers
Under $5 Million7%
$5 Million to $10 Million2%
$10 Million to $25 Million4%
Over $25 Million87%
The number of affected corporations
(other than S corporations) with total
receipts of less than $25 million rep-
resents 0.02% of all corporations (other
than S corporations) with total receipts of
less than $25 million.
The Treasury Department and the IRS
estimate that the total number of partner-
ships and S corporations with a foreign
branch subject to section 987 is approx-
imately 800. Approximately 50 percent
of those filers have gross receipts of less
than $25 million, but the data does not
indicate whether these partnerships are
part of larger enterprises. The number of
affected partnerships and S corporations
with total receipts of less than $25 million
represents 0.004% of all partnerships and
S corporations with total receipts of less
than $25 million. Small entities may also
own partnership interests.
The primary rules that apply to part-
nerships (that is, the deferral rules in
§1.987-12 and the suspended loss rules
in §§1.987-11 and 1.987-13) apply only
in the case of a remittance or termination
that would result in the recognition of a
significant amount of section 987 gain or
loss. Small entities typically will not rec-
ognize section 987 gain or loss in excess
of the applicable thresholds.
These final regulations generally
modify the rules that would otherwise
apply under the 2016 final regulations
by providing taxpayers with additional
elections that reduce the compliance
burden of applying section 987. Small
entities generally would not be affected
by these rules unless they choose to
make one of the new elections in order
to reduce their compliance burden. In
addition, the final regulations contain
several rules intended to limit their
impact on small taxpayers. For exam-
ple, the final regulations provide a de
minimis rule under which section 987
loss is not suspended unless the amount
of the loss exceeds the lesser of $3 mil-
lion or two percent of gross income,
as described in part X.A.1 of the Sum-
mary of Comments and Explanation of
Revisions. In addition, for purposes of
the transition rules, the final regulations
provide an election under which small
businesses can treat small QBUs as hav-
ing no pretransition gain or loss. See
part IX.A.2 of the Summary of Com-
ments and Explanation of Revisions.
A portion of the economic impact of
the final regulations may derive from the
collection of information requirements
imposed under §§1.987-1(g), 1.987-
10(k), and 1.987-14(c). The Treasury
Department and the IRS have deter-
mined that the average burden is 1.95
hours per response. The IRS’s Research,
Applied Analytics, and Statistics divi-
sion estimates that the appropriate wage
rate for this set of taxpayers is $99.87

January 13, 2025 342 Bulletin No. 2025–3
per hour. Thus, the annual burden per
taxpayer from each collection of infor-
mation requirement is $194.75. The
requirements of §1.987-1(g) apply only
if a taxpayer chooses to make or revoke
an election (and only in the year of the
election or revocation), the require-
ments of §1.987-10(k) apply only in
the first taxable year in which the final
regulations apply, and the requirements
of §1.987-14(c) apply only if a taxpayer
identifies a hedge as a section 987 hedg-
ing transaction (which is unlikely to be
relevant for small entities).
Another portion of the economic
impact of the final regulations may
derive from the recordkeeping require-
ments of §1.987-9, which identify the
records needed to satisfy the taxpayer’s
obligations under section 6001. The
requirements of §1.987-9 generally will
be less burdensome for small entities
than the requirements of the 2016 final
regulations due to the modifications
described in part V.A.1 of the Summary
of Comments and Explanation of Revi-
sions (which permit QBU net value to be
computed without preparing a tax basis
balance sheet).
IV. Section 7805(f)
Pursuant to section 7805(f) of the
Code, the proposed regulations preceding
these final regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business
and no comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in
any one year by a State, local, or Tribal
government, in the aggregate, or by the
private sector, of $100 million in 1995
dollars, updated annually for inflation.
The final regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
VI. Executive Order 13132:
Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
State and local governments, and is not
required by statute, or preempts State
law, unless the agency meets the con-
sultation and funding requirements of
section 6 of the Executive order. The
final regulations do not have federalism
implications and do not impose substan-
tial direct compliance costs on State and
local governments or preempt State law
within the meaning of the Executive
order.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance
cited in this document are published in the
Internal Revenue Bulletin or Cumulative
Bulletin and are available from the Super-
intendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
https://www.irs.gov.
Drafting Information
The principal authors of these final
regulations are Adam G. Province and
Raphael J. Cohen of the Office of Asso-
ciate Chief Counsel (International); and
Matthew N. Palucki and Jeremy Aron-
Dine of the Office of Associate Chief
Counsel (Corporate). However, other
personnel from the Treasury Department
and the IRS participated in their devel-
opment.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS amend 26 CFR part 1 as fol-
lows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by:
a. Removing the entry for §§1.861-9
and 1.861-9T and §§1.861-8T through
1.861-14T;
b. Adding entries for §§1.861-8T,
1.861-9, 1.861-9T through 1.861-14T in
numerical order;
c. Removing the entry for §§1.985-0
through 1.985-5;
d. Adding entries for §§1.985-0 through
1.985-5 in numerical order;
e. Removing the entry for §§1.987-1
through 1.987-5;
f. Adding entries for §§1.987-1 through
1.987-11 in numerical order;
g. Revising the entry for §1.987-12;
h. Adding entries for §§1.987-13
through 1.987-15 in numerical order;
i. Removing the entry for §§1.988-0
through 1.988-5;
j. Adding entries for §§1.988-0 through
1.988-5 and 1.989(a)-1 in numerical
order; and
k. Revising the entry for §1.1502-13.
The additions and revisions read as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.861-8T also issued under 26
U.S.C. 863(a), 864(e), 865(i), and 7701(f).
Section 1.861-9 also issued under 26
U.S.C. 861, 863(a), 864(e), 864(e)(7),
865(i), 987, and 989(c), and 7701(f).
Section 1.861-9T also issued under
26 U.S.C. 861, 863(a), 864(e), 864(e)(7),
865(i), and 7701(f).
* * * * *
Section 1.861-10T also issued under 26
U.S.C. 863(a), 864(e), 865(i), and 7701(f).
* * * * *
Section 1.861-11T also issued under 26
U.S.C. 863(a), 864(e), 865(i), and 7701(f).
* * * * *
Section 1.861-12T also issued under 26
U.S.C. 863(a), 864(e), 865(i), and 7701(f).
* * * * *
Section 1.861-13T also issued under 26
U.S.C. 863(a), 864(e), 865(i), and 7701(f).
* * * * *
Section 1.861-14T also issued under 26
U.S.C. 863(a), 864(e), 865(i), and 7701(f).
* * * * *
Section 1.985-0 also issued under 26
U.S.C. 985.

Bulletin No. 2025–3 343 January 13, 2025
Section 1.985-1 also issued under 26
U.S.C. 985.
Section 1.985-2 also issued under 26
U.S.C. 985.
Section 1.985-3 also issued under 26
U.S.C. 985.
Section 1.985-4 also issued under 26
U.S.C. 985.
Section 1.985-5 also issued under 26
U.S.C. 985, 987, and 989.
* * * * *
Section 1.987-1 also issued under 26
U.S.C. 987, 989, and 1502.
Section 1.987-2 also issued under 26
U.S.C. 987, 989, and 1502.
Section 1.987-3 also issued under 26
U.S.C. 987 and 989.
Section 1.987-4 also issued under 26
U.S.C. 987 and 989.
Section 1.987-5 also issued under 26
U.S.C. 987 and 989.
Section 1.987-6 also issued under 26
U.S.C. 904, 987, and 989.
Section 1.987-7 also issued under 26
U.S.C. 987 and 989.
Section 1.987-8 also issued under 26
U.S.C. 987 and 989.
Section 1.987-9 also issued under 26
U.S.C. 987, 989, and 6001.
Section 1.987-10 also issued under 26
U.S.C. 987, 989, and 6001.
Section 1.987-11 also issued under 26
U.S.C. 987, 989, and 1502.
Section 1.987-12 also issued under 26
U.S.C. 987 and 989.
Section 1.987-13 also issued under 26
U.S.C. 987 and 989.
Section 1.987-14 also issued under 26
U.S.C. 987 and 989.
Section 1.987-15 also issued under 26
U.S.C. 987 and 989.
Section 1.988-0 also issued under 26
U.S.C. 988.
Section 1.988-1 also issued under 26
U.S.C. 988 and 989.
Section 1.988-2 also issued under 26
U.S.C. 988.
Section 1.988-3 also issued under 26
U.S.C. 988.
Section 1.988-4 also issued under 26
U.S.C. 988 and 989.
Section 1.988-5 also issued under 26
U.S.C. 988.
* * * * *
Section 1.989(a)-1 also issued under 26
U.S.C. 989.
* * * * *
Section 1.1502-13 also issued under 26
U.S.C. 250(c), 987, 989, and 1502.
* * * * *
Par. 2. Section 1.861-9 is amended by:
a. Revising paragraphs (g)(2)(ii)(A)
introductory text, (g)(2)(ii)(A)(1), and (g)
(2)(ii)(B); and
b. Adding paragraph (g)(2)(v).
The revisions and addition read as fol-
lows:
§1.861-9 Allocation and apportionment
of interest expense and rules for asset-
based apportionment.
* * * * *
(g) * * *
(2) * * *
(ii) * * *
(A) Tax book value method. In the case
of taxpayers using the tax book value
method of apportionment, the following
rules apply to determine the value of the
assets of a qualified business unit (QBU)
(as defined in section 989(a)) of a domes-
tic corporation with a functional currency
other than the dollar.
(1) Section 987 QBU. In the case of a
section 987 QBU (as defined in §1.987-
1(b)(3)), the tax book value is determined
by applying the rules of paragraph (g)
(2)(i) of this section and §1.861-9T(g)
(3) to the beginning-of-year and end-of-
year owner functional currency amount
of assets. The beginning-of-year owner
functional currency amount of assets is
determined by reference to the owner
functional currency amount of assets
computed under §1.987-4(d)(1)(i)(B)
and (e) on the last day of the preceding
taxable year. The end-of-year owner
functional currency amount of assets is
determined by reference to the owner
functional currency amount of assets
computed under §1.987-4(d)(1)(i)(A) and
(e) on the last day of the current taxable
year. The beginning-of-year and end-of-
year owner functional currency amount
of assets, as so determined within each
grouping, are then averaged as provided
in paragraph (g)(2)(i) of this section.
* * * * *
(B) Fair market value method. In the
case of taxpayers using the fair market
value method of apportionment, the begin-
ning-of-year and end-of-year fair market
values of branch assets within each group-
ing are computed in dollars and averaged
as provided in this paragraph (g)(2) and
§1.861-9T(g)(2).
* * * * *
(v) Applicability date. Generally,
paragraph (g)(2)(ii)(A)(1) of this section
applies to taxable years beginning after
December 31, 2024. However, if pursu-
ant to §1.987-15(b), a taxpayer chooses
to apply §§1.987-1 through 1.987-15
to a taxable year before the first taxable
year described in §1.987-15(a)(1), then
paragraph (g)(2)(ii)(A)(1) of this section
applies to that taxable year and subse-
quent years.
* * * * *
§1.861-9T [Amended]
Par. 3. Section 1.861-9T is amended
by removing and reserving paragraph (g)
(2)(ii) and removing paragraph (g)(2)(vi).
Par. 4. Section 1.904-4 is amended by
revising paragraph (c)(5)(iii)(B) to read as
follows:
§1.904-4 Separate application of
section 904 with respect to certain
categories of income.
* * * * *
(c) * * *
(5) * * *
(iii) * * *
(B) Section 987. For special rules relat-
ing to the allocation and apportionment of
foreign income taxes to section 987 items,
see §1.987-6(b)(3).
* * * * *
Par. 5. Add an undesignated center
heading before § 1.985-0 to read as fol-
lows:
*****
Foreign Currency Transactions
*****
§1.985-1 [Amended]
Par. 6. Section 1.985-1 is amended by:
a. In paragraph (f) designating Exam-
ples 1 through 12 as paragraphs (f)(1)
through (12), respectively; and
b. Removing and reserving newly
redesignated paragraphs (f)(9) through
(11).

January 13, 2025 344 Bulletin No. 2025–3
Par. 7. Section 1.985-5 is amended by:
a. In paragraph (a) removing the lan-
guage “§1.987-1(b)(2)” and adding the
language “§1.987-1(b)(3)” in its place;
b. In paragraph (d)(1)(i) removing the
language “1.987-11” and adding the lan-
guage “1.987-15” in its place;
c. Revising the last sentence of para-
graph (d)(2);
d. Removing the second sentence of
paragraph (e)(1);
e. Revising and republishing para-
graphs (e)(4) and (f); and
f. Revising paragraph (g).
The revisions read as follows:
§1.985-5 Adjustments required upon
change in functional currency.
* * * * *
(d) * * *
(2) * * * See §§1.987-5, 1.987-8,
1.987-12, and 1.987-13 for the effect of a
termination of a section 987 QBU that is
subject to §§1.987-1 through 1.987-15.
(e) * * *
(4) Adjustments to a section 987
QBU’s balance sheet and unrecognized
section 987 gain or loss when an owner
changes functional currency—(i) Owner
changing to a functional currency other
than the section 987 QBU’s functional
currency. If an owner of a section 987
QBU, subject to §§1.987-1 through
1.987-15 pursuant to §1.987-1(b)(1),
changes to a functional currency other
than the functional currency of the sec-
tion 987 QBU, the adjustments described
in paragraphs (e)(4)(i)(A) through (C)
of this section are taken into account for
purposes of section 987.
(A) Determining new historic rates.
The historic rate (as defined in § 1.987-
1(c)(3)) for the year of change and sub-
sequent taxable years with respect to a
historic item (as defined in §1.987-1(e))
reflected on the balance sheet of the sec-
tion 987 QBU immediately before the
year of change is equal to the historic
rate before the year of change (that is, a
rate that translates the section 987 QBU’s
functional currency into the owner’s old
functional currency) divided by the spot
rate for translating an amount denom-
inated in the owner’s new functional
currency into the owner’s old functional
currency on the last day of the last tax-
able year ending before the year of
change. For example, if a taxpayer that
owns a section 987 QBU with a British
pound functional currency changes from
a U.S. dollar functional currency to a
euro functional currency, and the historic
rate for translating a specific item of the
section 987 QBU from GBP to USD is
1.50 and the spot rate for translating EUR
to USD on the last day of the last tax-
able year before the change is 1.10, then
the new historic rate for translating this
historic item from GBP to EUR is 1.36
(1.50/1.10).
(B) Determining the owner functional
currency net value of the section 987 QBU
on the last day of the last taxable year
ending before the year of change under
§1.987-4(d)(1)(i)(B). For purposes of
determining the change in the owner func-
tional currency net value of the section
987 QBU on the last day of the last taxable
year preceding the year of change under
§1.987-4(d)(1)(i)(B) and (e), the section
987 QBU’s marked items are translated
into the owner’s new functional currency
at the spot rate on the last day of the last
taxable year ending before the year of
change.
(C) Translation of unrecognized sec-
tion 987 gain or loss. Any net accumu-
lated unrecognized section 987 gain
or loss determined under § 1.987-4(c),
cumulative suspended section 987 loss
determined under §1.987-11(b), or
deferred section 987 gain or loss deter-
mined under §1.987-12 is translated from
the owner’s old functional currency into
the owner’s new functional currency
using the spot rate for translating an
amount denominated in the owner’s old
functional currency into the owner’s new
functional currency on the last day of the
last taxable year ending before the year
of change.
(ii) Taxpayer with the same functional
currency as its QBU changing to a differ-
ent functional currency. If a taxpayer with
the same functional currency as its QBU
changes to a new functional currency
and as a result the taxpayer becomes an
owner of a section 987 QBU (see §1.987-
1), the taxpayer and the section 987 QBU
become subject to section 987 for the
year of change and subsequent taxable
years.
(iii) Owner changing to the same
functional currency as the section 987
QBU. If an owner changes its functional
currency to the functional currency of its
section 987 QBU, the section 987 QBU is
treated as if it terminated on the last day
of the last taxable year ending before the
year of change. See §§1.987-5, 1.987-8,
1.987-12, and 1.987-13 for the conse-
quences of a termination of a section 987
QBU that is subject to §§1.987-1 through
1.987-15.
(f) Example. The provisions of this sec-
tion are illustrated by the following exam-
ple:
(1) Facts. FC, a foreign corporation, is wholly
owned by DC, a domestic corporation. The Commis-
sioner granted permission to change FC’s functional
currency from the British pound to the euro begin-
ning January 1, year 2. The EUR/GBP exchange rate
on December 31, year 1, is €1:£0.50.
(2) Analysis—(i) Determining new functional
currency basis of property and liabilities. The fol-
lowing table shows how FC must convert the items
on its balance sheet from the British pound to the
euro on December 31, year 1.

Bulletin No. 2025–3 345 January 13, 2025
Table 1 to paragraph (f)(2)(i)
Conversion of FC’s Balance Sheet Items
GBP EUR
Assets:
Cash on hand £40,000 €80,000
Accounts Receivable £10,000 €20,000
Inventory £100,000 €200,000
€100,000 Euro Bond (£100,000 historical basis) £50,000 €100,000
Fixed assets:
Property £200,000 €400,000
Plant £500,000€1,000,000
Accumulated Depreciation (£200,000) (€400,000)
Equipment £1,000,000 €2,000,000
Accumulated Depreciation (£400,000) (€800,000)
————— ————-
Total Assets £1,300,000 €2,600,000
Liabilities and Equity:
Accounts Payable £50,000 €100,000
Long-term Liabilities £400,000 €800,000
Paid-in-Capital £800,000 €1,600,000
Retained Earnings £50,000 €100,000
————— ————-
Total Liabilities and Equity£1,300,000 €2,600,000
(ii) Exchange gain or loss on section 988 trans-
actions. Under paragraph (b) of this section, FC will
recognize a £50,000 loss (£50,000 current value
minus £100,000 historical basis) on the Euro Bond
resulting from the change in functional currency
because, after the change, the Euro Bond will no
longer be an asset denominated in a non-functional
currency. The amount of FC’s retained earnings on
its December 31, year 1, balance sheet reflects the
£50,000 loss on the Euro Bond.
(g) Applicability date. Generally, this sec-
tion applies to taxable years beginning after
December 31, 2024. However, if pursuant to
§1.987-15(b), a taxpayer chooses to apply
§§1.987-1 through 1.987-15 to a taxable
year before the first taxable year described
in §1.987-15(a)(1), then this section applies
to that taxable year and subsequent years.
Par. 8. Revise §§ 1.987-0 through
1.987-12 and add §§ 1.987.13 through
1.987-15 to read as follows:
Foreign Currency Transactions
*****
Sec.
1.987-0 Table of contents.
1.987-1 Scope, definitions and special
rules.
1.987-2 Attribution of items to eligible QBUs;
definition of a transfer and related rules.
1.987-3 Determination of section 987 tax-
able income or loss of an owner of a sec-
tion 987 QBU.
1.987-4 Determination of net unrecog-
nized section 987 gain or loss of a section
987 QBU.
1.987-5 Recognition of section 987 gain
or loss.
1.987-6 Character and source of section
987 gain or loss.
1.987-7 Application of the section 987 reg-
ulations to partnerships and S corporations.
1.987-8 Termination of a section 987
QBU.
1.987-9 Recordkeeping requirements.
1.987-10 Transition rules.
1.987-11 Suspended section 987 loss
relating to certain elections; loss-to-the-
extent-of-gain rule.
1.987-12 Deferral of section 987 gain or
loss.
1.987-13 Suspended section 987 loss upon
terminations.
1.987-14 Section 987 hedging transac-
tions.
1.987-15 Applicability date.
*****
§1.987-0 Table of contents.
This section lists the headings for
§§1.987-1 through 1.987-15.
§1.987-1 Scope, definitions and special
rules.
(a) In general.
(b) Scope of section 987 and certain
rules relating to QBUs.
(1) Persons subject to section 987.
(i) In general.
(ii) Inapplicability to certain entities.
(2) Application of the section 987 regu-
lations to earnings and profits.
(i) In general.
(ii) Timing.
(3) Definition of a section 987 QBU.
(i) In general.
(ii) Section 987 QBU grouping elec-
tion.
(4) Definition of an eligible QBU.
(i) In general.
(ii) Qualified business unit.
(5) Definition of an owner.
(i) Direct ownership.
(ii) [Reserved]
(6) [Reserved]

January 13, 2025 346 Bulletin No. 2025–3
(7) Examples illustrating paragraph (b)
of this section.
(i) Example 1: Owner owns an eligible
QBU and a DE holding company.
(ii) Example 2: Owner owns eligible
QBUs through DEs.
(iii) Example 3: Section 987 grouping
election.
(c) Exchange rates.
(1) Spot rate.
(i) In general.
(ii) Election to use a spot rate conven-
tion.
(2) Yearly average exchange rate.
(3) Historic rate.
(i) In general.
(ii) Date placed in service for deprecia-
ble or amortizable property.
(iii) Changed functional currency.
(d) Marked item.
(1) In general.
(2) Current rate election.
(e) Historic item.
(f) Example: Identification of marked
and historic items.
(1) Facts.
(2) Analysis.
(g) Elections.
(1) Persons making the election.
(i) United States persons.
(ii) CFCs.
(iii) Consolidated groups.
(iv) Partnerships.
(2) Consistency rules.
(i) Consolidated groups.
(ii) CFCs and foreign partnerships.
(iii) Section 381(a) transactions.
(3) Manner of making or revoking
elections.
(i) Statement must be attached to a
return.
(ii) Election requirements.
(iii) Elections made under the 2016 and
2019 section 987 regulations.
(4) No change in method of account-
ing.
(5) Principles of §1.964-1(c)(3) appli-
cable to section 987 elections.
(h) Definitions.
§1.987-2 Attribution of items to eligible
QBUs; definition of a transfer and related
rules.
(a) In general.
(b) Attribution of items to an eligible
QBU.
(1) General rules.
(2) Exceptions for non-portfolio stock,
interests in partnerships, and certain
acquisition indebtedness.
(i) In general.
(ii) Separate account assets.
(3) Adjustments to items reflected on
the books and records.
(i) General rule.
(ii) Factors indicating no tax avoid-
ance.
(iii) Factors indicating tax avoidance.
(iv) Section 988 transactions.
(c) Transfers to and from section 987
QBUs.
(1) In general.
(2) Disregarded transactions.
(i) General rule.
(ii) Definition of a disregarded transac-
tion.
(iii) Items derived from disregarded
transactions ignored.
(3) through (6) [Reserved]
(7) Application of general tax law prin-
ciples.
(8) Interaction with §1.988-1(a)(10).
(9) Certain disregarded transactions
not treated as transfers.
(i) Combinations of section 987 QBUs.
(ii) Change in functional currency from
a combination.
(iii) Separation of section 987 QBUs.
(iv) Special rules for successor sus-
pended loss QBUs.
(10) Examples.
(i) Example 1: Loan to a section 987 QBU.
(ii) Example 2: Transfer between sec-
tion 987 QBUs.
(iii) Example 3: Sale of property
between two section 987 QBUs.
(iv) through (ix) [Reserved]
(x) Example 10: Contribution of a sec-
tion 987 QBU’s assets to a corporation.
(xi) Example 11: Circular transfers.
(xii) Example 12: Transfers without
substance.
(xiii) Example 13: Offsetting positions
in section 987 QBUs
(xiv) Example 14: Offsetting positions
with respect to a section 987 QBU and a
section 988 transaction.
(xv) Example 15: Offsetting positions
with respect to a section 987 QBU and a
section 988 transaction.
(xvi) Example 16: Borrowing by sec-
tion 987 QBU followed by immediate dis-
tribution to owner.
(xvii) Example 17: Payment of inter-
est by section 987 QBU on obligation of
owner.
(xviii) Example 18: Sale of the inter-
ests in a DE.
(d) Translation of items transferred to a
section 987 QBU.
(1) Marked items.
(2) Historic items.
(e) Cross-reference.
§1.987-3 Determination of section 987
taxable income or loss of an owner of a
section 987 QBU.
(a) In general.
(b) Determination of each item of
income, gain, deduction, or loss in the sec-
tion 987 QBU’s functional currency.
(1) In general.
(2) Translation of items of income,
gain, deduction, or loss that are denomi-
nated in a nonfunctional currency.
(3) [Reserved]
(4) Section 988 transactions.
(i) In general.
(ii) Section 988 mark-to-market elec-
tion.
(c) Translation of items of income,
gain, deduction, or loss of a section 987
QBU into the owner’s functional currency.
(1) In general.
(2) Exceptions.
(i) Recovery of basis with respect to
historic assets.
(ii) through (iii) [Reserved]
(iv) Cost of goods sold computation.
(v) Translation of income to account
for certain foreign income tax claimed as
a credit.
(3) Adjustments to COGS required
under the simplified inventory method.
(i) In general.
(ii) Adjustment for cost recovery
deductions included in inventoriable costs.
(iii) Adjustment for beginning inven-
tory for non-LIFO inventory.
(iv) Adjustment for year of LIFO liq-
uidation.
(d) [Reserved]
(e) Examples.
(1) Example 1: Item of income denom-
inated in nonfunctional currency.
(2) Example 2: Asset sold for nonfunc-
tional currency.
(3) Example 3: Historic inventory
method.

Bulletin No. 2025–3 347 January 13, 2025
(i) Facts.
(ii) Analysis.
(4) Example 4: Simplified inventory
method.
(i) Facts.
(ii) Analysis.
(5) Example 5: Depreciation expense
that is not an inventoriable cost.
(6) Example 6: Translation of depreci-
ation expense that is an inventoriable cost
(historic inventory method).
(7) Example 7: Sale of land.
(8) Example 8: Current rate election.
(9) through (12) [Reserved]
(13) Example 13: Section 988 transac-
tion.
(i) Facts.
(ii) Analysis.
(14) Example 14: Payment of foreign
income tax.
(i) Facts.
(ii) Analysis.
§1.987-4 Determination of net
unrecognized section 987 gain or loss of
a section 987 QBU.
(a) In general.
(b) Calculation of net unrecognized
section 987 gain or loss.
(c) Net accumulated unrecognized sec-
tion 987 gain or loss for all prior taxable
years.
(1) In general.
(2) Additional adjustments for cer-
tain taxable years beginning on or before
December 31, 2024.
(d) Calculation of unrecognized sec-
tion 987 gain or loss for a taxable year.
(1) Step 1: Determine the change in the
owner functional currency net value of the
section 987 QBU for the taxable year.
(i) In general.
(ii) Year section 987 QBU is termi-
nated.
(iii) First taxable year of a section 987
QBU.
(iv) First year in which an election is in
effect or ceases to be in effect.
(2) Step 2: Increase the amount deter-
mined in step 1 by the amount of assets
transferred from the section 987 QBU to
the owner.
(i) In general.
(ii) Assets transferred from the section
987 QBU to the owner during the taxable
year.
(3) Step 3: Decrease the amount deter-
mined in steps 1 and 2 by the amount of
assets transferred from the owner to the
section 987 QBU.
(i) In general.
(ii) Assets transferred from the owner to
the section 987 QBU during the taxable year.
(4) Step 4: Decrease the amount deter-
mined in steps 1 through 3 by the amount
of liabilities transferred from the section
987 QBU to the owner.
(i) In general.
(ii) Liabilities transferred from the
owner to the section 987 QBU during the
taxable year.
(5) Step 5: Increase the amount deter-
mined in steps 1 through 4 by the amount
of liabilities transferred from the owner to
the section 987 QBU.
(6) Step 6: Decrease or increase the
amount determined in steps 1 through 5
by the section 987 taxable income or loss,
respectively, of the section 987 QBU for
the taxable year.
(7) Step 7: Increase the amount deter-
mined in steps 1 through 6 by certain
expenses or losses that are not deduct-
ible in computing the section 987 taxable
income or loss of the section 987 QBU for
the taxable year.
(8) Step 8: Decrease the amount deter-
mined in steps 1 through 7 by the amount
of certain income or gain that is not
included in taxable income in computing
the section 987 taxable income or loss of
the section 987 QBU for the taxable year.
(9) Step 9: Increase or decrease the
amount determined in steps 1 through 8
by any income or gain, or any deduction
or loss, respectively, that does not impact
the adjusted balance sheet.
(10) Step 10: Decrease or increase the
amount determined in steps 1 through 9
by any increase or decrease, respectively,
to the section 987 QBU’s net assets that
is not previously taken into account under
steps 2 through 9.
(i) In general.
(ii) Determining the residual increase
or decrease to net assets.
(iii) Modifications for taxable years to
which a current rate election or an annual
recognition election applies.
(e) Determination of the owner func-
tional currency net value of a section 987
QBU.
(1) In general.
(i) Marked item.
(ii) Historic item.
(2) Current rate election.
(i) In general.
(ii) QBU net value.
(iii) Alternative calculation of QBU net
value.
(f) Combinations and separations.
(1) Combinations.
(2) Separations.
(3) Examples.
(i) Example 1: Combination of two sec-
tion 987 QBUs that have the same owner.
(ii) Example 2: Separation of two sec-
tion 987 QBUs that have the same owner.
(g) Examples.
(1) Example 1: Determination of net
unrecognized section 987 gain or loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Determination of net
unrecognized section 987 gain or loss if a
current rate election in effect.
(i) Facts.
(ii) Analysis.
(iii) Alternative computation of QBU
net value.
(3) Example 3: Determination of net
unrecognized section 987 gain or loss
when a current rate election is revoked.
(i) Facts.
(ii) Analysis.
§1.987-5 Recognition of section 987 gain
or loss.
(a) Recognition of section 987 gain or
loss by the owner of a section 987 QBU.
(b) Remittance proportion.
(1) In general.
(2) Annual recognition election.
(c) Remittance.
(1) Definition.
(2) Alternative calculation.
(i) Step 1: Determine the change in
QBU net value.
(ii) Step 2: Adjust the amount deter-
mined in step 1 for income or loss of the
section 987 QBU.
(iii) Step 3: Multiply the amount deter-
mined in step 2 by negative one.
(3) Day when a remittance is deter-
mined.
(4) Termination.
(d) Aggregate of all amounts trans-
ferred from the section 987 QBU to the
owner for the taxable year.

January 13, 2025 348 Bulletin No. 2025–3
(e) Aggregate of all amounts trans-
ferred from the owner to the section 987
QBU for the taxable year.
(f) Determination of owner’s adjusted
basis in transferred assets and amount of
transferred liabilities.
(1) In general.
(2) Marked items.
(3) Historic items.
(g) Example—Calculation of section
987 gain or loss recognized.
(1) Facts.
(i) In general.
(ii) Year 1 balance sheet.
(iii) Transfers and income in year 2.
(iv) Year 2 balance sheet.
(2) Analysis.
(i) Computation of amount of remit-
tance.
(ii) Alternative computation of remit-
tance amount.
(iii) Computation of section 987 QBU
gross assets plus remittance.
(iv) Computation of remittance propor-
tion.
(v) Computation of section 987 gain or
loss.
(3) Annual recognition election.
§1.987-6 Character and source of section
987 gain or loss.
(a) Ordinary income or loss.
(b) Character and source of section 987
gain or loss.
(1) Timing of source and character
determination.
(2) Method for determining the charac-
ter and source section 987 gain or loss.
(i) Initial assignment
(ii) Reassignment of section 987 gain
or loss.
(iii) Special rule for the application of
the GILTI high-tax exclusion to section
987 gain or loss.
(3) Allocation and apportionment of
foreign income tax to section 987 items
under section 861.
(i) The foreign gross income is an item
of foreign currency gain or loss.
(ii) The same event or events give rise
to both the foreign gross income and the
section 987 gain or loss.
(c) Examples.
(1) Example 1: Initial assignment and
reassignment of section 987 gain or loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Effect of GILTI high-
tax exclusion.
(i) Facts.
(ii) Analysis.
(3) Example 3: Section 987 gain or loss
treated as attributable to section 988 trans-
actions.
(i) Facts.
(ii) Analysis.
(4) Example 4: Section 987 gain or loss
assigned to passive foreign personal hold-
ing company income.
(i) Facts.
(ii) Analysis.
§1.987-7 Application of the section
987 regulations to partnerships and S
corporations.
(a) Overview.
(b) Section 987 regulations generally
do not apply to partnerships.
(c) Provisions of the section 987 regu-
lations that apply to partnerships.
(1) In general.
(i) Eligible QBU.
(ii) Partnership.
(2) Applicable provisions.
(i) In general.
(ii) Annual recognition election.
(iii) Section 988 mark-to-market elec-
tion.
(3) Modifications to applicable provi-
sions.
(i) In general.
(ii) Controlled group.
(4) Terminating QBUs.
(d) Suspended section 987 loss.
(1) In general.
(i) Rules of §1.987-11(c) and (d)(2) do
not apply.
(ii) Suspension of section 987 loss.
(2) Exceptions.
(i) Method under which historic items
do not give rise to section 987 gain or loss.
(ii) Annual recognition election.
(iii) De minimis rule.
(3) Recognition of suspended section
987 loss.
(i) In general.
(ii) Partnership that is not engaged in a
trade or business.
(iii) Application of the loss-to-the-ex-
tent-of-gain rule.
(e) Adjustments to the basis of a part-
ner’s interest in the partnership.
(f) S corporations treated as partner-
ships.
(g) Examples.
(1) Example 1: Aggregate approach to
section 987.
(i) Facts.
(ii) Analysis.
(2) Example 2: Entity approach to sec-
tion 987.
(i) Facts.
(ii) Analysis.
§1.987-8 Termination of a section 987
QBU.
(a) Scope.
(b) In general.
(1) Trade or business ceases.
(2) Substantially all assets transferred.
(3) Owner no longer a CFC.
(4) Owner ceases to exist.
(5) Section 987 QBU ceases to be an
eligible QBU with a functional currency
different from its owner.
(6) Change in form of ownership.
(c) Transactions described in section
381(a).
(1) Liquidations.
(2) Reorganizations.
(d) [Reserved]
(e) Effect of terminations.
(f) Examples.
(1) Example 1: Cessation of operations.
(i) Facts.
(ii) Analysis.
(2) Example 2: Transfer of a section
987 QBU to a member of a consolidated
group.
(i) Facts.
(ii) Analysis.
(3) Example 3: Cessation of controlled
foreign corporation status.
(i) Facts.
(ii) Analysis.
(4) Example 4: Section 332 liquidation.
(i) Facts.
(ii) Analysis.
(5) [Reserved]
(6) Example 6: Deemed transfers to a
CFC upon a check-the-box election.
(i) Facts.
(ii) Analysis.
(7) Example 7: Sale of a section 987
QBU to a member of a consolidated
group.
(i) Facts.
(ii) Analysis.

Bulletin No. 2025–3 349 January 13, 2025
§1.987-9 Recordkeeping requirements.
(a) In general.
(b) Supplemental information.
(c) Retention of records.
(d) Information on a dedicated section
987 form.
§1.987-10 Transition rules.
(a) Overview.
(1) In general.
(2) Terms defined under prior §1.987-
12.
(b) Scope.
(1) Owner of a section 987 QBU.
(2) Deferral QBU owner and owner of
outbound loss QBU.
(c) Transition date.
(1) In general.
(2) Terminating QBU.
(i) In general.
(ii) Ordering rule.
(d) Application of the section 987 regu-
lations after the transition date.
(1) Owner functional currency net
value on the last day of the preceding tax-
able year.
(2) Determination of historic rate.
(3) Transition exchange rate.
(i) In general.
(ii) Earnings only method.
(e) Pretransition gain or loss.
(1) In general.
(2) Amount of pretransition gain or loss
for an owner that applied an eligible pre-
transition method.
(i) Owner of a section 987 QBU
(ii) Deferral QBU owner.
(iii) Owner of an outbound loss QBU.
(3) Amount of pretransition gain or loss
for an owner that did not apply an eligible
pretransition method.
(i) In general.
(ii) Computation of pretransition gain
or loss.
(iii) Annual unrecognized section 987
gain or loss.
(iv) Deferral QBU owner.
(v) Owner of an outbound loss QBU.
(4) Eligible pretransition method.
(i) Earnings and capital method.
(ii) Other reasonable methods.
(iii) Other earnings only methods.
(iv) Error in the application of a section
987 method.
(v) Certain consistent practices not
treated as errors.
(vi) Deferral of section 987 gain or loss
until termination is not reasonable.
(vii) Anti-abuse rule.
(5) Recognition of pretransition gain or
loss.
(i) In general.
(ii) Election to recognize pretransition
section 987 gain or loss ratably over the
transition period.
(6) Predecessor of an owner.
(i) In general.
(ii) Predecessor.
(7) Small business election.
(i) Scope.
(ii) Owner threshold.
(iii) QBU threshold.
(iv) Small business election.
(f) QBUs to which the fresh start tran-
sition method was applied.
(1) In general.
(2) Application of the section 987 regu-
lations after the transition date.
(i) Owner functional currency net
value on the last day of the preceding tax-
able year.
(ii) Determination of historic rate.
(iii) Unrecognized section 987 gain or
loss.
(3) Taxpayers that are required to
transition using the fresh start transition
method.
(g) [Reserved]
(h) Determination of source and char-
acter.
(1) In general.
(2) Deferral QBU or outbound loss
QBU.
(i) [Reserved]
(j) Adjustments to avoid double count-
ing or omissions.
(k) Reporting.
(1) In general.
(2) QBUs for which reporting is
required.
(i) In general.
(ii) QBUs to which the fresh start tran-
sition method was applied.
(3) Attachments not required where
information is reported on a form.
(4) No change in method of account-
ing.
(l) Examples.
(1) Example 1: Earnings and capital
method.
(i) Facts.
(ii) Analysis.
(2) Example 2: Earnings only method
described in paragraph (e)(4)(ii) of this
section.
(i) Facts.
(ii) Analysis.
(3) Example 3: Earnings only method
described in paragraph (e)(4)(iii) of this
section.
(i) Facts.
(ii) Analysis.
(4) Example 4: Owner did not apply
section 987(3).
(i) Facts.
(ii) Analysis.
(5) Example 5: Error in application of
method.
(i) Facts.
(ii) Analysis.
(6) Example 6: Consistent practice not
treated as an error.
(i) Facts.
(ii) Analysis.
§1.987-11 Suspended section 987 loss
relating to certain elections; loss to the
extent of gain rule.
(a) In general.
(b) Cumulative suspended section 987
loss in a recognition grouping.
(1) In general.
(2) Combined QBU.
(3) Separated QBU.
(c) Suspension of section 987 loss for
taxable years in which a current rate elec-
tion is in effect and an annual recognition
election is not in effect.
(1) In general.
(2) De minimis rule.
(3) Taxable year of controlled group
members.
(i) In general.
(ii) Owner is a CFC.
(d) Suspension of net unrecognized
section 987 loss upon making or revoking
certain elections.
(1) Making an annual recognition elec-
tion.
(2) Revoking a current rate election.
(e) Loss-to-the-extent of gain rule.
(1) In general.
(2) Separate determination for each
recognition grouping.
(3) Amount of suspended section 987
loss recognized.
(i) Current year gain amount.

January 13, 2025 350 Bulletin No. 2025–3
(ii) Lookback gain amount.
(iii) Suspended section 987 loss not
taken into account.
(iv) Lookback period.
(v) Anti-abuse rule.
(4) Suspended section 987 loss recog-
nized with respect to each section 987 QBU
and suspended section 987 loss QBU.
(5) Section 381(a) transactions.
(i) In general.
(ii) Limitation for inbound section
381(a) transactions.
(6) Consolidated group members.
(i) In general.
(ii) Suspended section 987 losses aris-
ing in separate return limitation years.
(f) Recognition groupings.
(1) Sourcing and section 904 category.
(2) Statutory and residual groupings
for CFC owners.
(g) Examples.
(1) Example 1: Suspension of section
987 loss and recognition of suspended
section 987 loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Recognition of sus-
pended section 987 loss by reason of gain
recognized during the lookback period.
(i) Facts.
(ii) Analysis.
(iii) Alternative facts.
(iv) Analysis of alternative facts.
(3) Example 3: Suspension of section
987 loss when a current rate election is
revoked. (i) Facts.
(ii) Analysis.
§1.987-12 Deferral of section 987 gain
or loss.
(a) Overview.
(1) Scope.
(2) Exceptions.
(i) Annual recognition election.
(ii) De minimis rule.
(b) Treatment of section 987 gain and
loss in connection with a deferral event.
(1) Gain or loss recognized (or suspended)
in the taxable year of a deferral event.
(2) Deferred section 987 gain or loss.
(i) In general.
(ii) Deferred section 987 gain or loss
attributable to a successor deferral QBU.
(c) Recognition (or suspension) of
deferred section 987 gain or loss follow-
ing a deferral event.
(1) Recognition upon a subsequent
remittance.
(i) In general.
(ii) Amount.
(iii) Deemed remittance by a successor
deferral QBU.
(2) Deferral events and outbound loss
events with respect to a successor deferral
QBU.
(d) Successor deferral QBU becomes a
successor suspended loss QBU.
(e) Anti-abuse rule.
(f) Combinations and separations of
successor deferral QBUs.
(1) Combined QBU.
(2) Separated QBU.
(g) Definitions.
(1) Deferral event.
(i) Events.
(ii) Assets on books of successor defer-
ral QBU.
(2) Successor deferral QBU.
(3) Original deferral QBU owner.
(4) Qualified successor.
(h) Examples.
(1) Example 1: Contribution of a sec-
tion 987 QBU with net unrecognized
section 987 gain to a member of the con-
trolled group.
(i) Facts.
(ii) Analysis.
(2) Example 2: Contribution of a section
987 QBU with net unrecognized section 987
loss to a member of the controlled group
when a current rate election is in effect.
(i) Facts.
(ii) Analysis.
(3) Example 3: Election to be classified
as a corporation.
(i) Facts.
(ii) Analysis.
(4) Example 4: Partial recognition of
deferred gain or loss.
(i) Facts.
(ii) Analysis.
§1.987-13 Suspended section 987 loss
upon terminations.
(a) Overview.
(1) In general.
(2) Ordering rule.
(b) Termination of a section 987 QBU
with suspended loss.
(1) Suspended section 987 loss becomes
suspended section 987 loss with respect to
a successor suspended loss QBU.
(i) Successor suspended loss QBU.
(ii) Attribution of suspended section
987 loss to successor suspended loss
QBU.
(2) Recognition of suspended section
987 loss.
(c) Termination of a successor sus-
pended loss QBU.
(1) Successor to the successor sus-
pended loss QBU.
(i) Successor suspended loss QBU.
(ii) Attribution of suspended section
987 loss to successor suspended loss
QBU.
(2) Recognition of suspended section
987 loss.
(d) Transfer of successor suspended
loss QBU owner.
(e) Transfer of original suspended loss
QBU owner.
(f) Owner ceases to exist.
(g) Inbound nonrecognition transac-
tions–no carryover of suspended section
987 loss.
(h) Outbound transactions–recognition
or suspension of net unrecognized section
987 loss.
(1) In general.
(2) Outbound loss event.
(3) Loss recognition upon an outbound
loss event
(4) Loss suspension upon outbound
loss event.
(i) [Reserved]
(j) Termination of a successor sus-
pended loss QBU.
(k) Anti-abuse.
(l) Definitions.
(1) Original suspended loss QBU
owner.
(i) In general.
(ii) Successors.
(2) Successor suspended loss QBU.
(3) Successor suspended loss QBU
owner.
(4) Ownership interests.
(5) Significant portion.
(m) Examples.
(1) Example 1: Trade or business of a
section 987 QBU ceases.
(i) Facts.
(ii) Analysis.
(2) Example 2: Trade or business of a
section 987 QBU is sold to a third party.
(i) Facts.
(ii) Analysis.
(3) Example 3: Outbound loss event.

Bulletin No. 2025–3 351 January 13, 2025
(i) Facts.
(ii) Analysis.
§1.987-14 Section 987 hedging
transactions.
(a) Overview.
(b) Section 987 hedging transaction.
(1) In general.
(2) Requirements.
(i) Identification.
(ii) Current rate election.
(iii) Mark-to-market method of
accounting.
(iv) Treatment under U.S. generally
accepted accounting principles.
(v) Hedge entered into by owner of the
hedged QBU.
(3) Anti-abuse rule.
(4) Partial termination of a section 987
hedging transaction.
(c) Identification requirements.
(1) In general.
(2) Inadvertent error.
(d) Taxation of section 987 hedging
transactions.
(1) Hedging gain or loss with respect to
a hedged QBU.
(2) Adjustment to unrecognized section
987 gain or loss for the taxable year.
(i) Hedging loss.
(ii) Hedging gain.
(3) Termination of a hedged QBU.
(e) Examples.
(1) Example 1: Section 987 hedging
transaction.
(i) Facts.
(ii) Analysis.
(2) Example 2: Excess hedging gain
from a section 987 hedging transaction.
(i) Facts.
(ii) Analysis.
§1.987-15 Applicability date.
(a) Applicability date of section 987
regulations.
(1) In general.
(2) Applicability date for a terminating
QBU.
(b) Application of the section 987 reg-
ulations to taxable years beginning on or
before December 31, 2024, and ending
after November 9, 2023.
(c) Application of the 2016 and 2019
section 987 regulations.
(1) In general.
(2) Application to section 987 QBUs
not owned on the transition date.
(3) Modifications of defined terms for
purposes of this paragraph (c).
(i) Application of §1.987-10 in lieu of
prior §1.987-10.
(ii) Partnerships not included in section
987 electing group.
(iii) Transition date.
(d) Prior §1.987-12.
§1.987-1 Scope, definitions, and special
rules.
(a) In general. Sections 1.987-1
through 1.987-15 (the section 987 regu-
lations) provide rules for determining the
taxable income or loss and earnings and
profits of a taxpayer with respect to a qual-
ified business unit (QBU) that is subject to
section 987. Further, the section 987 reg-
ulations provide rules for determining the
timing, amount, character, and source of
section 987 gain or loss recognized with
respect to a section 987 QBU. This section
addresses the scope of the section 987 reg-
ulations and provides certain definitions,
special rules, and procedures for making
elections. Section 1.987-2 provides rules
for attributing assets and liabilities and
items of income, gain, deduction, and
loss to an eligible QBU. It also provides
rules regarding the translation of items
transferred to a section 987 QBU. Section
1.987-3 provides rules for determining
and translating the taxable income or loss
of a taxpayer with respect to a section 987
QBU. Section 1.987-4 provides rules for
determining net unrecognized section 987
gain or loss. Section 1.987-5 provides rules
regarding the recognition of section 987
gain or loss. It also provides rules regard-
ing the translation of items transferred
from a section 987 QBU to its owner. Sec-
tion 1.987-6 provides rules regarding the
character and source of section 987 gain
or loss. Section 1.987-7 provides rules
relating to the application of the section
987 regulations with respect to a partner-
ship or S corporation. Section 1.987-8
provides rules regarding the termination
of a section 987 QBU. Section 1.987-9
provides rules regarding the recordkeep-
ing required under section 987. Section
1.987-10 provides transition rules. Section
1.987-11 provides rules relating to sus-
pended losses in connection with certain
elections and the loss-to-the-extent-of-
gain rule. Section 1.987-12 provides rules
regarding when section 987 gain or loss
is deferred, as well as when such deferred
amounts are recognized. Section 1.987-13
provides rules relating to suspended sec-
tion 987 loss of an owner with respect to a
section 987 QBU that terminates. Section
1.987-14 provides rules relating to section
987 hedging transactions. Section 1.987-
15 provides the applicability date of the
section 987 regulations.
(b) Scope of section 987 and certain
rules relating to QBUs—(1) Persons sub-
ject to section 987—(i) In general. Except
as provided in paragraphs (b)(1)(ii) and
(b)(6) of this section, any individual or
corporation is subject to the section 987
regulations. See §1.987-7 for rules relat-
ing to the application of the section 987
regulations in the case of a partnership or
S corporation.
(ii) Inapplicability to certain entities.
Section 987(3) and the section 987 reg-
ulations do not apply to individuals who
are not United States persons and foreign
corporations that either are not controlled
foreign corporations or that are controlled
foreign corporations in which no United
States shareholders own (within the mean-
ing of section 958(a)) stock.
(2) Application of the section 987 reg-
ulations to earnings and profits—(i) In
general. The rules and principles of the
section 987 regulations also apply to the
determination of earnings and profits, and
any elections that apply pursuant to the
section 987 regulations also apply for pur-
poses of determining earnings and profits.
(ii) Timing. Earnings and profits are
increased when section 987 gain is rec-
ognized and decreased when section 987
loss is recognized. As a result, converting
net unrecognized section 987 gain or loss
to deferred section 987 gain or loss or sus-
pended section 987 loss does not affect
earnings and profits because the amounts
have not yet been recognized.
(3) Definition of a section 987 QBU—
(i) In general. For purposes of section 987,
a section 987 QBU is an eligible QBU that
has a functional currency different from
its owner. A section 987 QBU will con-
tinue to be treated as a section 987 QBU
of the owner until a sale or other termina-
tion of the section 987 QBU as described
in §1.987-8(b) and (c). See §1.985-1 for

January 13, 2025 352 Bulletin No. 2025–3
rules determining the functional currency
of an eligible QBU.
(ii) Section 987 QBU grouping elec-
tion—(A) In general. Solely for purposes
of section 987, an owner may elect to
treat all section 987 QBUs with the same
functional currency as a single section
987 QBU except to the extent provided
in paragraph (b)(3)(ii)(B) of this section.
However, a QBU described in §1.987-7(c)
(1) may not be treated as part of the same
QBU as a section 987 QBU that is not
described in §1.987-7(c)(1).
(B) [Reserved]
(4) Definition of an eligible QBU—(i)
In general. For purposes of section 987,
an eligible QBU means a qualified busi-
ness unit that is not subject to the United
States dollar approximate separate trans-
actions method rules of §1.985-3.
(ii) Qualified business unit. For pur-
poses of this paragraph (b)(4), a qualified
business unit is defined in §1.989(a)-1(b),
except that a corporation, partnership,
trust, estate, or disregarded entity is not
itself a qualified business unit, but the
activities of such entity may be a quali-
fied business unit if they meet the require-
ments of §1.989(a)-1(b)(1) and (b)(2)(ii).
For example, if a corporation is solely
engaged in activities that constitute a trade
or business, and the corporation maintains
only one set of books and records, the
activities (but not the corporation) are a
qualified business unit.
(5) Definition of an owner. For pur-
poses of section 987, an owner is any per-
son having direct ownership in an eligible
QBU (including ownership through DEs).
The term owner does not include an eli-
gible QBU. For example, a section 987
QBU (QBU1) is not an owner of another
section 987 QBU (QBU2) even if QBU1
wholly owns the DE that owns QBU2. A
person that is not subject to the section
987 regulations under paragraph (b)(1)(ii)
of this section can meet the definition of
an owner under this paragraph (b)(5) for
purposes of applying the section 987 reg-
ulations to other persons.
(i) Direct ownership. A person is a
direct owner of an eligible QBU if the per-
son is the owner for Federal income tax
purposes of the assets and liabilities of the
eligible QBU.
(ii) [Reserved]
(6) [Reserved]
(7) Examples illustrating paragraph
(b) of this section. The following examples
illustrate the principles of this paragraph
(b). The following facts are assumed for
purposes of the examples. U.S. Corp is a
domestic corporation, has the U.S. dollar
as its functional currency, and uses the
calendar year as its taxable year. Except as
otherwise provided: Business A and Busi-
ness B are eligible QBUs and have the
euro and the Japanese yen, respectively, as
their functional currencies; and DE1 and
DE2 are DEs, have no assets or liabilities,
and conduct no activities.
(i) Example 1: Owner owns an eligible QBU
and a DE holding company—(A) Facts. U.S. Corp
owns Business A and all of the interests in DE1. DE1
maintains a separate set of books and records that
are kept in British pounds. DE1 owns pounds and
all of the stock of a foreign corporation, FC. DE1 is
liable to a lender on a pound-denominated obliga-
tion that was incurred to acquire the stock of FC. The
FC stock, the pounds, and the liability incurred to
acquire the FC stock are recorded on DE1’s separate
books and records. DE1 has no other assets or liabil-
ities and conducts no activities (other than holding
the FC stock and pounds and servicing its liability).
(B) Analysis—(1) Pursuant to paragraph (b)(5)
of this section, U.S. Corp is the owner of Business A
because it has direct ownership of Business A, an eli-
gible QBU. Because Business A is an eligible QBU
with a functional currency that is different from the
functional currency of its owner, U.S. Corp, Business
A is a section 987 QBU under paragraph (b)(3)(i) of
this section. As a result, U.S. Corp and its section
987 QBU, Business A, are subject to section 987.
(2) Holding the stock of FC and pounds and ser-
vicing a liability does not constitute a trade or busi-
ness within the meaning of §1.989(a)-1(c). Because
the activities of DE1 do not constitute a trade or
business within the meaning of §1.989(a)-1(c), such
activities are not an eligible QBU. In addition, pursu-
ant to paragraph (b)(4)(ii) of this section, DE1 itself
is not an eligible QBU. As a result, neither DE1 nor
its activities qualify as a section 987 QBU of U.S.
Corp. Therefore, neither the activities of DE1 nor
DE1 itself is subject to section 987. For the foreign
currency treatment of payments on DE1’s pound-de-
nominated liability, see §1.988-2(b).
(ii) Example 2: Owner owns eligible QBUs
through DEs—(A) Facts. U.S. Corp owns all of
the interests in DE1. DE1 owns Business A and all
of the interests in DE2. The only activities of DE1
are Business A activities and holding the interests
in DE2. DE2 owns Business B and Business C. For
purposes of this example, Business B does not main-
tain books and records that are separate from DE2.
Instead, the activities of Business B are reflected on
the books and records of DE2, which are maintained
in Japanese yen. In addition, Business C has the U.S.
dollar as its functional currency, maintains books and
records that are separate from the books and records
of DE2, and is an eligible QBU.
(B) Analysis—(1) Pursuant to paragraph (b)(4)
(ii) of this section, DE1 and DE2 are not eligible
QBUs. Moreover, pursuant to paragraph (b)(5) of
this section, DE1 is not the owner of the Business A,
Business B, or Business C eligible QBUs, and nei-
ther Business A nor DE2 is the owner of the Business
B or Business C eligible QBUs. Instead, pursuant to
paragraph (b)(5) of this section, U.S. Corp is the
owner of the Business A, Business B, and Business
C eligible QBUs.
(2) Because Business A and Business B are eligi-
ble QBUs with functional currencies that are differ-
ent than the functional currency of U.S. Corp, Busi-
ness A and Business B are section 987 QBUs under
paragraph (b)(3)(i) of this section.
(3) The Business C eligible QBU has the same
functional currency as U.S. Corp, the U.S. dollar.
Therefore, the Business C eligible QBU is not a
section 987 QBU under paragraph (b)(3)(i) of this
section.
(iii) Example 3: Section 987 grouping election—
(A) Facts. U.S. Corp owns all of the interests in DE1.
DE1 owns Business A and Business B. For purposes
of this example, assume Business B has the euro as
its functional currency.
(B) Analysis—(1) Pursuant to paragraph (b)
(4)(ii) of this section, DE1 is not an eligible QBU.
Moreover, pursuant to paragraph (b)(5) of this sec-
tion, DE1 is not the owner of the Business A or Busi-
ness B eligible QBUs. Instead, pursuant to paragraph
(b)(5) of this section, U.S. Corp is the owner of the
Business A and Business B eligible QBUs.
(2) Business A and Business B constitute two
separate eligible QBUs, each with the euro as its
functional currency. Accordingly, Business A and
Business B are section 987 QBUs of U.S. Corp
under paragraph (b)(3)(i) of this section. U.S. Corp
may elect to treat Business A and Business B as a
single section 987 QBU pursuant to paragraph (b)(3)
(ii) of this section. If such election is made, pursuant
to paragraph (b)(5) of this section, U.S. Corp would
be the owner of the Business AB section 987 QBU
that would include the activities of both the Business
A section 987 QBU and the Business B section 987
QBU. In addition, pursuant to paragraph (b)(5) of
this section, DE1 would not be treated as the owner
of the Business AB section 987 QBU.
(c) Exchange rates. Solely for purposes
of section 987, the spot rate, the yearly
average exchange rate, and the historic
rate are determined as provided in para-
graphs (c)(1) through (3) of this section.
(1) Spot rate—(i) In general. Except
as otherwise provided in this section, the
spot rate means the rate determined under
the rules of §1.988-1(d)(1), (2), and (4) on
the relevant date.
(ii) Election to use a spot rate conven-
tion. An owner may elect to use a spot rate
convention that reasonably approximates
the spot rate determined in paragraph (c)
(1)(i) of this section. A spot rate conven-
tion may be based on the spot rate at the
beginning of a reasonable period, the spot
rate at the end of a reasonable period,
the average of spot rates for a reasonable
period, or spot and forward rates for a rea-

Bulletin No. 2025–3 353 January 13, 2025
sonable period. For this purpose, a reason-
able period may not exceed three months.
For example, in lieu of the spot rate
determined in paragraph (c)(1)(i) of this
section, the spot rate for all transactions
during a monthly period may be deter-
mined pursuant to one of the following
conventions: the spot rate at the beginning
of the current month or at the end of the
preceding month; the monthly average of
daily spot rates for the current or preced-
ing month; or an average of the beginning
and ending spot rates for the current or
preceding month. Similarly, in lieu of the
spot rate determined in paragraph (c)(1)(i)
of this section, the spot rate may be deter-
mined pursuant to an average of the spot
rate and the 30-day forward rate on a day
of the preceding month. Use of a spot rate
convention that is consistent with the con-
vention used for financial accounting pur-
poses is generally presumed to reasonably
approximate the rate in paragraph (c)(1)
(i) of this section. However, the Commis-
sioner may prescribe the spot rate as deter-
mined in paragraph (c)(1)(i) of this section
or an appropriate spot rate pursuant to this
paragraph (c)(1)(ii) if the Commissioner
determines that the use of the convention
would not clearly reflect income based
on the facts and circumstances available
at the time of the election. The election
or revocation of a spot rate convention
does not change the spot rate with respect
to any day of a taxable year before the
election or revocation becomes effective.
See paragraph (g) of this section for rules
relating to section 987 elections.
(2) Yearly average exchange rate. For
purposes of section 987, the yearly aver-
age exchange rate is a rate that represents
an average exchange rate for the taxable
year (or, if the section 987 QBU existed
for less than the full taxable year, the
portion of the year during which the sec-
tion 987 QBU existed) computed under
any reasonable method. For example, an
owner may determine the yearly average
exchange rate based on a daily, monthly, or
quarterly averaging convention, whether
weighted or unweighted, and may take
into account forward rates for a period not
to exceed three months. Use of an averag-
ing convention that is consistent with the
convention used for financial accounting
purposes is generally presumed to be a
reasonable method. However, the Com-
missioner may prescribe an appropriate
yearly average exchange rate if the Com-
missioner determines that the use of the
convention would not have been expected
to clearly reflect income based on the facts
and circumstances available at the time of
the election.
(3) Historic rate—(i) In general.
Except as otherwise provided in the sec-
tion 987 regulations, the historic rate is
determined as described in paragraphs (c)
(3)(i)(A) through (E) of this section.
(A) Assets generally. In the case of
an asset other than inventory that is
acquired by a section 987 QBU (or oth-
erwise becomes attributable to a section
987 QBU, including through a transfer),
the historic rate is the yearly average
exchange rate applicable to the year of
acquisition (or the year in which the asset
otherwise becomes attributable to the sec-
tion 987 QBU).
(B) Inventory under the simplified
inventory method. If a taxpayer has not
elected under §1.987-3(c)(2)(iv)(B) to use
the historic inventory method, the historic
rate for inventory is determined under this
paragraph (c)(3)(i)(B).
(1) LIFO inventory. The historic rate
for LIFO inventory is the yearly average
exchange rate applicable to the year in
which the inventory’s LIFO layer arose.
(2) Non-LIFO inventory. The historic
rate for non-LIFO inventory is the yearly
average exchange rate for the relevant
taxable year. For example, in determining
the owner functional currency net value
of a section 987 QBU on the last day of
the current taxable year under §1.987-4(d)
(1)(i)(A), the historic rate for non-LIFO
inventory is the yearly average exchange
rate for the current taxable year. In deter-
mining the owner functional currency net
value of a section 987 QBU on the last
day of the preceding taxable year under
§1.987-4(d)(1)(i)(B), the historic rate for
non-LIFO inventory is the yearly average
exchange rate for the preceding taxable
year.
(C) Inventory under the historic inven-
tory method. If a taxpayer has elected
under §1.987-3(c)(2)(iv)(B) to use the his-
toric inventory method, each inventoriable
cost with respect to a section 987 QBU’s
inventory may have a different historic
rate. The historic rate for each inventori-
able cost is the exchange rate at which the
cost would be translated under §1.987-3 if
it were not an inventoriable cost.
(D) Liabilities generally. In the case
of a liability that is incurred or assumed
by a section 987 QBU, the historic rate is
the yearly average exchange rate applica-
ble to the year the liability is incurred or
assumed.
(E) Determination of historic rates
after revocation of current rate election.
If a current rate election is revoked or oth-
erwise ceases to be in effect, the historic
rate of all historic items (other than non-
LIFO inventory subject to the simplified
inventory method) that were attributable
to a section 987 QBU on the last day of
the last taxable year in which the current
rate election was in effect is the spot rate
applicable to that day. Similarly, except as
provided in paragraph (c)(3)(i)(B)(2) of
this section, if a marked item becomes a
historic item (such as when an asset of an
insurance company ceases to be a separate
account asset), the historic rate for the his-
toric item is equal to the spot rate applica-
ble to the last day of the last taxable year
in which it was treated as a marked item.
(ii) Date placed in service for depre-
ciable or amortizable property. In the
case of depreciable or amortizable prop-
erty, an owner may determine the historic
rate by reference to the date such property
is placed in service by the section 987
QBU rather than the date the property was
acquired, provided that this convention is
consistently applied for all such property
attributable to that section 987 QBU.
(iii) Changed functional currency.
In the case of a section 987 QBU or an
owner of a section 987 QBU that previ-
ously changed its functional currency,
§1.985-5(d)(1)(ii)(A) and (e)(4)(i)(A),
respectively, are taken into account in
determining the historic rate for an item
reflected on the balance sheet of the sec-
tion 987 QBU immediately before the
year of change.
(d) Marked item—(1) In general.
Except as provided in paragraph (d)(2)
of this section, a marked item is an asset
(marked asset) or liability (marked lia-
bility) that is attributable to a section 987
QBU under §1.987-2(b) and that—
(i) Is denominated in, or determined by
reference to, the functional currency of the
section 987 QBU and would be a section
988 transaction if such item were held or

January 13, 2025 354 Bulletin No. 2025–3
entered into directly by the owner of the
section 987 QBU;
(ii) Is a prepaid expense or a liabil-
ity for an advance payment of unearned
income, in either case having an original
term of one year or less on the date the
prepaid expense or liability for an advance
payment of unearned income arises;
(iii) Is a section 988 transaction of the
section 987 QBU;
(iv) Is an insurance reserve; or
(v) Is a separate account asset.
(2) Current rate election. A taxpayer
may elect to treat all assets and liabili-
ties that are attributable to a section 987
QBU under §1.987-2(b) as marked items
(a current rate election). See §1.987-11(c)
for rules suspending section 987 loss if a
current rate election is in effect.
(e) Historic item. A historic item is an
asset (historic asset) or liability (historic
liability) that is attributable to a section
987 QBU under §1.987-2(b) and that is
not a marked item.
(f) Example: Identification of marked
and historic items. The following example
illustrates the application of paragraphs
(d) and (e) of this section.
(1) Facts. U.S. Corp is a domestic corporation
with the U.S. dollar as its functional currency and is
the owner of Business A, a section 987 QBU that has
the pound as its functional currency. Items reflected
on Business A’s balance sheet include £10,000,
$1,000, a building with a basis of £100,000, a light
general purpose truck with a basis of £30,000, a
computer with a basis of £1,000, a 60-day receivable
for ¥15,000, an account payable of £5,000, and a
foreign currency contract within the meaning of sec-
tion 1256(g)(2) that requires Business A to exchange
£100 for $125 in 90 days.
(2) Analysis. Under paragraph (d) of this section,
the £10,000, the $1,000, the ¥15,000 receivable, the
£5,000 account payable, and the £/$ section 1256
foreign currency contract are marked items. The
other items are historic items under paragraph (e) of
this section.
(g) Elections. This paragraph (g) pro-
vides rules for making and revoking elec-
tions under the section 987 regulations
(the section 987 elections). A section 987
election is made for the owner and for a
taxable year and applies to every section
987 QBU owned by the owner while the
election is in effect. Once made, a sec-
tion 987 election remains in effect until
revoked.
(1) Persons making the election. A
section 987 election is made or revoked
by the authorized person. The authorized
person is described in paragraph (g)(1)(i),
(ii), (iii), or (iv) of this section. If there are
multiple controlling domestic sharehold-
ers, references to “the authorized person”
refer to all authorized persons acting in
concert.
(i) United States persons. Except as
provided in paragraph (g)(1)(iii) or (iv) of
this section, if the owner of a section 987
QBU is a United States person, the owner
is the authorized person.
(ii) CFCs. If the owner of a section
987 QBU is a controlled foreign corpora-
tion, the controlling domestic sharehold-
ers (determined under §1.964-1(c)(5)(i))
of the controlled foreign corporation are
treated as the authorized person.
(iii) Consolidated groups. If the owner
is a member of a consolidated group, see
§1.1502-77.
(iv) Partnerships. If the owner of a
section 987 QBU is a partnership, the
election is made or revoked by the part-
nership. For a partnership that is not oth-
erwise required to file a partnership return,
see §1.6031(a)-1(b)(5) for elections that
can only be made by a partnership under
section 703.
(2) Consistency rules—(i) Consoli-
dated groups. A section 987 election is
made or revoked by a consolidated group
and applies to all members of the group.
Therefore, the same section 987 elections
will be in effect for all members of a con-
solidated group at all times. If a corpora-
tion becomes a member of a consolidated
group, it is deemed to make or revoke
any section 987 election as necessary to
be consistent with the consolidated group.
If a corporation ceases to be a member of
a consolidated group and does not join
another group, its section 987 elections
are unaffected by its departure from the
group. All members of a consolidated
group are treated as a single United States
person for purposes of applying paragraph
(g)(2)(ii) of this section.
(ii) CFCs and foreign partnerships. If
the authorized person makes or revokes an
election on behalf of any person (includ-
ing the authorized person) described in
paragraphs (g)(2)(ii)(A) through (C) of
this section (the section 987 electing
group), then the election must be made or
revoked on behalf of all members of the
section 987 electing group for the first
taxable year of each entity that ends with
or within the taxable year of the United
States person described in paragraph (g)
(2)(ii)(A) of this section in which the elec-
tion or revocation became effective. If an
entity that was not previously a member
of the section 987 electing group becomes
a member (for example, upon formation
or acquisition), it is deemed to make or
revoke any section 987 election as neces-
sary to be consistent with the other mem-
bers (without regard to the requirements
of paragraph (g)(3)(ii) of this section).
The following persons are described in
this paragraph (g)(2)(ii):
(A) A United States person (the rele-
vant United States person).
(B) Each controlled foreign corpora-
tion in which the relevant United States
person owns (within the meaning of sec-
tion 958(a)) more than fifty percent of the
stock (by vote or value).
(C) In the case of an election that can be
made by or for a partnership, each foreign
partnership in which the relevant United
States person owns (directly or indirectly)
more than fifty percent of the capital and
profits interest.
(iii) Section 381(a) transactions. If
a corporation (acquiring corporation)
acquires the assets of another corpora-
tion in a transaction described in section
381(a), the acquiring corporation’s elec-
tion status applies to all section 987 QBUs
owned by the acquiring corporation after
the transaction.
(3) Manner of making or revoking elec-
tions. The section 987 elections must be
made in accordance with this paragraph
(g)(3), except as provided in forms and
instructions or other guidance as provided
by the Secretary.
(i) Statement must be attached to a
return. An authorized person that makes
or revokes a section 987 election in accor-
dance with this paragraph (g) must attach
to its return the statement described in
this paragraph (g)(3)(i) (or must provide
the information described in this para-
graph (g)(3)(i) in the manner prescribed in
forms or instructions or other guidance).
Each statement must include an identi-
fication of the election that is made or
revoked (including the section and para-
graph of the regulations under which the
election is made); the name, address, and
functional currency of each owner (or if
the owner is a member of a consolidated
group, the common parent of the consol-

Bulletin No. 2025–3 355 January 13, 2025
idated group) for which the election is
made or revoked; and the name, address,
functional currency, and owner of each
section 987 QBU to which the election
applies. The elections provided in §1.987-
10 are made by reporting the election on
the statement described in §1.987-10(k).
An election to use a spot rate convention
under paragraph (c)(1)(ii) of this section
must describe the convention.
(ii) Election requirements—(A) Con-
sent required. Except as provided in para-
graph (g)(3)(ii)(B) or (C) of this section, a
section 987 election may not be made or
revoked without the consent of the Com-
missioner. A copy of the consent must
be attached to the statement described in
paragraph (g)(3)(i) of this section. For
purposes of this paragraph (g)(3)(ii), the
Commissioner’s consent may be obtained
only with a ruling or administrative pro-
nouncement. See Revenue Procedure
2024-1, I.R.B. 2024-1 (or superseding
guidance).
(B) Current rate election, annual rec-
ognition election, and section 988 mark-
to-market election. Except as provided
in paragraph (g)(3)(ii)(C) of this section,
the authorized person may make a cur-
rent rate election, an annual recognition
election, or a section 988 mark-to-market
election without the Commissioner’s con-
sent by filing the statement prescribed in
paragraph (g)(3)(i) of this section with the
Internal Revenue Service in accordance
with the prescribed form or its instruc-
tions (or other guidance) on or before the
first day of the taxable year to which the
election applies, and attaching a copy of
the statement to its return. Once made, a
current rate election, annual recognition
election, or section 988 mark-to-market
election may not be revoked without the
Commissioner’s consent for any taxable
year beginning within 60 months of the
first day of the taxable year for which it
was made. Once revoked, a new current
rate election, annual recognition election,
or section 988 mark-to-market election
may not be made without the Commis-
sioner’s consent for any taxable year
beginning within 60 months of the first
day of the taxable year for which it was
revoked.
(C) First year to which the section 987
regulations apply. The authorized person
may make a section 987 election with-
out the consent of the Commissioner on
its original, timely filed (including exten-
sions) return for the first taxable year of an
owner in which both—
(1) The section 987 regulations apply
(other than by applying solely to one
or more terminating QBUs pursuant to
§1.987-15(a)(2)); and
(2) Either the owner or any member
of its consolidated group or section 987
electing group is the owner of a section
987 QBU.
(iii) Elections made under the 2016
and 2019 section 987 regulations. Each
section 987 election must be made by the
authorized person under the rules of this
section without regard to whether the elec-
tion was in effect under the 2016 and 2019
final regulations or under prior §1.987-8T.
In the first taxable year in which the sec-
tion 987 regulations apply, any elections
made under the 2016 and 2019 final regu-
lations cease to be effective.
(4) No change in method of account-
ing. An election under section 987 is not
treated as a change in method of account-
ing for purposes of sections 446 and 481.
(5) Principles of §1.964-1(c)(3) appli-
cable to section 987 elections. Except
as otherwise provided in this paragraph
(g), if the authorized person makes or
revokes a section 987 election on behalf
of a controlled foreign corporation, the
authorized person must make or revoke
the section 987 election in accordance
with the rules and principles of §1.964-
1(c)(3).
(h) Definitions. The definitions in this
paragraph (h) apply for purposes of the
section 987 regulations.
1991 proposed regulations. 1991 pro-
posed regulations means proposed §§
1.987-1 through 1.987-3 as contained in
56 FR 48457-01 (September 25, 1991).
2006 proposed regulations. 2006 pro-
posed regulations means: proposed §§
1.861-9T(g)(2)(ii)(A)(1) and (g)(2)(vi);
1.985-5; 1.987-1 through 1.987-11; 1.988-
1(a)(3) and (4), (a)(10)(ii), and (i); 1.988-
4(b)(2); and 1.989(a)-1(b)(2)(i), and (b)
(4) as contained in 71 FR 52876-01 (Sep-
tember 7, 2006).
2016 and 2019 section 987 regulations.
2016 and 2019 section 987 regulations
means the following regulations:
(i) Sections 1.861-9T(g)(2)(ii)(A)(1)
and (g)(2)(vi); 1.985-5; 1.987-1 through
1.987-10; 1.988-1(a)(4), (a)(10)(ii), and
(i); 1.988-4(b)(2); and 1.989(a)-1(b)(2)(i),
(b)(4), (d)(3) and (4), as contained in 26
CFR in part 1 in effect on April 1, 2017.
(ii) Sections 1.987-2T(c)(9), 1.987-
4T(c)(2) and (f), and 1.987-7T, as con-
tained in 26 CFR in part 1 in effect on
April 1, 2017 (until they were revoked on
May 13, 2019).
(iii) Sections 1.987-2(c)(9) and 1.987-
4(c)(2) and (f), as contained in 26 CFR in
part 1 in effect on April 1, 2020 (beginning
on May 13, 2019).
(iv) Sections 1.987-1T (other than
§§1.987-1T(g)(2)(i)(B) and (g)(3)(i)(H)),
1.987-3T, 1.987-6T, 1.988-1T, and 1.988-
2T(i), as contained in 26 CFR in part 1 in
effect on April 1, 2017 (until they expired
on December 6, 2019).
Adjusted balance sheet. Adjusted bal-
ance sheet means a tax basis balance sheet
in the functional currency of the eligible
QBU, determined by—
(i) Preparing a balance sheet for the
relevant date from the section 987 QBU’s
books and records (within the meaning of
§1.989(a)-1(d)) recorded in the section
987 QBU’s functional currency and show-
ing all assets and liabilities attributable to
the section 987 QBU under §1.987-2(b)
(the preliminary balance sheet); and
(ii) Making adjustments necessary to
conform the items reflected on the pre-
liminary balance sheet to United States
tax accounting principles (including
adjustments to reflect items that were
not reflected on the preliminary balance
sheet but should be reflected under United
States tax accounting principles, and
adjustments to eliminate items that are
reflected on the preliminary balance sheet
but should not be reflected under United
States tax accounting principles).
Annual recognition election. Annual
recognition election has the meaning pro-
vided in §1.987-5(b)(2).
Authorized person. Authorized person
has the meaning provided in paragraph (g)
(1) of this section.
Combination. Combination has the
meaning provided in §1.987-2(c)(9)(i).
Combined QBU. Combined QBU has
the meaning provided in §1.987-2(c)(9)
(i).
Combining QBU. Combining QBU has
the meaning provided in §1.987-2(c)(9)
(i).

January 13, 2025 356 Bulletin No. 2025–3
Consolidated group. Consolidated
group has the meaning provided in
§1.1502-1(h).
Controlled foreign corporation. Con-
trolled foreign corporation (or CFC) has
the meaning provided in section 957 (or, if
applicable, section 953(c)(1)(B)).
Controlled group. A controlled group
means all persons with the relationships to
each other specified in section 267(b) or
section 707(b).
Cumulative suspended section 987
loss. Cumulative suspended section 987
loss has the meaning provided in §1.987-
11(b).
Current rate election. Current rate
election has the meaning provided in para-
graph (d)(2) of this section.
Current year gain amount. Current
year gain amount has the meaning pro-
vided in §1.987-11(e)(3)(i).
Deferral event. Deferral event has the
meaning provided in §1.987-12(g)(1).
Deferred section 987 gain or loss.
Deferred section 987 gain or loss has the
meaning provided in §1.987-12(b)(2).
Deferred section 987 gain or loss does not
include net unrecognized section 987 gain
or loss or suspended section 987 loss.
Disregarded entity. Disregarded
entity (or DE) means an entity disre-
garded as an entity separate from its
owner for Federal income tax pur-
poses, including an entity described
in §301.7701-2(c)(2) of this chapter, a
qualified subchapter S subsidiary under
section 1361(b)(3), a qualified REIT
subsidiary within the meaning of sec-
tion 856(i)(2), and a trust all of which is
treated (under subpart E of part I of sub-
chapter J of Chapter 1 of the Code) as
owned by the grantor or another person.
Disregarded transactions. Disregarded
transactions has the meaning provided in
§1.987-2(c)(2)(ii).
Earnings only method. Earnings only
method means a method of applying sec-
tion 987 before the transition date under
which gain or loss under section 987(3) is
determined only with respect to the earn-
ings of a section 987 QBU.
ECI. ECI means income that is effec-
tively connected with the conduct of a
trade or business within the United States.
Eligible pretransition method. Eligible
pretransition method has the meaning pro-
vided in §1.987-10(e)(4).
Eligible QBU. Eligible QBU has the
meaning provided in paragraph (b)(4) of
this section.
Financial instrument. Financial
instrument has the meaning provided in
§1.1275-6(b)(3). It includes a financial
instrument entered into between related
parties or unrelated parties.
Foreign source income. Foreign source
income means income from sources with-
out the United States.
Generally accepted accounting prin-
ciples. Generally accepted accounting
principles means United States generally
accepted accounting principles described
in standards established and made effec-
tive by the Financial Accounting Stan-
dards Board.
Hedge. Hedge has the meaning pro-
vided in §1.987-14(b)(1).
Hedged QBU. Hedged QBU has the
meaning provided in §1.987-14(b)(1).
Hedging gain or loss. Hedging gain or
loss has the meaning provided in §1.987-
14(d)(1).
Historic asset. Historic asset has the
meaning provided in paragraph (e) of this
section.
Historic item. Historic item has the
meaning provided in paragraph (e) of this
section.
Historic liability. Historic liability has
the meaning provided in paragraph (e) of
this section.
Historic rate. Historic rate has the
meaning provided in paragraph (c)(3) of
this section.
Insurance reserve. Insurance reserve
means an item that is a reserve under section
807(c) or section 953(b) (as applicable).
LIFO. LIFO means the last-in, first-out
inventory method (as described in section
472).
LIFO inventory. LIFO inventory means
inventory accounted for under the LIFO
inventory method.
Liability. Liability means the amount of
a liability on the adjusted balance sheet (or
the amount that would be on the adjusted
balance sheet if an adjusted balance sheet
were prepared for that day).
Lookback gain amount. Lookback
gain amount has the meaning provided in
§1.987-11(e)(3)(ii).
Lookback period. Lookback period has
the meaning provided in §1.987-11(e)(3)
(iv).
Loss-to-the-extent-of-gain rule. Loss-
to-the-extent-of-gain rule has the meaning
provided in §1.987-11(e)(1).
Marked asset. Marked asset has the
meaning provided in paragraph (d) of this
section.
Marked item. Marked item has the
meaning provided in paragraph (d) of this
section.
Marked liability. Marked liability has
the meaning provided in paragraph (d) of
this section.
Net accumulated unrecognized section
987 gain or loss. Net accumulated unrec-
ognized section 987 gain or loss has the
meaning provided in §1.987-4(c).
Net unrecognized section 987 gain or
loss. Net unrecognized section 987 gain or
loss has the meaning provided in §1.987-
4(b). Net unrecognized section 987 gain or
loss does not include deferred section 987
gain or loss or suspended section 987 loss.
Non-LIFO inventory. Non-LIFO inven-
tory means inventory that is not accounted
for under the LIFO inventory method.
Original deferral QBU. Original
deferral QBU has the meaning provided
in §1.987-12(b).
Original deferral QBU owner. Origi-
nal deferral QBU owner has the meaning
provided in §1.987-12(g)(3).
Original suspended loss QBU owner.
Original suspended loss QBU owner has
the meaning provided in §1.987-13(l)(1).
Outbound loss event. Outbound loss
event has the meaning provided in §1.987-
13(h)(2).
Outbound loss QBU. Outbound loss
QBU has the meaning provided in §1.987-
13(h)(1).
Outbound section 987 loss. Outbound
section 987 loss has the meaning provided
in §1.987-13(h)(4).
Owner. Owner has the meaning pro-
vided in paragraph (b)(5) of this section.
Prior §1.987-1. Prior §1.987-1 means
§1.987-1, as contained in 26 CFR in part 1
in effect on April 1, 2017.
Prior §1.987-4. Prior §1.987-4 means
§1.987-4, as contained in 26 CFR in part 1
in effect on April 1, 2017.
Prior §1.987-5. Prior §1.987-5 means
§1.987-5, as contained in 26 CFR in part 1
in effect on April 1, 2017.
Prior §1.987-8T. Prior §1.987-8T
means §1.987-8T, as contained in 26 CFR
in part 1 in effect on April 1, 2017.

Bulletin No. 2025–3 357 January 13, 2025
Prior §1.987-10. Prior §1.987-10
means §1.987-10, as contained in 26 CFR
in part 1 in effect on April 1, 2017.
Prior §1.987-12. Prior §1.987-12
means §1.987-12, as contained in 26 CFR
in part 1 in effect on April 1, 2020.
Prior §1.987-12T. Prior §1.987-12T
means §1.987-12T, as contained in 26
CFR in part 1 in effect on April 1, 2017.
QBU net value. QBU net value has the
meaning provided in §1.987-4(e)(2)(ii).
Recognition grouping. Recognition
grouping has the meaning provided in
§1.987-11(f).
Remittance. Remittance has the mean-
ing provided in §1.987-5(c).
S corporation. S corporation has the
meaning provided in section 1361(a)(1).
Section 904 category. Section 904 cate-
gory means a separate category of income
described in §1.904-5(a)(4)(v).
Section 987 electing group. Section 987
electing group has the meaning provided
in paragraph (g)(2)(ii) of this section.
Section 987 elections. Section 987
elections has the meaning provided in
paragraph (g) of this section.
Section 987 gain or loss. Section 987
gain or loss means gain or loss that is rec-
ognized under §1.987-5, deferred section
987 gain or loss, suspended section 987
loss, and pretransition gain or loss that is
recognized under §1.987-10(e)(5)(ii).
Section 987 hedging transaction. Sec-
tion 987 hedging transaction has the
meaning provided in §1.987-14(b).
Section 987 QBU. Section 987 QBU
has the meaning provided in paragraph (b)
(3) of this section.
Section 987 regulations. Section 987
regulations has the meaning provided in
paragraph (a) of this section.
Section 987 taxable income or loss.
Section 987 taxable income or loss has the
meaning provided in §1.987-3(a).
Section 988 mark-to-market election.
Section 988 mark-to-market election has
the meaning provided in §1.987-3(b)(4)
(ii).
Separate account. Separate account
means a separate set of financial records
maintained with respect to an insurance
contract or group of contracts to report
assets and liabilities for specific prod-
ucts that are separated from the insurer’s
general account, provided the following
requirements are met—
(i) Any liability of the separate account
is the liability only of that account and not
the liability of any other separate account
or the general account;
(ii) The separate account is not part
of the company’s general account and is
protected from the general creditors of the
company; and
(iii) The value of each contract sup-
ported by the separate account is sup-
ported proportionately by each of the
assets in such account.
Separate account asset. Separate
account asset means an asset that is
reflected on the books and records of
an eligible QBU and held in a separate
account with respect to a separate account
insurance contract. A separate account
asset does not include an asset held in the
general account.
Separate account insurance contract.
Separate account insurance contract
means a contract that would be treated as
an insurance contract for Federal income
tax purposes (except to the extent pro-
vided in this definition with respect to
the requirements in section 72(s), 101(f),
817(h), or 7702) for which some or all
of the assets supporting the insurance
reserves are required to be held in a sep-
arate account under the insurance regula-
tory rules of the jurisdiction in which the
contract is issued, and either—
(i) The contract qualifies as a variable
contract under section 817(d) (treating
foreign law as a State law or regulation);
or
(ii) The contract would qualify as a
variable contract under section 817(d)
(treating foreign law as a State law or reg-
ulation) but for its failure to meet one or
more of the requirements in section 72(s),
101(f), 817(h), or 7702, provided that the
following requirements are met—
(A) The contract is regulated as a life
insurance or annuity contract in the for-
eign jurisdiction in which it is issued;
(B) The contract reserves are computed
or estimated on the basis of recognized mor-
tality or morbidity tables and assumed rates
of interest. For this purpose, the reflection of
the investment return and the market value
of assets in the separate account is consid-
ered an assumed rate of interest; and
(C) No policyholder, annuitant,
insured, or beneficiary under the contract
is a United States person.
Separated QBU. Separated QBU has
the meaning provided in §1.987-2(c)(9)
(iii).
Separating QBU. Separating QBU has
the meaning provided in §1.987-2(c)(9)
(iii).
Separation. Separation has the mean-
ing provided in §1.987-2(c)(9)(iii).
Separation fraction. In the case of
a separated QBU, separation fraction
means a fraction, the numerator of which
is the aggregate adjusted basis of the gross
assets attributable to the separated QBU
immediately after the separation, and the
denominator of which is the aggregate
adjusted basis of the gross assets attribut-
able to all separated QBUs immediately
after the separation.
Spot rate. Spot rate has the meaning
provided in paragraph (c)(1) of this sec-
tion.
SRLY section 987 losses. SRLY section
987 losses has the meaning provided in
§1.987-11(e)(6)(ii).
Successor deferral QBU. Successor
deferral QBU has the meaning provided
in §1.987-12(g)(2).
Successor deferral QBU owner. Suc-
cessor deferral QBU owner has the mean-
ing provided in §1.987-12(c)(1).
Successor suspended loss QBU. Suc-
cessor suspended loss QBU has the mean-
ing provided in §1.987-13(l)(2).
Successor suspended loss QBU owner.
Successor suspended loss QBU owner has
the meaning provided in §1.987-13(l)(3).
Suspended section 987 loss. Suspended
section 987 loss means section 987 loss
that is subject to the limitations on rec-
ognition described in §1.987-11(e). See
§§1.987-10(e)(5), 1.987-11(c) and (d),
1.987-12(c), and 1.987-13(h) for rules
regarding when net unrecognized sec-
tion 987 loss or deferred section 987 loss
becomes suspended section 987 loss. Sus-
pended section 987 loss does not include
net unrecognized section 987 loss or
deferred section 987 loss.
Tentative tested income group. Tenta-
tive tested income group has the meaning
provided in §1.987-6(b)(2)(i)(D)(1).
Terminating QBU. Terminating QBU
means a section 987 QBU, if both—
(i) The section 987 QBU terminates on
any date on or after November 9, 2023, or
the section 987 QBU terminates as a result
of an entity classification election made

January 13, 2025 358 Bulletin No. 2025–3
under §301.7701-3 of this chapter that is
filed on or after November 9, 2023, and
that is effective before November 9, 2023;
and
(ii) When the section 987 QBU termi-
nates, neither the section 987 regulations
nor the 2016 and 2019 section 987 reg-
ulations would apply with respect to the
section 987 QBU but for §1.987-15(a)(2).
Termination. With respect to a section
987 QBU, termination has the meaning
provided in §1.987-8(b) and (c). With
respect to a successor suspended loss
QBU, the term termination has the mean-
ing provided in §1.987-13(j).
Trade or business. Trade or business has
the meaning provided in §1.989(a)-1(c).
Transfer. Transfer has the meaning
provided in §1.987-2(c).
Transition date. Transition date has the
meaning provided in §1.987-10(c).
United States person. United States
person (or U.S. person) has the meaning
provided in section 7701(a)(30).
United States shareholder. United
States shareholder (or U.S. shareholder)
has the meaning provided in section
951(b) (or, if applicable, section 953(c)(1)
(A)).
U.S. source income. U.S. source income
means income from sources within the
United States.
Yearly average exchange rate. Yearly
average exchange rate has the meaning
provided in paragraph (c)(2) of this sec-
tion.
§1.987-2 Attribution of items to eligible
QBUs; definition of a transfer and
related rules.
(a) In general. This section provides
rules regarding when items are attributed
to eligible QBUs and when they are
treated as transferred to or from section
987 QBUs. Paragraph (b) of this section
provides rules for attributing assets and
liabilities, and items of income, gain,
deduction, and loss, to an eligible QBU.
Paragraph (c) of this section defines a
transfer to or from a section 987 QBU.
Paragraph (d) of this section provides
translation rules for transfers to a section
987 QBU. Paragraph (e) of this section
provides a cross-reference relating to the
treatment of section 987 QBUs owned by
consolidated groups.
(b) Attribution of items to an eligible
QBU—(1) General rules. Except as pro-
vided in paragraphs (b)(2) and (3) of this
section, items are attributable to an eligi-
ble QBU to the extent they are reflected
on the separate set of books and records,
as defined in §1.989(a)-1(d)(1) and (2),
of the eligible QBU. For purposes of this
section, the term item refers to any asset
or liability, and any item of income, gain,
deduction, or loss. Items that are attributed
to an eligible QBU pursuant to this section
must be adjusted to conform to Federal
income tax principles. An item that is not
taken into account for financial account-
ing purposes, and therefore is not reflected
on the separate set of books and records
of an eligible QBU, is treated as reflected
on the separate set of books and records
of an eligible QBU to the extent it would
have been so reflected if the item were
taken into account for financial account-
ing purposes. Except as provided in
§1.989(a)-1(d)(3), these attribution rules
apply solely for purposes of section 987.
For example, the allocation and appor-
tionment of interest expense under section
864(e) is independent of these rules.
(2) Exceptions for non-portfolio stock,
interests in partnerships, and certain
acquisition indebtedness. (i) In general.
Except as provided in paragraph (b)(2)(ii)
of this section, the following items are not
considered to be on the books and records
of an eligible QBU:
(A) Stock of a corporation (whether
domestic or foreign), other than stock of
a corporation if the owner of the eligible
QBU owns less than 10 percent of the
total combined voting power of all classes
of stock entitled to vote and less than 10
percent of the total value of all classes
of stock of such corporation. For this
purpose, section 958 (other than section
958(b)(1)) applies in determining owner-
ship of a controlled foreign corporation
and section 318(a) applies in determining
ownership of other corporations, except
that in applying section 318(a)(2)(C), the
phrase “10 percent” is used instead of the
phrase “50 percent.”
(B) An interest in a partnership
(whether domestic or foreign).
(C) A liability that was incurred to
acquire stock described in paragraph
(b)(2)(i)(A) of this section or that was
incurred to acquire a partnership interest
described in paragraph (b)(2)(i)(B) of this
section.
(D) Income, gain, deduction, or loss
arising from the items described in para-
graphs (b)(2)(i)(A) through (C) of this
section. For example, if a dividend is
received with respect to stock of a corpo-
ration described in paragraph (b)(2)(i)(A)
of this section, the dividend is excluded
from the income of the eligible QBU.
See also paragraph (c)(2)(ii) of this sec-
tion, treating the payment as received by
the owner and contributed to the eligible
QBU.
(ii) Separate account assets. Paragraph
(b)(2)(i) of this section does not apply to
separate account assets, liabilities related
to separate account assets, or income,
gain, deduction, or loss arising from those
assets and liabilities.
(3) Adjustments to items reflected on
the books and records—(i) General rule.
If a principal purpose of recording (or
not recording) an item on the books and
records of an eligible QBU is the avoid-
ance of Federal income tax under, or
through the use of, section 987, the item
must be allocated between or among the
eligible QBU, the owner of such eligi-
ble QBU, and any other persons, entities
(including DEs), or other QBUs within
the meaning of §1.989(a)-1(b) (including
eligible QBUs) in a manner that reflects
the substance of the transaction. For pur-
poses of this paragraph (b)(3)(i), relevant
factors for determining whether such Fed-
eral income tax avoidance is a principal
purpose of recording (or not recording)
an item on the books and records of an
eligible QBU include the factors set forth
in paragraphs (b)(3)(ii) and (iii) of this
section. The presence or absence of any
factor or factors is not determinative. The
weight given to any factor (whether or not
set forth in paragraphs (b)(3)(ii) and (iii)
of this section) depends on the facts and
circumstances.
(ii) Factors indicating no tax avoid-
ance. For purposes of paragraph (b)(3)
(i) of this section, factors that may indi-
cate that recording (or not recording) an
item on the books and records of an eligi-
ble QBU did not have as a principal pur-
pose the avoidance of Federal income tax
under, or through the use of, section 987
include the recording (or not recording) of
an item:

Bulletin No. 2025–3 359 January 13, 2025
(A) For a significant and bona fide
business purpose;
(B) In a manner that is consistent with
the economics of the underlying transac-
tion;
(C) In accordance with generally
accepted accounting principles (or a sim-
ilar comprehensive accounting standard);
(D) In a manner that is consistent with
the treatment of similar items from year
to year;
(E) In accordance with accepted condi-
tions or practices in the particular trade or
business of the eligible QBU;
(F) In a manner that is consistent
with an explanation of existing internal
accounting policies that is evidenced by
documentation contemporaneous with
the timely filing of a return for the taxable
year; and
(G) As a result of a transaction between
legal entities (for example, the transfer of
an asset or the assumption of a liability),
even if such transaction is not regarded for
Federal income tax purposes (for exam-
ple, a transaction between a DE and its
owner).
(iii) Factors indicating tax avoid-
ance. For purposes of paragraph (b)(3)(i)
of this section, factors that may indicate
that a principal purpose of recording (or
not recording) an item on the books and
records of an eligible QBU is the avoid-
ance of Federal income tax under, or
through the use of, section 987 include:
(A) The presence or absence of an item
on the books and records that is the result
of one or more transactions that are transi-
tory, for example, due to a circular flow of
cash or other property;
(B) The presence or absence of an item
on the books and records that is the result
of one or more transactions that do not
have substance; and
(C) The presence or absence of an item
on the books and records that results in
the taxpayer (or a person related to the
taxpayer within the meaning of section
267(b) or section 707(b)) having offset-
ting positions with respect to the func-
tional currency of a section 987 QBU.
(iv) Section 988 transactions. A sec-
tion 988 transaction that is reflected on
the books and records of an eligible QBU
is not attributable to an eligible QBU if
the transaction was entered into or was
reflected on the eligible QBU’s books and
records with a principal purpose of gener-
ating fully or partially offsetting amounts
of section 988 gain or loss and section 987
gain or loss (or if the taxpayer chose to
denominate the section 988 transaction in
a nonfunctional currency with such a prin-
cipal purpose).
(c) Transfers to and from section 987
QBUs—(1) In general. The following
rules apply for purposes of determining
whether there is a transfer of an asset or
a liability from an owner to a section 987
QBU, or from a section 987 QBU to an
owner. These rules apply solely for pur-
poses of section 987.
(2) Disregarded transactions—(i) Gen-
eral rule. An asset or liability is treated as
transferred to a section 987 QBU from its
owner if, as a result of a disregarded trans-
action, such asset or liability is reflected
on the books and records of (or otherwise
becomes attributable to) the section 987
QBU within the meaning of paragraph (b)
of this section. Similarly, an asset or lia-
bility is treated as transferred from a sec-
tion 987 QBU to its owner if, as a result
of a disregarded transaction, such asset
or liability is no longer reflected on the
books and records of (or otherwise ceases
to be attributable to) the section 987 QBU
within the meaning of paragraph (b) of
this section.
(ii) Definition of a disregarded trans-
action. For purposes of this section, a dis-
regarded transaction means a transaction
that is not regarded for Federal income
tax purposes (for example, any transac-
tion between separate section 987 QBUs
of the same owner). For purposes of this
paragraph (c), a disregarded transaction
is treated as including events described
in paragraphs (c)(2)(ii)(A) through (F) of
this section.
(A) If the recording (or not recording)
of an asset or liability on the books and
records of a section 987 QBU of an owner
is the result of such asset or liability being
removed from (or included on) the books
and records of the owner or another eligi-
ble QBU of the owner, the asset or liabil-
ity is treated as transferred to (or from) the
section 987 QBU in a disregarded trans-
action.
(B) If an asset or liability that was pre-
viously attributable to a section 987 QBU
of an owner begins to be attributable to
the owner (or another eligible QBU of
the owner) as a result of the application
of paragraph (b)(2) or (3) of this section,
the asset or liability is treated as having
been transferred by the section 987 QBU
in a disregarded transaction. If an asset or
liability that was previously attributable
to the owner (or another eligible QBU of
the owner) begins to be attributable to the
section 987 QBU as a result of the appli-
cation of paragraph (b)(2) or (3) of this
section, the asset or liability is treated as
transferred to the section 987 QBU in a
disregarded transaction.
(C) If an asset or liability that is attrib-
utable to a section 987 QBU is sold or
exchanged (including in a nonrecognition
transaction, such as an exchange under
section 351) for an asset or liability that
is not attributable to the section 987 QBU
immediately after the sale or exchange,
the sold or exchanged asset or liability
that was attributable to the section 987
QBU immediately before the transaction
is treated as transferred from the section
987 QBU to its owner in a disregarded
transaction immediately before the sale
or exchange for purposes of section 987
(including for purposes of recognizing
section 987 gain or loss under §1.987-5)
and subsequently sold or exchanged by
the owner.
(D) If an asset or liability of an owner
of a section 987 QBU that is not attrib-
utable to a section 987 QBU is sold or
exchanged (including in a nonrecognition
transaction, such as an exchange under
section 351) for an asset or liability that
is attributable to the section 987 QBU
immediately after the sale or exchange,
the asset or liability that is attributable to
the section 987 QBU immediately after
the transaction is treated as received or
assumed by the owner and transferred
from the owner to the section 987 QBU
in a disregarded transaction immediately
after the sale or exchange for purposes
of section 987 (including for purposes of
recognizing section 987 gain or loss under
§1.987-5).
(E) If an asset or liability that is attrib-
utable to a section 987 QBU was received,
transferred, assumed, or accrued in a
regarded transaction (including the mak-
ing or receiving of a payment) in which
the related item of income, gain, deduc-
tion, or loss is not attributable to the sec-
tion 987 QBU, the asset or liability is

January 13, 2025 360 Bulletin No. 2025–3
treated as though it was received, trans-
ferred, assumed, or accrued by the owner
or another eligible QBU and transferred to
or from the section 987 QBU in a disre-
garded transaction. Similarly, if an asset
or liability that is not attributable to a sec-
tion 987 QBU was received, transferred,
assumed, or accrued in a regarded trans-
action (including the making or receiving
of a payment) in which the related item of
income, gain, deduction, or loss is attrib-
utable to the section 987 QBU, the asset
or liability is treated as though it was
received, transferred, assumed, or accrued
by the section 987 QBU and transferred
to or from the section 987 QBU in a dis-
regarded transaction. For example, if a
section 987 QBU receives a dividend on
an interest in stock that would be attrib-
utable to the section 987 QBU but for
paragraph (b)(2)(i)(A) of this section, the
owner is treated as receiving the dividend
and transferring to the section 987 QBU
the amount of the dividend in a disre-
garded transaction. Similarly, if a section
987 QBU pays interest on a liability that
would be attributable to the section 987
QBU but for paragraph (b)(2)(i)(C) of this
section, the section 987 QBU is treated
as transferring to the owner the amount
of the interest expense and the owner is
treated as paying the interest expense in
a disregarded transaction. See also para-
graph (c)(7) of this section (application of
general tax law principles).
(F) In the first taxable year in which an
eligible QBU is treated as a section 987
QBU, all assets and liabilities attributable
to the eligible QBU are treated as trans-
ferred from the owner to the section 987
QBU in a disregarded transaction on the
first day on which the eligible QBU is
treated as a section 987 QBU.
(iii) Items derived from disregarded
transactions ignored. For purposes of sec-
tion 987, disregarded transactions do not
give rise to items of income, gain, deduc-
tion, or loss that are taken into account in
determining section 987 taxable income
or loss under §1.987-3.
(3) through (6) [Reserved]
(7) Application of general tax law
principles. General tax law princi-
ples, including the circular cash flow,
step-transaction, economic substance, and
substance-over-form doctrines, apply for
purposes of determining whether there is
a transfer of an asset or liability under this
paragraph (c), including a transfer of an
asset or liability pursuant to a disregarded
transaction.
(8) Interaction with §1.988-1(a)(10).
See §1.988-1(a)(10) for rules regarding
the treatment of an intra-taxpayer transfer
of a section 988 transaction.
(9) Certain disregarded transactions
not treated as transfers—(i) Combinations
of section 987 QBUs. The combination (a
combination) of two or more separate sec-
tion 987 QBUs (combining QBUs) that
are directly owned by the same owner into
one section 987 QBU (combined QBU)
does not give rise to a transfer of any com-
bining QBU’s assets or liabilities to the
owner under this paragraph (c). In addi-
tion, transactions between the combining
QBUs occurring in the taxable year of the
combination do not result in a transfer of
the combining QBUs’ assets or liabilities
to the owner under this paragraph (c). For
this purpose, a combination occurs when
the assets and liabilities that were attrib-
utable to two or more combining QBUs
begin to be attributable to a combined
QBU and the separate existence of the
combining QBUs ceases. A combination
may result from any transaction or series
of transactions in which the combining
QBUs become a combined QBU. A com-
bination may also result when an owner of
two or more section 987 QBUs with the
same functional currency becomes sub-
ject to a grouping election under §1.987-
1(b)(3)(ii) or when a section 987 QBU of
an owner subject to a grouping election
changes its functional currency to that
of another section 987 QBU of the same
owner. For purposes of determining net
unrecognized section 987 gain or loss,
deferred section 987 gain or loss, and
cumulative suspended section 987 loss of
a combined QBU, the combining QBUs
are treated as having combined immedi-
ately before the beginning of the taxable
year of combination. See §§1.987-4(f)(1),
1.987-11(b)(2), and 1.987-12(f)(1).
(ii) Change in functional currency
from a combination. If, following a com-
bination of section 987 QBUs described
in paragraph (c)(9)(i) of this section, the
combined section 987 QBU has a different
functional currency than one or more of the
combining section 987 QBUs, any such
combining section 987 QBU is treated as
changing its functional currency, and the
owner of the combined section 987 QBU
must comply with the regulations under
section 985 regarding the change in func-
tional currency. See §§1.985-1(c)(6) and
1.985-5.
(iii) Separation of section 987 QBUs.
The separation (a separation) of a sec-
tion 987 QBU (separating QBU) into
two or more section 987 QBUs (sepa-
rated QBUs) that, after the separation, are
directly owned by the same owner does
not result in a transfer of the separating
QBU’s assets or liabilities to the owner
under this paragraph (c). Additionally,
transactions that occurred between the
separating QBUs in the taxable year of
the separation before the completion of
the separation do not result in transfers
for purposes of section 987. For this pur-
pose, a separation occurs when the assets
and liabilities that were attributable to a
separating QBU begin to be attributable
to two or more separated QBUs and each
of the separated QBUs continues to per-
form a significant portion of the separat-
ing QBU’s activities immediately after the
separation. A separation may result from
any transaction or series of transactions
in which a separating QBU becomes two
or more separated QBUs described in the
preceding sentence. A separation may also
result when a section 987 QBU that is sub-
ject to a grouping election under §1.987-
1(b)(3)(ii) changes its functional currency
or when the grouping election is revoked.
For purposes of determining net unrecog-
nized section 987 gain or loss, deferred
section 987 gain or loss, or cumulative
suspended section 987 loss of a separated
QBU, the separating QBU is treated as
having separated immediately before the
beginning of the taxable year of separa-
tion. See §§1.987-4(f)(2), 1.987-11(b)(3),
and 1.987-12(f)(2).
(iv) Special rules for successor sus-
pended loss QBUs. For purposes of
determining whether a combination or
separation has occurred with respect to a
successor suspended loss QBU, the rules
of paragraphs (c)(9)(i) and (iii) of this sec-
tion are applied without regard to whether
any of the combining QBUs, the com-
bined QBU, the separating QBU, or the
separated QBUs are section 987 QBUs. A
combined QBU is a successor suspended
loss QBU if either combining QBU was a

Bulletin No. 2025–3 361 January 13, 2025
successor suspended loss QBU, and a sep-
arated QBU is a successor suspended loss
QBU if the separating QBU was a succes-
sor suspended loss QBU.
(10) Examples. The following exam-
ples illustrate the principles of this para-
graph (c). For purposes of the examples, X
and Y are domestic corporations, have the
U.S. dollar as their functional currencies,
and use the calendar year as their taxable
years. Furthermore, except as otherwise
provided, Business A and Business B are
eligible QBUs that have the euro and the
Japanese yen, respectively, as their func-
tional currencies, and DE1 and DE2 are
DEs. For purposes of determining whether
any of the transfers in these examples
result in remittances, see §1.987-5.
(i) Example 1: Loan to a section 987 QBU—(A)
Facts. X owns all of the interests in DE1. DE1 owns
Business A, which is a section 987 QBU of X. X
owns €100 that are not reflected on the books and
records of Business A. Business A is in need of addi-
tional capital and, as a result, X lends the €100 to
DE1 for use in Business A in exchange for a note.
(B) Analysis—(1) The loan from X to DE1 is not
regarded for Federal income tax purposes (because it
is an interbranch transaction) and therefore is a disre-
garded transaction (as defined in paragraph (c)(2)(ii)
of this section). Because DE1 is a DE, the DE1 note
held by X and the liability of DE1 under the note are
not taken into account under this section.
(2) As a result of the disregarded transaction,
the €100 is reflected on the books and records of
Business A and is attributable to Business A under
paragraph (b) of this section. Therefore, X is treated
as transferring €100 to its Business A section 987
QBU for purposes of section 987. This transfer is
taken into account in determining the amount of any
remittance for the taxable year under §1.987-5(c).
See §1.988-1(a)(10)(ii) for the application of section
988 to X as a result of the transfer of nonfunctional
currency to its section 987 QBU.
(ii) Example 2: Transfer between section 987
QBUs—(A) Facts. X owns Business A and Business
B, both of which are section 987 QBUs of X. X owns
equipment that is used in Business A and is reflected
on the books and records of Business A. Because
Business A has excess manufacturing capacity and
X intends to expand the manufacturing capacity of
Business B, the equipment formerly used in Business
A is transferred to Business B for use by Business B.
As a result of the transfer, the equipment is removed
from the books and records of Business A and is
recorded on the books and records of Business B.
(B) Analysis. The transfer of the equipment from
the books and records of Business A to the books and
records of Business B is not regarded for Federal
income tax purposes (because it is an interbranch
transaction) and therefore is a disregarded transac-
tion (as defined in paragraph (c)(2)(ii) of this sec-
tion). Therefore, for purposes of section 987, the
Business A section 987 QBU is treated as trans-
ferring the equipment to X, and X is subsequently
treated as transferring the equipment to the Business
B section 987 QBU. These transfers are taken into
account in determining the amount of any remittance
for the taxable year under §1.987-5(c).
(iii) Example 3: Sale of property between two sec-
tion 987 QBUs—(A) Facts. X owns all of the inter-
ests in DE1 and DE2. DE1 and DE2 own Business
A and Business B, respectively, both of which are
section 987 QBUs of X. DE1 owns equipment that
is used in Business A and is reflected on the books
and records of Business A. For business reasons,
DE1 sells a portion of the equipment used in Busi-
ness A to DE2 in exchange for a fair market value
amount of Japanese yen. The yen used by DE2 to
acquire the equipment was generated by Business B
and was reflected on Business B’s books and records.
Following the sale, the yen and the equipment will be
used in Business A and Business B, respectively. As
a result of such sale, the equipment is removed from
the books and records of Business A and is recorded
on the books and records of Business B. Similarly,
as a result of the sale, the yen is removed from the
books and records of Business B and is recorded on
the books and records of Business A.
(B) Analysis—(1) The sale of equipment between
DE1 and DE2 is a transaction that is not regarded for
Federal income tax purposes (because it is an inter-
branch transaction) and therefore the transaction is a
disregarded transaction (as defined in paragraph (c)
(2)(ii) of this section). Pursuant to paragraph (c)(2)
(iii) of this section, the sale does not give rise to an
item of income, gain, deduction, or loss for purposes
of determining section 987 taxable income or loss
under §1.987-3. However, the yen and equipment
exchanged by DE1 and DE2 in connection with the
sale must be taken into account as a transfer under
paragraph (c)(2)(i) of this section.
(2) As a result of the disregarded transaction,
the equipment ceases to be reflected on the books
and records of Business A and becomes reflected
on the books and records of Business B. Therefore,
the Business A section 987 QBU is treated as trans-
ferring the equipment to X, and X is subsequently
treated as transferring the equipment to the Business
B section 987 QBU.
(3) Additionally, as a result of the disregarded
transaction, the yen currency ceases to be reflected
on the books and records of Business B and becomes
reflected on the books and records of Business
A. Therefore, the Business B section 987 QBU is
treated as transferring the yen to X, and X is subse-
quently treated as transferring the yen from X to the
Business A section 987 QBU. The transfers among
Business A, Business B and X are taken into account
in determining the amount of any remittance for the
taxable year under §1.987-5(c).
(iv) through (ix) [Reserved]
(x) Example 10: Contribution of a section 987
QBU’s assets to a corporation—(A) Facts. X owns
Business A. X forms Z, a domestic corporation, con-
tributing 50 percent of its Business A assets and lia-
bilities to Z in exchange for all of the stock of Z. X
and Z do not file a consolidated tax return.
(B) Analysis. Pursuant to paragraph (b)(2) of
this section, the Z stock received in exchange for 50
percent of Business A’s assets and liabilities is not
reflected on the books and records of, and therefore
is not attributable to, Business A for purposes of sec-
tion 987 immediately after the exchange. As a result,
pursuant to paragraphs (c)(2)(i) and (ii) of this sec-
tion, 50 percent of the assets and liabilities of Busi-
ness A are treated as transferred from Business A to
X in a disregarded transaction immediately before
the exchange. See §1.1502-13(j)(9) if X and Z file a
consolidated return.
(xi) Example 11: Circular transfers—(A) Facts.
X owns Business A. On December 30, year 1, Busi-
ness A purports to transfer €100 to X. On January
2, year 2, X purports to transfer €50 to Business A.
On January 4, year 2, X purports to transfer another
€50 to Business A. As of the end of year 1, X has net
unrecognized section 987 loss with respect to Busi-
ness A, such that a remittance, if respected, would
result in recognition of a foreign currency loss under
section 987.
(B) Analysis. Because the transfer by Business
A to X is offset by the transfers from X to Business
A that occurred in close temporal proximity, the
purported transfers to and from Business A may be
disregarded for purposes of section 987 pursuant to
general tax principles under paragraph (c)(7) of this
section.
(xii) Example 12: Transfers without substance—
(A) Facts. X owns Business A and Business B. On
January 1, year 1, Business A purports to transfer
€100 to X. On January 4, year 1, X purports to trans-
fer €100 to Business B. The account in which Busi-
ness B deposited the €100 is used to pay the operat-
ing expenses and other costs of Business A. As of the
end of year 1, X has net unrecognized section 987
loss with respect to Business A, such that a remit-
tance, if respected, would result in recognition of a
foreign currency loss under section 987.
(B) Analysis. Because Business A continues to
have use of the transferred property, the €100 pur-
ported transfer from Business A to X may be dis-
regarded for purposes of section 987 pursuant to
general tax principles under paragraph (c)(7) of this
section.
(xiii) Example 13: Offsetting positions in sec-
tion 987 QBUs—(A) Facts. X owns Business A and
Business B. Business A and Business B each have
the euro as their functional currency. X has not made
a grouping election under §1.987-1(b)(3)(ii). On
January 1, year 1, X borrows €1,000 from a third-
party lender, records the liability with respect to the
borrowing on the books and records of Business
A, and records the borrowed €1,000 on the books
and records of Business B. On December 31, year
2, when Business A has $100 of net unrecognized
section 987 loss and Business B has $100 of net
unrecognized section 987 gain resulting from the
change in exchange rates with respect to the liability
and the €1,000, X terminates the Business A section
987 QBU.
(B) Analysis. Under paragraph (b)(3) of this sec-
tion, the fact that Business A and Business B have
offsetting positions in the euro is a factor indicating
that a principal purpose of recording the euro-de-
nominated liability on the books and records of
Business A and the borrowed euros on the books and
records of Business B was the avoidance of tax under
section 987. If such a principal purpose is present,
the items must be reallocated (that is, the euros and
the euro-denominated liability) between Business A,
Business B, and X under paragraph (b)(3) of this sec-
tion to reflect the substance of the transaction.

January 13, 2025 362 Bulletin No. 2025–3
(xiv) Example 14: Offsetting positions with
respect to a section 987 QBU and a section 988
transaction—(A) Facts. X owns all of the inter-
ests in DE1, and DE1 owns Business A. On Janu-
ary 1, year 1, X borrows €1,000 from a third-party
lender and records the liability with respect to the
borrowing on its books and records. X contributes
the €1,000 loan proceeds to DE1 and the €1,000 are
reflected on the books and records of Business A. On
December 31, year 2, when Business A has $100 of
net unrecognized section 987 loss resulting from the
change in exchange rates with respect to the €1,000
received from the borrowing, and when the euro-de-
nominated borrowing, if repaid, would result in $100
of gain under section 988, X terminates the Business
A section 987 QBU.
(B) Analysis. Under paragraph (b)(3) of this sec-
tion, the fact that X and Business A have offsetting
positions in the euro is a factor indicating that a prin-
cipal purpose of recording the borrowed euros on the
books and records of Business A, or not recording
the corresponding euro-denominated liability on the
books and records of Business A, was the avoid-
ance of tax under section 987. If such a principal
purpose is present, the items (that is, the euros and
the euro-denominated liability) must be reallocated
between Business A and X under paragraph (b)(3) of
this section to reflect the substance of the transaction.
(xv) Example 15: Offsetting positions with
respect to a section 987 QBU and a section 988
transaction—(A) Facts. X owns all of the stock of Y
and all of the interests in DE1. DE1 owns Business
A. X and Y do not file a consolidated return. On Jan-
uary 1, year 1, DE1 lends €1,000 to Y. X records the
receivable with respect to the loan on Business A’s
books and records. On December 31, year 2, when
Business A has $100 of net unrecognized section 987
gain resulting from the loan, Y repays the €1,000 lia-
bility. The repayment of the euro-denominated bor-
rowing results in $100 of loss to Y under section 988.
Business A does not make any remittances to X in
year 2, so the offsetting gain with respect to the loan
receivable has not been recognized by X.
(B) Analysis. Under paragraph (b)(3) of this sec-
tion, the fact that Y (a related party to X) and Busi-
ness A have offsetting positions in the euro is a fac-
tor indicating that a principal purpose of recording
the euro-denominated receivable on the books and
records of Business A, rather than on the books and
records of X, was to avoid Federal income tax under,
or through the use of, section 987. If such a princi-
pal purpose is present, the euro-denominated receiv-
able must be reallocated between Business A and X
under paragraph (b)(3) of this section to reflect the
substance of the transaction. Other provisions (for
example, section 267) may also apply to defer or dis-
allow the loss. See §1.1502-13(j)(9) if X and Y file a
consolidated return.
(xvi) Example 16: Borrowing by section 987
QBU followed by immediate distribution to owner—
(A) Facts. X owns all of the interests in DE1. DE1
owns Business A. On January 1, year 1, Business A
borrows €1,000 from a bank. On January 2, year 1,
Business A distributes the €1,000 it received from
the bank to X. There are no other transfers between
X and Business A during the year. At the end of the
year, X has net unrecognized section 987 loss with
respect to Business A such that a remittance would
result in the recognition of foreign currency loss
under section 987.
(B) Analysis. Under paragraph (b)(3) of this sec-
tion, if a principal purpose of recording of the loan
on the books and records of Business A, rather than
on the books and records of X, was to avoid Fed-
eral income tax under, or through the use of, section
987, the items must be reallocated to reflect the sub-
stance of the transaction (for example, by moving the
loan onto the books of X, resulting in the transfer
not being taken into account for purposes of section
987).
(xvii) Example 17: Payment of interest by sec-
tion 987 QBU on obligation of owner—(A) Facts. X
owns all of the interests in DE1. DE1 owns Business
A. On January 1, X borrows €1,000 from a bank. On
July 1, DE1 pays €20 in interest on X’s €1,000 obli-
gation to the bank, which is treated as a payment by
Business A.
(B) Analysis. Under general tax law principles as
provided in paragraph (c)(7) of this section, on July
1, year 1, Business A is treated for purposes of sec-
tion 987 as making a transfer of €20 to X, and X is
treated as making a €20 interest payment to the bank.
See also paragraph (c)(2)(ii)(E) of this section for
interest payments on loans that are not attributable
to a section 987 QBU pursuant to paragraph (b)(2) or
(3) of this section.
(xviii) Example 18: Sale of the interests in a
DE—(A) Facts. X owns all of the interests in DE1,
a disregarded entity. DE1 owns Business A, which is
a section 987 QBU of X. X has made a current rate
election under §1.987-1(d)(2) but not an annual rec-
ognition election under §1.987-5(b)(2). On Decem-
ber 31, year 1, X sells all of the interests in DE1 to
FC, an unrelated foreign corporation, for $150,000,
when the exchange rate is €1=$1.2. The sale pro-
ceeds are reflected on X’s books and records after
the sale. At the time of the sale, all of DE1’s assets
are used in Business A and are reflected on the books
and records of Business A. The assets have a basis of
€100,000 and Business A has no liabilities. In year 1,
X has net unrecognized section 987 gain with respect
to Business A of $20,000.
(B) Analysis—(1) Under paragraph (c)(2)(ii)
(C) of this section, if an asset that is attributable
to a section 987 QBU is sold or exchanged for an
asset that is not attributable to the section 987 QBU
immediately after the sale or exchange, the sold or
exchanged asset is treated as transferred from the
section 987 QBU to its owner in a disregarded trans-
action immediately before the sale or exchange and
subsequently sold or exchanged by the owner. The
sale of DE1 is treated as a sale of the assets of Busi-
ness A in exchange for cash that is not reflected on
the books and records of the Business A section 987
QBU. Therefore, the assets of Business A are treated
as transferred from the Business A section 987 QBU
to X, and X is treated as selling the assets to FC.
(2) The deemed transfer of all of Business A’s
assets to X results in a termination of the Business
A section 987 QBU under §1.987-8(b)(2) (substan-
tially all assets transferred). Under §1.987-5(c)(4)
and §1.987-8(e), a termination of a section 987 QBU
is treated as a remittance of all the gross assets of
the section 987 QBU to the owner on the date of the
termination. Therefore, the owner’s remittance pro-
portion is one, and X recognizes all of its net unrec-
ognized section 987 gain with respect to Business A,
or $20,000.
(3) Because a current rate election was in effect,
all of the assets of Business A are marked items.
Therefore, under §1.987-5(f)(2), X’s basis in the
assets transferred from Business A is determined by
translating Business A’s functional currency basis
in the assets into X’s functional currency at the spot
rate applicable to the date of the transfer, €1=$1.2.
Consequently, immediately before the sale of the
interests in DE1, X’s functional currency basis in
Business A’s assets (which Business A held with
a basis of €100,000) is $120,000. X recognizes
$30,000 of gain under section 1001(a) on the sale
of DE1.
(d) Translation of items transferred to
a section 987 QBU—(1) Marked items.
The adjusted basis of a marked asset, or
the amount of a marked liability, trans-
ferred to a section 987 QBU is translated
into the section 987 QBU’s functional
currency at the spot rate applicable to the
date of transfer. If, and to the extent that,
exchange gain or loss is recognized on the
asset or liability transferred under §1.988-
1(a)(10)(ii), the adjusted basis of the
marked asset, or the amount of the marked
liability, is adjusted to take into account
the exchange gain or loss recognized.
(2) Historic items. The adjusted basis
of a historic asset, or the amount of a his-
toric liability, transferred to a section 987
QBU is translated into the section 987
QBU’s functional currency at the rate pro-
vided in §1.987-1(c)(3).
(e) Cross-reference. See also §1.1502-
13(j)(9) regarding the treatment of inter-
company transactions involving section
987 QBUs owned by a member of a con-
solidated group.
§1.987-3 Determination of section 987
taxable income or loss of an owner of a
section 987 QBU.
(a) In general. This section provides
rules for determining the taxable income
or loss of an owner of a section 987 QBU
(section 987 taxable income or loss). Para-
graph (b) of this section provides rules for
determining items of income, gain, deduc-
tion, and loss in the section 987 QBU’s
functional currency. Paragraph (c) of this
section provides rules for translating each
item determined under paragraph (b) of
this section into the functional currency
of the owner of the section 987 QBU.
Paragraph (d) of this section is reserved.
Paragraph (e) of this section provides

Bulletin No. 2025–3 363 January 13, 2025
examples illustrating the application of
the rules of this section.
(b) Determination of each item of
income, gain, deduction, or loss in the
section 987 QBU’s functional currency—
(1) In general. The owner of a section
987 QBU must determine each item of
income, gain, deduction, or loss attribut-
able to the section 987 QBU in the sec-
tion 987 QBU’s functional currency under
Federal income tax principles.
(2) Translation of items of income,
gain, deduction, or loss that are denomi-
nated in a nonfunctional currency. Except
as otherwise provided in paragraph (b)(4)
of this section, an item of income, gain,
deduction, or loss (or the item’s compo-
nents and related items, such as gross
receipts and amount realized) that is
denominated in (or determined by refer-
ence to) a nonfunctional currency (includ-
ing the functional currency of the owner)
is translated into the section 987 QBU’s
functional currency at the spot rate on
the date such item is properly taken into
account. Paragraphs (e)(1) and (2) of this
section (Examples 1 and 2) illustrate the
application of this paragraph (b)(2).
(3) [Reserved]
(4) Section 988 transactions—(i) In
general. Section 988 and the regulations
under section 988 apply to section 988
transactions of a section 987 QBU. The
determination of whether an asset or lia-
bility of a section 987 QBU is a section
988 transaction is determined by refer-
ence to the functional currency of the sec-
tion 987 QBU. Section 988 gain or loss
is determined in, and by reference to, the
functional currency of the section 987
QBU. The amount of section 988 gain or
loss determined under this paragraph (b)
(4)(i) is translated into the owner’s func-
tional currency under paragraph (c) of this
section.
(ii) Section 988 mark-to-market elec-
tion—(A) In general. A taxpayer may
elect to apply the section 988 mark-to-
market method of accounting described
in this paragraph (b)(4)(ii) with respect to
all section 988 transactions that are prop-
erly attributable to a section 987 QBU and
that are not otherwise accounted for under
a mark-to-market method of accounting
under section 475 or section 1256 (other
than a section 988 transaction described
in paragraph (b)(4)(ii)(B) of this section).
Under the section 988 mark-to-market
method of accounting, the timing of sec-
tion 988 gain or loss on section 988 trans-
actions described in the preceding sen-
tence is determined under the principles
of section 1256. Only section 988 gain or
loss is taken into account under the for-
eign currency mark-to-market method of
accounting. Appropriate adjustments must
be made to prevent the section 988 gain or
loss from being taken into account again
after it is recognized under this paragraph
(b)(4)(ii). A section 988 transaction sub-
ject to the foreign currency mark-to-mar-
ket method of accounting is not subject
to the netting rule of section 988(b) and
§1.988–2(b)(8) (under which exchange
gain or loss is limited to overall gain or
loss realized in a transaction) in taxable
years before the taxable year in which sec-
tion 988 gain or loss would be recognized
with respect to the section 988 transaction
but for this election.
(B) Built-in loss transactions contrib-
uted to a section 987 QBU. Paragraph (b)
(4)(ii)(A) of this section does not apply to
a section 988 transaction if—
(1) The transaction was transferred to
the section 987 QBU from its owner (or
from another eligible QBU of the owner);
(2) Immediately before the transfer, the
transaction was a section 988 transaction
in the hands of the owner (or other eligible
QBU of the owner) and was not subject to
a mark-to-market method of accounting;
(3) If the owner (or other eligible QBU)
had disposed of the section 988 transac-
tion immediately before the transfer (and
§1.988-2(b)(8) did not apply), the owner
would have recognized section 988 loss;
and
(4) Section 988 loss was not recog-
nized in connection with the transfer
under §1.988-1(a)(10).
(c) Translation of items of income, gain,
deduction, or loss of a section 987 QBU
into the owner’s functional currency—(1)
In general. Except as otherwise provided
in this section, the exchange rate to be
used by an owner in translating an item of
income, gain, deduction, or loss attribut-
able to a section 987 QBU (or the item’s
components and related items, such as
gross receipts, amount realized, basis, and
cost of goods sold) into the owner’s func-
tional currency, if necessary, is the yearly
average exchange rate for the taxable year.
(2) Exceptions. Except as otherwise
provided in paragraph (c)(2)(v) of this
section, this paragraph (c)(2) applies only
to taxable years for which neither the
annual recognition election nor the current
rate election is in effect.
(i) Recovery of basis with respect to his-
toric assets. Except as otherwise provided
in this paragraph (c)(2), the exchange rate
to be used by the owner in translating any
recovery of basis (whether through a sale
or exchange; deemed sale or exchange;
cost recovery deduction such as depreci-
ation, depletion or amortization; or other-
wise) with respect to a historic asset is the
historic rate for the property to which such
recovery of basis is attributable.
(ii) through (iii) [Reserved]
(iv) Cost of goods sold computation—
(A) General rule—simplified inventory
method. Except as otherwise provided in
paragraph (c)(2)(iv)(B) of this section,
cost of goods sold (COGS) for a taxable
year is translated into the functional cur-
rency of the owner at the yearly aver-
age exchange rate for the taxable year in
which the sale of inventory occurs (or the
COGS is otherwise taken into account in
computing taxable income) and adjusted
as provided in paragraph (c)(3) of this sec-
tion.
(B) Election to use the historic inven-
tory method. In lieu of using the simplified
inventory method described in paragraph
(c)(2)(iv)(A) of this section, the owner of
a section 987 QBU may elect under this
paragraph (c)(2)(iv)(B) to translate inven-
toriable costs (including current-year
inventoriable costs and costs that were
capitalized into inventory in prior years)
that are included in COGS at the historic
rate for each such cost.
(v) Translation of income to account
for certain foreign income tax claimed
as a credit. The owner of a section 987
QBU claiming a credit under section 901
for foreign income taxes, other than for-
eign income taxes deemed paid under
section 960, that are properly reflected on
the books and records of the section 987
QBU (the creditable tax amount) must
determine section 987 taxable income or
loss attributable to the section 987 QBU
by reducing the amount of section 987
taxable income or loss that otherwise
would be determined under this section
by an amount equal to the creditable tax

January 13, 2025 364 Bulletin No. 2025–3
amount, translated into U.S. dollars using
the yearly average exchange rate for the
taxable year in which the creditable tax is
accrued, and by increasing the resulting
amount by an amount equal to the cred-
itable tax amount, translated using the
same exchange rate that is used to trans-
late the creditable taxes into U.S. dollars
under section 986(a). This paragraph (c)
(2)(v) applies whether or not a current rate
election or an annual recognition election
is in effect. See paragraph (e)(14) of this
section (Example 14) for an illustration of
this rule.
(3) Adjustments to COGS required
under the simplified inventory method.
This paragraph (c)(3) applies only to tax-
able years for which neither the annual
recognition election nor the current rate
election is in effect.
(i) In general. An owner of a section
987 QBU that uses the simplified inventory
method described in paragraph (c)(2)(iv)
(A) of this section must make the adjust-
ment described in paragraph (c)(3)(ii) of
this section. In addition, the owner must
make the adjustment described in paragraph
(c)(3)(iii) of this section with respect to any
inventory for which the section 987 QBU
does not use the LIFO inventory method
and must make the adjustment described
in paragraph (c)(3)(iv) of this section with
respect to any inventory for which the sec-
tion 987 QBU uses the LIFO inventory
method. An owner of a section 987 QBU
that uses the simplified inventory method
must make all of the applicable adjustments
described in paragraphs (c)(3)(ii) through
(iv) of this section with respect to the sec-
tion 987 QBU even in taxable years in
which the amount of COGS is zero.
(ii) Adjustment for cost recovery deduc-
tions included in inventoriable costs—(A)
In general. The translated COGS amount
computed under paragraph (c)(2)(iv)(A)
of this section is increased or decreased
(as appropriate) by the amount described
in paragraph (c)(3)(ii)(B) of this section.
The adjustment is included as an adjust-
ment to translated COGS computed under
paragraph (c)(2)(iv)(A) of this section in
full in the year to which the adjustment
relates and is not allocated between COGS
and ending inventory.
(B) Amount of adjustment. With respect
to each cost recovery deduction attribut-
able to a historic asset that is included in
inventoriable costs for a taxable year, the
adjustment is equal to—
(1) The amount of the cost recovery
deduction included in inventoriable costs,
translated at the historic rate for the prop-
erty to which the deduction is attributable;
less
(2) The amount of the cost recovery
deduction included in inventoriable costs,
translated at the yearly average exchange
rate for the current taxable year.
(iii) Adjustment for beginning inven-
tory for non-LIFO inventory—(A) In gen-
eral. In the case of non-LIFO inventory,
the translated COGS amount computed
under paragraph (c)(2)(iv)(A) of this sec-
tion is increased or decreased (as appro-
priate) by the amount described in para-
graph (c)(3)(iii)(B) of this section.
(B) Amount of adjustment. The adjust-
ment is equal to—
(1) The ending non-LIFO inventory
included on the closing balance sheet for
the preceding taxable year, translated at
the exchange rate described in paragraph
(c)(3)(iii)(C) of this section (which is gen-
erally the yearly average exchange rate for
the preceding taxable year); less
(2) The ending non-LIFO inventory
included on the closing balance sheet for
the preceding taxable year, translated at
the yearly average exchange rate for the
current taxable year.
(C) Exchange rate—(1) In general.
Except as provided in paragraph (c)(3)
(iii)(C)(2) of this section, the exchange
rate used to translate non-LIFO inventory
under paragraph (c)(3)(iii)(B)(1) of this
section is the yearly average exchange
rate for the preceding taxable year.
(2) Revocation of current rate election
or taxable year beginning on the transi-
tion date. In the first taxable year in which
a current rate election is revoked or oth-
erwise ceases to be in effect (or in the
taxable year beginning on the transition
date), the exchange rate used to translate
non-LIFO inventory under paragraph (c)
(3)(iii)(B)(1) of this section is the spot rate
applicable to the last day of the preceding
taxable year.
(iv) Adjustment for year of LIFO liq-
uidation—(A) In general. In the case of
inventory with respect to which a sec-
tion 987 QBU uses the LIFO inventory
method, the translated COGS amount
computed under paragraph (c)(2)(iv)(A)
of this section is increased or decreased
(as appropriate) by the amount described
in paragraph (c)(3)(iv)(B) of this section.
(B) Amount of adjustment. With respect
to each LIFO layer liquidated in whole or
in part during the taxable year, the adjust-
ment is equal to:
(1) The amount of the LIFO layer liq-
uidated during the taxable year, translated
at the historic rate that is used for translat-
ing the LIFO layer (which is generally the
yearly average exchange rate for the year
the LIFO layer arose); less
(2) The amount of the LIFO layer liq-
uidated during the taxable year, translated
at the yearly average exchange rate for the
taxable year.
(d) [Reserved]
(e) Examples. The following examples
illustrate the application of this section. For
purposes of the examples, U.S. Corp is a
domestic corporation that uses the calendar
year as its taxable year and has the U.S.
dollar as its functional currency. Except as
otherwise indicated, U.S. Corp is the owner
of Business A, a section 987 QBU with the
euro as its functional currency, and U.S.
Corp elects under paragraph (c)(2)(iv)(B)
of this section to use the historic inventory
method with respect to Business A but does
not make any other elections.
(1) Example 1: Item of income denominated in
nonfunctional currency. Business A accrues £100 of
income from the provision of services. Under para-
graph (b)(2) of this section, the £100 is translated
into €90 at the spot rate on the date of accrual, with-
out the use of a spot rate convention. In determining
U.S. Corp’s taxable income, the €90 of income is
translated into dollars at the yearly average exchange
rate under paragraph (c)(1) of this section.
(2) Example 2: Asset sold for nonfunctional cur-
rency. Business A sells a historic asset consisting of
non-inventory property for £100. Under paragraph
(b)(2) of this section, the £100 amount realized is
translated into €85 at the spot rate on the sale date
without the use of a spot rate convention. In deter-
mining U.S. Corp’s taxable income, the €85 is trans-
lated into dollars at the yearly average exchange rate
under paragraph (c)(1) of this section. The euro basis
of the property is translated into dollars at the his-
toric rate under paragraph (c)(2)(i) of this section.
(3) Example 3: Historic inventory method—(i)
Facts. Business A uses a first-in, first-out (FIFO)
method of accounting for inventory. Business A sells
1,200 units of inventory in year 2 for €3 per unit. The
yearly average exchange rate is €1 = $1.02 for year 1
and €1 = $1.05 for year 2.
(ii) Analysis—(A) Gross sales. Business A’s
gross sales are translated under paragraph (c)(1) of
this section at the yearly average exchange rate for
the year of the sale. Business A’s dollar gross sales
will be computed as follows:

Bulletin No. 2025–3 365 January 13, 2025
Table 1 to paragraph (e)(3)(ii)(A)
Gross Sales (year 2)
Month# of unitsAmount in €€/$ yearly average rateAmount in $
Jan100€ 300€1 = $1.05$315.00
Feb200600€1 = $1.05630.00
March00€1 = $1.050.00
April200600€1 = $1.05630.00
May100300€1 = $1.05315.00
June00€1 = $1.050.00
July100300€1 = $1.05315.00
Aug100300€1 = $1.05315.00
Sept00€1 = $1.050.00
Oct00€1 = $1.050.00
Nov 100300€1 = $1.05315.00
Dec300900€1 = $1.05945.00
1,200$3,780.00
(B) Translated basis of inventory. The purchase price for each inventory unit was €1.50. Under §1.987-1(c)(3)(i) and paragraph (c)(2)(iv)(B) of this section, the
basis of each item of inventory is translated into dollars at the yearly average exchange rate for the year the inventory was acquired.
Table 2 to paragraph (e)(3)(ii)(B)
Opening Inventory and Purchases (year 2)
Month# of unitsAmount in €€/$ yearly average rateAmount in $
Opening inventory (purchased in Dec. year 1)
100€150€1 = $1.02$153.00
Purchases in year 2
Jan300€ 450€1 = $1.05$472.50
Feb00€1 = $1.050
March00€1 = $1.050
April300450€1 = $1.05472.50
May00€1 = $1.050
June00€1 = $1.050
July300450€1 = $1.05472.50
Aug00€1 = $1.050
Sept00€1 = $1.050
Oct00€1 = $1.050
Nov 300450€1 = $1.05472.50
Dec00€1 = $1.050
1,200$1,890.00
(C) COGS. Because Business A uses a FIFO
method for inventory, Business A is considered to have
sold in year 2 the 100 units of opening inventory pur-
chased in year 1 ($153.00), the 300 units purchased in
January year 2 ($472.50), the 300 units purchased in
April year 2 ($472.50), the 300 units purchased in July
year 2 ($472.50), and 200 of the 300 units purchased
in November year 2 ($315.00). Accordingly, Business
A’s translated dollar COGS for year 2 is $1,885.50.
Business A’s opening inventory for year 3 is 100 units
of inventory with a translated dollar basis of $157.50.
(D) Gross sales income. Accordingly, for pur-
poses of section 987, Business A has gross income
in dollars of $1,894.50 ($3,780.00 - $1,885.50) from
the sale of inventory in year 2.
(4) Example 4: Simplified inventory method—(i)
Facts. The facts are the same as in paragraph (e)(3)
of this section (Example 3), except that U.S. Corp
does not elect to use the historic inventory method
with respect to Business A.
(ii) Analysis. Because U.S. Corp does not elect
to use the historic inventory method, the simplified
inventory method under paragraph (c)(2)(iv)(A) of
this section applies.
(A) Gross sales. Business A’s dollar gross sales
will be computed as described in paragraph (e)(3)(ii)
(A) of this section (Example 3). Therefore, Business
A has gross sales of $3,780.
(B) COGS. Business A sold 1,200 units of inven-
tory in year 2, and the purchase price for each unit
was €1.50. The total purchase price for the inven-
tory sold in year 2 was €1,800. Under the simplified
inventory method provided in paragraph (c)(2)(iv)

January 13, 2025 366 Bulletin No. 2025–3
(A) of this section, COGS for a taxable year is trans-
lated into the functional currency of the owner at the
yearly average exchange rate for the taxable year in
which the sale of inventory occurs. Therefore, before
making the adjustments required under paragraph
(c)(3) of this section, Business A’s dollar COGS for
year 2 is equal to $1,890 (the purchase price for the
inventory sold in year 2 (€1,800), translated at the
yearly average exchange rate of €1 = $1.05).
(C) Adjustments required. Because the simplified
inventory method applies, Business A’s COGS must
be adjusted under paragraph (c)(3) of this section.
No adjustment is required under paragraph (c)(3)(ii)
of this section because no cost recovery deduction
attributable to a historic asset is included in inven-
toriable costs for year 2. However, an adjustment for
beginning inventory is required under paragraph (c)
(3)(iii)(A) of this section because Business A uses a
FIFO method of accounting for inventory.
(D) Adjustment for beginning inventory. The
adjustment required under paragraph (c)(3)(iii)(A) of
this section is equal to: the ending non-LIFO inven-
tory included on Business A’s closing balance sheet
for the preceding taxable year (€150), translated
at the yearly average exchange rate for year 1 (€1
= $1.02), which is $153; less the ending non-LIFO
inventory included on Business A’s closing balance
sheet for the preceding taxable year (€150), trans-
lated at the yearly average exchange rate for year
2 (€1 = $1.05), which is $157.50. Therefore, there
is a negative adjustment to COGS of $4.50. Busi-
ness A’s COGS for year 2 is reduced from $1,890
to $1,885.50.
(E) Gross sales income. Accordingly, for pur-
poses of section 987, Business A has gross income
in dollars of $1,894.50 ($3,780.00 - $1,885.50) from
the sale of inventory in year 2.
(5) Example 5: Depreciation expense that is not
an inventoriable cost. The facts are the same as in
paragraph (e)(3) of this section (Example 3) except
that during year 2, Business A incurred €100 of
depreciation expense with respect to a truck. No por-
tion of the depreciation expense is an inventoriable
cost. The truck was purchased on January 15, year
1. The yearly average exchange rate for year 1 was
€1 = $1.02. Under paragraph (c)(2)(i) of this section,
the €100 of depreciation is translated into dollars at
the historic rate. The historic rate is the yearly aver-
age exchange rate for year 1. Accordingly, U.S. Corp
takes into account depreciation of $102 with respect
to Business A in year 2.
(6) Example 6: Translation of depreciation
expense that is an inventoriable cost (historic inven-
tory method). The facts are the same as in paragraph
(e)(5) of this section (Example 5) except that the
€100 of depreciation expense incurred during year
2 with respect to the truck is an inventoriable cost.
As a result, the depreciation expense is capitalized
into the 1,200 units of inventory purchased by Busi-
ness A in year 2. Of those 1,200 units, 1,100 units
are sold during the year, and 100 units become end-
ing inventory. The portion of depreciation expense
capitalized into inventory that is sold during year 2
is reflected in Business A’s euro COGS and is trans-
lated at the €1 = $1.02 yearly average exchange
rate for year 1, the year in which the truck was
purchased. The portion of the depreciation expense
capitalized into the 100 units of ending inventory is
not taken into account in year 2 but rather, will be
taken into account in the year the ending inventory
is sold, translated at the €1 = $1.02 yearly average
exchange rate for year 1.
(7) Example 7: Sale of land. Business A pur-
chased raw land on October 16, year 1, for €8,000
and sold the land on November 1, year 2, for €10,000.
The yearly average exchange rate was €1 = $1.02 for
year 1 and €1 = $1.05 for year 2. Under paragraph
(c)(1) of this section, the amount realized is trans-
lated into dollars at the yearly average exchange rate
for year 2 (€10,000 x $1.05 = $10,500). Under para-
graph (c)(2)(i) of this section, the basis is translated
at the historic rate for year 1, which is the yearly
average exchange rate under section §1.987-1(c)
(3)(i) (€8,000 x $1.02 = $8,160). Accordingly, the
amount of gain reported by U.S. Corp on the sale of
the land is $2,340 ($10,500 - $8,160).
(8) Example 8: Current rate election. The facts
are the same as in paragraph (e)(7) of this section
(Example 7), except that U.S. Corp makes a current
rate election under §1.987-1(d)(2). Under paragraph
(c)(2) of this section, the exceptions to paragraph (c)
(1) of this section generally do not apply in a taxable
year for which an annual recognition election or a
current rate election is in effect. As a result, all items
of income, gain, deduction, and loss with respect to
Business A are translated into U.S Corp’s functional
currency at the yearly average exchange rate under
paragraph (c)(1) of this section. Business A’s gain on
the sale of the land is determined in its functional
currency and is equal to €2,000 (amount realized of
€10,000 less basis of €8,000). This gain is translated
at the yearly average exchange rate for year 2 of €1 =
$1.05, and the amount of gain reported by U.S. Corp
on the sale of the land is $2,100. The result would be
the same if U.S. Corp made an annual recognition
election under §1.987-5(b)(2) (and did not make a
current rate election).
(9) through (12) [Reserved]
(13) Example 13: Section 988 transaction—(i)
Facts. Business A receives and accrues $100 of
income from the provision of services on January
1, 2021. Business A continues to hold the $100 as a
U.S. dollar-denominated demand deposit at a bank
on December 31, 2021. U.S. Corp has made a section
988 mark-to-market election under paragraph (b)(4)
(ii) of this section. The euro-dollar spot rate without
the use of a spot rate convention is €1 = $1 on Jan-
uary 1, 2021, and €1 = $2 on December 31, 2021,
and the yearly average exchange rate for 2021 is €1
= $1.50.
(ii) Analysis—(A) Under paragraph (b)(2) of this
section, the $100 earned by Business A is translated
into €100 at the spot rate on January 1, 2021, as
defined in §1.987-1(c)(1) without the use of a spot
rate convention. In determining U.S. Corp’s taxable
income, the €100 of services income is translated
into $150 at the yearly average exchange rate for
2021, as provided in paragraph (c)(1) of this section.
(B) Under paragraph (b)(4)(i) of this section, sec-
tion 988 gain or loss for Business A’s section 988
transactions is determined in, and by reference to, the
euro, the functional currency of Business A. Accord-
ingly, section 988 gain or loss must be determined
on Business A’s holding of the $100 demand deposit
in, and by reference to, the euro. Under §1.988-2(a)
(2), Business A is treated as having an amount real-
ized of €50 when the $100 is marked to market at
the end of 2021 under paragraph (b)(4)(ii) of this
section. Marking the dollars to market gives rise to
a section 988 loss of €50 (€50 amount realized, less
Business A’s €100 basis in the $100). In determining
U.S. Corp’s taxable income, that €50 loss is trans-
lated into a $75 loss at the yearly average exchange
rate for 2021, as provided in paragraph (c)(1) of this
section.
(14) Example 14: Payment of foreign income
tax—(i) Facts. Business A earns €100 of revenue
from the provision of services and incurs €30 of
general expenses and €10 of depreciation expense
during 2021. Except as otherwise provided, U.S.
Corp uses the yearly average exchange rate described
in §1.987-1(c)(2) to translate items of income, gain,
deduction, and loss of Business A. Business A is sub-
ject to income tax in Country X at a 25 percent rate.
U.S. Corp claims a credit with respect to Business
A’s foreign income taxes and elects under section
986(a)(1)(D) to translate the foreign income taxes
at the spot rate on the date the taxes were paid. The
yearly average exchange rate for 2021 is €1 = $1.50.
The historic rate used to translate the depreciation
expense is €1 = $1.00. The spot rate on the date that
Business A paid its foreign income taxes was €1 =
$1.60.
(ii) Analysis. Because U.S. Corp has elected to
translate foreign income taxes at the spot rate on the
date such taxes were paid rather than at the yearly
average exchange rate, U.S. Corp must make the
adjustments described in paragraph (c)(2)(v) of
this section. Accordingly, U.S. Corp determines its
section 987 taxable income or loss by reducing the
section 987 taxable income or loss that otherwise
would be determined under this section by €15,
translated into U.S. dollars at the yearly average
exchange rate (€1 = $1.50), and increasing the
resulting amount by €15, translated using the same
exchange rate that is used to translate the creditable
taxes into U.S. dollars under section 986(a) (€1 =
$1.60). Following these adjustments, Business A’s
section 987 taxable income for 2021 is $96.50,
computed as follows:
Table 3 to paragraph (e)(14)(ii)
Amount in € Translation Rate Amount in $
Revenue €100 €1 = $1.50 $150.00
General Expenses (30) €1 = $1.50 (45.00)
Depreciation (10) €1 = $1.00 (10.00)
Tentative section 987 taxable income €60 $95.00

Bulletin No. 2025–3 367 January 13, 2025
Adjustments under paragraph (c)(2)(v) of this section:
Decrease by €15 tax translated at yearly average exchange rate (€1 = $1.50) ($22.50)
ncrease by €15 tax translated at spot rate on payment date (€1 = $1.60) 24.00
Section 987 taxable income $96.50
§1.987-4 Determination of net
unrecognized section 987 gain or loss of
a section 987 QBU.
(a) In general. The net unrecognized
section 987 gain or loss of a section 987
QBU is determined by the owner annually
as provided in paragraph (b) of this section
in the owner’s functional currency. Only
assets and liabilities attributable to the
section 987 QBU are taken into account.
(b) Calculation of net unrecognized
section 987 gain or loss. Net unrecognized
section 987 gain or loss of a section 987
QBU for a taxable year equals the sum of:
(1) The section 987 QBU’s net accu-
mulated unrecognized section 987 gain
or loss for all prior taxable years as deter-
mined in paragraph (c) of this section; and
(2) The section 987 QBU’s unrecog-
nized section 987 gain or loss for the cur-
rent taxable year as determined in para-
graph (d) of this section and §1.987-14.
(c) Net accumulated unrecognized
section 987 gain or loss for all prior tax-
able years—(1) In general. A section 987
QBU’s net accumulated unrecognized
section 987 gain or loss for all prior tax-
able years is the aggregate of the amounts
determined under paragraph (d) of this
section for all prior taxable years to which
this section applies, reduced by amounts
recognized under §1.987-5(a), amounts
treated as deferred section 987 gain or
loss, and amounts treated as suspended
section 987 loss for all prior taxable years
to which this section applies. Accordingly,
net accumulated unrecognized section 987
gain or loss is not reduced under this para-
graph (c)(1) when deferred section 987
gain or loss is recognized (or suspended)
under §1.987-12 or when suspended sec-
tion 987 loss is recognized under §1.987-
11 or §1.987-13.
(2) Additional adjustments for cer-
tain taxable years beginning on or before
December 31, 2024. For any section 987
QBU in existence before the transition
date, see §1.987-10(e)(5) and (f)(2) for
additional adjustments to the section 987
QBU’s net accumulated unrecognized
section 987 gain or loss.
(d) Calculation of unrecognized sec-
tion 987 gain or loss for a taxable year.
The unrecognized section 987 gain or
loss of a section 987 QBU for a taxable
year is generally determined under para-
graphs (d)(1) through (10) of this section.
However, for taxable years in which a
current rate election or an annual recogni-
tion election is in effect, the unrecognized
section 987 gain or loss of a section 987
QBU for a taxable year is determined by
applying only paragraphs (d)(1) through
(5) and (10) of this section. See §1.987-
14 for additional adjustments that must
be made to the unrecognized section 987
gain or loss of a section 987 QBU for a
taxable year in connection with a section
987 hedging transaction.
(1) Step 1: Determine the change in the
owner functional currency net value of the
section 987 QBU for the taxable year—(i)
In general. The change in the owner func-
tional currency net value of the section
987 QBU for the taxable year equals—
(A) The owner functional currency net
value of the section 987 QBU, determined
in the functional currency of the owner
under paragraph (e) of this section, on the
last day of the taxable year; less
(B) The owner functional currency net
value of the section 987 QBU, determined
in the functional currency of the owner
under paragraph (e) of this section, on the
last day of the preceding taxable year.
(ii) Year section 987 QBU is termi-
nated. If a section 987 QBU is terminated
within the meaning of §1.987-8 during an
owner’s taxable year, the termination date
is treated as the last day of the taxable year
for purposes of this section.
(iii) First taxable year of a section 987
QBU. If the owner’s taxable year is the
first taxable year of a section 987 QBU,
the owner functional currency net value
of the section 987 QBU described in para-
graph (d)(1)(i)(B) of this section is zero.
(iv) First year in which an election is in
effect or ceases to be in effect. Except as
otherwise provided, the owner functional
currency net value of the section 987 QBU
described in paragraph (d)(1)(i)(B) of this
section is determined based on the elec-
tions that were (or were not) in effect on
the last day of the preceding taxable year.
(2) Step 2: Increase the amount deter-
mined in step 1 by the amount of assets
transferred from the section 987 QBU to
the owner—(i) In general. The amount
determined in paragraph (d)(1) of this
section is increased by the total amount
of assets transferred from the section 987
QBU to the owner during the taxable year
translated into the functional currency of
the owner as provided in paragraph (d)(2)
(ii) of this section.
(ii) Assets transferred from the sec-
tion 987 QBU to the owner during the
taxable year. The total amount of assets
transferred from the section 987 QBU to
the owner for the taxable year translated
into the functional currency of the owner
equals the sum of:
(A) The amount of the functional
currency of the section 987 QBU and
the aggregate adjusted basis of all other
marked assets, after taking into account
§1.988-1(a)(10), transferred to the owner
during the taxable year determined in the
functional currency of the section 987
QBU and translated into the functional
currency of the owner at the spot rate
applicable to the date of transfer; and
(B) The aggregate adjusted basis of all
historic assets transferred to the owner
during the taxable year determined in the
functional currency of the section 987
QBU and translated into the functional
currency of the owner at the historic rate
for each such asset.
(3) Step 3: Decrease the amount deter-
mined in steps 1 and 2 by the amount of
assets transferred from the owner to the
section 987 QBU—(i) In general. The
aggregate amount determined in para-
graphs (d)(1) and (2) of this section is
decreased by the total amount of assets
transferred from the owner to the section
987 QBU during the taxable year deter-

January 13, 2025 368 Bulletin No. 2025–3
mined in the functional currency of the
owner as provided in paragraph (d)(3)(ii)
of this section.
(ii) Assets transferred from the owner
to the section 987 QBU during the taxable
year. The total amount of assets trans-
ferred from the owner to the section 987
QBU for the taxable year equals the sum
of:
(A) The amount of functional currency
of the owner transferred to the section 987
QBU during the taxable year; and
(B) The aggregate adjusted basis of
all other assets, after taking into account
§1.988-1(a)(10), transferred to the section
987 QBU during the taxable year deter-
mined in the functional currency of the
owner immediately before the transfer.
(4) Step 4: Decrease the amount deter-
mined in steps 1 through 3 by the amount
of liabilities transferred from the section
987 QBU to the owner—(i) In general.
The aggregate amount determined in para-
graphs (d)(1) through (3) of this section is
decreased by the total amount of liabilities
transferred from the section 987 QBU to
the owner during the taxable year trans-
lated into the functional currency of the
owner as provided in paragraph (d)(4)(ii)
of this section.
(ii) Liabilities transferred from the sec-
tion 987 QBU to the owner during the tax-
able year. The total amount of liabilities
transferred from the section 987 QBU to
the owner for the taxable year equals the
sum of:
(A) The amount of marked liabilities,
after taking into account §1.988-1(a)(10),
transferred to the owner during the taxable
year determined in the functional currency
of the section 987 QBU and translated into
the functional currency of the owner at the
spot rate applicable to the date of transfer;
and
(B) The amount of historic liabilities
transferred to the owner during the taxable
year determined in the functional currency
of the section 987 QBU and translated into
the functional currency of the owner at the
historic rate for each such liability.
(5) Step 5: Increase the amount deter-
mined in steps 1 through 4 by the amount
of liabilities transferred from the owner
to the section 987 QBU. The aggregate
amount determined in paragraphs (d)(1)
through (4) of this section is increased by
the total amount of liabilities, after taking
into account §1.988-1(a)(10), transferred
from the owner to the section 987 QBU
during the taxable year determined in the
functional currency of the owner immedi-
ately before the transfer.
(6) Step 6: Decrease or increase the
amount determined in steps 1 through 5
by the section 987 taxable income or loss,
respectively, of the section 987 QBU for
the taxable year. The aggregate amount
determined in paragraphs (d)(1) through
(5) of this section is decreased or increased
by the section 987 taxable income or loss,
respectively, computed under §1.987-3 for
the taxable year.
(7) Step 7: Increase the amount deter-
mined in steps 1 through 6 by certain
expenses or losses that are not deduct-
ible in computing the section 987 tax-
able income or loss of the section 987
QBU for the taxable year. The aggregate
amount determined under paragraphs (d)
(1) through (6) of this section is increased
by the amount of any expense or loss that
reduces the basis of assets or increases the
amount of liabilities attributable to the
section 987 QBU for the taxable year but
is not deductible in computing the section
987 QBU’s taxable income or loss for
the taxable year (such as business inter-
est expense that is not deductible under
section 163(j)). Items of expense or loss
described in the preceding sentence are
translated into the functional currency of
the owner using the exchange rate that
would apply under §1.987-3(c) if they
were deductible in computing the section
987 QBU’s taxable income or loss for
the taxable year. However, any foreign
income taxes incurred by the section 987
QBU with respect to which the owner
claims a credit are translated at the same
rate at which such taxes were translated
under section 986(a).
(8) Step 8: Decrease the amount
determined in steps 1 through 7 by the
amount of certain income or gain that is
not included in taxable income in com-
puting the section 987 taxable income
or loss of the section 987 QBU for the
taxable year. The aggregate amount
determined under paragraphs (d)(1)
through (7) of this section is decreased
by the amount of any income or gain that
increases the basis of assets or reduces
the amount of liabilities attributable to
the section 987 QBU for the taxable year
but is not included in taxable income in
computing the section 987 QBU’s tax-
able income or loss for the taxable year.
Items of income or gain described in the
preceding sentence are translated into
the functional currency of the owner
using the exchange rate that would apply
under §1.987-3(c) if they were included
in taxable income in computing the sec-
tion 987 QBU’s taxable income or loss
for the taxable year.
(9) Step 9: Increase or decrease the
amount determined in steps 1 through 8
by any income or gain, or any deduction
or loss, respectively, that does not impact
the adjusted balance sheet. The aggregate
amount determined under paragraphs (d)
(1) through (8) of this section is increased
by any items of income or gain taken into
account in paragraph (d)(6) of this section
(step 6) that do not increase the basis of
assets or reduce the amount of liabilities
attributable to the section 987 QBU for the
taxable year, and decreased by any items
of deduction or loss taken into account in
paragraph (d)(6) of this section (step 6)
that do not reduce the basis of assets or
increase the amount of liabilities attribut-
able to the section 987 QBU for the taxable
year. Items of income, gain, deduction, or
loss described in the preceding sentence
are translated into the functional currency
of the owner using the exchange rate that
applied under §1.987-3(c) in computing
the section 987 QBU’s taxable income or
loss for the taxable year.
(10) Step 10: Decrease or increase the
amount determined in steps 1 through 9
by any increase or decrease, respectively,
to the section 987 QBU’s net assets that
is not previously taken into account under
steps 2 through 9—(i) In general. Except
as provided in paragraph (d)(10)(iii) of
this section, the aggregate amount deter-
mined under paragraphs (d)(1) through (9)
of this section is—
(A) Decreased by the residual increase
to net assets (as defined in paragraph (d)
(10)(ii) of this section), translated into the
owner’s functional currency at the yearly
average exchange rate for the taxable
year; or
(B) Increased by the residual decrease
to net assets (as defined in paragraph (d)
(10)(ii) of this section), translated into the
owner’s functional currency at the yearly
average exchange rate for the taxable year.

Bulletin No. 2025–3 369 January 13, 2025
(ii) Determining the residual increase
or decrease to net assets—(A) In gen-
eral. The residual increase to net assets
is the positive amount, if any, that would
be determined under paragraphs (d)(1)
through (9) of this section in the func-
tional currency of the section 987 QBU
if such amounts were determined in the
functional currency of the section 987
QBU. The residual decrease to net assets
is the negative amount, if any, that would
be determined under paragraphs (d)(1)
through (9) of this section in the func-
tional currency of the section 987 QBU
if such amounts were determined in the
functional currency of the section 987
QBU.
(B) Application of step 1 in the func-
tional currency of the section 987 QBU
if a current rate election is in effect. In a
taxable year in which a current rate elec-
tion is in effect, for purposes of applying
step 1 (paragraph (d)(1) of this section) in
the functional currency of the section 987
QBU, the change in the net value of the
section 987 QBU is determined by refer-
ence to the QBU net value described in
paragraph (e)(2)(ii) of this section.
(C) Application of steps 3 and 5 in the
functional currency of the section 987
QBU. For purposes of applying steps 3
and 5 (paragraphs (d)(3) and (5) of this
section) in the functional currency of the
section 987 QBU, the amount of assets
and liabilities transferred from an owner
to a section 987 QBU is determined by
translating the basis of the assets and the
amount of the liabilities under §1.987-
2(d).
(iii) Modifications for taxable years to
which a current rate election or an annual
recognition election applies. For any tax-
able year to which a current rate election
or an annual recognition election applies,
paragraphs (d)(10)(i) and (ii) of this sec-
tion are applied by replacing “paragraphs
(d)(1) through (9) of this section” with
“paragraphs (d)(1) through (5) of this sec-
tion.”
(e) Determination of the owner func-
tional currency net value of a section
987 QBU—(1) In general. Except as pro-
vided in paragraph (e)(2) of this section,
the owner functional currency net value
of a section 987 QBU on the last day of
a taxable year is equal to the aggregate
amount of functional currency and the
adjusted basis of each other asset on the
section 987 QBU’s adjusted balance sheet
on that day, less the aggregate amount of
each liability on the section 987 QBU’s
adjusted balance sheet on that day, in each
case translated into the owner’s functional
currency as provided in paragraphs (e)(1)
(i) and (ii) of this section.
(i) Marked item. A marked item is
translated into the owner’s functional cur-
rency at the spot rate applicable to the last
day of the relevant taxable year.
(ii) Historic item. A historic item is
translated into the owner’s functional cur-
rency at the historic rate.
(2) Current rate election—(i) In gen-
eral. If a current rate election is in effect,
the owner functional currency net value of
a section 987 QBU on the last day of a
taxable year is equal to the QBU net value
described in paragraph (e)(2)(ii) of this
section, translated into the owner’s func-
tional currency at the spot rate applicable
to that day.
(ii) QBU net value. The QBU net value
of a section 987 QBU on the last day of
a taxable year is determined in the func-
tional currency of the section 987 QBU
and is equal to the aggregate amount of
functional currency and the adjusted
basis of each other asset that is attribut-
able to the section 987 QBU on that day,
less the aggregate amount of each liabil-
ity that is attributable to the section 987
QBU on that day. The QBU net value of
a section 987 QBU on the last day of a
taxable year may be determined either
by preparing an adjusted balance sheet
or by following the steps described in
paragraph (e)(2)(iii) of this section (pro-
vided that the calculation is made con-
sistently for all years in which a current
rate election is in effect). However, in the
first taxable year in which a current rate
election ceases to be in effect, the owner
functional currency net value of the sec-
tion 987 QBU for the preceding taxable
year must be determined by preparing an
adjusted balance sheet.
(iii) Alternative calculation of QBU
net value. The QBU net value of a section
987 QBU on the last day of a taxable year
can be computed using the following steps
(each applied in the functional currency of
the section 987 QBU). See paragraph (g)
(2)(iii) of this section (Example 2) for an
example illustrating this rule.
(A) Step 1: Determine the QBU net
value on the last day of the preceding tax-
able year. Determine the QBU net value on
the last day of the preceding taxable year
under this paragraph (e)(2). If the owner’s
taxable year is the first taxable year of a
section 987 QBU, the QBU net value on
the last day of the preceding taxable year
is zero. In the first taxable year in which
a current rate election is in effect (other
than the taxable year beginning on the
transition date or the first taxable year of a
section 987 QBU), the QBU net value on
the last day of the preceding taxable year
is determined by preparing an adjusted
balance sheet. In the taxable year begin-
ning on the transition date (other than the
first taxable year of a section 987 QBU),
the QBU net value on the last day of the
preceding taxable year may be determined
either by preparing an adjusted balance
sheet or by applying the steps described in
this paragraph (e)(2)(iii) for each taxable
year beginning with the first taxable year
of the section 987 QBU.
(B) Step 2: Adjust for transfers between
the section 987 QBU and its owner. The
amount determined in paragraph (e)(2)
(iii)(A) of this section is increased by
the amount of each transfer described in
paragraph (d)(3) or (4) of this section and
decreased by the amount of each transfer
described in paragraph (d)(2) or (5) of this
section (in each case, after adjustment for
gain or loss recognized under §1.988-1(a)
(10)). For this purpose, the amount of
assets and liabilities transferred from an
owner to a section 987 QBU is determined
by translating the basis of the assets and
the amount of the liabilities under §1.987-
2(d)(1).
(C) Step 3: Adjust for income or loss of
the section 987 QBU. The amount deter-
mined in paragraph (e)(2)(iii)(B) of this
section is increased by items of income
and gain attributable to the section 987
QBU (including tax-exempt income
described in paragraph (d)(8) of this sec-
tion) for the taxable year and reduced by
items of deduction and loss attributable to
the section 987 QBU (including non-de-
ductible expenses described in paragraph
(d)(7) of this section) for the taxable year.
However, no adjustment is made under
the preceding sentence for any item of
income, gain, deduction, or loss described
in paragraph (d)(9) of this section.

January 13, 2025 370 Bulletin No. 2025–3
(f) Combinations and separations—
(1) Combinations. The net accumulated
unrecognized section 987 gain or loss of a
combined QBU for a taxable year is equal
to the sum of the combining QBUs’ net
accumulated unrecognized section 987
gain or loss. See paragraph (f)(3)(i) of this
section (Example 1) for an illustration of
this rule.
(2) Separations. The net accumulated
unrecognized section 987 gain or loss of a
separated QBU for a taxable year is equal
to the separating QBU’s net accumulated
unrecognized section 987 gain or loss mul-
tiplied by the separation fraction. For pur-
poses of determining the owner functional
currency net value and QBU net value of
the separated QBUs on the last day of the
taxable year preceding the taxable year of
separation under paragraphs (d)(1)(i)(B)
and (e) of this section, the assets and lia-
bilities attributable to the separating QBU
on that day are deemed to be attributable
to the separated QBUs on that day, and are
apportioned between the separated QBUs
in a reasonable manner that takes into
account the assets and liabilities attribut-
able to the separated QBUs immediately
after the separation. See paragraph (f)(3)
(ii) of this section (Example 2) for an illus-
tration of this rule.
(3) Examples. The following examples
illustrate the rules of paragraphs (f)(1) and
(2) of this section. For purposes of these
examples, assume that no section 987
elections are in effect.
(i) Example 1: Combination of two section 987
QBUs that have the same owner—(A) Facts. DC1, a
domestic corporation, owns Entity A, a DE. Entity A
conducts a manufacturing business that constitutes a
section 987 QBU (Manufacturing QBU) that has the
euro as its functional currency. Manufacturing QBU
has a net accumulated unrecognized section 987 loss
of $100. DC1 also owns Entity B, a DE. Entity B
conducts a sales business that constitutes a section
987 QBU (Sales QBU) that has the euro as its func-
tional currency. Sales QBU has a net accumulated
unrecognized section 987 gain of $110. During the
taxable year, Entity A merges into Entity B under
local law pursuant to which Entity A ceases to exist,
Entity B survives, and Entity B acquires all the assets
and liabilities of Entity A. As a result, the books and
records of Manufacturing QBU and Sales QBU are
combined into a new single set of books and records.
The combined entity has the euro as its functional
currency.
(B) Analysis. Pursuant to §1.987-2(c)(9)(i),
Manufacturing QBU and Sales QBU are combining
QBUs, and their combination does not give rise to a
transfer that is taken into account in determining the
amount of a remittance (as defined in §1.987-5(c)).
For purposes of computing net unrecognized section
987 gain or loss under this section for the year of
the combination, the combination is deemed to have
occurred on the last day of the owner’s prior tax-
able year, such that the owner functional currency
net value of the combined section 987 QBU at the
end of that taxable year described under paragraph
(d)(1)(i)(B) of this section takes into account items
attributable to both Manufacturing QBU and Sales
QBU at that time. Additionally, any transactions
between Manufacturing QBU and Sales QBU occur-
ring during the year of the merger will not result in
transfers to or from a section 987 QBU. Pursuant to
paragraph (f)(1) of this section, the combined QBU
will have a net accumulated unrecognized section
987 gain of $10 (the $100 loss from Manufacturing
QBU plus the $110 gain from Sales QBU).
(ii) Example 2: Separation of two section 987
QBUs that have the same owner—(A) Facts. DC1,
a domestic corporation, owns Entity A, a DE. Entity
A conducts a business in the Netherlands that consti-
tutes a section 987 QBU (Dutch QBU) that has the
euro as its functional currency. The business of Dutch
QBU consists of manufacturing and selling bicycles
and scooters and is recorded on a single set of books
and records. On the last day of year 1, the adjusted
basis of the gross assets of Dutch QBU is €1,000.
In year 2, the net accumulated unrecognized section
987 loss of Dutch QBU from all prior taxable years
is $200. During year 2, Entity A separates the bicycle
and scooter business such that each business begins
to have its own books and records and to meet the
definition of a section 987 QBU under §1.987-1(b)
(3) (hereafter, “bicycle QBU” and “scooter QBU”).
There are no transfers between DC1 and Dutch QBU
before the separation. After the separation, the aggre-
gate adjusted basis of bicycle QBU’s assets is €600
and the aggregate adjusted basis of scooter QBU’s
assets is €400. Each section 987 QBU continues to
have the euro as its functional currency.
(B) Analysis. Pursuant to §1.987-2(c)(9)(iii),
bicycle QBU and scooter QBU are separated QBUs,
and the separation of Dutch QBU, a separating QBU,
does not give rise to a transfer taken into account in
determining the amount of a remittance. For purposes
of computing net unrecognized section 987 gain or
loss under this section for year 2, the separation will
be deemed to have occurred on the last day of the
owner’s prior taxable year, year 1. Pursuant to para-
graph (f)(2) of this section and §1.987-1(h), bicycle
QBU will have a separation fraction of €600/€1,000
and net accumulated unrecognized section 987 loss
of $120 (€600/€1,000 x $200), and scooter QBU will
have a separation fraction of €400/€1,000 and net
accumulated unrecognized section 987 loss of $80
(€400/€1,000 x $200).
(g) Examples. The following examples
illustrate the provisions of this section.
For purposes of the examples, U.S. Corp
is a domestic corporation that uses the cal-
endar year as its taxable year and has the
dollar as its functional currency. Except as
otherwise indicated, no section 987 elec-
tions are in effect. The examples are not
intended to demonstrate when activities
constitute a trade or business within the
meaning of §1.989(a)-1(b)(2)(ii)(A) and
(c) and therefore whether a section 987
QBU is considered to exist.
(1) Example 1: Determination of net unrecog-
nized section 987 gain or loss—(i) Facts. On July 1,
year 1, U.S. Corp establishes Japan Branch, a section
987 QBU that has the yen as its functional currency,
and U.S. Corp transfers to Japan Branch ¥100,000
with a basis of $1,000 and raw land with a basis
of $500. On the same day, Japan Branch borrows
¥10,000 from a bank. In year 1, Japan Branch earns
¥12,000 for providing services and incurs ¥2,000 of
related expenses. Japan Branch thus earns ¥10,000
of net income in year 1. The spot rate on July 1, year
1, is $1 = ¥100; the spot rate on December 31, year
1, is $1 = ¥120; and the average rate for the period
of July 1, year 1, to December 31, year 1, is $1 =
¥110. Thus, the ¥12,000 of services revenue when
translated under §1.987-3(c)(1) at the yearly aver-
age exchange rate equals $109.09 (¥12,000 x ($1 /
¥110)) = $109.09). The ¥2,000 of expenses trans-
lated at the same yearly average exchange rate equals
$18.18 (¥2,000 x ($1 / ¥110) = $18.18). Thus, Japan
Branch’s net income translated into dollars equals
$90.91 ($109.09 - $18.18 = $90.91).
(ii) Analysis. Under paragraph (a) of
this section, U.S. Corp must compute the
net unrecognized section 987 gain or loss
of Japan Branch for year 1. Because this is
Japan Branch’s first taxable year, the net
unrecognized section 987 gain or loss (as
defined under paragraph (b) of this sec-
tion) is equal to the branch’s unrecognized
section 987 gain or loss for year 1 as deter-
mined in paragraph (d) of this section. The
calculations under paragraph (d) of this
section are made as follows:
(A) Step 1. Under paragraph (d)(1) of this sec-
tion (step 1), U.S. Corp must determine the change
in the owner functional currency net value (OFCNV)
of Japan Branch for year 1 in dollars. The change in
the OFCNV of Japan Branch for year 1 is equal to
the OFCNV of Japan Branch determined in dollars
on the last day of year 1, less the OFCNV of Japan
Branch determined in dollars on the last day of the
preceding taxable year.
(1) The OFCNV of Japan Branch on Decem-
ber 31, year 1 is determined under paragraph (e) of
this section as the sum of the basis of each asset on
Japan Branch’s adjusted balance sheet on December
31, year 1, less the sum of each liability on Japan
Branch’s adjusted balance sheet on that date, trans-
lated into dollars as provided in paragraphs (e)(1)(i)
and (ii) of this section.
(2) For this purpose, Japan Branch will show
the following assets and liabilities on its adjusted
balance sheet for December 31, year 1: cash of
¥120,000; raw land with a basis of ¥55,000 ($500
translated under §1.987-2(d)(2) at the historic rate of
$1 = ¥110); and liabilities of ¥10,000.
(3) Under paragraphs (e)(1)(i) and (ii) of this sec-
tion, U.S. Corp will translate these items as follows.
The ¥120,000 is a marked asset and the ¥10,000 lia-
bility is a marked liability. These items are translated
into dollars on December 31, year 1, using the spot

Bulletin No. 2025–3 371 January 13, 2025
rate on December 31, year 1, of $1 = ¥120. The raw
land is a historic asset and is translated into dollars
under paragraph (e)(1)(ii) of this section at the his-
toric rate, which under §1.987-1(c)(3)(i)(A) is the
yearly average exchange rate of $1 = ¥110 applica-
ble to the year the land was transferred to the QBU.
(4) The OFCNV of Japan Branch on December
31, year 1, in dollars is $1,416.67. The determination
of the OFCNV of Japan Branch on December 31,
year 1, is shown below in dollars together with the
corresponding amounts in yen.
Table 1 to paragraph (g)(1)(ii)(A)(4)
OFCNV—End of Year 1
AssetsAmount in ¥Translation RateAmount in $
Ye n¥120,000$1 = ¥120 (spot rate-12/31/year 1) $1,000.00
Land¥55,000$1 = ¥110 (historic rate-yearly average rate-year 1) $500.00
Total assets¥175,000$1,500.00
Liabilities
Bank loan¥10,000$1 = ¥120 (spot rate-12/31/year 1) $83.33
Total liabilities¥10,000$83.33
Year 1 ending net value¥165,000$1,416.67
(5) Under paragraph (d)(1) of this section, the
change in OFCNV of Japan Branch for year 1 is equal
to the OFCNV of the branch determined in dollars
on December 31, year 1, (which is $1,416.67) less
the OFCNV of the branch determined in dollars on
the last day of the preceding taxable year. Because
this is the first taxable year of Japan Branch, the
OFCNV of Japan Branch determined in dollars on
the last day of the preceding taxable year is zero
under paragraph (d)(1)(iii) of this section. Accord-
ingly, the change in OFCNV of Japan Branch for
year 1 is $1,416.67.
(B) Step 2 (no adjustment). No adjustment is
made under paragraph (d)(2) of this section (step 2)
because no assets were transferred by Japan Branch
to U.S. Corp during the taxable year.
(C) Step 3. On July 1, year 1, U.S. Corp trans-
ferred to Japan Branch ¥100,000 with a basis of
$1,000.00 and raw land with a basis of $500.00
(equal to ¥55,000, translated under §1.987-2(d)(2) at
the historic rate of $1 = ¥110). The total amount of
assets transferred from U.S. Corp to Japan Branch in
dollars is $1,500, and the total amount of the transfer
in yen is ¥155,000. Therefore, under paragraph (d)
(3) of this section (step 3), the amount determined
in previous steps is reduced by $1,500.00, from
$1,416.67 to negative $83.33.
(D) Steps 4 and 5 (no adjustment). No adjust-
ment is made under paragraphs (d)(4) and (5) of this
section (steps 4 and 5) because no liabilities were
transferred by U.S. Corp to Japan Branch or by Japan
Branch to U.S. Corp during the taxable year.
(E) Step 6. Under paragraph (d)(6) of this section
(step 6), the amount determined in previous steps
is decreased by the section 987 taxable income of
Japan Branch of $90.91, from negative $83.33 to
negative $174.24.
(F) Steps 7 through 9 (no adjustment). No adjust-
ment is made under paragraphs (d)(7) through (9) of
this section (steps 7 through 9) because all of Japan
Branch’s items of income or deduction for the tax-
able year impact the basis of Japan Branch’s assets
or the amount of its liabilities and are taken into
account in computing taxable income.
(G) Step 10 (no adjustment)—(1) Calculation of
residual increase or decrease to net assets. Under
paragraph (d)(10)(ii) of this section, the residual
increase (or decrease) to net assets is the positive (or
negative) amount, if any, that would be determined
under paragraphs (d)(1) through (9) of this section
(steps 1 through 9) in the functional currency of the
section 987 QBU if such amounts were determined
in the functional currency of the section 987 QBU.
In year 1, the relevant steps that must be applied in
the functional currency of Japan Branch (the yen) are
paragraphs (d)(1), (3), and (6) of this section (steps 1,
3, and 6). For purposes of applying paragraph (d)(1)
of this section (step 1) in yen, the change in the net
value of Japan Branch is ¥165,000. See paragraph (g)
(1)(ii)(A)(4) of this section. For purposes of applying
paragraph (d)(3) of this section (step 3) in yen, the
amount of assets transferred from U.S. Corp to Japan
Branch is ¥155,000. See paragraph (g)(1)(ii)(C) of
this section. For purposes of applying paragraph
(d)(6) of this section (step 6) in yen, Japan Branch
earned ¥10,000 of net income in year 1. The appli-
cation of these steps results in no residual increase
or decrease to the adjusted balance sheet, as shown
below:
Table 2 to paragraph (g)(1)(ii)(G)(1)
Application of Relevant Steps in Yen
Change in net value in yen (step 1)¥165,000
Subtract amount determined in yen under step 3 (transfers from owner to section 987 QBU)(¥155,000)
Subtract amount determined in yen under step 6 (section 987 taxable income or loss)(¥10,000)
Residual increase or decrease to the adjusted balance sheet¥0
(2) No residual increase or decrease to the
adjusted balance sheet. As explained in paragraph
(g)(1)(ii)(G)(1) of this section, there is no residual
increase or decrease to the adjusted balance sheet of
Japan Branch in year 1. Therefore, no adjustment is
made under paragraph (d)(10) of this section (step
10). Accordingly, the unrecognized section 987 loss
of Japan Branch for year 1 is $174.24.
(2) Example 2: Determination of net unrecog-
nized section 987 gain or loss if a current rate elec-
tion is in effect—(i) Facts. The facts are the same
as in paragraph (g)(1) of this section (Example 1),
except that U.S. Corp makes a current rate election
under §1.987-1(d)(2) for year 1.
(ii) Analysis. Because a current rate election is
in effect for year 1, the unrecognized section 987
gain or loss for year 1 is determined by applying
only paragraphs (d)(1) through (5) and (10) of this
section (steps 1 through 5 and step 10). The calcu-
lations under paragraph (d) of this section are made
as follows:
(A) Step 1. The change in the OFCNV of Japan
Branch for year 1 is equal to the OFCNV of Japan
Branch determined in dollars on the last day of year
1, less the OFCNV of Japan Branch determined in
dollars on the last day of the preceding taxable year.
(1) For this purpose, Japan Branch will show the
same assets and liabilities on its adjusted balance
sheet for December 31, year 1 as are described in
paragraph (g)(1)(ii)(A)(2) of this section (Example
1), but the land is treated as a marked asset as a result
of the current rate election. The adjusted balance
sheet reflects cash of ¥120,000, raw land with a basis
of ¥50,000 ($500 translated under §1.987-2(d)(1) at
the July 1, year 1 spot rate of $1 = ¥100), and liabil-
ities of ¥10,000.

January 13, 2025 372 Bulletin No. 2025–3
(2) Under paragraph (e)(2)(ii) of this section,
because a current rate election is in effect, the
OFCNV of Japan Branch at the end of year 1 is equal
to the QBU net value, translated into U.S. dollars at
the applicable spot rate on the last day of the taxable
year. The QBU net value of Japan Branch at the end
of year 1 is ¥160,000, as shown below. The OFCNV
of Japan Branch is $1,333.33, which is equal to the
QBU net value of ¥160,000, translated at the appli-
cable spot rate on December 31, year 1 of $1 = ¥120.
Table 3 to paragraph (g)(2)(ii)(A)(2)
QBU Net Value—Year 1
AssetsAmount in ¥
Ye n¥120,000
Land¥50,000
Total assets¥170,000
Liabilities
Bank loan¥10,000
Total liabilities¥10,000
Year 1 QBU net value¥160,000
(3) Under paragraph (d)(1) of this section, the
change in OFCNV of Japan Branch for year 1 is equal
to the OFCNV of the branch determined in dollars on
December 31, year 1, (which is $1,333.33) less the
OFCNV of the branch determined in dollars on the
last day of the preceding taxable year. Because this
is the first taxable year of Japan Branch, the OFCNV
of Japan Branch determined in dollars on the last day
of the preceding taxable year is zero under paragraph
(d)(1)(iii) of this section. Accordingly, the change in
OFCNV of Japan Branch for year 1 is $1,333.33.
(B) Step 2 (no adjustment). No adjustment is
made under paragraph (d)(2) of this section (step 2)
because no assets were transferred by Japan Branch
to U.S. Corp during the taxable year.
(C) Step 3. On July 1, year 1, U.S. Corp trans-
ferred to Japan Branch ¥100,000 with a basis of
$1,000.00 and raw land with a basis of $500.00 (equal
to ¥50,000, translated under §1.987-2(d)(1) at the spot
rate on July 31, year 1 of $1 = ¥100). The total amount
of assets transferred in dollars is $1,500.00, and the
amount of assets transferred in yen is ¥150,000.
Therefore, under paragraph (d)(3) of this section (step
3), the amount determined in previous steps is reduced
by $1,500, from $1,333.33 to negative $166.67.
(D) Steps 4 and 5 (no adjustment). No adjust-
ment is made under paragraphs (d)(4) and (5) of this
section (steps 4 and 5) because no liabilities were
transferred by U.S. Corp to Japan Branch or by Japan
Branch to U.S. Corp during the taxable year.
(E) Steps 6 through 9 do not apply. Under para-
graph (d) of this section, paragraphs (d)(6) through
(9) of this section (steps 6 through 9) do not apply
because a current rate election is in effect.
(F) Step 10—(1) Application of relevant steps
in Japan Branch’s functional currency. Under
paragraph (d)(10)(iii) of this section, because
a current rate election is in effect, the residual
increase or decrease to net assets is determined by
applying paragraphs (d)(1) through (5) of this sec-
tion (steps 1 through 5) in the functional currency
of the section 987 QBU. The relevant steps that
must be applied under paragraph (d)(10) of this
section in the functional currency of Japan Branch
are paragraphs (d)(1) and (3) of this section (steps
1 and 3). Under paragraph (d)(10)(ii)(B) of this
section, step 1 is applied by reference to Japan
Branch’s QBU net value. See paragraphs (g)(2)(ii)
(A) and (C) of this section for amounts determined
in yen. The residual increase to net assets is deter-
mined as follows:
Table 4 to paragraph (g)(2)(ii)(F)(1)
Application of Relevant Steps in Yen
Step 1: Change in net value¥160,000
Step 3: Subtract amount of transfers from owner to section 987 QBU(¥150,000)
Residual increase or decrease to the adjusted balance sheet¥10,000
(2) Residual increase or decrease to net assets.
As explained in paragraph (g)(2)(ii)(F)(1) of this
section, the residual increase to Japan Branch’s net
assets in year 1 is ¥10,000. This amount, translated
at the yearly average exchange rate of $1 = ¥110,
equals $90.91. Therefore, the amount determined
in previous steps is reduced by $90.91, from nega-
tive $166.67 to negative $257.58. Accordingly, the
unrecognized section 987 loss of Japan Branch for
year 1 is $257.58.
(iii) Alternative computation of QBU net value.
Alternatively, for purposes of applying steps 1 and
10 (paragraphs (d)(1) and (10) of this section), U.S.
Corp can determine QBU net value using the follow-
ing steps under paragraph (e)(2)(iii) of this section.
(A) Step 1: Determine QBU net value at the end
of the preceding taxable year. Because year 1 is the
first taxable year in which Japan Branch exists, the
QBU net value at the end of the preceding taxable
year is zero.
(B) Step 2: Adjust for transfers between the sec-
tion 987 QBU and its owner. During year 1, U.S.
Corp transferred assets to Japan Branch with an
aggregate basis of ¥150,000, as described in para-
graph (g)(2)(ii)(C) of this section. Therefore, the
amount determined in step 1 is increased from zero
to ¥150,000.
(C) Step 3: Adjust for income or loss of the sec-
tion 987 QBU. During year 1, Japan Branch earned
¥10,000 of net income. Therefore, the amount
determined in step 2 is increased from ¥150,000 to
¥160,000.
(D) QBU net value. Japan Branch’s QBU net
value at the end of the preceding taxable year is zero.
This amount is increased by the transfer from U.S.
Corp of ¥150,000 and by Japan Branch’s taxable
income of ¥10,000. Japan Branch did not have any
tax-exempt income or non-deductible expenses in
year 1. Accordingly, Japan Branch’s QBU net value
at the end of year 1 is ¥160,000.
(3) Example 3: Determination of net unrecog-
nized section 987 gain or loss when a current rate
election is revoked—(i) Facts—(A) Background.
The facts in year 1 are the same as in paragraph (g)
(2) of this section (Example 2). In year 9, a current
rate election remains in effect, U.S. Corp has net
unrecognized section 987 loss of $1,000 with respect
to Japan Branch, and Japan Branch does not make
a remittance. On December 31, year 9, the adjusted
balance sheet of Japan Branch shows the following
assets and liabilities: cash of ¥120,000; raw land
with a basis of ¥50,000; and liabilities of ¥10,000.
Effective for year 10, U.S. Corp revokes the current
rate election.

Bulletin No. 2025–3 373 January 13, 2025
(B) Operations in year 10. In year 10, Japan
Branch earns ¥12,000 for providing services and
incurs ¥2,000 of related expenses. Japan Branch thus
earns ¥10,000 of net income in year 10. On Decem-
ber 31, year 10, the adjusted balance sheet of Japan
Branch shows the following assets and liabilities:
cash of ¥130,000; raw land with a basis of ¥50,000;
and liabilities of ¥10,000. Assume that the spot rate
on December 31, year 9, is $1 = ¥120; the spot rate on
December 31, year 10, is $1 = ¥130; and the yearly
average exchange rate for year 10 is $1 = ¥125.
Thus, the ¥12,000 of services revenue when properly
translated under §1.987-3(c)(1) at the yearly average
exchange rate equals $96.00 (¥12,000 × ($1/¥125))
= $96.00). The ¥2,000 of expenses translated at the
same yearly average exchange rate equals $16.00
(¥2,000 × ($1/¥125) = $16.00). Thus, Japan Branch’s
net income translated into dollars equals $80. There
are no transfers of assets or liabilities between U.S.
Corp and Japan Branch in year 10.
(ii) Analysis—(A) Determination of OFCNV for
year 9. Under paragraph (d)(1)(iv) of this section, the
OFCNV of a section 987 QBU on the last day of the
preceding taxable year is determined based on the elec-
tions that were (or were not) in effect on the last day
of that taxable year. In year 9, a current rate election
was in effect. Therefore, in determining the OFCNV
of Japan Branch for year 9, all assets and liabilities of
Japan Branch (including the land) are treated as marked
items. Under paragraph (e)(2)(ii) of this section,
because a current rate election was in effect for year 9,
the OFCNV of Japan Branch at the end of year 9 is
equal to the QBU net value, translated into U.S. dollars
at the applicable spot rate on the last day of the taxable
year. The QBU net value of Japan Branch at the end of
year 9 is ¥160,000, as shown below. The OFCNV of
Japan Branch is $1,333.33, which is equal to the QBU
net value of ¥160,000, translated at the applicable spot
rate on December 31, year 9 of $1 = ¥120.
Table 5 to paragraph (g)(3)(ii)(A)
QBU Net Value - End of Year 9
AssetsAmount in ¥
Ye n¥120,000
Land¥50,000
Total assets¥170,000
Liabilities
Bank loan¥10,000
Total liabilities¥10,000
Year 9 ending net value¥160,000
(B) Determination of OFCNV for year 10. In
year 10, a current rate election is not in effect. There-
fore, in determining the OFCNV of Japan Branch for
year 10, the land owned by Japan Branch is treated
as a historic item. Under §1.987-1(c)(3)(i)(E), the
historic rate applicable to historic items that were
attributable to Japan Branch on the last day of the
last taxable year in which a current rate election was
in effect (December 31, year 9) generally is equal to
the spot rate applicable to that day. Therefore, the
historic rate applicable to the land is the spot rate on
December 31, year 9. The OFCNV of Japan Branch
for year 10 is $1,339.74, determined under paragraph
(e) of this section as follows (together with the corre-
sponding amounts in yen):
Table 6 to paragraph (g)(3)(ii)(B)
OFCNV—End of Year 10
AssetsAmount in ¥Translation RateAmount in $
Ye n¥130,000$1 = ¥130 (spot rate-12/31/year 10) $1,000.00
Land¥50,000$1 = ¥120 (historic rate-spot rate-12/31/year 9) $416.67
Total assets¥180,000$1,416.67
Liabilities
Bank loan¥10,000$1 = ¥130 (spot rate-12/31/year 10) $76.92
Total liabilities¥10,000$76.92
Year 10 ending net value¥170,000$1,339.74
(C) Determination of unrecognized section 987
gain or loss for year 10. The unrecognized section
987 gain or loss of Japan Branch for year 10 is deter-
mined under paragraph (d) of this section as follows:
(1) Step 1. The change in the OFCNV of Japan
Branch for year 10 is equal to the OFCNV of Japan
Branch determined in dollars on the last day of year
10, less the OFCNV of Japan Branch determined
in dollars on the last day of year 9. Therefore, the
change in OFCNV is equal to $6.41 ($1,339.74 -
$1,333.33).
(2) Steps 2 through 5 (no adjustment). No adjust-
ment is made under paragraphs (d)(2) through (5)
of this section (steps 2 through 5) because no assets
or liabilities were transferred by U.S. Corp to Japan
Branch or by Japan Branch to U.S. Corp during the
taxable year.
(3) Step 6. Under paragraph (d)(6) of this section
(step 6), the amount determined in previous steps is
decreased by the section 987 taxable income of Japan
Branch of $80.00, from $6.41 to negative $73.59.
(4) Steps 7 through 10 (no adjustment). No
adjustment is made under paragraphs (d)(7) through
(10) of this section (steps 7 through 10) because all
of Japan Branch’s items of income or deduction for
the taxable year impact the basis of Japan Branch’s
assets or the amount of its liabilities and are taken
into account in computing taxable income. In addi-
tion, Japan Branch does not have a residual increase
or decrease to net assets (because the change in net
value of ¥10,000 is equal to the amount of Japan
Branch’s net income in year 10). Accordingly, the
unrecognized section 987 loss of Japan Branch for
year 10 is negative $73.59.
(D) Determination of net unrecog-
nized section 987 gain or loss. In year
10, Japan Branch has net accumulated
section 987 loss of $1,000. Because U.S.
Corp revoked the current rate election for
year 10, the net accumulated section 987
loss of $1,000 becomes suspended section
987 loss under §1.987-11(d)(2) and Japan
Branch’s net accumulated section 987 loss

January 13, 2025 374 Bulletin No. 2025–3
is reduced to zero. Therefore, in year 10,
Japan Branch’s net unrecognized section
987 loss is equal to $73.59, its unrecog-
nized section 987 loss for year 10.
§1.987-5 Recognition of section 987
gain or loss.
(a) Recognition of section 987 gain
or loss by the owner of a section 987
QBU. The taxable income of an owner
of a section 987 QBU includes the own-
er’s section 987 gain or loss recognized
with respect to the section 987 QBU for
the taxable year. Except as otherwise
provided in the section 987 regulations
(including §1.987-11(c), §1.987-12(b) or
(e), or §1.987-13(h) or (k)), for any tax-
able year the owner’s section 987 gain or
loss recognized with respect to a section
987 QBU is equal to:
(1) The owner’s net unrecognized
section 987 gain or loss with respect to
the section 987 QBU determined under
§1.987-4 on the last day of such taxable
year (or, if earlier, on the day the section
987 QBU is terminated under §1.987-8);
multiplied by
(2) The owner’s remittance proportion
for the taxable year, as determined under
paragraph (b) of this section.
(b) Remittance proportion—(1) In gen-
eral. Except as provided in paragraph (b)
(2) of this section, the owner’s remittance
proportion with respect to a section 987
QBU for a taxable year is equal to:
(i) The amount of the remittance, as
determined under paragraph (c) of this
section, to the owner from the section 987
QBU for such taxable year; divided by
(ii) The sum of:
(A) The aggregate adjusted basis of
the gross assets that are attributable to
the section 987 QBU as of the end of the
taxable year, determined in the functional
currency of the section 987 QBU; and
(B) The amount of the remittance, as
determined under paragraph (c) of this
section.
(2) Annual recognition election. A
taxpayer may elect to recognize its net
unrecognized section 987 gain or loss
with respect to the section 987 QBU on
an annual basis (annual recognition elec-
tion). For any taxable year in which the
annual recognition election is in effect,
the owner’s remittance proportion with
respect to a section 987 QBU is one. See
paragraph (g) of this section for an exam-
ple illustrating this rule. Additionally, for
any taxable year of an original deferral
QBU owner in which an annual recogni-
tion election is in effect, the remittance
proportion with respect to any successor
deferral QBU is one.
(c) Remittance—(1) Definition. A
remittance is determined in the section
987 QBU’s functional currency and equals
the excess, if any, of:
(i) The aggregate of all amounts trans-
ferred from the section 987 QBU to the
owner during the taxable year, as deter-
mined in paragraph (d) of this section;
over
(ii) The aggregate of all amounts trans-
ferred from the owner to the section 987
QBU during the taxable year, as deter-
mined in paragraph (e) of this section.
(2) Alternative calculation. The amount
of a remittance described in paragraph
(c)(1) of this section may alternatively
be determined under the following steps
(each applied in the functional currency
of the section 987 QBU). If the amount
determined under this paragraph (c)(2) is
negative, the amount of the remittance is
zero.
(i) Step 1: Determine the change in
QBU net value. The change in QBU net
value is equal to the QBU net value on the
date provided in paragraph (c)(3) of this
section, less the QBU net value on the last
day of the preceding taxable year. In the
first taxable year in which the section 987
QBU exists, the QBU net value on the last
day of the preceding taxable year is zero.
(ii) Step 2: Adjust the amount deter-
mined in step 1 for income or loss of the
section 987 QBU. The amount determined
in paragraph (c)(2)(i) of this section is
reduced (including below zero) by items
of income and gain attributable to the
section 987 QBU (including tax-exempt
income described in §1.987-4(d)(8)) for
the taxable year and increased by items of
deduction and loss attributable to the sec-
tion 987 QBU (including non-deductible
expenses described in §1.987-4(d)(7)) for
the taxable year. However, no adjustment
is made under the preceding sentence for
any item of income, gain, deduction, or
loss described in §1.987-4(d)(9) (items
that do not impact the adjusted balance
sheet).
(iii) Step 3: Multiply the amount deter-
mined in step 2 by negative one. The
amount of a remittance is equal to the
amount determined in paragraph (c)(2)(ii)
of this section multiplied by negative one.
(3) Day when a remittance is deter-
mined. An owner’s remittance from a sec-
tion 987 QBU for a taxable year is deter-
mined on the last day of the taxable year
(or, if earlier, on the day of the taxable
year when the section 987 QBU is termi-
nated under §1.987-8).
(4) Termination. A termination of a
section 987 QBU as determined under
§1.987-8 is treated as a remittance of all
the gross assets of the section 987 QBU
to the owner on the date of such termi-
nation. See §1.987-8(e). Accordingly, for
purposes of paragraph (b) of this section,
the remittance proportion in the case of a
termination is one.
(d) Aggregate of all amounts trans-
ferred from the section 987 QBU to the
owner for the taxable year. For purposes
of paragraph (c)(1)(i) of this section, the
aggregate of all amounts transferred from
the section 987 QBU to the owner for
the taxable year is the aggregate amount
of functional currency and the aggregate
adjusted basis of the other assets trans-
ferred (after taking into account §1.988-
1(a)(10)), determined in the section 987
QBU’s functional currency. Solely for
this purpose, the amount of liabilities
transferred from the owner to the section
987 QBU (determined in the section 987
QBU’s functional currency under §1.987-
2(d) after taking into account §1.988-1(a)
(10)) is treated as a transfer of assets from
the section 987 QBU to the owner with an
adjusted basis equal to the amount of such
liabilities.
(e) Aggregate of all amounts trans-
ferred from the owner to the section 987
QBU for the taxable year. For purposes
of paragraph (c)(1)(ii) of this section, the
aggregate of all amounts transferred from
the owner to the section 987 QBU for
the taxable year is the aggregate amount
of functional currency and the aggregate
adjusted basis of the assets transferred
(determined in the section 987 QBU’s
functional currency under §1.987-2(d)
after taking into account §1.988-1(a)
(10)). Solely for this purpose, the amount
of liabilities transferred from the section
987 QBU to the owner (determined in the

Bulletin No. 2025–3 375 January 13, 2025
section 987 QBU’s functional currency
after taking into account §1.988-1(a)(10))
is treated as a transfer of assets from the
owner to the section 987 QBU with an
adjusted basis equal to the amount of such
liabilities.
(f) Determination of owner’s adjusted
basis in transferred assets and amount
of transferred liabilities—(1) In general.
The owner’s adjusted basis in an asset
or the amount of a liability received in a
transfer from a section 987 QBU (whether
or not such transfer is made in connec-
tion with a remittance) is determined in
the owner’s functional currency under the
rules prescribed in paragraphs (f)(2) and
(3) of this section.
(2) Marked items. The basis of a marked
asset or amount of a marked liability is the
amount determined by translating the sec-
tion 987 QBU’s functional currency basis
of the asset or amount of the liability, after
taking into account §1.988-1(a)(10), into
the owner’s functional currency at the spot
rate applicable to the date of transfer.
(3) Historic items. The basis of a his-
toric asset or amount of a historic liability
is the amount determined by translating
the section 987 QBU’s functional currency
basis of the asset or amount of the liability
into the owner’s functional currency at the
historic rate for the asset or liability.
(g) Example—Calculation of section
987 gain or loss recognized. The follow-
ing example illustrates the calculation of
section 987 gain or loss under this section.
For purposes of this example, except as
otherwise indicated, assume that no sec-
tion 987 elections are in effect. Deprecia-
tion is ignored for purposes of this exam-
ple.
(1) Facts—(i) In general. U.S. Corp, a domestic
corporation with the dollar as its functional currency,
operates in the United Kingdom through Business A,
a section 987 QBU with the pound as its functional
currency. The net unrecognized section 987 gain for
Business A as determined under §1.987-4 as of the
last day of year 2 is $80.
(ii) Year 1 balance sheet. At the end of year 1,
the following assets are attributable to Business A:
cash of £3,350; a computer with an adjusted basis of
£500; and a machine with an adjusted basis of £500.
Thus, the aggregate basis of Business A’s assets is
£4,350. Business A has no liabilities.
(iii) Transfers and income in year 2. During year
2, Business A earned income of £1,500. In addition,
the following transfers took place between U.S.
Corp and Business A in year 2. On January 5, year 2,
U.S. Corp transferred to Business A £300 (acquired
by U.S. Corp immediately before the transfer). On
March 5, year 2, Business A transferred a machine
(with an adjusted basis of £500) to U.S. Corp. On
November 1, year 2, Business A transferred £2,300
to U.S. Corp. On December 7, year 2, U.S. Corp
transferred a truck to Business A. The adjusted basis
of the truck, when properly translated into pounds
under §1.987-2(d), is £2,000.
(iv) Year 2 balance sheet. At the end of year 2, the
following assets are attributable to Business A: cash
of £2,850, a computer with a pound adjusted basis
of £500, and a truck with a pound adjusted basis of
£2,000. Thus, the aggregate basis of Business A’s
assets is £5,350. Business A has no liabilities.
(2) Analysis. U.S. Corp’s section 987 gain with
respect to Business A is determined as follows:
(i) Computation of amount of remittance. Under
paragraphs (c)(1) and (2) of this section, U.S. Corp
must determine the amount of the remittance for year
2 in the QBU’s functional currency (pounds) on the
last day of year 2. The amount of the remittance for
year 2 is £500, determined as follows:
Table 1 to paragraph (g)(2)(i)
Transfers from Business A to U.S. Corp in pounds:
Machine£500
Pounds£2,300
Aggregate transfers from Business A to U.S. Corp£2,800
Transfers from U.S. Corp to Business A in pounds:
Truck£2,000
Pounds£300
Aggregate transfers from U.S. Corp to Business A£2,300
Computation of amount of remittance:
Aggregate transfers from Business A to U.S. Corp£2,800
Less: aggregate transfers from U.S. Corp to Business A(£2,300)
Total remittance£500
(ii) Alternative computation of remittance
amount. Under paragraph (c)(2) of this section, U.S.
Corp can compute the amount of the remittance for
year 2 using the following steps.
(A) Step 1: Change in QBU net value. The
change in Business A’s QBU net value is equal to
£1,000 (£5,350 - £4,350).
(B) Step 2: Adjustment for income or loss. The
amount determined in step 1 (£1,000) is reduced by
Business A’s income for year 2 of £1,500, to negative
£500.
(C) Step 3: Multiply by negative one. The amount
determined in step 2 (negative £500) is multiplied by
negative one. The remittance for year 2 is equal to £500.
(iii) Computation of section 987 QBU gross
assets plus remittance. Under paragraph (b)(1)(ii) of
this section, Business A must determine the aggre-
gate basis of its gross assets and must increase this
amount by the amount of the remittance.
Table 2 to paragraph (g)(2)(iii)
Computer£500
Pounds£2,850
Truck£2,000
Aggregate gross assets£5,350
Remittance£500
Aggregate basis of Business A’s gross assets at end of year 2, increased by amount of remittance£5,850

January 13, 2025 376 Bulletin No. 2025–3
(iv) Computation of remittance proportion.
Under paragraph (b) of this section, Business A must
compute the remittance proportion by dividing the
£500 remittance amount by the £5,850 sum of the
aggregate basis of Business A’s gross assets and the
amount of the remittance. The resulting remittance
proportion is 0.085.
(v) Computation of section 987 gain or loss. The
amount of U.S. Corp’s section 987 gain or loss that is
recognized with respect to Business A is determined
under paragraph (a) of this section by multiplying the
0.085 remittance proportion by the $80 of net unrec-
ognized section 987 gain. U.S. Corp’s resulting rec-
ognized section 987 gain for year 2 is $6.80.
(3) Annual recognition election. If an
annual recognition election under para-
graph (b)(2) of this section were in effect
for year 2, U.S. Corp’s remittance propor-
tion would be one. Accordingly, U.S. Corp
would recognize all $80 of the net unrec-
ognized section 987 gain with respect to
Business A.
§1.987-6 Character and source of
section 987 gain or loss.
(a) Ordinary income or loss. Section
987 gain or loss is ordinary income or loss
for Federal income tax purposes.
(b) Character and source of section
987 gain or loss. With respect to each sec-
tion 987 QBU, the character and source
of section 987 gain or loss is determined
under this paragraph (b) for all purposes
of the Internal Revenue Code, including
sections 904(d), 907, and 954.
(1) Timing of character and source
determination. The character and source
of section 987 gain or loss is determined
based on the initial assignment pursuant
to paragraph (b)(2)(i) of this section and
may be reassigned in the year in which
the section 987 gain or loss is recognized
pursuant to paragraph (b)(2)(ii) of this
section. The initial assignment is made in
the earliest of the taxable years described
in paragraphs (b)(1)(i) through (iv) of this
section.
(i) The taxable year in which net unrec-
ognized section 987 gain or loss is recog-
nized.
(ii) The taxable year in which net unrec-
ognized section 987 loss or pretransition
loss becomes suspended section 987 loss.
(iii) The taxable year in which net
unrecognized section 987 gain or loss
becomes deferred section 987 gain or loss.
(iv) In the case of pretransition gain
or loss that is recognized ratably over the
transition period pursuant to the election
under §1.987-10(e)(5)(ii), the taxable year
that includes the transition date.
(2) Method for determining the charac-
ter and source of section 987 gain or loss—
(i) Initial assignment—(A) In general. In
the taxable year of the initial assignment,
determined under paragraph (b)(1) of this
section, the owner assigns gross section
987 gain or loss to the statutory and resid-
ual groupings in the same proportions
as the proportions in which the tax book
value of the assets of the section 987 QBU
are assigned to the groupings under the
asset method in §§1.861-9(g) and 1.861-
9T(g), as modified by this paragraph (b)
(2)(i). For purposes of applying the asset
method, the owner takes into account
only the assets that are attributable to the
section 987 QBU under §1.987-2(b). See
§1.987-11(e) and (f) (grouping of section
987 gain and loss and applying the loss-
to-the-extent-of-gain rule on basis of the
initial assignment of section 987 gain and
loss under this paragraph (b)(2)(i)).
(B) Special rules for applying the asset
method to assign section 987 gain or loss.
For purposes of assigning gross section
987 gain or loss to the statutory and resid-
ual groupings under paragraph (b)(2)(i)(A)
of this section, the proportions in which
the tax book value of the assets of the sec-
tion 987 QBU are assigned to the group-
ings described in paragraph (b)(2)(i)(A) of
this section are determined without regard
to section 987 gain or loss. Further, the
section 987 gain or loss is assigned after
any reattribution of gross income required
under §1.904-4(f)(2)(vi) or §1.951A-2(c)
(7)(ii)(B)(2) (or the principles thereof, as
applicable), but before the allocation and
apportionment of expenses or the applica-
tion of provisions that are based on a net
income computation, such as the high-
tax exception to passive category income
in §1.904-4(c), the high-tax exception to
foreign base company income in §1.954-
1(d), and the high-tax exclusion from
tested income in §1.951A-2(c)(7).
(C) Election to treat section 987 gain or
loss that is assigned to subpart F income
groups relating to foreign personal hold-
ing company income as attributable to
section 988 transactions—(1) In general.
If an election is made under this paragraph
(b)(2)(i)(C)(1), section 987 gain or loss
assigned under paragraphs (b)(2)(i)(A)
and (B) of this section to any grouping of
passive foreign personal holding company
income, as described in §1.960-1(d)(2)(ii)
(B)(2)(i), is treated as foreign currency
gain of the owner attributable to section
988 transactions not directly related to
the business needs of the controlled for-
eign corporation, or as loss allocated and
apportioned to such foreign currency gain.
See §1.987-1(g) for rules that apply to sec-
tion 987 elections.
(2) Coordination with §1.954-2(g). The
rules of §1.954-2(g)(2), (3) and (4) apply
without regard to any section 987 gain
treated as gain from section 988 transac-
tions, or loss allocated and apportioned to
such gain, by reason of an election under
paragraph (b)(2)(i)(C)(1) of this section.
(D) Section 987 gain or loss assigned
to tentative tested income rather than
tested income—(1) In general. In the case
of a controlled foreign corporation, sec-
tion 987 gain or loss is initially assigned
to tentative tested income within a section
904 category (a tentative tested income
group) under paragraphs (b)(2)(i)(A) and
(B) of this section as though the election
described in §1.951A-2(c)(7)(viii) is in
effect for the taxable year. As a result, sec-
tion 987 gain or loss that would have ini-
tially been characterized as tested income
if no election under §1.951A-2(c)(7)(viii)
was in effect is initially characterized as
tentative tested income.
(2) For purposes of the GILTI high-tax
exclusion, section 987 gain or loss is not
attributable to any tested unit. In the case
of a controlled foreign corporation, the ini-
tial assignment of section 987 gain or loss
is made as though the section 987 gain or
loss was not attributable to any tested unit
for purposes of applying §1.951A-2(c)(7)
(GILTI high-tax exclusion). See paragraph
(b)(2)(iii) of this section (applying the
GILTI high-tax exclusion by treating all
section 987 gain or loss in the same ten-
tative tested income group as composing a
single tentative tested income item).
(ii) Reassignment of section 987 gain
or loss. In the taxable year in which sec-
tion 987 gain or loss is recognized (deter-
mined by taking into account §§1.987-5,
1.987-11(e), 1.987-12(c), and 1.987-13(b)
through (d), if applicable), the section 987
gain or loss is sourced and characterized
based on the initial assignment in para-
graph (b)(2)(i) of this section, but with

Bulletin No. 2025–3 377 January 13, 2025
appropriate changes to account for the
application of provisions that apply to the
section 987 gain or loss based on a net
income computation such as the high-tax
exception to passive category income in
§1.904-4(c), the high-tax exception to for-
eign base company income in §1.954-1(d),
and the high-tax exclusion to tested income
in §1.951A-2(c)(7). Thus, for example, if
an election under §1.951A-2(c)(7)(viii) is
in effect for the taxable year, section 987
gain or loss initially assigned to a tentative
tested income group will be reassigned
to a tested income group (as defined in
§1.960-1(d)(2)(ii)(C)) or to the residual
income group (as defined in §1.960-1(d)
(2)(ii)(D)), as applicable, depending on
whether the item of income (as described
in paragraph (b)(2)(iii) of this section) is
subject to a high rate of tax (as determined
under §1.951A-2(c)(7)(vi)). If no election
is made under §1.951A-2(c)(7)(viii) for a
taxable year, all of the section 987 gain or
loss that is recognized in the taxable year
that was initially assigned to tentative
tested income under paragraph (b)(2)(i)
of this section, is reassigned to the appro-
priate tested income group (as defined in
§1.960–1(d)(2)(ii)(C)).
(iii) Special rule for the application of
the GILTI high-tax exclusion to section
987 gain or loss. Section 987 gain in a ten-
tative tested income group that is recog-
nized by a controlled foreign corporation
in a taxable year comprises a single tenta-
tive gross tested income item (as if it were
allocable to its own tested unit) within the
meaning of §1.951A-2(c)(7)(ii), and sec-
tion 987 loss in a tentative tested income
group that is recognized by a controlled
foreign corporation in the taxable year
is allocated and apportioned to the cor-
responding tentative gross tested income
item for purposes of calculating the tenta-
tive tested income item within the mean-
ing of §1.951A-2(c)(7)(iii). Thus, for pur-
poses of applying the high-tax exclusion
in §1.951A-2(c)(7), all of the section 987
gain and loss in a tentative tested income
group that is recognized by the controlled
foreign corporation in a taxable year is a
single tentative tested income item.
(3) Allocation and apportionment of
foreign income tax to section 987 items
under section 861. For purposes of apply-
ing the definition of a corresponding U.S.
item in §1.861-20(b), an item of foreign
gross income and an item of section 987
gain or loss are treated as arising from the
same transaction or other realization event
only if the requirements in both para-
graphs (b)(3)(i) and (ii) of this section are
satisfied.
(i) The foreign gross income is an
item of foreign currency gain or loss. The
owner of the section 987 QBU, original
deferral QBU owner, or original sus-
pended loss QBU owner includes the for-
eign gross income under the laws of the
foreign country in which it is a tax resi-
dent because under that foreign law it is
required to recognize foreign currency
gain or loss with respect to its interest in
the section 987 QBU or with respect to a
successor deferral QBU or successor sus-
pended loss QBU.
(ii) The same event or events give rise
to both the foreign gross income and the
section 987 gain or loss. The remittance
under §1.987-5(c) that gave rise to the
item of section 987 gain or loss comprises
one or more of the events that gave rise to
the item of foreign gross income described
in paragraph (b)(3)(i) of this section.
(c) Examples. The following examples
illustrate the application of this section.
For purposes of the examples, except as
otherwise indicated, assume that no sec-
tion 987 elections are in effect.
(1) Example 1: Initial assignment and reassign-
ment of section 987 gain or loss—(i) Facts. CFC is
a controlled foreign corporation with the Swiss franc
(Sf) as its functional currency. CFC is the owner of
Business A, a section 987 QBU that has the euro as
its functional currency. For year 1, CFC does not
have an election described in §1.951A-2(c)(7)(viii)
in effect but is subject to an election under paragraph
(b)(2)(i)(C) of this section. CFC recognizes section
987 gain of Sf10,000 under §1.987-5. Business A has
average total assets of Sf1,000,000 in year 1, which
generate income (other than section 987 gain) as fol-
lows: Sf750,000 of assets that produce gross income
in the statutory grouping for foreign source general
category tested income under sections 904(d)(1)
(A) and 951A; and Sf250,000 of assets that produce
foreign source passive gross income in one of the
groupings described in §§1.960-1(d)(2)(ii)(B)(2)(i)
and 1.954-1(c)(1)(iii)(B) (subpart F income groups
relating to passive foreign personal holding company
income).
(ii) Analysis. Under paragraphs (b)(2)(i)(A),
(B), and (D) of this section, Sf7,500 (Sf750,000/
Sf1,000,000 x Sf10,000) of the section 987 gain is
initially assigned to the statutory grouping of for-
eign source general category tentative tested income.
Because an election under §1.951A-2(c)(7)(viii) is
not in effect for the taxable year in which the sec-
tion 987 gain is recognized, the section 987 gain is
reassigned under paragraph (b)(2)(ii) of this section
to foreign source general category tested income.
The remaining Sf2,500 (Sf250,000/Sf1,000,000 x
Sf10,000) is characterized under paragraphs (b)(2)
(i)(A) and (B) of this section by reference to assets
that give rise to foreign source passive gross income
in one of the groupings described in §1.960-1(d)(2)
(ii)(B)(2)(i) (subpart F income groups relating to
passive foreign personal holding company income)
and is therefore generally treated under the election
in paragraph (b)(2)(i)(C) of this section as foreign
source foreign currency gain of CFC attributable to
section 988 transactions not directly related to the
business needs of the controlled foreign corporation.
All of the section 987 gain is treated as ordinary
income under paragraph (a) of this section.
(2) Example 2: Effect of GILTI high-tax exclu-
sion—(i) Facts. The facts are the same as in para-
graph (c)(1) of this section (Example 1) except that
CFC does have an election described in §1.951A-
2(c)(7)(viii) in effect. Without regard to the sec-
tion 987 gain or loss, CFC has two tentative gross
tested income items: Sf100,000 of gross tentative
tested income attributable to a CFC tested unit (the
CFC item) and Sf5,000,000 of gross tentative tested
income attributable to a Business A tested unit (the
Business A item). CFC accrues Sf1,010,000 of cur-
rent year taxes and has no other current year deduc-
tions. CFC is not required by its country of tax res-
idence to include in foreign gross income foreign
currency gain or loss with respect to its interest in a
foreign QBU. For purposes of § 1.951A-2(c)(7)(iii)
(A), Sf1,000,000 of current year tax is allocated and
apportioned to the Business A item and Sf10,000 is
allocated and apportioned to the CFC item. At all rel-
evant times Sf1 = $1.
(ii) Analysis. As in paragraph (c)(1)(ii) of this
section (Example 1), Sf7,500 of section 987 gain
is initially assigned to the statutory grouping of
foreign source general category tentative tested
income. Under paragraph (b)(2)(iii) of this section,
the section 987 gain comprises a single tentative
gross tested income item of the CFC (the section 987
item). Therefore, the CFC has three tentative gross
tested income items: the section 987 item, the CFC
item, and the Business A item. No tax is allocated and
apportioned to the section 987 item. See paragraph
(b)(3) of this section. Applying §1.951A-2(c)(7)(vi),
the effective tax rate of the section 987 item is 0%
($0/$7,500), the effective tax rate of the CFC item is
10% ($10,000/$100,000), and the effective tax rate of
the Business A item is 20% ($1,000,000/$5,000,000).
An election under §1.951A-2(c)(7)(viii) is in effect;
therefore, the section 987 gain is reassigned based on
the application of §1.951A-2(c)(7). Because the sec-
tion 987 item was not subject to an effective tax rate
of greater than 90 percent of the maximum rate of tax
specified in section 11, it is reassigned under para-
graph (b)(2) of this section to foreign source general
category tested income. The remaining Sf2,500 of
section 987 gain is foreign source foreign currency
gain of CFC attributable to section 988 transactions
not directly related to the business needs of the con-
trolled foreign corporation for the reasons stated in
paragraph (c)(1)(ii) of this section (Example 1).
(3) Example 3: Section 987 gain or loss treated
as attributable to section 988 transactions—(i)
Facts. The facts are the same as in paragraph (c)(1)
of this section (Example 1) except that CFC recog-

January 13, 2025 378 Bulletin No. 2025–3
nizes section 987 loss of Sf40,000, Sf5,000 of which
is characterized under paragraphs (b)(2)(i)(A) and
(B) of this section by reference to assets that give
rise to foreign source passive gross income in a sep-
arate subpart F income group for non-related party
interest income of Business A and Sf5,000 of which
is characterized by reference to assets that give rise
to foreign source passive gross income in a separate
subpart F income group for gains from certain prop-
erty transactions of Business A not derived from the
active conduct of a trade or business. CFC otherwise
has Sf12,000 of net foreign currency gain deter-
mined under §1.954-2(g) that is taken into account
in determining the excess of foreign currency gain
over foreign currency losses characterized as foreign
personal holding company income under section
954(c)(1)(D).
(ii) Analysis. Under paragraph (b)(2)(i)(C) of this
section, the Sf10,000 total section 987 loss charac-
terized by reference to assets that give rise to foreign
source passive gross income in one of the groupings
described in §§1.960-1(d)(2)(ii)(B)(2)(i) and 1.954-
1(c)(1)(iii)(B) (subpart F income groups relating to
passive foreign personal holding company income)
is treated as foreign source foreign currency loss of
CFC attributable to section 988 transactions. Accord-
ingly, CFC will aggregate the Sf10,000 section 987
loss with the Sf12,000 net foreign currency gain and
will have Sf2,000 of net foreign currency gain char-
acterized as passive foreign personal holding com-
pany income under section 954(c)(1)(D).
(4) Example 4: Section 987 gain or loss assigned
to passive foreign personal holding company
income—(i) Facts. The facts are the same as in para-
graph (c)(3) of this section (Example 3) except that
CFC is not subject to an election under paragraph (b)
(2)(i)(C) of this section.
(ii) Analysis. As the CFC is not subject to an
election under paragraph (b)(2)(i)(C) of this section,
Sf5,000 of section 987 loss is initially assigned to the
statutory grouping for foreign source passive gross
income in a separate subpart F income group for
non-related party interest income of Business A, and
Sf5,000 is initially assigned to the statutory grouping
for foreign source passive gross income in a separate
subpart F income group for gains from certain prop-
erty transactions of Business A not derived from the
active conduct of a trade or business. The Sf12,000
net foreign currency gain is foreign source passive
gross income in a separate subpart F income group
for foreign currency gain of CFC attributable to sec-
tion 988 transactions of CFC. As a result, if the net
income in a subpart F income group to which either
section 987 loss is assigned is less than zero, that
loss will not reduce any other category of subpart
F income, including CFC’s foreign currency gain
from section 988 transactions, except by reason of
the earnings and profit limitation in section 952(c)
(1). See §1.954-1(c)(1)(ii).
§1.987-7 Application of the section
987 regulations to partnerships and S
corporations.
(a) Overview. This section provides
rules relating to the application of the
section 987 regulations to partnerships
and S corporations. Paragraph (b) of this
section provides the general rule that the
section 987 regulations do not apply to
partnerships. Paragraph (c) of this section
identifies certain provisions of the section
987 regulations that are applicable to part-
nerships, subject to certain modifications.
Paragraph (d) of this section provides spe-
cial rules relating to suspended section
987 loss. Paragraph (e) of this section pro-
vides rules for adjusting a partner’s basis
in its partnership interest. Paragraph (f) of
this section provides that S corporations
are treated in the same manner as part-
nerships for purposes of the section 987
regulations. Paragraph (g) of this section
provides examples that illustrate the rules
of this section.
(b) Section 987 regulations generally
do not apply to partnerships. Except as
otherwise provided in this section, the sec-
tion 987 regulations do not apply to a part-
nership, and the section 987 regulations
do not apply to an eligible QBU if a part-
nership is the owner for Federal income
tax purposes of the eligible QBU’s assets
and liabilities. However, a taxpayer must
apply sections 987 and 989(a) to partner-
ships and eligible QBUs of partnerships in
a reasonable manner using a method that
is applied consistently from year to year
with respect to a particular partnership or
eligible QBU. In addition, all members of
the same controlled group must apply the
same method consistently with respect to
a particular partnership or eligible QBU.
(c) Provisions of the section 987 reg-
ulations that apply to partnerships—(1)
In general—(i) Eligible QBU. The rules
described in paragraph (c)(2) of this sec-
tion apply to an eligible QBU if a partner-
ship is the owner for Federal income tax
purposes of the eligible QBU’s assets and
liabilities and either—
(A) The partnership (or a partner) treats
the eligible QBU as a qualified business
unit of the partnership that is subject to
section 987 (for example, under an entity
approach); or
(B) A partner in the partnership treats
all or a portion of the eligible QBU as a
qualified business unit of the partner that
is subject to section 987 (for example,
under an aggregate approach).
(ii) Partnership. The rules described in
paragraph (c)(2) of this section apply to a
partnership if a partner in the partnership
treats the partnership itself (or an interest
in the partnership) as a qualified business
unit that is subject to section 987 (for
example, under an entity approach).
(2) Applicable provisions—(i) In gen-
eral. Sections 1.987-6 (character and
source of section 987 gain or loss), 1.987-
9(d) (information on a dedicated section
987 form), §§1.987-11 through 1.987-13
(suspended section 987 loss, deferral of
section 987 gain or loss, and suspended
section 987 loss upon terminations,
respectively), and §1.987-15 (applicabil-
ity dates) apply to a QBU described in
paragraph (c)(1) of this section, subject to
the modifications described in this para-
graph (c) and in paragraph (d) of this sec-
tion.
(ii) Annual recognition election. An
annual recognition election under §1.987-
5(b)(2) applies to a QBU described in
paragraph (c)(1) of this section, subject
to the modifications described in this
paragraph (c). In each taxable year of the
owner of a QBU described in paragraph
(c)(1) of this section in which an annual
recognition election is in effect, the owner
recognizes any unrecognized gain or loss
with respect to the QBU under section
987(3) (other than suspended section 987
loss) as though the QBU terminated on the
last day of the taxable year. Appropriate
adjustments must be made to prevent the
gain or loss from being taken into account
again after it is recognized under this para-
graph (c)(2)(ii) (for example, in the case
of a taxpayer applying the 1991 proposed
regulations, by adjusting the equity and
basis pools to reflect the gain or loss rec-
ognized). The rules of §1.987-1(g) apply
with respect to an annual recognition elec-
tion that is made by or for an owner of a
QBU described in paragraph (c)(1) of this
section.
(iii) Section 988 mark-to-market elec-
tion. A section 988 mark-to-market elec-
tion under §1.987-3(b)(4)(ii) applies to a
QBU described in paragraph (c)(1) of this
section. The rules of §1.987-1(g) apply
with respect to a section 988 mark-to-
market election that is made by or for an
owner of a QBU described in paragraph
(c)(1) of this section.
(3) Modifications to applicable pro-
visions—(i) In general. An owner of
a QBU described in paragraph (c)(1)
of this section must adapt the rules

Bulletin No. 2025–3 379 January 13, 2025
described in paragraph (c)(2) of this sec-
tion as necessary to recognize section
987 gain or loss in a manner that is con-
sistent with the principles of those rules.
For purposes of applying this section
and the rules described in paragraph (c)
(2) of this section to a QBU described
in paragraph (c)(1) of this section, the
definitions provided in the section 987
regulations apply with appropriate mod-
ifications. For example, in the case of a
QBU described in paragraph (c)(1) of
this section, the term section 987 gain or
loss means gain or loss recognized under
section 987(3), the term owner means
the person that recognizes gain or loss
under section 987(3), and the term sec-
tion 987 QBU means any qualified busi-
ness unit subject to section 987 (includ-
ing a QBU described in paragraph (c)(1)
of this section). In addition, references to
other rules of the section 987 regulations
must be adapted as necessary to apply
section 987 in a manner that is consis-
tent with the principles of this section
and the rules described in paragraphs (c)
(2) of this section. For example, refer-
ences to the recognition of section 987
gain or loss under §1.987-5 encompass
any recognition of gain or loss under
section 987(3).
(ii) Controlled group. For purposes
of applying §§1.987-12 and 1.987-13,
if a partner in a partnership is treated as
the owner of an eligible QBU described
in paragraph (c)(1)(i) of this section (for
example, under an aggregate approach)
before the QBU terminates, each mem-
ber of the partnership’s controlled group
is treated as a member of the partner’s
controlled group at any time that the part-
ner (or any member of the partner’s con-
trolled group, determined without regard
to this paragraph (c)(3)(ii)) continues to
be a direct or indirect partner in the part-
nership. This paragraph (c)(3)(ii) does not
apply for purposes of the de minimis rule
in §1.987-11(c)(2).
(4) Terminating QBUs. In the case of a
terminating QBU described in paragraph
(c)(1) of this section, the rules of this sec-
tion and the rules described in paragraph
(c)(2) of this section apply immediately
before the termination, but §1.987-10
does not apply because §1.987-10 is not
applicable to a QBU described in para-
graph (c)(1) of this section.
(d) Suspended section 987 loss—(1)
In general—(i) Rules of §1.987-11(c) and
(d)(2) do not apply. The rules of §1.987-
11(c) and (d)(2) do not apply to a QBU
described in paragraph (c)(1) of this sec-
tion.
(ii) Suspension of section 987 loss.
Except as provided in paragraph (d)(2) of
this section, any loss that would otherwise
be recognized under section 987(3) (after
applying §1.987-12) with respect to a
QBU described in paragraph (d)(1)(ii)(A)
or (B) of this section is not recognized and
becomes suspended section 987 loss.
(A) Eligible QBU. This paragraph
(d)(1)(ii) applies to an eligible QBU
described in paragraph (c)(1)(i) of this
section.
(B) Partnership. This paragraph (d)(1)
(ii) applies to a partnership (or a partner-
ship interest) described in paragraph (c)
(1)(ii) of this section if at least 95 percent
of the interests in partnership capital and
profits are owned, directly or indirectly,
by persons related to each other within
the meaning of section 267(b) or section
707(b). For this purpose, ownership of an
interest in partnership capital or profits is
determined in accordance with the rules
for constructive ownership provided in
section 267(c), other than section 267(c)
(3).
(2) Exceptions—(i) Method under
which historic items do not give rise to
section 987 gain or loss. Paragraph (d)
(1)(ii) of this section does not apply to an
eligible QBU described in paragraph (d)
(1)(ii)(A) of this section if section 987 is
consistently applied to the QBU using a
method under which historic items of the
QBU do not give rise to section 987 gain
or loss (for example, a method that fol-
lows the principles of §§1.987-3 through
1.987-5).
(ii) Annual recognition election. Para-
graph (d)(1)(ii) of this section does not
apply in a taxable year in which an annual
recognition election is in effect.
(iii) De minimis rule. Paragraph (d)(1)
(ii) of this section does not apply in a tax-
able year described in §1.987-11(c)(2).
(3) Recognition of suspended section
987 loss—(i) In general. Except as pro-
vided in paragraph (d)(3)(ii) of this sec-
tion, suspended section 987 loss with
respect to a QBU described in paragraph
(d)(1)(ii)(A) or (B) of this section is rec-
ognized under the rules of §§1.987-11(e)
and 1.987-13.
(ii) Partnership that is not engaged in
a trade or business. In the case of a part-
nership described in paragraph (d)(1)(ii)
(B) of this section that is not engaged in
a trade or business, suspended section 987
loss cannot be recognized under §1.987-
13(b) through (d) (and thus can only be
recognized under §1.987-11(e)).
(iii) Application of the loss-to-the-ex-
tent-of-gain rule. If a partner in a partner-
ship is the owner of a section 987 QBU
described in paragraph (c)(1) of this sec-
tion and also owns one or more section
987 QBUs that are not described in para-
graph (c)(1) of this section, the loss-to-
the-extent-of-gain rule of §1.987-11(e) is
applied by taking into account all of the
owner’s section 987 gain and suspended
section 987 loss in each recognition group-
ing with respect to all of its section 987
QBUs (whether or not they are described
in paragraph (c)(1) of this section).
(e) Adjustments to the basis of a part-
ner’s interest in the partnership. When,
and to the extent that, a partner recognizes
section 987 gain or loss, defers section
987 gain or loss, or suspends section 987
loss at the partner level with respect to a
partnership described in paragraph (c)(1)
(ii) of this section or an eligible QBU of
the partnership described in paragraph
(c)(1)(i) of this section, the principles of
sections 704(d) and 705 apply as though
the item of income or loss was part of the
partner’s distributive share of partnership
items. Thus, proper adjustments must be
made to the partner’s adjusted basis in the
partnership under the principles of section
705, taking into account the principles of
section 704(d).
(f) S corporations treated as partner-
ships. For purposes of the section 987 reg-
ulations, S corporations are treated in the
same manner as partnerships and share-
holders of S corporations are treated in the
same manner as partners of partnerships.
(g) Examples. The following examples
illustrate the principles of this section.
For purposes of these examples, DC1 and
DC2 are domestic corporations, and P is a
foreign partnership. P is also the owner for
Federal income tax purposes of the assets
and liabilities of Business A, an eligible
QBU that has the pound as its functional
currency. DC1 and DC2 each own 50% of

January 13, 2025 380 Bulletin No. 2025–3
the capital and profits interests in P. If P is
treated as a qualified business unit under
section 989(a), P would have the euro as
its functional currency due to activities
unrelated to Business A.
(1) Example 1: Aggregate approach to section
987—(i) Facts. DC1 and DC2 each apply section
987 using an aggregate approach, under which each
partner’s indirect interest in Business A is treated as a
section 987 QBU of the partner. DC1 and DC2 each
use the earnings and capital method described in
the 1991 proposed regulations to apply section 987
with respect to Business A. Neither DC1 nor DC2
has made an annual recognition election. Under the
earnings and capital method, but for the application
of paragraph (d)(1)(ii) of this section, DC1 and DC2
each would recognize section 987 loss of $10 million
in year 1 with respect to Business A.
(ii) Analysis—(A) Application of loss suspen-
sion rule to Business A. Business A is an eligible
QBU described in paragraph (c)(1)(i) of this section
because a partnership (P) is the owner of Business A’s
assets and liabilities for federal income tax purposes
and P’s partners treat Business A as a section 987
QBU. Therefore, under paragraph (d)(1)(ii) of this
section, the section 987 loss of DC1 and DC2 that
would otherwise be recognized in year 1 becomes
suspended section 987 loss, which DC1 and DC2
may recognize in year 1 or in future taxable years
under §§1.987-11(e) and 1.987-13(b) through (d).
(B) Annual recognition election. If DC1 and DC2
were subject to an annual recognition election in year
1, they would recognize section 987 gain or loss with
respect to Business A as though Business A termi-
nated at the end of year 1, and the loss suspension
rule of paragraph (d)(1)(ii) of this section would not
apply.
(C) FEEP method. If DC1 and DC2 applied
section 987 to Business A under the principles of
§§1.987-3 through 1.987-5, such that historic items
of Business A did not give rise to section 987 gain or
loss, the loss suspension rule of paragraph (d)(1)(ii)
of this section would not apply.
(2) Example 2: Entity approach to section 987—
(i) Facts. P applies section 987 to Business A using
an entity approach, under which Business A is treated
as a section 987 QBU of P. P is treated as a qualified
business unit under section 989(a) and uses the euro as
its functional currency. P uses the earnings and capital
method described in the 1991 proposed regulations to
apply section 987 with respect to Business A. Under
the earnings and capital method, but for the applica-
tion of paragraph (d)(1)(ii) of this section, P would
recognize section 987 loss of $10 million in year 1
with respect to Business A. In addition, DC1 and
DC2 apply section 987 to P using an entity approach,
treating each partner’s interest in P as a section 987
QBU. DC1 and DC2 each use the earnings and cap-
ital method described in the 1991 proposed regula-
tions to apply section 987 with respect to P. Under the
earnings and capital method, but for the application
of paragraph (d)(1)(ii) of this section, DC1 and DC2
each would recognize section 987 loss of $10 million
in year 1 with respect to P. Neither DC1 nor DC2 has
made an annual recognition election.
(ii) Analysis—(A) Business A treated as a QBU
subject to section 987. Business A is an eligible
QBU described in paragraph (c)(1)(i) of this section
because a partnership (P) is the owner of Business
A’s assets and liabilities for Federal income tax pur-
poses, and P treats Business A as a QBU subject to
section 987. Therefore, the loss suspension rule in
paragraph (d)(1)(ii) of this section applies to suspend
P’s recognition of section 987 loss with respect to
Business A.
(B) Treatment of P as a section 987 QBU. P is
a partnership described in paragraph (c)(1)(ii) of
this section because DC1 and DC2 each treat their
interest in P as a section 987 QBU. Under paragraph
(d)(1)(ii)(B) of this section, if DC1 and DC2 are
related within the meaning of section 267(b) or sec-
tion 707(b), the loss suspension rule in paragraph (d)
(1)(ii) of this section applies to suspend DC1’s and
DC2’s recognition of section 987 loss with respect
to their interest in P. However, if DC1 and DC2 are
unrelated, the loss suspension rule in paragraph (d)
(1)(ii) of this section does not apply.
§1.987-8 Termination of a section 987
QBU.
(a) Scope. This section provides rules
regarding the termination of a section 987
QBU. Paragraph (b) of this section pro-
vides general rules for determining when
a termination occurs. Paragraph (c) of this
section provides exceptions to the general
termination rules for certain transactions
described in section 381(a). Paragraph (d)
of this section is reserved. Paragraph (e)
of this section describes certain effects of
terminations. Paragraph (f) of this section
contains examples that illustrate the prin-
ciples of this section.
(b) In general. Except as provided in
paragraph (c) of this section, a section
987 QBU terminates if the conditions
described in any one of paragraphs (b)(1)
through (6) of this section are satisfied.
(1) Trade or business ceases. A sec-
tion 987 QBU ceases its trade or business.
When a section 987 QBU ceases its trade
or business is determined based on all the
facts and circumstances, provided that an
owner may continue to treat a section 987
QBU as a section 987 QBU for a reason-
able period during the winding up of such
trade or business, which period may in no
event exceed two years from the date on
which such QBU ceases its activities car-
ried on for profit. See paragraph (f)(1) of
this section (Example 1).
(2) Substantially all assets transferred.
The section 987 QBU transfers substan-
tially all (within the meaning of section
368(a)(1)(C)) of its assets to its owner.
For purposes of this paragraph (b)(2), the
amount of assets transferred from the sec-
tion 987 QBU to its owner as a result of
a transaction is reduced by the amount of
assets transferred from the owner to the
section 987 QBU pursuant to the same
transaction. See paragraphs (f)(2), (6), and
(7) of this section (Examples 2, 6, and 7).
(3) Owner no longer a CFC. A foreign
corporation that is a controlled foreign
corporation that is the owner of a section
987 QBU ceases to be a controlled foreign
corporation as a result of a transaction or
series of transactions after which persons
that were related to the corporation within
the meaning of section 267(b) immedi-
ately before the transaction or series of
transactions collectively own sufficient
interests in the corporation such that the
corporation would continue to be consid-
ered a controlled foreign corporation if
such persons were United States share-
holders within the meaning of section
951(b). See paragraph (f)(3) of this section
(Example 3).
(4) Owner ceases to exist. The owner
of the section 987 QBU ceases to exist
(including in connection with a trans-
action described in section 381(a)). See
paragraph (f)(4) of this section (Example
4).
(5) Section 987 QBU ceases to be an
eligible QBU with a functional currency
different from its owner. The section 987
QBU ceases to be an eligible QBU that
has a functional currency different from
its owner. See §1.985-5(d)(2) and (e)(4)
(iii) (providing that a termination result-
ing from a change in functional currency
occurs on the last day of the last taxable
year ending before the year of change).
(6) Change in form of ownership. An
individual or corporation that was the
direct owner of a section 987 QBU ceases
to be the direct owner of the section 987
QBU (for example, because the assets of
the section 987 QBU are transferred to a
partnership).
(c) Transactions described in section
381(a)—(1) Liquidations. Notwithstand-
ing paragraph (b) of this section, a ter-
mination does not occur when the owner
(distributor) of a section 987 QBU ceases
to exist in a liquidation described in sec-
tion 332 pursuant to which it transfers
the section 987 QBU to another corpora-
tion (distributee), except in the following
cases:

Bulletin No. 2025–3 381 January 13, 2025
(i) The distributor is a domestic corpo-
ration and the distributee is a foreign cor-
poration.
(ii) The distributor is a foreign corpo-
ration and the distributee is a domestic
corporation.
(iii) The distributor and the distribu-
tee are both foreign corporations and the
functional currency of the distributee is
the same as the functional currency of the
distributor’s section 987 QBU.
(2) Reorganizations. Notwithstanding
paragraph (b) of this section, a termination
does not occur when the owner (trans-
feror) of the section 987 QBU ceases to
exist in a reorganization described in sec-
tion 381(a)(2) pursuant to which it trans-
fers the section 987 QBU to another cor-
poration (acquiring corporation), except
in the following cases:
(i) The transferor is a domestic corpo-
ration and the acquiring corporation is a
foreign corporation.
(ii) The transferor is a foreign corpo-
ration and the acquiring corporation is a
domestic corporation.
(iii) The transferor is a controlled for-
eign corporation immediately before the
transfer, the acquiring corporation is a
foreign corporation that is not a controlled
foreign corporation immediately after the
transfer, and the acquiring corporation
was related to the transferor within the
meaning of section 267(b) immediately
before the transfer.
(iv) The transferor and the acquiring
corporation are foreign corporations and
the functional currency of the acquiring
corporation is the same as the functional
currency of the transferor’s section 987
QBU.
(d) [Reserved]
(e) Effect of terminations. A termina-
tion of a section 987 QBU as determined
in this section is treated as a remittance of
all the gross assets of the section 987 QBU
to its owner immediately before the sec-
tion 987 QBU terminates. Thus, except as
otherwise provided in the section 987 reg-
ulations, a termination generally results in
the recognition of any net unrecognized
section 987 gain or loss of the section 987
QBU (unless it is treated as deferred sec-
tion 987 gain or loss or suspended section
987 loss). See §1.987-5(c)(3) (generally
recognizing section 987 gain or loss on
a termination) and §§1.987-11 through
1.987-13 (suspending section 987 gain or
loss and deferring section 987 loss in cer-
tain instances).
(f) Examples. The following examples
illustrate the principles of this section.
Except as otherwise provided, U.S. Corp
is a domestic corporation that has the U.S.
dollar as its functional currency, and Busi-
ness A is a section 987 QBU.
(1) Example 1: Cessation of operations—(i)
Facts. U.S. Corp is the owner of Business A, a sales
office of U.S. Corp in Country X. Business A ceases
sales activities on December 31, year 1. During year
2, Business A sells all of the assets used in its sales
activities and winds up its business, settling out-
standing accounts.
(ii) Analysis. Business A’s trade or business
ceases on December 31, year 1. The cessation of
Business A’s trade or business causes a termination
of the Business A section 987 QBU under paragraph
(b)(1) of this section on December 31, year 1, unless
U.S. Corp chooses to continue to treat Business A as
a section 987 QBU until completion of the wind-up
activities in year 2. If U.S. Corp chooses to continue
to treat Business A as a section 987 QBU during the
wind-up of Business A, the Business A section 987
QBU would terminate under paragraph (b)(1) of this
section upon completion of the wind-up in year 2.
(2) Example 2: Transfer of a section 987 QBU
to a member of a consolidated group—(i) Facts.
U.S. Corp, the owner of Business A, transfers all the
assets and liabilities of Business A to DS, a domes-
tic corporation all of the stock of which is owned by
U.S. Corp, in a transaction qualifying under section
351. U.S. Corp and DS are members of the same
consolidated group.
(ii) Analysis. Pursuant to §1.987-2(c)(2)(i) and
(ii), as a result of the deemed exchange of the assets
and liabilities of Business A for DS stock in a section
351 transaction, Business A is treated as transferring
its assets and liabilities to U.S. Corp immediately
before the transfer by U.S. Corp of the assets and
liabilities to DS. Because a section 351 transaction
is not a transaction described in section 381(a)(2),
the transfer of all of the assets of Business A to U.S.
Corp causes a termination of the Business A section
987 QBU under paragraph (b)(2) of this section.
(3) Example 3: Cessation of controlled foreign
corporation status—(i) Facts. Foreign parent (FP) is
a foreign corporation that owns all the stock of U.S.
Corp, a domestic corporation. U.S. Corp owns all
of the stock of FC, a controlled foreign corporation
as defined in section 957. FC is the owner of Busi-
ness A. U.S. Corp liquidates into FP. FC no longer
constitutes a controlled foreign corporation after the
liquidation.
(ii) Analysis. Because FC ceases to qualify as a
controlled foreign corporation as a result of a trans-
action after which persons that were related to FC
within the meaning of section 267(b) immediately
before the transaction collectively own sufficient
interests in FC such that FC would continue to be
considered a controlled foreign corporation if such
persons were United States shareholders within the
meaning of section 951(b), the Business A section
987 QBU terminates pursuant to paragraph (b)(3) of
this section.
(4) Example 4: Section 332 liquidation—(i)
Facts. U.S. Corp owns all of the stock of FC, a for-
eign corporation. FC is the owner of Business A.
Pursuant to a liquidation described in section 332,
FC distributes all of its assets and liabilities to U.S.
Corp.
(ii) Analysis. FC’s liquidation causes a termina-
tion of the Business A section 987 QBU as provided
in paragraph (b)(4) of this section because FC ceases
to exist as a result of the liquidation. The exception
for certain section 332 liquidations provided under
paragraph (c)(1) of this section does not apply
because U.S. Corp is a domestic corporation and FC
is a foreign corporation. See paragraph (c)(1)(ii) of
this section.
(5) [Reserved]
(6) Example 6: Deemed transfers to a CFC upon
a check-the-box election—(i) Facts. In year 1, U.S.
Corp forms an entity in a foreign country, Entity A.
Entity A owns Business A, which has the pound as
its functional currency. Entity A forms Entity B in
another foreign country. Entity B owns Business B,
a section 987 QBU that has the euro as its functional
currency. At the time of formation, Entity A and
Entity B elect to be DEs. In year 6, Entity A files an
election on Form 8832 to be classified as a corpora-
tion under §301.7701-3(g)(1)(iv) of this chapter and
becomes a CFC (FC) owned directly by U.S. Corp.
FC has the pound as its functional currency.
(ii) Analysis—(A) Under §1.987-1(b)(5), U.S.
Corp is the owner of Business A and Business B.
In year 6, when Entity A elects to be classified as a
corporation, U.S. Corp is deemed to contribute the
assets and liabilities of Business A and Business B
to FC under section 351 in exchange for FC stock.
Pursuant to §1.987-2(c)(2)(i) and (ii), as a result of
the deemed exchange of the assets and liabilities of
Business A and Business B for FC stock in a section
351 transaction, Business A and Business B are each
treated as transferring their assets and liabilities to
U.S. Corp immediately before U.S. Corp’s transfer
of such assets and liabilities to FC. The transfer of
assets from Business A and Business B to U.S. Corp
causes terminations of those section 987 QBUs under
paragraph (b)(2) of this section. The assets and liabil-
ities of Business A and Business B are now owned by
FC, but because FC and Business A have the same
functional currency, only Business B qualifies as a
section 987 QBU to which section 987 applies.
(B) Terminations also would have occurred in
year 6 if U.S. Corp had contributed Entity A and
Entity B to an existing foreign corporation owned
by U.S. Corp or to a newly created foreign corpora-
tion owned by U.S. Corp pursuant to a section 351
exchange because the transfer of all of the assets of
Business A and Business B would cause terminations
of those section 987 QBUs under paragraph (b)(2) of
this section.
(7) Example 7: Sale of a section 987 QBU to a
member of a consolidated group—(i) Facts. U.S.
Corp, the owner of Business A, sells all of the assets
and liabilities of Business A to DS, a domestic cor-
poration, in exchange for cash. U.S. Corp and DS are
members of the same consolidated group. The cash
received on the sale is recorded on the books of U.S.
Corp.
(ii) Analysis. Pursuant to §1.987-2(c)(2)(i)
and (ii), Business A is treated as transferring all of

January 13, 2025 382 Bulletin No. 2025–3
its assets and liabilities to U.S. Corp immediately
before the sale by U.S. Corp to DS. As a result of
this deemed transfer from Business A to U.S. Corp,
the Business A section 987 QBU terminates under
paragraph (b)(2) of this section.
§1.987-9 Recordkeeping requirements.
(a) In general. An owner (or the autho-
rized person on behalf of an owner) must
keep a copy of the statement described
in §1.987-1(g)(3)(i) for each section
987 election made by or on behalf of
the owner (if not required to be made
on a form published by the Commis-
sioner) and reasonable records sufficient
to establish section 987 taxable income
or loss and section 987 gain or loss with
respect to each section 987 QBU, suc-
cessor deferral QBU, and successor sus-
pended loss QBU, as applicable, for each
taxable year.
(b) Supplemental information. A per-
son’s obligation to maintain records under
section 6001 and paragraph (a) of this sec-
tion is not satisfied unless the following
information is maintained in those records
with respect to each section 987 QBU,
successor deferral QBU, and successor
suspended loss QBU for each taxable
year:
(1) The amount of the items of income,
gain, deduction, or loss attributed to the
section 987 QBU in the functional cur-
rency of the section 987 QBU and its
owner.
(2) The adjusted balance sheet of the
section 987 QBU in the functional cur-
rency of the section 987 QBU and its
owner. If a current rate election is in effect
and the owner computes QBU net value
under §1.987-4(e)(2)(iii) without prepar-
ing an adjusted balance sheet, the infor-
mation needed to apply §1.987-4(e)(2)(iii)
must be maintained in lieu of an adjusted
balance sheet.
(3) The exchange rates used to translate
items of income, gain, deduction, or loss
of the section 987 QBU into the owner’s
functional currency and, if a spot rate con-
vention is used, the manner in which the
convention is determined.
(4) The exchange rates used to translate
the assets and liabilities of the section 987
QBU into the owner’s functional currency
and, if a spot rate convention is used, the
manner in which the convention is deter-
mined.
(5) The amount of assets and liabilities
transferred by the owner to the section
987 QBU determined in the functional
currency of the owner and the section 987
QBU.
(6) The amount of assets and liabili-
ties transferred by the section 987 QBU
to the owner determined in the functional
currency of the owner and the section 987
QBU.
(7) The amount of the unrecognized
section 987 gain or loss for the taxable
year determined under §1.987-4(d).
(8) The amount of the net accumulated
unrecognized section 987 gain or loss for
the taxable year determined under §1.987-
4(c).
(9) The amount of the remittance and
the remittance proportion for the taxable
year.
(10) The computations required under
§§1.861-9(g) and 1.861-9T(g) for pur-
poses of sourcing and characterizing sec-
tion 987 gain or loss, deferred section 987
gain or loss, suspended section 987 loss,
or pretransition gain or loss under §1.987-
6.
(11) The cumulative suspended section
987 loss in each recognition grouping.
(12) The outstanding deferred sec-
tion 987 gain or loss in each recognition
grouping.
(13) The transition information
required to be determined under §1.987-
10(k).
(14) The identification required under
§1.987-14(c) with respect to a section 987
hedging transaction.
(c) Retention of records. The records
required by this section, or records that
support the information required on a form
published by the Commissioner regarding
section 987, must be maintained and kept
available for inspection by the Internal
Revenue Service for so long as the con-
tents thereof may become relevant in the
administration of the Internal Revenue
Code.
(d) Information on a dedicated section
987 form. Information necessary to deter-
mine section 987 gain or loss and sec-
tion 987 taxable income or loss must be
reported on a form prescribed for that pur-
pose (or, until that form is published, on
Form 8858 or its successor) in accordance
with the applicable forms and instruc-
tions. A taxpayer satisfies its obligation
described in paragraphs (a) and (b) of this
section to the extent that the taxpayer pro-
vides the specific information required on
Form 8858 (or its successor) or other form
prescribed for this purpose (including the
information required by the instructions
accompanying those forms).
§1.987-10 Transition rules.
(a) Overview—(1) In general. This
section provides transition rules for the
first taxable year in which the section
987 regulations apply. Paragraph (b) of
this section describes the scope of this
section’s application. Paragraph (c) of
this section provides rules for determin-
ing the transition date. Paragraph (d) of
this section provides rules relating to the
application of the section 987 regulations
after the transition date. Paragraph (e) of
this section provides rules relating to the
determination and recognition of pretran-
sition gain or loss. Paragraph (f) of this
section provides special rules for section
987 QBUs to which the fresh start tran-
sition method was applied. Paragraph (g)
of this section is reserved. Paragraph (h)
of this section provides rules relating to
the source and character of pretransition
gain or loss. Paragraph (i) of this section is
reserved. Paragraph (j) of this section pro-
vides adjustments to avoid double count-
ing or omissions. Paragraph (k) of this
section provides reporting requirements
that apply in the taxable year beginning
on the transition date. Paragraph (l) of this
section provides examples illustrating the
rules of this section.
(2) Terms defined under prior §1.987-
12. For purposes of this section, the terms
deferral QBU, deferral QBU owner, suc-
cessor QBU, outbound loss QBU, out-
bound section 987 loss, and qualified suc-
cessor have the meaning provided in prior
§1.987-12.
(b) Scope—(1) Owner of a section 987
QBU. Except as provided in paragraph (f)
of this section, any person that is an owner
of a section 987 QBU on the applicable
transition date and any person that is the
owner of a terminating QBU on the ter-
mination date must apply the rules of this
section with respect to the section 987
QBU.
(2) Deferral QBU owner and owner of
outbound loss QBU. Except as provided

Bulletin No. 2025–3 383 January 13, 2025
in paragraph (f) of this section, a deferral
QBU owner or the owner of an outbound
loss QBU must apply the rules of this sec-
tion with respect to the deferral QBU or
outbound loss QBU if the deferral event
or outbound loss event occurred before
the applicable transition date. This para-
graph (b)(2) does not apply to the owner
of a terminating QBU.
(c) Transition date—(1) In general.
Except as provided in paragraph (c)(2) of
this section, the transition date for a sec-
tion 987 QBU, deferral QBU, or outbound
loss QBU is the first day of the first tax-
able year described in §1.987-15(a)(1),
(b), or (c) to which this section applies.
(2) Terminating QBU—(i) In general.
With respect to a terminating QBU, the
transition date is the day after the ter-
mination date. Until the transition date
described in paragraph (c)(1) of this sec-
tion, the owner of the terminating QBU
must apply the section 987 regulations
with respect to the terminating QBU, and
any section 987 gain or loss attributable
thereto, without regard to any section 987
elections (other than the election described
in §1.987-6(b)(2)(i)(C)).
(ii) Ordering rule. In the case of a ter-
minating QBU, the transition rules of this
section are applied immediately before
the termination, and the consequences of
the termination are determined under the
section 987 regulations after applying this
section.
(d) Application of the section 987 reg-
ulations after the transition date—(1)
Owner functional currency net value on
the last day of the preceding taxable year.
Except as provided in paragraph (f) of this
section, for purposes of applying §1.987-4
in the taxable year beginning on the tran-
sition date, the owner functional currency
net value of a section 987 QBU on the last
day of the preceding taxable year under
§1.987-4(d)(1)(i)(B) is determined by
translating the assets and liabilities that
are attributable to the section 987 QBU on
the day before the transition date into the
owner’s functional currency at the transi-
tion exchange rate described in paragraph
(d)(3) of this section.
(2) Determination of historic rate. If
a current rate election is not in effect for
the taxable year beginning on the tran-
sition date, the historic rate for historic
items that are attributable to a section 987
QBU on the day before the transition date
(other than non-LIFO inventory subject
to the simplified inventory method under
§1.987-3(c)(2)(iv)(A)) is the transition
exchange rate described in paragraph (d)
(3) of this section.
(3) Transition exchange rate—(i) In
general. Except as provided in paragraph
(d)(3)(ii) of this section, the transition
exchange rate is the spot rate applicable to
the day before the transition date.
(ii) Earnings only method. If an earn-
ings only method described in paragraph
(e)(4)(ii) of this section was applied with
respect to a section 987 QBU before the
transition date, and a current rate election
is not in effect in the taxable year begin-
ning on the transition date, the transition
exchange rate for each historic item (other
than inventory subject to the simplified
inventory method under §1.987-3(c)(2)
(iv)(A)) is the pretransition translation rate
described in paragraph (e)(2)(i)(C) of this
section. This paragraph (d)(3)(ii) does not
apply with respect to a terminating QBU.
(e) Pretransition gain or loss—(1) In
general. Except as provided in paragraph
(f) of this section, pretransition gain or
loss is determined and recognized under
this paragraph (e).
(2) Amount of pretransition gain or loss
for an owner that applied an eligible pre-
transition method—(i) Owner of a section
987 QBU. If an owner of a section 987
QBU described in paragraph (b)(1) of this
section applied an eligible pretransition
method with respect to the section 987
QBU, the amount of pretransition gain or
loss with respect to the section 987 QBU
is equal to the sum of the deemed termi-
nation amount described in paragraph (e)
(2)(i)(A) of this section and the owner
functional currency net value adjustment
described in paragraph (e)(2)(i)(B) of this
section. See paragraphs (l)(1) through (3)
of this section (Examples 1 through 3) for
an illustration of this rule.
(A) Deemed termination amount. The
deemed termination amount is the amount
of section 987 gain or loss that would have
been recognized by the owner under the
eligible pretransition method if the section
987 QBU terminated and transferred all of
its assets and liabilities to the owner on the
day before the transition date and §§1.987-
12 and 1.987-13 and prior §1.987-12 did
not apply.
(B) Owner functional currency net
value adjustment. The owner functional
currency net value adjustment may be
either positive or negative and is equal
to the amount described in paragraph (e)
(2)(i)(B)(1) of this section reduced by the
amount described in paragraph (e)(2)(i)
(B)(2) of this section.
(1) The basis of the assets, reduced by
the amount of liabilities, that are attribut-
able to the section 987 QBU on the day
before the transition date, translated into
the owner’s functional currency at the
transition exchange rate.
(2) The basis of the assets, reduced by
the amount of liabilities, that are attribut-
able to the section 987 QBU on the day
before the transition date, translated into
the owner’s functional currency at the pre-
transition translation rate.
(C) Pretransition translation rate. The
pretransition translation rate is the rate
that would be used under the eligible pre-
transition method to determine the basis
of an asset or the amount of a liability in
the hands of the owner of a section 987
QBU if the section 987 QBU transferred
all of its assets and liabilities to the owner
on the day before the transition date.
(ii) Deferral QBU owner. If a defer-
ral QBU owner described in paragraph
(b)(2) of this section applied an eligible
pretransition method with respect to the
deferral QBU, the amount of pretransi-
tion gain or loss with respect to the defer-
ral QBU is equal to the deferred section
987 gain or loss (determined under prior
§1.987-12) that was not recognized
before the transition date with respect to
the deferral QBU.
(iii) Owner of an outbound loss QBU.
If the owner of an outbound loss QBU
described in paragraph (b)(2) of this
section applied an eligible pretransition
method with respect to the outbound loss
QBU, the pretransition loss with respect to
the outbound loss QBU is equal to the out-
bound section 987 loss that was not added
to the basis of stock or recognized under
prior §1.987-12 before the transition date
with respect to the outbound loss QBU.
(3) Amount of pretransition gain or
loss for an owner that did not apply an
eligible pretransition method—(i) In gen-
eral. If the owner of a section 987 QBU
described in paragraph (b)(1) of this sec-
tion did not apply an eligible pretransition

January 13, 2025 384 Bulletin No. 2025–3
method with respect to the section 987
QBU, the amount of pretransition gain or
loss with respect to the section 987 QBU
is determined under paragraph (e)(3)(ii)
of this section. See paragraph (l)(4) of this
section (Example 4) for an illustration of
this rule.
(ii) Computation of pretransition gain
or loss. With respect to a section 987 QBU
described in paragraph (e)(3)(i) of this
section, pretransition gain or loss is equal
to the amount described in paragraph (e)
(3)(ii)(A) of this section reduced by the
amount described in paragraph (e)(3)(ii)
(B) of this section.
(A) The sum of the owner’s annual
unrecognized section 987 gain or loss
determined under paragraph (e)(3)(iii) of
this section with respect to the section 987
QBU for all taxable years ending before
the transition date and beginning after
September 7, 2006, in which it was the
owner of the section 987 QBU.
(B) The total net amount of section
987 gain or loss recognized by the owner
with respect to the section 987 QBU in all
taxable years ending before the transition
date and beginning after September 7,
2006.
(iii) Annual unrecognized section 987
gain or loss. An owner of a section 987
QBU described in paragraph (e)(3)(i) of
this section determines annual unrecog-
nized section 987 gain or loss with respect
to a section 987 QBU under the rules of
§1.987-4(d), applied as though a current
rate election was in effect for all relevant
taxable years, and subject to the following
modifications—
(A) Only §1.987-4(d)(1) and (10)
(steps 1 and 10) are applied; and
(B) Section 1.987-4(d)(10) is applied
by replacing “paragraphs (d)(1) through
(9) of this section” with “paragraph (d)(1)
of this section.”
(iv) Deferral QBU owner. If a deferral
QBU owner described in paragraph (b)(2)
of this section did not apply an eligible
pretransition method with respect to the
deferral QBU, the pretransition gain or
loss with respect to the deferral QBU is
equal to the amount that would be deter-
mined under paragraph (e)(3)(ii) of this
section with respect to the deferral QBU
if the transition date was the day of the
deferral event, reduced by the amount of
deferred section 987 gain or loss (deter-
mined under prior §1.987-12) recognized
before the actual transition date.
(v) Owner of an outbound loss QBU.
If the owner of an outbound loss QBU
described in paragraph (b)(2) of this sec-
tion did not apply an eligible pretransition
method with respect to the outbound loss
QBU, the pretransition loss with respect
to the outbound loss QBU is equal to the
amount that would be determined under
paragraph (e)(3)(ii) of this section with
respect to the outbound loss QBU if the
transition date was the day of the outbound
loss event, reduced by any outbound sec-
tion 987 loss recognized or added to the
basis of stock under prior §1.987-12
before the actual transition date.
(4) Eligible pretransition method. An
eligible pretransition method means a
method of applying section 987 before the
transition date that is described in para-
graphs (e)(4)(i) through (iii) of this sec-
tion. An owner is treated as applying an
eligible pretransition method with respect
to a section 987 QBU only if it applied
an eligible pretransition method with
respect to the QBU on a return filed before
November 9, 2023.
(i) Earnings and capital method. An
earnings and capital method is an eligible
pretransition method if it is applied in a
reasonable manner. For purposes of this
paragraph (e)(4)(i), an earnings and cap-
ital method means a method of applying
section 987 that requires section 987 gain
or loss to be determined and recognized
with respect to both the earnings of the
section 987 QBU and capital contributed
to the section 987 QBU (for example, the
method prescribed in the 1991 proposed
regulations under section 987). See para-
graph (l)(1) of this section (Example 1) for
an illustration of this rule.
(ii) Other reasonable methods. Any
reasonable method of applying section
987 is an eligible pretransition method
if it produces the same total amount of
income over the life of the owner of a sec-
tion 987 QBU as the method described in
paragraph (e)(4)(i) of this section (taking
into account the aggregate of section 987
gain or loss, section 987 taxable income
or loss, and income or loss recognized by
the owner of the section 987 QBU with
respect to property transferred between
the section 987 QBU and the owner or any
QBU of the owner). See paragraph (l)(2)
of this section (Example 2) for an illustra-
tion of this rule.
(iii) Other earnings only methods. An
earnings only method that does not meet
the requirements of paragraph (e)(4)(ii)
of this section is an eligible pretransition
method, provided that—
(A) The earnings only method was
first applied by the owner on a return filed
before November 9, 2023;
(B) The earnings only method was
applied consistently to all section 987
QBUs of the owner since the first taxable
year in which the owner applied an eligi-
ble pretransition method; and
(C) The owner of the section 987 QBU
otherwise applied section 987 in a reason-
able manner. See paragraph (l)(3) of this
section (Example 3) for an illustration of
this rule.
(iv) Error in the application of a sec-
tion 987 method. If an owner generally
applied section 987 with respect to a sec-
tion 987 QBU before the transition date
under a method described in paragraph (e)
(4)(i), (ii), or (iii) of this section but made
errors in the application of the method
or failed to apply the method to every
taxable year since the QBU’s inception,
the owner is considered to have applied
an eligible pretransition method with
respect to the QBU. However, pretran-
sition gain or loss must be determined
under paragraph (e)(2) of this section as
though the eligible pretransition method
was applied without error since the sec-
tion 987 QBU’s inception. See paragraph
(l)(5) of this section (Example 5) for an
illustration of this rule.
(v) Certain consistent practices not
treated as errors—(A) In general. If an
owner generally applied section 987 with
respect to a section 987 QBU before the
transition date under a method described
in paragraph (e)(4)(i), (ii), or (iii) of this
section and used a consistent practice
described in paragraph (e)(4)(v)(B) of
this section for purposes of applying that
method, the owner is considered to have
applied an eligible pretransition method
with respect to the QBU. In addition, the
consistent practice is not treated as an error
under paragraph (e)(4)(iv) of this section.
Therefore, the owner must take the consis-
tent practice into account in determining
pretransition gain or loss under paragraph
(e)(2) of this section. See paragraph (l)(6)

Bulletin No. 2025–3 385 January 13, 2025
of this section (Example 6) for an illustra-
tion of this rule.
(B) Practices not treated as errors—
(1) Reasonable conventions. The use of
a reasonable convention (for example,
the use of a yearly average exchange rate
rather than the applicable spot rate to
translate frequently recurring transfers) is
a practice described in this paragraph (e)
(4)(v)(B).
(2) Disregarded transactions. If, in
determining the amount of a remittance
that requires the recognition of gain or loss
under section 987(3), an owner of a QBU
consistently disregarded certain transfers to
or from the QBU (other than transfers from
the QBU to the owner that would be treated
as distributions if the QBU were treated as
a separate corporation), the owner is con-
sidered to have applied a practice described
in this paragraph (e)(4)(v)(B) with respect
to the QBU, provided that the owner other-
wise accounts for the disregarded transfers
in a reasonable manner (for example, under
the method described in the 1991 proposed
regulations, by taking the disregarded
transfers into account in computing equity
and basis pools so as to properly reflect the
owner’s net equity in the QBU and its func-
tional currency basis in the QBU).
(vi) Deferral of section 987 gain or
loss until termination is not reasonable.
For purposes of this paragraph (e)(4), a
method under which the owner of a sec-
tion 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.
(vii) Anti-abuse rule. If an owner
changes its pretransition method of apply-
ing section 987 with a principal pur-
pose of reducing its pretransition gain or
increasing its pretransition loss, the Com-
missioner may redetermine pretransition
gain or loss based on the owner’s origi-
nal method of applying section 987 or by
treating the owner as not applying an eli-
gible pretransition method.
(5) Recognition of pretransition gain or
loss—(i) In general. Except as provided
in paragraph (e)(5)(ii) of this section,
pretransition gain is recognized under
paragraph (e)(5)(i)(A) of this section and
pretransition loss is recognized under
paragraph (e)(5)(i)(B) of this section.
(A) Pretransition gain. Pretransition
gain with respect to a section 987 QBU is
treated as net accumulated unrecognized
section 987 gain (within the meaning
of §1.987-4(c)). Pretransition gain with
respect to a deferral QBU is treated as
deferred section 987 gain and is attributed
to one or more successor deferral QBUs
under the principles of §1.987-12(b)(2)
and (c)(2).
(B) Pretransition loss—(1) In gen-
eral. Except as provided in paragraph (e)
(5)(i)(B)(2) of this section, pretransition
loss with respect to a section 987 QBU, a
deferral QBU, or an outbound loss QBU
is treated as suspended section 987 loss
with respect to the section 987 QBU, the
deferral QBU, or the outbound loss QBU.
In the case of a deferral QBU or outbound
loss QBU, suspended section 987 loss is
attributed to one or more successor sus-
pended loss QBUs under the principles of
§1.987-13(b)(1) and (c)(1).
(2) Current rate election. If a current
rate election is in effect (and an annual
recognition election is not in effect) in the
taxable year beginning on the transition
date, pretransition loss with respect to a
section 987 QBU (other than a terminat-
ing QBU) is treated as net accumulated
unrecognized section 987 loss (within the
meaning of §1.987-4(c)), and pretransi-
tion loss with respect to a deferral QBU is
treated as deferred section 987 loss and is
attributed to one or more successor defer-
ral QBUs under the principles of §1.987-
12(b)(2) and (c)(2).
(ii) Election to recognize pretransition
section 987 gain or loss ratably over the
transition period—(A) In general. A tax-
payer may elect to recognize pretransition
gain or loss ratably over the transition
period. If an election is made to recog-
nize pretransition gain or loss ratably over
the transition period, then paragraph (e)
(5)(i) of this section does not apply, and
each owner to which the election applies
recognizes one tenth of its pretransition
gain or loss with respect to each section
987 QBU, original deferral QBU, and
outbound loss QBU in each taxable year
for ten taxable years beginning with the
taxable year that begins on the transition
date described in paragraph (c)(1) of this
section. See §1.987-1(g) for rules relating
to section 987 elections (including consis-
tency rules).
(B) Special rules for certain transac-
tions—(1) Scope. This paragraph (e)(5)
(ii)(B) applies if a corporation (acquir-
ing corporation) acquires the assets of an
owner that is subject to an election under
paragraph (e)(5)(ii)(A) of this section in
a transaction described in section 381(a),
and either the owner is a foreign corpo-
ration and the acquiring corporation is a
domestic corporation or the owner is a
domestic corporation and the acquiring
corporation is a foreign corporation. This
paragraph (e)(5)(ii)(B) also applies to any
transaction entered into with a principal
purpose of avoiding the recognition of
pretransition gain under paragraph (e)(5)
(ii)(A) of this section.
(2) Recognition of pretransition
gain or loss. In the case of a transac-
tion described in paragraph (e)(5)(ii)(B)
(1) of this section, pretransition gain or
loss that has not been recognized under
paragraph (e)(5)(ii)(A) of this section
ceases to be subject to the election to be
recognized ratably over the transition
period. Any unrecognized pretransition
gain is recognized immediately before
the transaction, and any unrecognized
pretransition loss becomes suspended
section 987 loss immediately before the
transaction. As a result, the suspended
section 987 loss may be recognized to
the extent of section 987 gain recognized
in the same recognition grouping pur-
suant to §1.987-11(e). See also §1.987-
13(g) (providing that any remaining sus-
pended section 987 loss does not carry
over to the acquiring corporation upon
an inbound transaction to which section
381(a) applies).
(C) Terminating QBU. This paragraph
(e)(5)(ii)(C) applies with respect to a ter-
minating QBU if, in the taxable year begin-
ning on the transition date described in
paragraph (c)(1) of this section, the owner
of the terminating QBU elects to recog-
nize pretransition gain or loss ratably over
the transition period. Any deferred section
987 gain or loss or suspended section 987
loss with respect to the terminating QBU
that was not recognized before the transi-
tion date described in paragraph (c)(1) of
this section is treated as pretransition gain
or loss for purposes of this paragraph (e)
(5)(ii) (and ceases to be treated as deferred
section 987 gain or loss or suspended sec-
tion 987 loss). The pretransition gain or
loss is recognized ratably over ten taxable
years beginning with the taxable year that

January 13, 2025 386 Bulletin No. 2025–3
begins on the transition date described in
paragraph (c)(1) of this section.
(6) Predecessor of an owner—(i) In
general. For purposes of this paragraph
(e), references to an owner of a section
987 QBU, a deferral QBU owner, and the
owner of an outbound loss QBU include a
predecessor described in paragraph (e)(6)
(ii) of this section.
(ii) Predecessor. If a corporation
(acquiring corporation) becomes the
owner of a section 987 QBU in a transac-
tion described in section 381(a) in which
the section 987 QBU does not terminate,
the corporation that was the owner of the
section 987 QBU immediately before
the transaction is a predecessor of the
acquiring corporation. If a corporation
(acquiring corporation) becomes a qual-
ified successor of a deferral QBU owner
or the owner of an outbound loss QBU
(each, a transferor corporation), the trans-
feror corporation is a predecessor of the
acquiring corporation. A predecessor of a
corporation includes the predecessor of a
predecessor of the corporation.
(7) Small business election—(i) Scope.
This paragraph (e)(7) applies if the owner
of a QBU meets the threshold described
in paragraph (e)(7)(ii) of this section and
the QBU meets the threshold described
in paragraph (e)(7)(iii) of this section.
This paragraph (e)(7) does not apply with
respect to a terminating QBU.
(ii) Owner threshold. An owner of a
QBU meets the requirements of this para-
graph (e)(7)(ii) if the owner would qualify
for the small business exemption provided
in section 163(j)(3) for the taxable year
beginning on the transition date described
in paragraph (c)(1) of this section.
(iii) QBU threshold. A QBU meets
the requirements of this paragraph (e)(7)
(iii) if the assets attributable to the QBU
have an adjusted basis (translated at the
spot rate applicable to the last day of each
taxable year) of $10 million or less at the
end of each of the three taxable years of
the owner ending before the transition
date described in paragraph (c)(1) of this
section (or, if the QBU was not in exis-
tence for three taxable years, each taxable
year ending before the transition date in
which the QBU existed). For this pur-
pose, all QBUs owned by members of the
same controlled group that have the same
country of residence (as defined in section
988(a)(3)(B)) are treated as a single QBU.
Solely for purposes of applying this para-
graph (e)(7)(iii) in the case of a deferral
QBU or outbound loss QBU described in
paragraph (b)(2) of this section, the termi-
nation date is treated as the transition date.
(iv) Small business election. If the
owner of a QBU meets the requirements
of paragraph (e)(7)(ii) of this section, the
owner may elect to treat all QBUs that
meet the requirements of paragraph (e)(7)
(iii) of this section as having no pretransi-
tion gain or loss.
(f) QBUs to which the fresh start transi-
tion method was applied—(1) In general.
Paragraphs (d) and (e) of this section do not
apply with respect to any section 987 QBU,
deferral QBU, or outbound loss QBU with
respect to which the taxpayer applied the
rules of prior §1.987-10 (or applied §1.987-
10 of the 2006 proposed regulations in a
reasonable manner) on a return filed before
November 9, 2023 or pursuant to para-
graph (f)(3) of this section.
(2) Application of the section 987 regu-
lations after the transition date—(i) Owner
functional currency net value on the last day
of the preceding taxable year. For purposes
of applying §1.987-4 with respect to a sec-
tion 987 QBU described in paragraph (f)(1)
of this section for the taxable year beginning
on the transition date, the owner functional
currency net value of the section 987 QBU
on the last day of the preceding taxable year
under §1.987-4(d)(1)(i)(B) is the amount
that was determined for the preceding tax-
able year under prior §1.987-4(d)(1)(A) or
§1.987-4(d)(1)(A) of the 2006 proposed
section 987 regulations, as applicable.
(ii) Determination of historic rate.
For purposes of applying the section 987
regulations with respect to historic items
(other than inventory subject to the sim-
plified inventory method under §1.987-
3(c)(2)(iv)(A)) that are attributable to the
section 987 QBU on the day before the
transition date, a taxpayer must use the
same historic rates as were used under
the taxpayer’s application of the 2016
and 2019 section 987 regulations or the
2006 proposed section 987 regulations,
as applicable, in place of the historic rates
that otherwise would be determined under
§1.987-1(c)(3).
(iii) Unrecognized section 987 gain or
loss—(A) Net accumulated unrecognized
section 987 gain or loss of a section 987
QBU. In taxable years beginning on or
after the transition date, for purposes of
calculating the net accumulated unrecog-
nized section 987 gain or loss of a section
987 QBU described in paragraph (f)(1) of
this section under §1.987-4(c)—
(1) Amounts determined under prior
§1.987-4(d) or under §1.987-4(d) or
§1.987-10 of the 2006 proposed sec-
tion 987 regulations, as applicable, are
included in amounts determined under
§1.987-4(d) for all prior taxable years; and
(2) Amounts taken into account under
prior §1.987-5(a) or under §1.987-5(a)
of the 2006 proposed section 987 reg-
ulations, as applicable, are included in
amounts recognized under §1.987-5(a) for
all prior taxable years. For this purpose,
amounts taken into account under prior
§1.987-5(a) or under §1.987-5(a) of the
2006 proposed section 987 regulations, as
applicable, are determined without regard
to prior §1.987-12 or prior §1.987-12T.
(B) Deferred section 987 gain or loss
attributable to a successor deferral QBU.
In the taxable year beginning on the transi-
tion date, the outstanding deferred section
987 gain or loss (as determined under prior
§1.987-12) of a deferral QBU described in
paragraph (f)(1) of this section becomes
deferred section 987 gain or loss (within
the meaning of §1.987-12). The deferred
section 987 gain or loss is attributed to one
or more successor deferral QBUs under the
principles of §1.987-12(b)(2) and (c)(2).
(C) Outbound section 987 loss attribut-
able to a successor suspended loss QBU. In
the taxable year beginning on the transition
date, outbound section 987 loss of an out-
bound loss QBU described in paragraph (f)
(1) of this section that has not been recog-
nized or added to the basis of stock under
prior §1.987-12 becomes suspended sec-
tion 987 loss. The suspended section 987
loss is attributed to one or more successor
suspended loss QBUs under the principles
of §1.987-13(b)(1) and (c)(1).
(3) Taxpayers that are required to transi-
tion using the fresh start transition method.
If a taxpayer is subject to a consent agree-
ment under which it is required to apply the
fresh start transition method with respect to
a section 987 QBU, then the taxpayer must
apply the transition rules of prior §1.987-
10 to that section 987 QBU for the taxable
year beginning on the transition date and
immediately before the taxpayer applies

Bulletin No. 2025–3 387 January 13, 2025
this section. In applying this section, the
taxpayer is treated as having applied prior
§1.987-10 to the section 987 QBU.
(g) [Reserved]
(h) Determination of source and char-
acter—(1) In general. Except as provided
in paragraph (h)(2) of this section, the
source and character of pretransition gain
or loss is determined under the rules of
§1.987-6. See §1.987-6(b)(1) (timing of
source and character determination).
(2) Deferral QBU or outbound loss QBU.
Notwithstanding paragraph (h)(1) of this
section and §1.987-6, the source and charac-
ter of pretransition gain or loss with respect
to a deferral QBU or an outbound loss QBU
described in paragraph (b)(2) of this section
is the same as the source and character of the
outstanding deferred section 987 gain or loss
(determined under prior §1.987-12) of the
deferral QBU or the outbound section 987
loss of the outbound loss QBU (determined
under prior §1.987-12(e)).
(i) [Reserved]
(j) Adjustments to avoid double count-
ing or omissions. If a difference between
the treatment of any item under the sec-
tion 987 regulations and the treatment of
the item under the taxpayer’s prior section
987 method would result in income, gain,
deduction, or loss (including section 988
gain or loss) being taken into account more
than once or not being taken into account,
then pretransition gain or loss, as determined
under paragraphs (e)(2) and (3) of this sec-
tion, is adjusted to account for the difference.
In case of a QBU described in paragraph (f)
(1) of this section, appropriate adjustments
must be made under the principles of para-
graph (e)(5) of this section. In the case of
a terminating QBU, the determination as
to whether an adjustment is required under
this paragraph (j) is made after taking into
account section 988 gain or loss recognized
in connection with the termination.
(k) Reporting—(1) In general. Except
as otherwise provided in this paragraph
(k), a statement titled “Section 987 Tran-
sition Information” must be attached to an
owner’s timely filed (including extensions)
return for the taxable year beginning on
the transition date providing the following
information for each QBU described in
paragraph (k)(2) of this section:
(i) A description of each QBU, the
QBU’s principal place of business, and a
description of the prior method used by
the taxpayer to determine its section 987
gain or loss, deferred section 987 gain or
loss, or outbound section 987 loss with
respect to the QBU, including an expla-
nation as to whether such method was an
eligible pretransition method.
(ii) The pretransition gain or loss with
respect to each QBU and the computa-
tions used to determine pretransition gain
or loss.
(iii) Whether the authorized person has
elected to recognize pretransition gain or
loss ratably over the transition period pur-
suant to paragraph (e)(5)(ii) of this sec-
tion.
(iv) Whether the authorized person
has made a small business election under
paragraph (e)(7) of this section and the
computations used to determine eligibility
for the election.
(v) With respect to each QBU for
which any adjustment is made under para-
graph (j) of this section, a description of
each adjustment and the basis for comput-
ing the adjustment.
(vi) A list of the QBUs described in
paragraph (f)(1) of this section, or a state-
ment that no QBUs are described in para-
graph (f)(1) of this section.
(2) QBUs for which reporting is
required—(i) In general. Except as pro-
vided in paragraph (k)(2)(ii) of this
section, the information described in
paragraph (k)(1) of this section must be
provided with respect to—
(A) Each section 987 QBU described
in paragraph (b)(1) of this section;
(B) Each deferral QBU described in
paragraph (b)(2) of this section and each
of its successor deferral QBUs; and
(C) Each outbound loss QBU described
in paragraph (b)(2) of this section and each
of its successor suspended loss QBUs.
(ii) QBUs to which the fresh start tran-
sition method was applied. A taxpayer is
not required to provide the information
described in paragraphs (k)(1)(i) through
(iv) of this section with respect to a QBU
described in paragraph (f)(1) of this section.
(3) Attachments not required where
information is reported on a form. This
paragraph (k) does not apply to the extent
provided on a form or instructions pub-
lished by the Commissioner.
(4) No change in method of account-
ing. The application of this section is not
treated as a change in method of account-
ing for purposes of sections 446 and 481.
(l) Examples. The following examples
illustrate the application of this section. For
purposes of the examples, DC is a domes-
tic corporation with the U.S. dollar as its
functional currency and Branch is a section
987 QBU with the euro as its functional
currency. DC has a taxable year ending
December 31, and the transition date is Jan-
uary 1, year 4. For purposes of the exam-
ples, except as otherwise indicated, assume
that no section 987 elections are in effect.
(1) Example 1: Earnings and capital method—
(i) Facts—(A) Formation of Branch and Branch’s
operations. DC formed Branch on November 30,
year 1, with a contribution of €150. In year 1, Branch
purchased a parcel of unimproved land for €100. In
year 2, Branch earned €25. In year 3, Branch again
earned €25. On June 30, year 3, Branch distributed
€100 cash to DC, and DC immediately exchanged
the €100 for $135.
(B) Exchange rates. The relevant exchange rates
are shown below.
Table 1 to paragraph (l)(1)(i)(B)
Exchange Rates
Spot RateYearly Average Exchange Rate
November 30, Year 1€1 = $1
December 31, Year 1€1 = $1.10
December 31, Year 2€1 = $1.20
June 30, Year 3€1 = $1.35
December 31, Year 3€1 = $1.40
Year 1€1 = $1.05
Year 2€1 = $1.15
Year 3€1 = $1.25

January 13, 2025 388 Bulletin No. 2025–3
(C) Pretransition method. DC used the method
prescribed in the 1991 proposed regulations under
section 987 with respect to Branch before the transi-
tion date. Under this method, DC maintains an equity
pool in euros (Branch’s functional currency) and a
basis pool in U.S. dollars (DC’s functional currency).
When Branch makes a remittance (whether out of
earnings or capital), DC recognizes section 987 gain
or loss equal to the difference between the amount
of the remittance (translated into U.S. dollars at the
spot rate on the date of the remittance) and the por-
tion of the basis pool attributable to the remittance.
DC’s basis in assets distributed from Branch is equal
to Branch’s basis in the assets, translated into U.S.
dollars at the spot rate on the date of the remittance.
Branch’s earnings are translated into U.S. dollars at
the average exchange rate for the taxable year. DC
otherwise applies section 987 in a reasonable man-
ner.
(D) Application of the pretransition method
before the transition date. For purposes of determin-
ing section 987 gain or loss recognized as a result of
the June 30, year 3, remittance, DC was required to
determine the amount in Branch’s equity and basis
pools. Branch’s equity pool was equal to €200, and
its basis pool was equal to $210, as shown in the table
below. Because the remittance was equal to 50% of
the equity pool (€100), 50% of the basis pool, or $105,
was attributable to the remittance. The amount of the
remittance was $135 (€100 translated at the spot rate
on June 30, year 3, of €1 = $1.35). Therefore, in year
3, DC recognized section 987 gain of $30, equal to
the difference between the amount of the remittance
($135) and the portion of the basis pool attributable
to the remittance ($105). As a result of the remittance,
the equity pool was reduced by the amount distributed
(€100), and the basis pool was reduced by the portion
of the basis pool attributable to the remittance ($105).
Therefore, after the remittance, the equity pool was
equal to €100, and the basis pool was equal to $105.
In the hands of DC, the euros distributed had a basis of
$135 (equal to the €100 distribution translated at the
spot rate on June 30, year 3, of €1 = $1.35). DC did not
recognize section 988 gain or loss when it exchanged
the euros for $135.
Table 2 to paragraph (l)(1)(i)(D)
Year 3 Equity and Basis Pools
Equity Pool Translation RateBasis Pool
Contribution (11/30/Year 1)€150€1 = $1$150
Year 2 Earnings€25€1 = $1.15$28.75
Year 3 Earnings€25€1 = $1.25$31.25
Total€200$210
(ii) Analysis—(A) DC’s method is an eligible
pretransition method. Before the transition date,
DC followed the method prescribed in the 1991
proposed regulations under section 987 with respect
to Branch. This method is an eligible pretransition
method under paragraph (e)(4)(i) of this section.
Therefore, DC determines its pretransition gain or
loss with respect to Branch under paragraph (e)(2)
of this section.
(B) Pretransition gain or loss. Under paragraph
(e)(2) of this section, DC’s pretransition gain or loss
with respect to Branch is equal to the sum of the
deemed termination amount described in paragraph
(e)(2)(i)(A) of this section and the owner functional
currency net value adjustment described in paragraph
(e)(2)(i)(B) of this section. As explained in para-
graphs (l)(1)(ii)(B)(1) and (2) of this section (Exam-
ple 1), DC’s deemed termination amount is $35 and
its owner functional currency net value adjustment
is zero. Therefore, DC has $35 of pretransition gain
with respect to Branch. Under paragraph (e)(5)(i)
(A) of this section, the pretransition gain is treated as
Branch’s net accumulated unrecognized section 987
gain. However, if DC elects to recognize its pretran-
sition gain ratably over the transition period under
paragraph (e)(5)(ii) of this section, the pretransition
gain is not treated as net accumulated unrecognized
section 987 gain. Instead, DC recognizes $3.50 (one
tenth of its pretransition gain) for each of the ten tax-
able years from year 4 through year 13.
(1) Deemed termination amount. Under para-
graph (e)(2)(i)(A) of this section, the deemed termi-
nation amount is the amount of section 987 gain or
loss that would have been recognized by DC under
the eligible pretransition method if Branch termi-
nated and transferred all its assets and liabilities to
DC (the land with a basis of €100) on December 31,
year 3. Under DC’s eligible pretransition method,
DC would have recognized section 987 gain of $35,
determined by subtracting the remaining basis pool
of $105 from the amount of the remittance of $140
(€100 translated at the spot rate on December 31,
year 3, of €1 = $1.40). Therefore, the deemed termi-
nation amount is $35.
(2) Owner functional currency net value adjust-
ment. On December 31, year 3, Branch had no liabil-
ities and only one asset: land with a basis of €100.
Under paragraph (e)(2)(i)(B) of this section, the
owner functional currency net value adjustment is
equal to the basis of the land, translated into U.S.
dollars at the transition exchange rate, reduced by
the basis of the land, translated into U.S. dollars at
the pretransition translation rate. Under paragraph
(d)(3)(i) of this section, the transition exchange rate
is the spot rate applicable to December 31, year 3.
Under paragraph (e)(2)(i)(C) of this section, the pre-
transition translation rate is the rate that would be
used under DC’s eligible pretransition method to
determine the basis of the land in the hands of DC
if Branch transferred the land to DC on December
31, year 3. Under DC’s eligible pretransition method,
if Branch transferred the land to DC, DC’s basis in
the land would be equal to Branch’s basis (€100)
translated at the spot rate on the date of the remit-
tance. Therefore, the pretransition translation rate
on December 31, year 3, is equal to the spot rate on
December 31, year 3. Consequently, the owner func-
tional currency net value adjustment is zero.
(C) Determination of unrecognized section 987
gain or loss in year 4. For purposes of determining
unrecognized section 987 gain or loss in year 4 under
§1.987-4(d), the owner functional currency net value
of Branch on the last day of year 3 is determined by
translating the €100 basis of the land at the transition
exchange rate, which is the spot rate on December
31, year 3 (€1 = $1.40). Therefore, the owner func-
tional currency net value of Branch on the last day of
year 3 is $140.
(2) Example 2: Earnings only method described
in paragraph (e)(4)(ii) of this section—(i) Facts—
(A) In general. The facts and exchange rates are the
same as in paragraph (l)(1) of this section (Example
1), except that DC uses an earnings only method
with respect to Branch before the transition date, as
described in paragraph (l)(2)(i)(B) of this section.
In addition, a current rate election is in effect for
Year 4.
(B) Pretransition method. Under the earnings
only method, DC maintains an equity pool in euros
(Branch’s functional currency) and a basis pool in
U.S. dollars (DC’s functional currency) with respect
to Branch’s earnings. DC also maintains separate
equity and basis pools with respect to Branch’s capi-
tal. Distributions are treated as being made first out of
earnings and then out of capital. When Branch makes
a remittance out of earnings, DC recognizes section
987 gain or loss equal to the difference between the
amount of the remittance (translated into U.S. dol-
lars at the spot rate on the date of the remittance)
and the portion of the earnings basis pool attribut-
able to the remittance. No section 987 gain or loss
is recognized on a distribution out of capital. DC’s
basis in assets distributed out of Branch’s earnings
is equal to Branch’s basis in the assets translated at
the spot rate on the date of the remittance. DC’s basis
in assets distributed out of Branch’s capital is equal
to the portion of the capital basis pool attributable
to the distribution. Branch’s earnings are translated
into U.S. dollars at the average exchange rate for the
taxable year. DC otherwise applies section 987 in a
reasonable manner.
(C) Application of the pretransition method
before the transition date. On June 30, year 3,
Branch distributed €100 cash to DC. Of this amount,
€50 represented a remittance out of earnings, and
€50 represented a distribution out of capital.
(1) Remittance out of earnings. For purposes of
determining section 987 gain or loss recognized on
the remittance, Branch’s earnings equity pool was
equal to €50, and its earnings basis pool was equal

Bulletin No. 2025–3 389 January 13, 2025
to $60, as shown in the table below. Because Branch
remitted 100% of the earnings equity pool (€50), the
entire earnings basis pool, or $60, was attributable
to the remittance. The value of the remittance was
$67.50 (€50 translated at the spot rate on June 30,
year 3, of €1 = $1.35). Therefore, in year 3, DC rec-
ognized section 987 gain of $7.50, equal to the dif-
ference between the value of the remittance ($67.50)
and the portion of the basis pool attributable to the
remittance ($60). As a result of the remittance, the
earnings equity pool and the earnings basis pool
were each reduced to zero. In the hands of DC, the
€50 distributed out of earnings had a basis of $67.50
(€50 translated at the spot rate on June 30, year 3, of
€1 = $1.35).
Table 3 to paragraph (l)(2)(i)(C)(1)
Earnings Equity and Basis Pools
Equity Pool Translation RateBasis Pool
Year 2 Earnings€25€1 = $1.15$28.75
Year 3 Earnings€25€1 = $1.25$31.25
Total€50$60
(2) Distribution out of capital. The basis
of the €50 distributed out of capital was
equal to the portion of the capital basis pool
attributable to the distribution. For this pur-
pose, the capital equity pool was equal to
€150, and the capital basis pool was equal to
$150, as shown in the table below. Because
Branch distributed 33% of the capital equity
pool, or €50, 33% of the capital basis pool,
or $50, was attributable to the distribution.
In the hands of DC, the €50 distributed out
of capital had a basis of $50. As a result of
the capital distribution, the capital equity
pool was reduced to €100 and the capital
basis pool was reduced to $100.
Table 4 to paragraph (l)(2)(i)(C)(2)
Capital Equity and Basis Pools
Equity Pool Translation RateBasis Pool
Contribution (11/30/Year 1)€150€1 = $1$150
Total€150$150
(3) Section 988 gain recognized. On June 30,
year 3, DC exchanged €100 with an aggregate basis
of $117.50 (equal to the sum of the $67.50 basis of
the remittance out of earnings and the $50 basis of
the distribution out of capital) for $135. Therefore,
DC recognized $17.50 of gain under section 988.
(ii) Analysis—(A) DC’s method is an eligible
pretransition method. Before the transition date,
DC followed a reasonable method of applying sec-
tion 987 that would result in the same total amount
of income over the life of DC ($125) as an earnings
and capital method, as explained in paragraphs (l)
(2)(ii)(A)(1) and (2) of this section (Example 2).
Therefore, this method is an eligible pretransition
method under paragraph (e)(4)(ii) of this section.
Consequently, DC determines its pretransition gain
or loss with respect to Branch under paragraph (e)
(2) of this section.
(1) DC’s total amount of income under its pre-
transition method. Under DC’s pretransition method,
DC recognized $7.50 of section 987 gain and $17.50
of section 988 gain in year 3. In addition, on Decem-
ber 31, year 3, DC had $40 of embedded gain in its
capital equity and basis pools (equal to the differ-
ence between its capital equity pool of €100, trans-
lated at the spot rate on December 31, year 3, of €1
= $1.40, and its capital basis pool of $100) which
will be taken into account in the future (when Branch
distributes property out of capital and the property
is sold). DC also recognized $60 of earnings with
respect to Branch ($28.75 in year 2 and $31.25 in
year 3). Thus, DC’s total income (recognized and
unrecognized) with respect to Branch is $125.
(2) DC’s total amount of income under an earn-
ings and capital method. If DC had instead applied
an earnings and capital method, as described in para-
graph (l)(1)(i)(C) of this section (Example 1), DC
would have recognized section 987 gain of $30 in
year 3 and would not have recognized section 988
gain in year 3, as explained in paragraph (l)(1)(i)(D)
of this section. On December 31, year 3, DC would
have unrecognized section 987 gain in its equity
and basis pools of $35 (see paragraph (l)(1)(ii)(B)
(1) of this section (Example 1)). DC would also have
recognized $60 of earnings with respect to Branch
($28.75 in year 2 and $31.25 in year 3). Thus, DC’s
total income (recognized and unrecognized) with
respect to Branch is $125.
(B) Pretransition gain or loss. Under paragraph
(e)(2) of this section, DC’s pretransition gain or loss
with respect to Branch is equal to sum of the deemed
termination amount described in paragraph (e)(2)(i)
(A) of this section and the owner functional currency
net value adjustment described in paragraph (e)(2)
(i)(B) of this section. As explained in paragraphs (l)
(2)(ii)(B)(1) and (2) of this section (Example 2), the
deemed termination amount is zero and the owner
functional currency net value adjustment is $40.
Therefore, DC has $40 of pretransition gain with
respect to Branch. Under paragraph (e)(5)(i)(A)
of this section, the pretransition gain is treated as
Branch’s net accumulated unrecognized section 987
gain. However, if DC elects to recognize its pretran-
sition gain ratably over the transition period under
paragraph (e)(5)(ii) of this section, the pretransition
gain is not treated as net accumulated unrecognized
section 987 gain. Instead, DC recognizes $4 (one
tenth of its pretransition gain) for each of the ten tax-
able years from year 4 through year 13.
(1) Deemed termination amount. Under para-
graph (e)(2)(i)(A) of this section, the deemed termi-
nation amount is the amount of section 987 gain or
loss that would have been recognized by DC under
the eligible pretransition method if Branch termi-
nated and transferred all of its assets and liabilities
to DC on December 31, year 3. Under DC’s eligible
pretransition method, if Branch had transferred all
of its assets and liabilities to DC, this would have
been treated as a distribution out of capital. Under
its eligible pretransition method, DC would not have
recognized section 987 gain or loss on a distribution
out of capital. Therefore, the deemed termination
amount is zero.
(2) Owner functional currency net value adjust-
ment. On December 31, year 3, Branch had no
liabilities and only one asset: land with a basis of
€100. Under paragraph (e)(2)(i)(B) of this section,
the owner functional currency net value adjustment
is equal to the basis of Branch’s land, translated
into U.S. dollars at the transition exchange rate,
reduced by the basis of Branch’s land, translated into
U.S. dollars at the pretransition translation rate on
December 31, year 3. Under paragraph (e)(2)(i)(C)
of this section, the pretransition translation rate is
the rate that would be used under the eligible pre-
transition method to determine the basis of the land
in the hands of DC if Branch transferred the land to
DC. Under DC’s eligible pretransition method, DC’s
basis in assets distributed from Branch is equal to
the portion of the capital basis pool attributable to
the distribution. If Branch transferred the land with
a basis of €100 to DC on December 31, year 3, its
remaining capital basis pool of $100 would be attrib-
utable to the distribution, and the land would have
a basis of $100 in the hands of DC. Because the
land had a basis of €100 in the hands of Branch, and
would have a basis of $100 in the hands of DC if it
were distributed on December 31, year 3, the pretran-
sition translation rate is €1 = $1. Under paragraph (d)
(3)(i) of this section, because a current rate election
is in effect for year 4, the transition exchange rate is

January 13, 2025 390 Bulletin No. 2025–3
the spot rate applicable to December 31, year 3. The
€100 basis of Branch’s land, translated at the spot
rate on December 31, year 3 of €1 = $1.40 is equal
to $140. The €100 basis of Branch’s land, translated
at the pretransition translation rate on December 31,
year 3 of €1 = $1 is equal to $100. Therefore, the
owner functional currency net value adjustment is
equal to $40 ($140 - $100).
(C) Determination of unrecognized section 987
gain or loss in year 4. For purposes of determining
unrecognized section 987 gain or loss in year 4 under
§1.987-4(d), the owner functional currency net value
of Branch on the last day of year 3 is determined by
translating the €100 basis of the land at the transition
exchange rate, which is the spot rate on December
31, year 3 (€1 = $1.40). Therefore, the owner func-
tional currency net value of Branch on the last day of
year 3 is $140.
(iii) Alternative facts—(A) No current rate elec-
tion. Assume the facts are the same as described
in paragraph (l)(2)(i) of this section (Example 2),
except that a current rate election is not in effect for
year 4.
(B) Analysis. As explained in paragraph (l)(2)
(ii)(A) of this section (Example 2), DC determines
its pretransition gain or loss with respect to Branch
under paragraph (e)(2) of this section. Because a
current rate election is not in effect, the transition
exchange rate is determined under paragraph (d)(3)
(ii) of this section.
(1) Transition exchange rate. DC applied an
earnings only method described in paragraph (e)(4)
(ii) of this section before the transition date. Under
paragraph (d)(3)(ii) of this section, because a current
rate election is not in effect for year 4, the transition
exchange rate for Branch’s land is equal to the pre-
transition translation rate. As explained in paragraph
(l)(2)(ii)(B)(2) of this section (Example 2), the pre-
transition translation rate is €1 = $1.
(2) Pretransition gain or loss. Because the transi-
tion exchange rate for the land (Branch’s sole asset) is
equal to the pretransition translation rate, the owner
functional currency net value adjustment is zero. As
explained in paragraph (l)(2)(ii)(B)(1) of this section
(Example 2), the deemed termination amount is also
zero. Therefore, DC has no pretransition gain or loss
with respect to Branch.
(3) Determination of unrecognized section 987
gain or loss in year 4. For purposes of determining
unrecognized section 987 gain or loss in year 4 under
§1.987-4(d), the owner functional currency net value
of Branch on the last day of year 3 is determined by
translating the €100 basis of the land at the transition
exchange rate, which is the pretransition translation
rate of €1 = $1. Therefore, the owner functional cur-
rency net value of Branch on the last day of year 3
is $100.
(3) Example 3: Earnings only method described
in paragraph (e)(4)(iii) of this section—(i) Facts—
(A) In general. The facts and exchange rates are the
same as in paragraph (l)(1) of this section (Example
1), except that DC used an earnings only method
with respect to Branch before the transition date, as
described in paragraph (l)(3)(i)(B) of this section.
(B) Pretransition method. Under the earnings
only method, DC maintains an equity pool in euros
(Branch’s functional currency) and a basis pool in
U.S. dollars (DC’s functional currency) with respect
to Branch’s earnings. However, DC does not main-
tain separate equity and basis pools with respect to
Branch’s capital. Distributions are treated as being
made first out of earnings and then out of capital.
When Branch makes a remittance out of earnings,
DC recognizes section 987 gain or loss equal to the
difference between the amount of the remittance
(translated into U.S. dollars at the spot rate on the
date of the remittance) and the portion of the earnings
basis pool attributable to the remittance. No section
987 gain or loss is recognized on a distribution out
of capital. Under DC’s pretransition method, DC’s
basis in assets distributed by Branch (whether out of
earnings or capital) is equal to Branch’s basis in the
assets translated at the spot rate on the date of the dis-
tribution. Branch’s earnings are translated into U.S.
dollars at the average exchange rate for the taxable
year. DC first applied its earnings only method on
a return filed before November 9, 2023. In addition,
DC applied its earnings only method consistently to
all of its section 987 QBUs and otherwise applied
section 987 in a reasonable manner.
(C) Application of the pretransition method
before the transition date. On June 30, year 3,
Branch distributed €100 cash to DC. Of this amount,
€50 represented a remittance out of earnings, and
€50 represented a distribution out of capital.
(1) Remittance out of earnings. For purposes of
determining section 987 gain or loss recognized on
the remittance, Branch’s earnings equity pool was
equal to €50, and its earnings basis pool was equal
to $60, as shown in the table below. Because Branch
remitted 100% of the earnings equity pool (€50), the
entire earnings basis pool, or $60, was attributable
to the remittance. The value of the remittance was
$67.50 (€50 translated at the spot rate on June 30,
year 3, of €1 = $1.35). Therefore, in year 3, DC rec-
ognized section 987 gain of $7.50, equal to the dif-
ference between the value of the remittance ($67.50)
and the portion of the basis pool attributable to the
remittance ($60). As a result of the remittance, the
earnings equity pool and the earnings basis pool
were each reduced to zero.
Table 5 to paragraph (l)(3)(i)(C)(1)
Earnings Equity and Basis Pools
Equity Pool Translation RateBasis Pool
Year 2 Earnings€25€1 = $1.15$28.75
Year 3 Earnings€25€1 = $1.25$31.25
Total€50$60
(2) Basis of euros distributed. In the hands of
DC, the €100 distributed had a basis of $135 (€100
translated at the spot rate on June 30, year 3, of €1
= $1.35). DC did not recognize gain or loss under
section 988 when it exchanged the €100 for $135.
(ii) Analysis—(A) DC’s method is an eligible
pretransition method. Unlike in paragraph (l)(2)
of this section (Example 2), DC’s earnings only
method would not result in the same total amount of
income over the life of DC as an earnings and capital
method described in paragraph (e)(4)(i) of this sec-
tion because DC does not maintain capital basis and
equity pools and DC translates the basis of all prop-
erty distributed from Branch at the spot rate on the
distribution date. However, this method is an eligi-
ble pretransition method under paragraph (e)(4)(iii)
of this section because DC first applied its earnings
only method on a return filed before November 9,
2023, DC applied its earnings only method consis-
tently to all of its section 987 QBUs, and DC oth-
erwise applied section 987 in a reasonable manner.
Consequently, DC determines its pretransition gain
or loss with respect to Branch under paragraph (e)
(2) of this section.
(B) Pretransition gain or loss. Under paragraph
(e)(2) of this section, DC’s pretransition gain or
loss with respect to Branch is equal to the sum of
the deemed termination amount described in para-
graph (e)(2)(i)(A) of this section and the owner func-
tional currency net value adjustment described in
paragraph (e)(2)(i)(B) of this section. As explained
in paragraphs (l)(3)(ii)(B)(1) and (2) of this section
(Example 3), the deemed termination amount is zero
and the owner functional currency net value adjust-
ment is zero. Therefore, DC has no pretransition gain
or loss with respect to Branch.
(1) Deemed termination amount. Under para-
graph (e)(2)(i)(A) of this section, the deemed termi-
nation amount is the amount of section 987 gain or
loss that would have been recognized by DC under
the eligible pretransition method if Branch termi-
nated and transferred all of its assets and liabilities
to DC on December 31, year 3. Under DC’s eligi-
ble pretransition method, if Branch had transferred
all of its assets and liabilities to DC, it would have
been treated as a distribution out of capital. Under
its eligible pretransition method, DC would not have
recognized section 987 gain or loss on a distribution
out of capital. Therefore, the deemed termination
amount is zero.
(2) Owner functional currency net value adjust-
ment. On December 31, year 3, Branch has no liabil-
ities and only one asset: land with a basis of €100.
Under paragraph (e)(2)(i)(B) of this section, the
owner functional currency net value adjustment is
equal to the basis of the land, translated into U.S.
dollars at the transition exchange rate, reduced by
the basis of the land, translated into U.S. dollars at
the pretransition translation rate. Under paragraph
(d)(3)(i) of this section, the transition exchange rate
is the spot rate applicable to December 31, year 3.
Under paragraph (e)(2)(i)(C) of this section, the pre-
transition translation rate is the rate that would be

Bulletin No. 2025–3 391 January 13, 2025
used under DC’s eligible pretransition method to
determine the basis of the land in the hands of DC
if Branch transferred the land to DC on December
31, year 3. Under DC’s eligible pretransition method,
if Branch transferred the land to DC, DC’s basis in
the land would be equal to Branch’s basis (€100)
translated at the spot rate on the date of the distri-
bution. Therefore, the pretransition translation rate
on December 31, year 3, is equal to the spot rate on
December 31, year 3. Consequently, the owner func-
tional currency net value adjustment is zero.
(C) Determination of unrecognized section 987
gain or loss in year 4. For purposes of determining
unrecognized section 987 gain or loss in year 4 under
§1.987-4(d), the owner functional currency net value
of Branch on the last day of year 3 is determined by
translating the €100 basis of the land at the spot rate
on December 31, year 3 (€1 = $1.40). Therefore, the
owner functional currency net value of Branch on the
last day of year 3 is $140.
(4) Example 4: Owner did not apply section
987(3)—(i) Facts. The facts and exchange rates are
the same as in paragraph (l)(1) of this section (Exam-
ple 1), except that DC did not apply section 987(3)
with respect to Branch and did not recognize section
987 gain or loss with respect to Branch before the
transition date.
(ii) Analysis—(A) DC’s method is not an eligible
pretransition method. Because DC did not apply sec-
tion 987(3) with respect to Branch before the transi-
tion date, DC did not apply an eligible pretransition
method under paragraph (e)(4) of this section. There-
fore, DC determines pretransition gain or loss under
paragraph (e)(3) of this section.
(B) Pretransition gain or loss. Under paragraph
(e)(3) of this section, DC’s pretransition gain or loss
with respect to Branch is equal to the annual unrec-
ognized section 987 gain or loss with respect to
Branch for all taxable years ending before the transi-
tion date in which DC was the owner of Branch (that
is, years 1 through 3), reduced by section 987 gain or
loss recognized by DC before the transition date. As
explained in paragraphs (l)(4)(ii)(C) through (E) of
this section (Example 4), DC’s annual unrecognized
section 987 gain for year 1 is $7.50, DC’s annual
unrecognized section 987 gain for year 2 is $16.25,
and DC’s annual unrecognized section 987 gain for
year 3 is $23.75. DC did not recognize any section
987 gain or loss with respect to Branch before the
transition date. Therefore, DC has $47.50 of pretran-
sition gain with respect to Branch. Under paragraph
(e)(5)(i)(A) of this section, the pretransition gain is
treated as Branch’s net accumulated unrecognized
section 987 gain. However, if DC elects to recog-
nize its pretransition gain ratably over the transition
period under paragraph (e)(5)(ii) of this section, the
pretransition gain is not treated as net accumulated
unrecognized section 987 gain. Instead, DC recog-
nizes $4.75 (one tenth of its pretransition gain) for
each of the ten taxable years from year 4 through
year 13.
(C) Annual unrecognized section 987 gain or loss
for year 1. Under paragraph (e)(3)(iii) of this section,
annual unrecognized section 987 gain or loss with
respect to a section 987 QBU is determined under the
rules of §1.987-4(d), applied as though a current rate
election was in effect for all relevant taxable years
(such that all items are treated as marked items), but
modified so that only §§1.987-4(d)(1) (change in
owner functional currency net value) and 1.987-4(d)
(10) (adjustment for residual increase or decrease to
net assets) are applied. As explained in paragraphs
(l)(4)(ii)(C)(1) and (2) of this section (Example 4), in
year 1, the change in owner functional currency net
value under §1.987-4(d)(1) is an increase of $165,
and there is a negative adjustment of $157.50 under
§1.987-4(d)(10). Therefore, DC’s annual unrecog-
nized section 987 gain for year 1 is $7.50.
(1) Change in owner functional currency net
value for year 1. On December 31, year 1, Branch
held land with a basis of €100 and €50 cash. There-
fore, on the last day of year 1, Branch’s owner func-
tional currency net value is $165 (150 euros trans-
lated at the spot rate on December 31, year 1, of €1
= $1.10). Because Branch was formed in year 1, its
owner functional currency net value on the last day
of the preceding taxable year is zero. See §1.987-4(d)
(1)(iii). Therefore, the change in owner functional
currency net value is an increase of $165.
(2) Residual increase to net assets for year 1.
Under §1.987-4(d)(10), unrecognized section 987
gain or loss for a taxable year is decreased by any
residual increase to net assets (and increased by any
residual decrease to net assets), translated into the
owner’s functional currency at the yearly average
exchange rate for the taxable year. For this purpose,
the residual increase (or decrease) to net assets is
equal to the change in net value of the section 987
QBU, determined in the section 987 QBU’s func-
tional currency (that is, the QBU net value). See
§1.987-4(d)(10)(ii)(B) and (e)(2)(ii). On December
31, year 1, Branch held land with a basis of €100
euros and €50 cash. Therefore, on the last day of year
1, Branch has a QBU net value of €150. Because
Branch was formed in year 1, its QBU net value on
the last day of the preceding taxable year is zero. See
§1.987-4(d)(1)(iii). Therefore, the residual increase
to net assets is €150. This results in a negative adjust-
ment to annual unrecognized section 987 gain or loss
of $157.50 for year 1 (equal to €150 translated at
the yearly average exchange rate for year 1 of €1 =
$1.05).
(D) Annual unrecognized section 987 gain or
loss for year 2. As explained in paragraphs (l)(4)(ii)
(D)(1) and (2) of this section (Example 4), in year 2,
the change in owner functional currency net value
under §1.987-4(d)(1) is an increase of $45, and there
is a negative adjustment of $28.75 under §1.987-4(d)
(10). Therefore, DC’s annual unrecognized section
987 gain for year 2 is $16.25.
(1) Change in owner functional currency net
value for year 2. On December 31, year 2, Branch
held land with a basis of €100 and €75 cash. There-
fore, on the last day of year 2, Branch’s owner func-
tional currency net value is $210 (175 euros trans-
lated at the spot rate on December 31, year 2, of €1 =
$1.20). As explained in paragraph (l)(4)(ii)(C)(1) of
this section (Example 4), Branch’s owner functional
currency net value on the last day of year 1 was $165.
Therefore, the change in owner functional currency
net value is an increase of $45.
(2) Residual increase to net assets for year 2.
On December 31, year 2, Branch held land with a
basis of €100 and €75 cash. Therefore, on the last
day of year 2, Branch has a QBU net value of €175.
As explained in paragraph (l)(4)(ii)(C)(2) of this sec-
tion (Example 4), Branch had a QBU net value of
€150 on December 31, year 1. Therefore, the residual
increase to net assets is €25. This results in a nega-
tive adjustment to annual unrecognized section 987
gain or loss of $28.75 for year 2 (equal to a reduction
of €25, translated at the yearly average exchange rate
for year 2 of €1 = $1.15).
(E) Annual unrecognized section 987 gain or loss
for year 3. As explained in paragraphs (l)(4)(ii)(E)
(1) and (2) of this section (Example 4), in year 3,
the change in owner functional currency net value
under §1.987-4(d)(1) is a decrease of $70, and there
is a positive adjustment of $93.75 under §1.987-4(d)
(10). Therefore, DC’s annual unrecognized section
987 gain for year 3 is $23.75.
(1) Change in owner functional currency net
value for year 3. On December 31, year 3, Branch
held land with a basis of €100. Therefore, on the last
day of year 3, Branch’s owner functional currency
net value is $140 (100 euros translated at the spot
rate on December 31, year 3, of €1 = $1.40). As
explained in paragraph (l)(4)(ii)(D)(1) of this section
(Example 4), Branch’s owner functional currency net
value on the last day of year 2 was $210. Therefore,
the change in owner functional currency net value is
a decrease of $70.
(2) Residual decrease to net assets for year 3.
On December 31, year 3, Branch held land with a
basis of €100. Therefore, on the last day of year 3,
Branch has a QBU net value of €100. As explained
in paragraph (l)(4)(ii)(D)(2) of this section (Example
4), Branch had a QBU net value of €175 on Decem-
ber 31, year 2. Therefore, the residual decrease to
net assets is €75. This results in a positive adjust-
ment to annual unrecognized section 987 gain or
loss of $93.75 for year 3 (equal to €75, translated
at the yearly average exchange rate for year 3 of €1
= $1.25).
(F) Determination of unrecognized section 987
gain or loss in year 4. For purposes of determining
unrecognized section 987 gain or loss in year 4 under
§1.987-4(d), the owner functional currency net value
of Branch on the last day of year 3 is determined by
translating the €100 basis of the land at the spot rate
on December 31, year 3 (€1 = $1.40). Therefore, the
owner functional currency net value of Branch on the
last day of year 3 is $140.
(5) Example 5: Error in application of method—
(i) Facts. The facts are the same as described in para-
graph (l)(1)(i) of this section (Example 1), except
that DC inadvertently miscalculated the amount of
the June 30, year 3, remittance as being €90 rather
than €100. This reduced the amount of section 987
gain recognized by DC in year 3.
(ii) Analysis. DC committed an error in its appli-
cation of the earnings and capital method to Branch.
Under paragraph (e)(4)(iv)(A) of this section, DC
is nonetheless treated as having applied an eligible
pretransition method. However, under paragraph
(e)(4)(iv)(B) of this section, DC must determine its
pretransition gain or loss as though the error had not
been made. Therefore, DC computes its pretransition
gain or loss as described in paragraph (l)(1)(ii)(B) of
this section (Example 1). DC has $35 of pretransition
gain with respect to Branch.
(6) Example 6: Consistent practice not treated
as an error—(i) Facts. Before the transition date,
DC used the earnings and capital method described

January 13, 2025 392 Bulletin No. 2025–3
in the 1991 proposed regulations under section 987
with respect to Branch, as described in paragraph (l)
(1)(i) of this section (Example 1). In years 1, 2, and 3,
Branch made recurring purchases of inventory from
Owner, which Branch sold to unrelated customers.
In connection with the purchase transactions, Branch
transferred cash to Owner, and Owner transferred
inventory to Branch. Owner did not take these trans-
fers into account in determining the amount of any
remittance and, accordingly, did not recognize sec-
tion 987 gain or loss with respect to these transfers.
However, Owner consistently adjusted Branch’s
equity and basis pools in a reasonable manner to
reflect all transfers between Owner and Branch; for
this purpose, the amount of each transfer made in
connection with the purchase transactions was trans-
lated using the average rate for the relevant taxable
year. Owner also adjusted Branch’s equity and basis
pools to account for Branch’s income from the sale
of inventory.
(ii) Analysis—(A) DC’s method is an eligible
pretransition method. Before the transition date, DC
followed the earnings and capital method described
in the 1991 proposed regulations under section 987
with respect to Branch. This method is an eligible
pretransition method under paragraph (e)(4)(i) of
this section. Therefore, DC determines its pretransi-
tion gain or loss with respect to Branch under para-
graph (e)(2) of this section.
(B) Effect of consistent practice. Before the tran-
sition date, Owner engaged in a consistent practice
under which Owner did not account for inventory
purchase transactions in determining the amount of
a remittance requiring the recognition of gain or loss
under section 987(3). However, Owner consistently
accounted for the disregarded transfers in a reason-
able manner for purposes of computing its equity and
basis pools. Under paragraph (e)(4)(v) of this sec-
tion, this consistent practice is not treated as an error
in the application of a pretransition method and does
not preclude Owner’s method from being treated as
an eligible pretransition method. Therefore, Owner
must take this consistent practice into account in
determining pretransition gain or loss under para-
graph (e)(2) of this section. In particular, Owner
must use the equity and basis pools computed under
its consistent practice (rather than the equity and
basis pools it would have computed if it had histori-
cally taken the disregarded transfers into account in
determining the amount of remittances) to determine
the deemed termination amount under paragraph (e)
(2)(i)(A) of this section.
§1.987-11 Suspended section 987 loss
relating to certain elections; loss-to-
the-extent-of-gain rule.
(a) In general. This section provides
rules relating to suspended section 987
loss. Paragraph (b) of this section provides
rules for computing the cumulative sus-
pended section 987 loss with respect to a
section 987 QBU or successor suspended
loss QBU. Paragraph (c) of this section
provides rules that suspend section 987
loss that would otherwise be recognized
when a current rate election is in effect.
Paragraph (d) of this section provides
rules that treat net unrecognized section
987 loss and deferred section 987 loss
as suspended section 987 loss when an
annual recognition election is made or a
current rate election is revoked. Paragraph
(e) of this section describes the extent to
which suspended section 987 loss is rec-
ognized under a loss-to-the-extent-of-gain
rule. Paragraph (f) of this section provides
rules for determining recognition group-
ings based on the source and character of
section 987 gain or loss. Paragraph (g) of
this section provides examples illustrating
the rules of this section.
(b) Cumulative suspended section 987
loss in a recognition grouping—(1) In
general. The cumulative suspended sec-
tion 987 loss in a recognition grouping
with respect to a section 987 QBU or a
successor suspended loss QBU for the
current taxable year is equal to the cumu-
lative suspended section 987 loss in the
recognition grouping for the prior taxable
year, decreased by the amount of sus-
pended section 987 loss in the recognition
grouping that was recognized with respect
to the QBU under paragraph (e) of this
section or under §1.987-13(b) through (d)
in the prior taxable year, and increased by
the amount that becomes suspended sec-
tion 987 loss in the recognition grouping
with respect to the QBU in the current tax-
able year (including under §1.987-10(e)
(5)(i)(B)(1)). If the taxable year is the first
taxable year of the section 987 QBU (or
the first taxable year in which the section
987 regulations apply), the cumulative
suspended section 987 loss for the prior
taxable year is zero. An owner’s (or orig-
inal suspended loss QBU owner’s) total
cumulative suspended section 987 loss in
a recognition grouping is equal to the sum
of its cumulative suspended section 987
gain or loss with respect to each section
987 QBU and successor suspended loss
QBU.
(2) Combined QBU. For purposes of
paragraph (b)(1) of this section, in the tax-
able year of a combination, the cumulative
suspended section 987 loss in a recogni-
tion grouping with respect to a combined
QBU for the prior taxable year is equal
to the sum of the cumulative suspended
section 987 loss in the recognition group-
ing with respect to each combining QBU
for the prior taxable year; the suspended
section 987 loss in a recognition group-
ing with respect to a combined QBU that
was recognized in the prior taxable year
is equal to sum of the suspended section
987 loss in the recognition grouping with
respect to each combining QBU that was
recognized in the prior taxable year.
(3) Separated QBU. For purposes of
paragraph (b)(1) of this section, in the tax-
able year of a separation, the cumulative
suspended section 987 loss in a recogni-
tion grouping with respect to a separated
QBU for the prior taxable year is equal to
the cumulative suspended section 987 loss
in the recognition grouping with respect to
the separating QBU for the prior taxable
year multiplied by the separation fraction;
the suspended section 987 loss in a recog-
nition grouping with respect to a separated
QBU that was recognized in the prior tax-
able year is equal to the suspended section
987 loss in the recognition grouping with
respect to the separating QBU that was
recognized in the prior taxable year multi-
plied by the separation fraction.
(c) Suspension of section 987 loss for
taxable years in which a current rate elec-
tion is in effect and an annual recognition
election is not in effect—(1) In general.
Except as provided in paragraph (c)(2)
of this section, in a taxable year in which
a current rate election is in effect and an
annual recognition election is not in effect,
to the extent that an owner’s net unrec-
ognized section 987 loss with respect to
a section 987 QBU would otherwise be
recognized under §1.987-5 (including
pursuant to §1.987-12(b)), or its deferred
section 987 loss would otherwise be
recognized under §1.987-12(c), the net
unrecognized section 987 loss or deferred
section 987 loss is not recognized by the
owner and instead becomes suspended
section 987 loss. See paragraph (g)(1) of
this section (Example 1) for an illustration
of this rule.
(2) De minimis rule. Paragraph (c)(1)
of this section does not apply in a taxable
year of an owner in which the total amount
of net unrecognized section 987 loss or
deferred section 987 loss of the owner
and all members of the owner’s controlled
group that would (but for the application
of this paragraph (c)(2) and §1.987-7(d)
(2)(iii)) become suspended section 987
loss under paragraph (c)(1) of this section

Bulletin No. 2025–3 393 January 13, 2025
or §1.987-7(d) does not exceed the lesser
of—
(i) $3 million; or
(ii) Two percent of the total amount of
gross income of the owner and all mem-
bers of the owner’s controlled group for
the taxable year.
(3) Taxable year of controlled group
members—(i) In general. Except as pro-
vided in paragraph (c)(3)(ii) of this sec-
tion, for purposes of applying paragraph
(c)(2) of this section with respect to an
owner, suspended section 987 loss and
gross income of a member of the owner’s
controlled group is determined by refer-
ence to the member’s suspended section
987 loss and gross income for its taxable
year ending with or within the owner’s
taxable year.
(ii) Owner is a CFC. For purposes of
applying paragraph (c)(2) of this section
with respect to an owner that is a CFC,
suspended section 987 loss and gross
income of a member of the owner’s con-
trolled group is determined by reference
to the member’s suspended section 987
loss and gross income for its taxable year
ending with or within the owner’s required
year described in section 898(c)(1), with-
out regard to section 898(c)(2).
(d) Suspension of net unrecognized
section 987 loss upon making or revoking
certain elections—(1) Making an annual
recognition election. At the beginning of
the first taxable year for which an annual
recognition election is in effect, an own-
er’s net accumulated unrecognized section
987 loss and deferred section 987 loss are
converted into suspended section 987 loss
if either—
(i) A current rate election was in effect
for the immediately preceding taxable
year; or
(ii) A current rate election was not in
effect for the immediately preceding tax-
able year and, as of the beginning of the
taxable year, the sum of the owner’s net
accumulated unrecognized section 987
loss and deferred section 987 loss exceeds
the sum of the owner’s net accumu-
lated unrecognized section 987 gain and
deferred section 987 gain by more than $5
million.
(2) Revoking a current rate election.
At the beginning of the first taxable year
in which a current rate election ceases
to be in effect, an owner’s net accumu-
lated unrecognized section 987 loss and
deferred section 987 loss are converted
into suspended section 987 loss. See para-
graph (g)(3) of this section (Example 3)
for an illustration of this rule.
(e) Loss-to-the-extent-of-gain rule—
(1) In general. An owner of a section 987
QBU (or an original suspended loss QBU
owner) only recognizes suspended section
987 loss to the extent described in this
paragraph (e) (the loss-to-the-extent-of-
gain rule). See §1.987-13(b) through (d)
for rules requiring the recognition of addi-
tional suspended section 987 loss (after
the application of the loss-to-the-extent-
of-gain rule) in connection with certain
transactions.
(2) Separate determination for each
recognition grouping. The amount of
suspended section 987 loss recognized is
determined separately for the suspended
section 987 loss in each recognition
grouping. Because the recognition group-
ings generally are determined on the basis
of the initial assignment of section 987
gain or loss under §1.987-6(b)(2)(i), the
loss-to-the-extent-of-gain rule generally is
applied on the basis of the initial assign-
ment of section 987 gain or loss.
(3) Amount of suspended section 987
loss recognized. Except as provided in
paragraph (e)(5) or (6) of this section, the
amount of suspended section 987 loss in
each recognition grouping that an owner
recognizes in a taxable year is equal to
the sum (if positive) of the current year
gain amount described in paragraph (e)(3)
(i) of this section and the lookback gain
amount described in paragraph (e)(3)(ii)
of this section, but may not exceed the
owner’s total cumulative suspended sec-
tion 987 loss in the recognition grouping.
If the sum of the current year gain amount
and the lookback gain amount is negative,
then the amount of suspended section 987
loss recognized under this paragraph (e) is
zero. See paragraphs (g)(1) and (2) of this
section (Examples 1 and 2) for an illustra-
tion of this rule.
(i) Current year gain amount. The cur-
rent year gain amount described in this
paragraph (e)(3)(i) is equal to the section
987 gain in the recognition grouping that
is recognized by the owner in the taxable
year, reduced (including below zero) by
section 987 loss (other than suspended
section 987 loss) in the recognition group-
ing that is recognized by the owner in the
taxable year.
(ii) Lookback gain amount. The look-
back gain amount described in this para-
graph (e)(3)(ii) is equal to the section 987
gain in the recognition grouping that was
recognized by the owner in the lookback
period, reduced (including below zero)
by section 987 loss (other than suspended
section 987 loss described in paragraph
(e)(3)(iii) of this section) in the recogni-
tion grouping that was recognized by the
owner in the lookback period. The total
amount of suspended section 987 loss rec-
ognized by reason of the recognition of an
amount of section 987 gain cannot, in any
event, exceed the amount of section 987
gain recognized.
(iii) Suspended section 987 loss not
taken into account—(A) In general. For
purposes of applying paragraph (e)(3)
(ii) of this section in a taxable year (the
current taxable year), suspended section
987 loss recognized during the lookback
period is not taken into account if it was
recognized under this paragraph (e) by
reason of the recognition of section 987
gain that was recognized before the look-
back period for the current taxable year.
(B) Ordering rule. For purposes of this
paragraph (e)(3)(iii), suspended section
987 loss is treated as recognized by reason
of the most recently recognized section
987 gain in the same recognition group-
ing. See paragraph (g)(2) of this section
(Example 2) for an illustration of this rule.
(iv) Lookback period—(A) In gen-
eral. Except as provided in paragraph (e)
(3)(iv)(B) of this section, the lookback
period with respect to a taxable year of an
owner means the three preceding taxable
years of the owner (or, if the owner was
not in existence for three preceding tax-
able years, each taxable year in which the
owner existed), but it does not include any
taxable year beginning before the transi-
tion date described in §1.987-10(c)(1).
(B) Taxable years in which both a cur-
rent rate election and an annual recog-
nition election are in effect. In a taxable
year of an owner in which both a current
rate election and an annual recognition
election are in effect, the lookback period
includes all prior taxable years of the
owner in which both a current rate elec-
tion and an annual recognition election
were continuously in effect.

January 13, 2025 394 Bulletin No. 2025–3
(v) Anti-abuse rule. If an owner rec-
ognizes section 987 gain with a principal
purpose of reducing the Federal income
tax liability of the owner (or its U.S.
shareholders or partners, as applicable),
including over multiple taxable years, the
section 987 gain is disregarded for pur-
poses of this paragraph (e)(3). For exam-
ple, this paragraph (e)(3)(v) may apply if
an owner that is a CFC recognizes section
987 gain that is offset by a tax attribute
of one of the CFC’s U.S. shareholders
that would not otherwise be used (such as
excess foreign tax credits with respect to
section 951A category income, or a tested
loss). In determining whether a principal
purpose described in this paragraph (e)
(3)(v) exists, all relevant facts and cir-
cumstances are considered, including the
extent to which the transaction giving
rise to the recognition of section 987 gain
resulted in a sustained economic contrac-
tion of the section 987 QBU over a period
of at least twelve months.
(4) Suspended section 987 loss rec-
ognized with respect to each section 987
QBU and suspended section 987 loss
QBU. The amount of suspended section
987 loss in a recognition grouping that is
recognized by an owner in a taxable year is
treated as attributable to each section 987
QBU or successor suspended loss QBU in
proportion to the QBU’s suspended sec-
tion 987 loss in that recognition grouping.
(5) Section 381(a) transactions—(i) In
general. Except as provided in paragraph
(e)(5)(ii) of this section (or to the extent
that other limitations apply), if one corpo-
ration (acquiring corporation) acquires the
assets of another corporation (transferor
corporation) in a transaction described in
section 381(a), section 987 gain or loss
recognized by the transferor corporation
during the lookback period is taken into
account in determining the lookback gain
amount of the acquiring corporation in
taxable years ending after the transaction
under paragraph (e)(3)(ii) of this section.
If the lookback period for a taxable year
of the acquiring corporation is determined
under paragraph (e)(3)(iv)(A) of this sec-
tion, the lookback period includes each
taxable year of the transferor corporation
ending with or within the current tax-
able year of the acquiring corporation or
during the acquiring corporation’s look-
back period. If the lookback period for a
taxable year of the acquiring corporation
is determined under paragraph (e)(3)(iv)
(B) of this section, the lookback period
includes only taxable years of the trans-
feror corporation in which both an annual
recognition election and a current rate
election were continuously in effect before
the transaction (and only if both elections
were continuously in effect from the date
of the transaction through the current tax-
able year).
(ii) Limitation for inbound nonrecogni-
tion transactions. If a foreign corporation
ceases to exist in a transaction described
in §1.987-8(c)(1)(ii) (inbound section 332
liquidation) or §1.987-8(c)(2)(ii) (inbound
reorganization), section 987 gain recog-
nized by the foreign corporation before
the transaction is disregarded for purposes
of applying paragraph (e)(3) of this sec-
tion in taxable years ending after the trans-
action.
(6) Consolidated group members—(i)
In general. All members of a consolidated
group are treated as a single owner for
purposes of applying this paragraph (e).
(ii) Suspended section 987 losses aris-
ing in separate return limitation years.
This paragraph (e)(6)(ii) applies to sus-
pended section 987 losses arising in a
separate return limitation year (SRLY,
as defined in §1.1502-1(f)) or treated as
arising in a SRLY under the principles of
§1.1502-21(c) (SRLY section 987 losses).
The aggregate of a member’s SRLY sec-
tion 987 losses that are included in the
determination of consolidated taxable
income for all consolidated return years of
the group may not exceed the aggregate
consolidated net income for all consoli-
dated return years of the group determined
by reference to only the member’s items
of section 987 gain or loss, including the
member’s section 987 losses actually
absorbed by the group in the taxable year
(whether or not absorbed by the member).
For purposes of applying this paragraph
(e)(6)(ii), the principles of §1.1502-21(c)
(including the SRLY subgroup principles
of §1.1502-21(c)(2)) apply with appropri-
ate adjustments.
(f) Recognition groupings. The term
recognition grouping means the sec-
tion 987 gain or loss (including section
987 gain or loss that is recognized under
§1.987-5, deferred section 987 gain or
loss, suspended section 987 loss, or pre-
transition gain or loss that is recognized
under §1.987-10(e)(5)(ii)) described in
paragraph (f)(1) or (2) of this section, as
applicable. If an owner has suspended sec-
tion 987 loss with respect to a terminat-
ing QBU in a taxable year ending before
the transition date described in §1.987-
10(c)(1), section 987 gain or loss of the
owner (other than section 987 gain or loss
with respect to the terminating QBU) is
assigned to a recognition grouping based
on the method that is used to determine
the source and character of section 987
gain or loss for that taxable year.
(1) Sourcing and section 904 cate-
gory. Except as provided in paragraph (f)
(2) of this section, a recognition grouping
includes only section 987 gain or loss that
is initially assigned to one of the following
statutory and residual groupings—
(i) U.S. source income; or
(ii) Foreign source income in a single
section 904 category.
(2) Statutory and residual groupings
for CFC owners. In the case of an owner
that is a controlled foreign corporation,
a recognition grouping includes only
section 987 gain or loss that is initially
assigned to one of the statutory and resid-
ual groupings described in paragraph (f)
(1) of this section and that is also initially
assigned to one of the following statutory
and residual groupings—
(i) Tentative tested income;
(ii) Each separate subpart F income
group (as defined in §1.960-1(d)(2)(ii)
(B));
(iii) Income described in section
952(b) (ECI that is excluded from subpart
F income); or
(iv) Income not described in paragraphs
(f)(2)(i) through (iii) of this section.
(g) Examples. The following examples
illustrate the application of this section.
(1) Example 1: Suspension of section 987 loss
and recognition of suspended section 987 loss—(i)
Facts. CFC is a controlled foreign corporation that
has the U.S. dollar as its functional currency. CFC
owns three section 987 QBUs, QBU1, QBU2, and
QBU3. QBU1 has the euro as its functional currency,
QBU2 has the pound as its functional currency, and
QBU3 has the yen as its functional currency. CFC is
subject to a current rate election but not an annual
recognition election. CFC is also subject to an elec-
tion under §1.987-6(b)(2)(i)(C) (treating section 987
gain or loss relating to passive foreign personal hold-
ing company income as attributable to section 988
transactions). An election has not been made under
§1.951A-2(c)(7)(viii) (GILTI high-tax exclusion)
with respect to CFC. In year 1, CFC did not have

Bulletin No. 2025–3 395 January 13, 2025
cumulative suspended section 987 loss with respect
to any of its QBUs and did not have outstanding
deferred section 987 gain or loss. In the three years
before year 2, CFC did not recognize any section 987
gain or loss. In year 2, CFC has net unrecognized
section 987 loss of $200 with respect to QBU1, net
unrecognized section 987 loss of $1,000 with respect
to QBU2, and net unrecognized section 987 gain of
$1,000 with respect to QBU3. In year 2, each QBU
makes a remittance, and CFC’s remittance propor-
tion (determined under §1.987-5(b)(1)) is 25% with
respect to QBU1, 15% with respect to QBU2, and
10% with respect to QBU3. For purposes of §1.987-
6(b)(2)(i), all of QBU1’s assets generate foreign
source passive category income that corresponds
to one or more subpart F income groups described
in §1.960-1(d)(2)(ii)(B)(2)(i) through (v), and all of
QBU2’s and QBU3’s assets generate foreign source
general category tested income. Another member of
CFC’s controlled group owns a section 987 QBU
with respect to which $10 million of net unrecog-
nized section 987 loss becomes suspended section
987 loss under paragraph (c)(1) of this section in
year 2.
(ii) Analysis—(A) Application of §§1.987-5 and
1.987-6 and paragraph (c) of this section. In year
2, CFC recognizes $100 of section 987 gain with
respect to QBU3 (10% of $1,000) under §1.987-
5(a). Under §1.987-6(b)(2)(i)(A), (B), and (D), the
section 987 gain is initially characterized as foreign
source general category tentative tested income. If
a current rate election was not in effect, in year 2
CFC would recognize $50 of section 987 loss with
respect to QBU1 (25% of $200) and $150 of sec-
tion 987 loss with respect to QBU2 (15% of $1,000).
However, under paragraph (c) of this section, these
amounts instead become suspended section 987 loss.
The de minimis rule under paragraph (c)(2) of this
section does not apply because a member of CFC’s
controlled group has more than $3 million of section
987 loss that is suspended in year 2 under paragraph
(c)(1) of this section. Under §1.987-6(b)(2)(i)(A)
and (B), the $50 of suspended section 987 loss with
respect to QBU1 is initially characterized as foreign
source passive category income assigned to a subpart
F income group described in §1.960-1(d)(2)(ii)(B)
(2)(i) through (v), and is treated as foreign currency
loss of the CFC attributable to section 988 transac-
tions not directly related to the business needs of the
CFC because an election under §1.987-6(b)(2)(i)(C)
is in effect. Under §1.987-6(b)(2)(i)(A), (B), and (D),
the $150 of suspended section 987 loss with respect
to QBU2 is initially characterized as foreign source
general category tentative tested income.
(B) Cumulative suspended section 987 loss.
Under paragraph (b) of this section, in year 2, CFC’s
cumulative suspended section 987 loss in the recog-
nition grouping of foreign source passive category
income in a separate subpart F income group for for-
eign currency gains of CFC with respect to QBU1 is
$50, the amount that became suspended section 987
loss in the recognition grouping in year 2. In addi-
tion, CFC’s total cumulative suspended section 987
loss in that recognition grouping is $50. Similarly,
CFC’s cumulative suspended section 987 loss in the
recognition grouping of foreign source general cate-
gory tentative tested income with respect to QBU2 is
$150, the amount that became suspended section 987
loss in the recognition grouping in year 2. In addi-
tion, CFC’s total cumulative suspended section 987
loss in that recognition grouping is $150.
(C) Current year gain amount and lookback gain
amount. Under paragraph (e)(3) of this section, in
year 2, CFC recognizes suspended section 987 loss
in a recognition grouping to the extent of the sum of
the current year gain amount described in paragraph
(e)(3)(i) of this section and the lookback gain amount
described in paragraph (e)(3)(ii) of this section. In
the recognition grouping of foreign source general
category tentative tested income, the current year
gain amount described in paragraph (e)(3)(i) of this
section is equal to the section 987 gain of $100 rec-
ognized by CFC in year 2 with respect to QBU3. The
current year gain amount for all other recognition
groupings is zero. During the lookback period (the
three years before year 2), CFC did not recognize
any section 987 gain or loss. Therefore, the lookback
gain amount described in paragraph (e)(3)(ii) of this
section is zero for all recognition groupings.
(D) Recognition of suspended section 987 loss. In
year 2, CFC has $50 of total cumulative suspended
section 987 loss in the recognition grouping of for-
eign source passive category income in a separate
subpart F income group for foreign currency gains
of CFC and $150 of total cumulative suspended sec-
tion 987 loss in the recognition grouping of foreign
source general category tentative tested income. In
the recognition grouping of foreign source general
category tentative tested income, CFC has a cur-
rent year gain amount of $100 and a lookback gain
amount of zero ($100 in total). Therefore, CFC rec-
ognizes $100 of suspended section 987 loss in that
recognition grouping. Under paragraph (e)(4) of this
section, the cumulative suspended section 987 loss
that is recognized by CFC is attributable to QBU2,
because QBU2 is CFC’s only QBU with cumulative
suspended section 987 loss in the recognition group-
ing of foreign source general category tentative
tested income. Because no election under §1.951A-
2(c)(7) applies in year 2, both the $100 of recog-
nized section 987 gain and the $100 of recognized
section 987 loss are allocated to foreign source gen-
eral category tested income. See §1.987-6(b)(2)(ii).
The amounts of suspended section 987 loss not rec-
ognized (that is, $50 of suspended section 987 loss
assigned to foreign source passive category income
in the subpart F income group for foreign currency
gains of CFC with respect to QBU1 and $50 of sus-
pended section 987 loss assigned to foreign source
general category tentative tested income with respect
to QBU2) remain suspended.
(2) Example 2: Recognition of suspended sec-
tion 987 loss by reason of gain recognized during
the lookback period—(i) Facts. CFC is a controlled
foreign corporation that has the U.S. dollar as its
functional currency. CFC owns QBU1, a section 987
QBU with the euro as its functional currency, and
CFC has no other QBUs. Assume that all section 987
gain or loss (including suspended section 987 loss)
is assigned to the same recognition grouping. CFC
is subject to a current rate election but not an annual
recognition election. Before year 1, QBU1 does not
have cumulative suspended section 987 loss. In year
1, CFC recognizes section 987 gain of $10 million
with respect to QBU1. In year 3, CFC recognizes sec-
tion 987 gain of $15 million with respect to QBU1.
In year 4, QBU1 has net unrecognized section 987
loss, and $10 million of the net unrecognized section
987 loss becomes suspended section 987 loss under
paragraph (c) of this section. In year 6, an additional
$10 million of net unrecognized section 987 loss
with respect to QBU1 becomes suspended section
987 loss under paragraph (c) of this section.
(ii) Analysis—(A) Recognition of suspended
section 987 loss in year 4. In year 4, CFC’s total
cumulative suspended section 987 loss is $10 mil-
lion (that is, the loss that becomes suspended in year
4). The current year gain amount under paragraph (e)
(3)(i) of this section is zero, because CFC does not
recognize section 987 gain in year 4. The lookback
period under paragraph (e)(3)(iv)(A) of this section
is three years (years 1 through 3). The lookback gain
amount under paragraph (e)(3)(ii) of this section is
$25 million (the sum of the $10 million of section
987 gain recognized in year 1 and the $15 million
of section 987 gain recognized in year 3). Therefore,
under paragraph (e)(3) of this section, CFC recog-
nizes suspended section 987 loss of $10 million.
Under paragraph (e)(3)(iii)(B) of this section, the
suspended section 987 loss is considered to be rec-
ognized by reason of the section 987 gain recognized
in year 3, which is the most recent taxable year in
which section 987 gain was recognized.
(B) Recognition of suspended section 987 loss in
year 6. In year 6, CFC’s total cumulative suspended
section 987 loss is $10 million (that is, the loss that
becomes suspended in year 6). The current year gain
amount under paragraph (e)(3)(i) of this section is
zero, because CFC does not recognize section 987
gain in year 6. The lookback period under paragraph
(e)(3)(iv)(A) of this section is three years (years 3
through 5). The lookback gain amount under para-
graph (e)(3)(ii) of this section is $5 million (the sum
of the section 987 gain of $15 million recognized
in year 3 and the suspended section 987 loss of $10
million recognized in year 4 by reason of the sec-
tion 987 gain recognized in year 3). Therefore, under
paragraph (e)(3) of this section, CFC recognizes $5
million of suspended section 987 loss in year 6.
(iii) Alternative facts. Assume the facts are the
same as described in paragraph (g)(2)(i) of this
section, with the following modifications. In year
1, CFC recognizes section 987 gain of $10 million
with respect to QBU1. CFC does not recognize sec-
tion 987 gain in year 3. In year 4, $10 million of net
unrecognized section 987 loss with respect to QBU1
becomes suspended section 987 loss under paragraph
(c) of this section. In year 5, CFC recognizes section
987 gain of $15 million with respect to QBU1. In
year 6, $10 million of net unrecognized section 987
loss with respect to QBU1 becomes suspended sec-
tion 987 loss under paragraph (c) of this section.
(iv) Analysis of alternative facts—(A) Recogni-
tion of suspended section 987 loss in year 4. In year 4,
CFC’s total cumulative suspended section 987 loss is
$10 million (that is, the loss that becomes suspended
in year 4). The current year gain amount under para-
graph (e)(3)(i) of this section is zero, because CFC
does not recognize section 987 gain in year 4. The
lookback period under paragraph (e)(3)(iv)(A) of
this section is three years (years 1 through 3). The
lookback gain amount under paragraph (e)(3)(ii) of
this section is $10 million (equal to the $10 million
of section 987 gain recognized in year 1). Therefore,

January 13, 2025 396 Bulletin No. 2025–3
under paragraph (e)(3) of this section, CFC recog-
nizes suspended section 987 loss of $10 million in
year 4. Under paragraph (e)(3)(iii)(B) of this section,
the suspended section 987 loss is considered to be
recognized by reason of the section 987 gain recog-
nized in year 1, which is the most recent taxable year
in which section 987 gain was recognized.
(B) Recognition of suspended section 987 loss in
year 6. In year 6, CFC’s total cumulative suspended
section 987 loss is $10 million (that is, the loss that
becomes suspended in year 6). The current year gain
amount under paragraph (e)(3)(i) of this section is
zero because CFC does not recognize section 987
gain in year 6. The lookback period under paragraph
(e)(3)(iv)(A) of this section is three years (years 3
through 5). The lookback gain amount under para-
graph (e)(3)(ii) of this section is $15 million (equal
to the section 987 gain of $15 million recognized in
year 5). Under paragraph (e)(3)(iii)(A) of this sec-
tion, the suspended section 987 loss recognized in
year 4 is not taken into account in determining the
lookback gain amount, because it was recognized by
reason of the section 987 gain recognized in year 1
(before the beginning of the lookback period for year
6). Therefore, under paragraph (e)(3) of this section,
CFC recognizes $10 million of suspended section
987 loss in year 6.
(3) Example 3: Suspension of section 987 loss
when a current rate election is revoked—(i) Facts.
U.S. Corp is a domestic corporation that owns all of
the interests in DE1. DE1 owns Business A, which is
a section 987 QBU of U.S. Corp. In year 1, U.S. Corp
made a current rate election but not an annual recog-
nition election. In year 9, U.S. Corp has net unrec-
ognized section 987 loss of $2 million with respect
to Business A, which is not recognized or suspended
in year 9. U.S. Corp revokes its current rate election
effective for year 10. In year 10, before the applica-
tion of this section, U.S. Corp has net accumulated
unrecognized section 987 loss of $2 million.
(ii) Analysis. Under paragraph (d)(2) of this sec-
tion, U.S. Corp’s net accumulated unrecognized sec-
tion 987 loss of $2 million with respect to Business
A is converted into suspended section 987 loss at the
beginning of year 10, the first taxable year in which
the current rate election ceases to be in effect.
§1.987-12 Deferral of section 987 gain
or loss.
(a) Overview—(1) Scope. This section
provides rules that defer the recognition
of section 987 gain or loss and rules for
recognizing (or suspending) deferred sec-
tion 987 gain or loss. This paragraph (a)
provides an overview of this section and
certain instances when this section does
not apply. Paragraph (b) of this section
describes the extent to which net unrec-
ognized section 987 gain or loss is recog-
nized under §1.987-5 (or in certain cases,
suspended) or becomes deferred section
987 gain or loss in connection with a
deferral event. Paragraph (c) of this sec-
tion describes the extent to which deferred
section 987 gain or loss is recognized (or in
certain cases, suspended) upon the occur-
rence of subsequent events. Paragraph (d)
of this section provides a rule relating to
the treatment of a successor deferral QBU
when deferred section 987 loss becomes
suspended section 987 loss. Paragraph
(e) of this section provides an anti-abuse
rule. Paragraph (f) of this section provides
rules for determining the deferred section
987 gain or loss of combined and sepa-
rated QBUs. Paragraph (g) of this section
provides definitions. Paragraph (h) of this
section provides examples illustrating the
rules of this section.
(2) Exceptions—(i) Annual recognition
election. This section does not apply to a
termination of a section 987 QBU in a tax-
able year in which an annual recognition
election is in effect.
(ii) De minimis rule. This section does
not apply in a taxable year if the aggre-
gate amount of net unrecognized section
987 gain or loss of the owner with respect
to all of its section 987 QBUs that would
become deferred section 987 gain or loss
under this section does not exceed $5 mil-
lion.
(b) Treatment of section 987 gain and
loss in connection with a deferral event.
Notwithstanding §1.987-5 (general rule
requiring recognition of section 987 gain
or loss in the taxable year of a remittance),
the owner of a section 987 QBU with
respect to which a deferral event occurs
(an original deferral QBU) includes in
taxable income section 987 gain or loss in
connection with the deferral event only to
the extent provided in this paragraph (b).
(1) Gain or loss recognized (or sus-
pended) in the taxable year of a deferral
event. In the taxable year of a deferral
event with respect to an original deferral
QBU, the owner of the original deferral
QBU recognizes section 987 gain or loss
under §1.987-5, except that, solely for
purposes of applying §1.987-5, all assets
and liabilities of the original deferral QBU
that, immediately after the deferral event,
are reflected on the books and records of a
successor deferral QBU are treated as not
having been transferred and therefore as
remaining on the books and records of the
original deferral QBU notwithstanding the
deferral event. Notwithstanding the prior
sentence, any section 987 loss that would
otherwise be recognized under this para-
graph (b)(1) and §1.987-5 may instead
become suspended loss under §1.987-
11(c) if a current rate election is in effect,
or under §1.987-13(h) if the deferral event
also constitutes an outbound loss event.
(2) Deferred section 987 gain or loss—
(i) In general. In the taxable year of a
deferral event with respect to an original
deferral QBU, any net unrecognized sec-
tion 987 gain or loss that is not recognized
or suspended in the taxable year of the
deferral event becomes deferred section
987 gain or loss of the original deferral
QBU owner. Suspended section 987 loss
does not become deferred section 987 loss
under this paragraph (b)(2).
(ii) Deferred section 987 gain or loss
attributable to a successor deferral QBU.
A portion of the deferred section 987 gain
or loss described in paragraph (b)(2)(i) of
this section becomes deferred section 987
gain or loss with respect to each succes-
sor deferral QBU. Such portion is equal
to the deferred section 987 gain or loss
multiplied by a fraction, the numerator
of which is the aggregate adjusted basis
of the gross assets transferred to the suc-
cessor deferral QBU in connection with
the deferral event and the denominator of
which is the aggregate adjusted basis of
the gross assets transferred to all succes-
sor deferral QBUs in connection with the
deferral event.
(c) Recognition (or suspension) of
deferred section 987 gain or loss follow-
ing a deferral event. An original deferral
QBU owner recognizes deferred section
987 gain or loss with respect to a succes-
sor deferral QBU in the taxable year of the
deferral event and in subsequent taxable
years as provided in this paragraph (c).
(1) Recognition upon a subsequent
remittance—(i) In general. Except as pro-
vided in paragraph (c)(2) of this section,
an original deferral QBU owner recog-
nizes deferred section 987 gain or loss in
the taxable year of the deferral event, and
in subsequent taxable years, upon a remit-
tance from a successor deferral QBU to
the owner of the successor deferral QBU
(successor deferral QBU owner) in the
amount described in paragraph (c)(1)(ii)
of this section. Notwithstanding the prior
sentence, any deferred section 987 loss
that would otherwise be recognized under
this paragraph (c)(1) may instead become
suspended section 987 loss under §1.987-

Bulletin No. 2025–3 397 January 13, 2025
11(c) (if a current rate election is in effect
with respect to the original deferral QBU
owner) or under §1.987-7(d)(1)(ii) (in the
case of a partnership).
(ii) Amount. The amount of deferred
section 987 gain or loss that is recognized
(or suspended) pursuant to this paragraph
(c)(1) in a taxable year of the original
deferral QBU owner is the original defer-
ral QBU owner’s outstanding deferred
section 987 gain or loss (that is, the amount
of deferred section 987 gain or loss not
previously recognized or suspended) with
respect to the successor deferral QBU
multiplied by the remittance proportion
of the successor deferral QBU owner with
respect to the successor deferral QBU for
the taxable year ending with or within the
taxable year of the original deferral QBU
owner, as determined under §1.987-5(b)
without regard to any annual recognition
election of the successor deferral QBU
owner. See paragraph (h)(4) of this section
(Example 4) for an illustration of this rule.
(iii) Deemed remittance by a successor
deferral QBU. For purposes of this para-
graph (c)(1), in a taxable year of the orig-
inal deferral QBU owner in which a suc-
cessor deferral QBU ceases to be owned
by a member of the controlled group that
includes the original deferral QBU owner,
the successor deferral QBU is treated as
having a remittance proportion of one.
Accordingly, if a successor deferral QBU
ceases to be owned by a member of the
controlled group that includes the original
deferral QBU owner, the original defer-
ral QBU owner’s outstanding deferred
section 987 gain or loss with respect to
that successor deferral QBU will be rec-
ognized (or suspended). For purposes of
this paragraph (c)(1), if the original defer-
ral QBU owner goes out of existence and
there is no qualified successor, in the last
taxable year of the original deferral QBU
owner, each successor deferral QBU is
treated as having a remittance proportion
of one. This paragraph (c)(1)(iii) does not
affect the application of the section 987
regulations to the successor deferral QBU
owner with respect to its ownership of the
successor deferral QBU.
(2) Deferral events and outbound loss
events with respect to a successor defer-
ral QBU. Notwithstanding paragraph (c)
(1) of this section, if assets of the suc-
cessor deferral QBU (transferred assets)
are transferred (or deemed transferred)
in a transaction that would constitute a
deferral event or an outbound loss event
if the original deferral QBU owner owned
the successor deferral QBU directly and
the original deferral QBU owner had net
unrecognized section 987 gain or loss
with respect to the successor deferral
QBU equal to its outstanding deferred
section 987 gain or loss with respect to
the successor deferral QBU (the deemed
transaction), then, in accordance with the
rules of this section and §1.987-13(h)—
(i) The original deferral QBU owner
recognizes its outstanding deferred section
987 gain or loss, or suspends its outstand-
ing deferred section 987 loss, to the extent
it would have recognized or suspended net
unrecognized section 987 gain or loss as a
result of the deemed transaction; and
(ii) Each section 987 QBU is a succes-
sor deferral QBU to the extent it would
have been after the deemed transaction
and the original deferral QBU owner has
deferred section 987 gain or loss with
respect to the successor deferral QBU to
the extent it would have after the deemed
transaction;
(iii) Each eligible QBU is a successor
suspended loss QBU to the extent it would
have been after the deemed transaction
and the original deferral QBU owner has
suspended section 987 loss with respect to
the suspended loss QBU to the extent it
would have after the deemed transaction.
(d) Successor deferral QBU becomes
a successor suspended loss QBU. A suc-
cessor deferral QBU becomes a succes-
sor suspended loss QBU, and an original
deferral QBU owner becomes an original
suspended loss QBU owner, if any of the
original deferral QBU owner’s deferred
section 987 loss with respect to the suc-
cessor deferral QBU becomes suspended
section 987 loss. An eligible QBU may be
both a successor deferral QBU and a suc-
cessor suspended loss QBU and the orig-
inal deferral QBU owner may also be an
original suspended loss QBU owner.
(e) Anti-abuse rule. No section 987
loss is recognized under this section,
§1.987-5 or §1.987-13 in connection with
a transaction or series of transactions that
are undertaken with a principal purpose of
avoiding the purposes of this section.
(f) Combinations and separations of
successor deferral QBUs. A combined
QBU is a successor deferral QBU if either
combining QBU was a successor deferral
QBU. A separated QBU is a successor
deferral QBU if the separating QBU was a
successor deferral QBU.
(1) Combined QBU. The outstanding
deferred section 987 gain or loss of a com-
bined QBU in each recognition grouping
for a taxable year is equal to the sum of the
combining QBUs’ outstanding deferred
section 987 gain or loss in that recognition
grouping.
(2) Separated QBU. The outstanding
deferred section 987 gain or loss of a sep-
arated QBU in each recognition grouping
for a taxable year is equal to the separating
QBU’s outstanding deferred section 987
gain or loss in each recognition grouping
multiplied by the separation fraction.
(g) Definitions. The following defini-
tions apply for purposes of this section.
(1) Deferral event. A deferral event
with respect to a section 987 QBU means
any transaction or series of transactions
that satisfy the conditions described in
both paragraphs (g)(1)(i) and (ii) of this
section.
(i) Events. The transaction or series of
transactions constitutes:
(A) A termination of the section 987
QBU under §1.987-8(b)(2) (substantially
all the assets transferred to the owner),
§1.987-8(b)(5) (section 987 QBU ceases
to be a section 987 QBU), or §1.987-8(b)
(6) (individual or corporation ceases to be
a direct owner of a section 987 QBU); or
(B) [Reserved]
(ii) Assets on books of successor defer-
ral QBU. Immediately after the trans-
action or series of transactions, assets of
the section 987 QBU are reflected on the
books and records of a successor deferral
QBU.
(2) Successor deferral QBU. A section
987 QBU (potential successor deferral
QBU) is a successor deferral QBU with
respect to a section 987 QBU referred
to in paragraph (g)(1)(i) of this section
if, immediately after the transaction or
series of transactions described in that
paragraph, the potential successor defer-
ral QBU satisfies all of the conditions
described in paragraphs (g)(2)(i) through
(iii) of this section.
(i) The books and records of the poten-
tial successor deferral QBU reflect assets
that, immediately before the transaction

January 13, 2025 398 Bulletin No. 2025–3
or series of transactions described in
paragraph (g)(1)(i) of this section, were
reflected on the books and records of the
section 987 QBU referred to in paragraph
(g)(1)(i) of this section.
(ii) The owner of the potential suc-
cessor deferral QBU and the owner of
the section 987 QBU referred to in para-
graph (g)(1)(i) of this section immediately
before the transaction or series of trans-
actions described in paragraph (g)(1)(i)
of this section are members of the same
controlled group.
(iii) If the owner of the section 987
QBU referred to in paragraph (g)(1)(i) of
this section immediately before the trans-
action or series of transactions described
in paragraph (g)(1)(i) of this section was a
U.S. person, the potential successor defer-
ral QBU is owned by a U.S. person.
(3) Original deferral QBU owner. An
original deferral QBU owner means, with
respect to an original deferral QBU, the
owner of the original deferral QBU imme-
diately before the deferral event, or the
owner’s qualified successor.
(4) Qualified successor. A qualified
successor with respect to a corporation
(transferor corporation) means another
corporation that acquires the assets of
the transferor corporation in a transaction
described in section 381(a) (acquiring
corporation), provided that the acquiring
corporation is a domestic corporation and
the transferor corporation was a domestic
corporation, or the acquiring corporation
is a controlled foreign corporation and the
transferor corporation was a controlled
foreign corporation. A qualified successor
of a person includes the qualified succes-
sor of a qualified successor.
(h) Examples. The following examples
illustrate the application of this section.
For purposes of the examples, DC1 is a
domestic corporation that owns all of the
stock of DC2, which is also a domestic
corporation, and CFC1, a controlled for-
eign corporation. In addition, DC1, DC2,
and CFC1 are members of a controlled
group, and the de minimis rule of para-
graph (a)(2)(ii) of this section is not appli-
cable. Finally, except as otherwise pro-
vided, Business A is a section 987 QBU
with the euro as its functional currency,
there are no transfers between Business A
and its owner, and Business A’s assets are
not depreciable or amortizable.
(1) Example 1: Contribution of a section 987
QBU with net unrecognized section 987 gain to a
member of the controlled group—(i) Facts. DC1
owns Business A. The adjusted balance sheet of
Business A reflects assets with an aggregate adjusted
basis of €1,000x and no liabilities. DC1 contributes
€900x of Business A’s assets to DC2 in exchange
for DC2 stock in a transaction to which section
351 applies. Immediately after the contribution, the
remaining €100x of Business A’s assets are no lon-
ger reflected on the books and records of a section
987 QBU (but are instead reflected on the books and
records of DC1’s home office). DC2, which has the
U.S. dollar as its functional currency, uses the Busi-
ness A assets in a business (Business B) that consti-
tutes a section 987 QBU. At the time of the contri-
bution, Business A has net unrecognized section 987
gain of $100x.
(ii) Analysis—(A) Under §1.987-2(c)(2)(ii),
DC1’s contribution of €900x of Business A’s assets
to DC2 is treated as a transfer of all of the assets of
Business A to DC1, immediately followed by DC1’s
contribution of €900x of Business A’s assets to DC2.
The contribution of Business A’s assets is a deferral
event within the meaning of paragraph (g)(1) of this
section because:
(1) The transfer from Business A to DC1 is a
transfer of substantially all of Business A’s assets
to DC1, resulting in a termination of the Business A
QBU under §1.987-8(b)(2); and
(2) Immediately after the transaction, assets of
Business A are reflected on the books and records of
Business B, a section 987 QBU owned by a member
of DC1’s controlled group and a successor deferral
QBU within the meaning of paragraph (g)(2) of this
section. Accordingly, Business A is an original defer-
ral QBU within the meaning of paragraph (b) of this
section, and DC1 is an original deferral QBU owner
of Business A within the meaning of paragraph (g)
(3) of this section.
(B) Under paragraph (b)(1) of this section, DC1’s
taxable income in the taxable year of the deferral
event includes DC1’s section 987 gain or loss deter-
mined with respect to Business A under §1.987-5,
except that, for purposes of applying §1.987-5, all
assets of Business A that are reflected on the books
and records of Business B immediately after Busi-
ness A’s termination are treated as not having been
transferred and therefore as though they remained
on Business A’s books and records (notwithstanding
the deemed transfer of those assets under §1.987-
8(e)). Accordingly, in the taxable year of the deferral
event, Business A is treated as making a remittance
of €100x, corresponding to the assets of Business A
that are no longer reflected on the books and records
of a section 987 QBU, and is treated as having a
remittance proportion with respect to Business A of
0.1, determined by dividing the €100x remittance by
the sum of the remittance and the €900x aggregate
adjusted basis of the gross assets deemed to remain
on Business A’s books and records at the end of the
taxable year. Thus, DC1 recognizes $10x of section
987 gain in the taxable year of the deferral event.
DC1’s deferred section 987 gain equals $90x, which
is the amount of its net unrecognized section 987
gain (which is $100x) less the amount of section 987
gain recognized by DC1 under §1.987-5 and this sec-
tion (which is $10x).
(2) Example 2: Contribution of a section 987
QBU with net unrecognized section 987 loss to a
member of the controlled group when a current rate
election is in effect—(i) Facts. The facts are the
same as in paragraph (h)(1) of this section (Example
1) except that a current rate election is in effect for
the taxable year (and an annual recognition election
is not in effect) and, at the time of the contribution,
Business A has net unrecognized section 987 loss
of $100x. Business A is engaged in the business of
manufacturing Product X before the contribution,
and Business B is engaged in the same business after
the contribution. After the contribution, the €100x of
assets that are reflected on the books and records of
DC1’s home office are not used in the business of
manufacturing Product X.
(ii) Analysis—(A) For the reasons described in
paragraph (h)(1) of this section (Example 1), the con-
tribution results in a termination of the Business A
QBU and a deferral event with respect to the Busi-
ness A QBU, an original deferral QBU; DC1 is an
original deferral QBU owner within the meaning of
paragraph (g)(3) of this section; Business B is a suc-
cessor deferral QBU with respect to Business A; and
DC2 is a successor deferral QBU owner.
(B) Under paragraph (b)(1) of this section, for
purposes of applying §1.987-5, all the assets of Busi-
ness A that are reflected on the books and records
of Business B immediately after Business A’s ter-
mination are treated as not having been transferred
and therefore as though they remained on Business
A’s books and records (notwithstanding the deemed
transfer of those assets under §1.987-8(e)). Accord-
ingly, in the taxable year of the deferral event, Busi-
ness A is treated as making a remittance of €100x,
corresponding to the assets of Business A that are no
longer reflected on the books and records of a section
987 QBU, and DC1 is treated as having a remittance
proportion with respect to Business A of 0.1, deter-
mined by dividing the €100x remittance by the sum
of the remittance and the €900x aggregate adjusted
basis of the gross assets deemed to remain on Busi-
ness A’s books and records at the end of the taxable
year. Thus, but for the application of §1.987-11(c),
DC1 would recognize $10x of section 987 loss in
the taxable year of the deferral event. Under §1.987-
11(c), because a current rate election is in effect (and
an annual recognition election is not in effect), the
loss is instead treated as suspended section 987 loss.
DC1’s deferred section 987 loss equals $90x, which
is the amount of its net unrecognized section 987 loss
less the amount of section 987 loss suspended under
§1.987-11(c) (which is $10x).
(C) Under §1.987-13(b)(1)(i), Business B is a
successor suspended loss QBU because, immedi-
ately after the termination of the Business A sec-
tion 987 QBU, a significant portion of the assets of
Business A was reflected on the books and records
of Business B (an eligible QBU), Business B con-
tinued to carry on the trade or business of Business
A, and Business B was owned by DC2, a member
of the same controlled group as DC1 (which is the
original suspended loss QBU owner under §1.987-
13(l)(1)). Therefore, under §1.987-13(b)(1)(ii), all of
Business A’s cumulative suspended section 987 loss
(including the suspended section 987 loss resulting
from the termination of Business A) becomes sus-
pended section 987 loss with respect to Business B.

Bulletin No. 2025–3 399 January 13, 2025
After the transaction, DC1 may recognize its sus-
pended section 987 loss with respect to Business B
under §1.987-11(e) or §1.987-13(b) through (d), as
applicable.
(3) Example 3: Election to be classified as a cor-
poration—(i) Facts. DC1 owns all of the interests in
Entity A, a DE. Entity A conducts Business A, which
has net unrecognized section 987 gain of $500x.
Entity A elects to be classified as a corporation under
§301.7701-3(c) of this chapter. As a result of the
election and pursuant to §301.7701-3(g)(1)(iv) of
this chapter, DC1 is treated as contributing all of the
assets and liabilities of Business A to newly-formed
CFC1, which has the euro as its functional currency.
Immediately after the contribution, the assets and lia-
bilities of Business A are reflected on CFC1’s books
and records.
(ii) Analysis. Under §1.987-2(c)(2)(ii), DC1’s
deemed contribution of all of the assets and liabil-
ities of Business A to CFC1 is treated as a transfer
of all of the assets and liabilities of Business A to
DC1, followed immediately by DC1’s contribution
of those assets and liabilities to CFC1. Because the
deemed transfer from Business A to DC1 is a trans-
fer of substantially all of Business A’s assets to DC1,
the Business A QBU terminates under §1.987-8(b)
(2). The contribution of Business A’s assets is not
a deferral event within the meaning of paragraph
(b) of this section because, immediately after the
transaction, no assets of Business A are reflected on
the books and records of a successor deferral QBU
within the meaning of paragraph (g)(2) of this sec-
tion due to the fact that the assets of Business A are
not reflected on the books and records of a section
987 QBU immediately after the termination. In addi-
tion, the requirement of paragraph (g)(2)(iii) of this
section is not met because Business A was owned by
a U.S. person and the potential successor deferral
QBU, which is owned by CFC1, is not owned by a
U.S. person. Accordingly, DC1 recognizes section
987 gain of $500x with respect to Business A under
§1.987-5 without regard to this section. Because the
requirement of paragraph (g)(2)(iii) of this section
is not met, the result would be the same even if the
assets of Business A were transferred in a section 351
exchange to an existing foreign corporation that had
a different functional currency than Business A.
(4) Example 4: Partial recognition of deferred
gain or loss—(i) Facts. DC1 owns all of the inter-
ests in Entity A, a DE that conducts Business A in
Country X. During year 1, DC1 contributes all of its
interests in Entity A to DC2 in an exchange to which
section 351 applies. At the time of the contribution,
Business A has net unrecognized section 987 gain of
$100x and cumulative suspended section 987 loss
of $50x. After the contribution, Entity A continues
to conduct the same trade or business in Country X
(Business B). In year 3, as a result of a net transfer of
property from Business B to DC2, DC2’s remittance
proportion with respect to Business B, as determined
under §1.987-5, is 0.25.
(ii) Analysis—(A) For the reasons described in
paragraph (h)(1) of this section (Example 1), the con-
tribution of all the interests in Entity A by DC1 to
DC2 results in a termination of the Business A QBU
and a deferral event with respect to the Business A
QBU, an original deferral QBU; DC1 is an original
deferral QBU owner within the meaning of para-
graph (g)(3) of this section; Business B is a successor
deferral QBU with respect to Business A; DC2 is a
successor deferral QBU owner; and the $100x of net
unrecognized section 987 gain with respect to Busi-
ness A becomes deferred section 987 gain as a result
of the deferral event.
(B) Under §1.987-13(b)(1)(i), Business B is a
successor suspended loss QBU because, immedi-
ately after the termination of the Business A sec-
tion 987 QBU, a significant portion of the assets of
Business A was reflected on the books and records
of Business B (an eligible QBU), Business B contin-
ued to carry on the trade or business of Business A,
and Business B was owned by DC2, a member of the
same controlled group as DC1 (which is the original
suspended loss QBU owner under §1.987-13(l)(1)).
Therefore, under §1.987-13(b)(1)(ii), all of DC1’s
cumulative suspended section 987 loss with respect
to Business A becomes suspended section 987 loss of
DC1 with respect to Business B.
(C) Under paragraph (c)(1)(i) of this section,
DC1 recognizes deferred section 987 gain in year
3 as a result of the remittance from Business B to
DC2. Under paragraph (c)(1)(ii) of this section, the
amount of deferred section 987 gain that DC1 recog-
nizes is $25x, which is DC1’s outstanding deferred
section 987 gain of $100x with respect to Business
A multiplied by the remittance proportion of 0.25 of
DC2 with respect to Business B for the taxable year
as determined under §1.987-5(b). In addition, under
§1.987-11(e), DC1 recognizes its cumulative sus-
pended section 987 loss to the extent of the deferred
section 987 gain recognized in the same recognition
grouping.
§1.987-13 Suspended section 987 loss
upon terminations.
(a) Overview—(1) In general. This
section provides rules relating to sus-
pended section 987 loss of an owner with
respect to a section 987 QBU or succes-
sor suspended loss QBU that terminates.
Paragraph (b) of this section provides
rules treating suspended section 987 loss
as recognized or attributable to a succes-
sor when a section 987 QBU terminates.
Paragraph (c) of this section provides rules
treating suspended section 987 loss as rec-
ognized or attributable to a subsequent
successor when a successor suspended
loss QBU terminates. Paragraph (d) of this
section provides rules regarding the recog-
nition of suspended section 987 loss when
interests in a successor suspended loss
QBU owner are transferred. Paragraph (e)
of this section provides rules that apply
when interests in an original suspended
loss QBU owner are transferred. Para-
graph (f) of this section provides rules that
apply when an original suspended loss
QBU owner ceases to exist. Paragraph (g)
of this section provides rules preventing
the carryover of suspended section 987
loss in connection with certain inbound
transactions. Paragraph (h) of this section
provides rules that suspend section 987
loss in connection with certain outbound
transactions. Paragraph (i) of this section
is reserved. Paragraph (j) of this section
provides rules relating to the termina-
tion of a successor suspended loss QBU.
Paragraph (k) of this section provides an
anti-abuse rule. Paragraph (l) of this sec-
tion provides definitions that apply for
purposes of this section. Paragraph (m) of
this section provides examples illustrating
the rules of this section.
(2) Ordering rule. Paragraphs (b)
through (d) of this section are applied after
the application of §1.987-11(e) (loss-to-
the-extent-of-gain rule).
(b) Termination of a section 987 QBU
with suspended loss. If a section 987 QBU
terminates, and at the time of termina-
tion, the owner has suspended section 987
loss with respect to the section 987 QBU
(including because the termination was an
outbound loss event or because net unrec-
ognized section 987 loss became sus-
pended section 987 loss upon termination
as a result of a current rate election), then
either paragraph (b)(1) or (2) of this sec-
tion applies. However, this paragraph (b)
does not apply to a termination that occurs
in connection with a transaction described
in paragraph (f) or (g) of this section.
(1) Suspended section 987 loss becomes
suspended section 987 loss with respect
to a successor suspended loss QBU—(i)
Successor suspended loss QBU. If, imme-
diately after the termination, a significant
portion of the assets of the terminating
section 987 QBU are reflected on the
books and records of an eligible QBU that
carries on a trade or business of the sec-
tion 987 QBU and is owned by the owner
of the section 987 QBU or a member of
its controlled group (determined imme-
diately after the transaction), then the eli-
gible QBU is a successor suspended loss
QBU and the rules provided in paragraph
(b)(1)(ii) of this section apply.
(ii) Attribution of suspended section
987 loss to successor suspended loss
QBU. A portion of the cumulative sus-
pended section 987 loss with respect to
the terminating section 987 QBU that is
not recognized in the taxable year of the
termination under §1.987-11(e) becomes

January 13, 2025 400 Bulletin No. 2025–3
suspended section 987 loss with respect to
each successor suspended loss QBU. Such
portion is equal to the suspended section
987 loss described in the preceding sen-
tence, multiplied by a fraction, the numer-
ator of which is the aggregate adjusted
basis of the gross assets transferred to the
successor suspended loss QBU in connec-
tion with the termination, and the denom-
inator of which is the aggregate adjusted
basis of the gross assets transferred to all
successor suspended loss QBUs in con-
nection with the termination.
(2) Recognition of suspended section
987 loss. If, immediately after the termi-
nation of the section 987 QBU, there is
no successor suspended loss QBU under
paragraph (b)(1) of this section, then the
owner recognizes the cumulative sus-
pended section 987 loss with respect to the
section 987 QBU that is not recognized in
the taxable year of the termination under
§1.987-11(e).
(c) Termination of a successor sus-
pended loss QBU. If a successor sus-
pended loss QBU terminates (as described
in paragraph (j) of this section), then
either paragraph (c)(1) or (2) of this sec-
tion applies. However, this paragraph (c)
does not apply to a termination that occurs
in connection with a transaction described
in paragraph (e), (f), or (g) of this section.
(1) Successor to the successor sus-
pended loss QBU—(i) Successor sus-
pended loss QBU. If, immediately after
the termination, a significant portion of
the assets of the terminating successor
suspended loss QBU (initial successor)
are reflected on the books and records of
an eligible QBU (subsequent successor)
that carries on a trade or business of the
initial successor and is owned by the origi-
nal suspended loss QBU owner or a mem-
ber of its controlled group (determined
immediately after the transaction), then
the subsequent successor is a successor
suspended loss QBU and the rules pro-
vided in paragraph (c)(1)(ii) of this sec-
tion apply.
(ii) Attribution of suspended section
987 loss to successor suspended loss
QBU. A portion of the cumulative sus-
pended section 987 loss with respect to the
initial successor that is not recognized in
the taxable year of the termination under
§1.987-11(e) becomes suspended section
987 loss with respect to each subsequent
successor. Such portion is equal to the sus-
pended section 987 loss described in the
preceding sentence, multiplied by a frac-
tion, the numerator of which is the aggre-
gate adjusted basis of the gross assets
transferred to the subsequent successor in
connection with the termination, and the
denominator of which is the aggregate
adjusted basis of the gross assets trans-
ferred to all subsequent successors in con-
nection with the termination.
(2) Recognition of suspended section
987 loss. If, immediately after the termi-
nation of the initial successor, there is no
subsequent successor that is a successor
suspended loss QBU under paragraph (c)
(1) of this section, then the original sus-
pended loss QBU owner recognizes the
cumulative suspended section 987 loss
with respect to the initial successor that is
not recognized in the taxable year of the
termination under §1.987-11(e).
(d) Transfer of successor suspended
loss QBU owner. If a successor suspended
loss QBU ceases to be owned by a mem-
ber of the original suspended loss QBU
owner’s controlled group as a result of a
direct or indirect transfer, or an issuance
or redemption, of an ownership interest
in the successor suspended loss QBU
owner, then the original suspended loss
QBU owner recognizes the cumulative
suspended section 987 loss with respect to
the successor suspended loss QBU that is
not recognized in the taxable year under
§1.987-11(e).
(e) Transfer of original suspended loss
QBU owner. If an original suspended
loss QBU owner ceases to be a member
of the successor suspended loss QBU
owner’s controlled group as a result of a
direct or indirect transfer, or an issuance
or redemption, of an ownership interest in
the original suspended loss QBU owner,
the original suspended loss QBU own-
er’s suspended section 987 loss ceases
to be attributable to any successor sus-
pended loss QBU (but it continues to be
suspended section 987 loss of the original
suspended loss QBU owner). As a result,
the suspended section 987 loss can be rec-
ognized by the original suspended loss
QBU owner under §1.987-11(e) but can-
not be recognized under paragraph (b)(2),
(c)(2), or (d) of this section.
(f) Owner ceases to exist. If the owner
of a section 987 QBU with suspended sec-
tion 987 loss or an original suspended loss
QBU owner ceases to exist and there is no
successor under paragraph (l)(1)(ii) of this
section (for example, as a result of a sec-
tion 331 liquidation), then any suspended
section 987 loss of the owner that is not
recognized after application of the loss-to-
the-extent-of-gain rule in §1.987-11(e) is
eliminated and cannot be recognized.
(g) Inbound nonrecognition transac-
tions—no carryover of suspended section
987 loss. If an owner of a section 987
QBU with suspended section 987 loss, or
an original suspended loss QBU owner,
ceases to exist in a transaction described
in §1.987-8(c)(1)(ii) (inbound section 332
liquidation) or §1.987-8(c)(2)(ii) (inbound
reorganization), then any suspended sec-
tion 987 loss of the owner or original
suspended loss QBU owner that is not
recognized after application of the loss-to-
the-extent-of-gain rule in §1.987-11(e) is
eliminated and cannot be recognized. As
a result, the distributee or acquiring cor-
poration does not succeed to or take into
account any suspended section 987 loss of
the owner or original suspended loss QBU
owner under section 381.
(h) Outbound transactions—recog-
nition or suspension of net unrecognized
section 987 loss. This paragraph (h)
applies to taxable years in which neither a
current rate election nor an annual recog-
nition election is in effect.
(1) In general. Notwithstanding
§1.987-5, if an outbound loss event occurs
with respect to a section 987 QBU (an out-
bound loss QBU), the original owner of
the section 987 QBU includes in taxable
income in the taxable year of the outbound
loss event section 987 loss with respect to
the outbound loss QBU only to the extent
provided in paragraph (h)(3) of this sec-
tion.
(2) Outbound loss event. An outbound
loss event means, with respect to a section
987 QBU:
(i) Any termination of the section 987
QBU as a result of a transfer by a U.S.
person of assets of the section 987 QBU
to a foreign person that is a member of the
same controlled group as the U.S. person
immediately before the transaction or, if
the transferee did not exist immediately
before the transaction, immediately after
the transaction (related foreign person),
provided that the termination would result

Bulletin No. 2025–3 401 January 13, 2025
in the recognition of section 987 loss with
respect to the section 987 QBU under
§1.987-5 but for this paragraph (h); or
(ii) [Reserved]
(3) Loss recognition upon an out-
bound loss event. In the taxable year of
an outbound loss event with respect to
an outbound loss QBU, the owner of the
outbound loss QBU recognizes section
987 loss as determined under §§1.987-5
and 1.987-12(b), except that, solely for
purposes of applying §1.987-5, assets
and liabilities of the outbound loss QBU
that, immediately after the outbound loss
event, are reflected on the books and
records of an eligible QBU owned by the
related foreign person described in para-
graph (h)(2) of this section are treated as
not having been transferred and therefore
as remaining on the books and records of
the outbound loss QBU notwithstanding
the outbound loss event.
(4) Loss suspension upon outbound
loss event. Net unrecognized section 987
loss or deferred section 987 loss that, as a
result of this paragraph (h), is not recog-
nized in the taxable year of the outbound
loss event (outbound section 987 loss)
under §1.987-5 becomes suspended sec-
tion 987 loss.
(i) [Reserved]
(j) Termination of a successor sus-
pended loss QBU. For purposes of apply-
ing paragraph (c) of this section, a succes-
sor suspended loss QBU terminates if it
ceases to be an eligible QBU of its owner.
(k) Anti-abuse. No section 987 loss is
recognized under this section, §1.987-5,
or §1.987-12 in connection with a trans-
action or series of transactions that are
undertaken with a principal purpose of
avoiding the purposes of this section.
(l) Definitions. The following defini-
tions apply for purposes of this section.
(1) Original suspended loss QBU
owner—(i) In general. An original sus-
pended loss QBU owner is the person
that was the owner of a section 987 QBU
before its termination in a transaction to
which paragraph (b)(1) of this section
applies.
(ii) Successors. If an original suspended
loss QBU owner is a corporation (trans-
feror corporation) and another corpora-
tion acquires the assets of the transferor
corporation in a transaction described in
section 381(a), then the acquiring corpora-
tion becomes the original suspended loss
QBU owner.
(2) Successor suspended loss QBU. See
paragraphs (b)(1) and (c)(1) of this section
and §1.987-12(d) for rules regarding when
an eligible QBU is a successor suspended
loss QBU.
(3) Successor suspended loss QBU
owner. A successor suspended loss QBU
owner is the owner of the assets and liabil-
ities of a successor suspended loss QBU.
(4) Ownership interests. The term own-
ership interests means stock in a corpora-
tion and partnership interests in a partner-
ship.
(5) Significant portion. With respect
to the assets of an eligible QBU, the term
significant portion means a significant
portion of the operating assets, determined
based on all the facts and circumstances,
provided that more than 30 percent of the
operating assets will constitute a signifi-
cant portion in all cases and less than 10
percent of the operating assets will not
constitute a significant portion in all cases.
(m) Examples. The following exam-
ples illustrate the application of this sec-
tion. For purposes of the examples, DC1
is a domestic corporation that owns all of
the interests in Entity A, a DE. Entity A
conducts Business A, a section 987 QBU
that is engaged in the business of selling
Product X. Business A has the euro as its
functional currency.
(1) Example 1: Trade or business of a section
987 QBU ceases—(i) Facts. Entity A’s trade or busi-
ness of selling Product X ceases, resulting in a ter-
mination of the Business A section 987 QBU under
§1.987-8(b)(1). After the trade or business is wound
up, the remaining assets are transferred to DC1 and
are not used in the trade or business of selling Prod-
uct X immediately following the termination. Busi-
ness A has cumulative suspended section 987 loss
under §1.987-11(b) of $500x.
(ii) Analysis. Immediately after the termination
of the Business A section 987 QBU, a significant
portion of Business A’s assets is not reflected on the
books and records of an eligible QBU that carries on
a trade or business of Business A and is owned by
DC1 or a member of its controlled group. Therefore,
Business A has no successor suspended loss QBU
under paragraph (b)(1) of this section. Consequently,
DC1 recognizes the cumulative suspended section
987 loss with respect to the Business A section 987
QBU under paragraph (b)(2) of this section.
(2) Example 2: Trade or business of a section
987 QBU is sold to a third party—(i) Facts. DC1
sells all the interests in Entity A to a third party for
cash. Business A has cumulative suspended section
987 loss under §1.987-11(b) of $500x.
(ii) Analysis. Under §1.987-2(c)(2)(ii), the sale of
the Business A assets and liabilities for cash that is
reflected on the books of DC1 is treated as a transfer
of all of the assets and liabilities of Business A to
DC1, followed immediately by DC1’s sale of those
assets and liabilities. Because the deemed transfer
from Business A to DC1 is a transfer of substantially
all of Business A’s assets to DC1, the Business A
section 987 QBU terminates under §1.987-8(b)(2).
Immediately after the termination of the Business A
section 987 QBU, a significant portion of Business
A’s assets is not reflected on the books and records
of an eligible QBU that carries on a trade or business
of Business A and is owned by DC1 or a member of
its controlled group. Therefore, Business A has no
successor suspended loss QBU under paragraph (b)
(1) of this section. Consequently, DC1 recognizes the
cumulative suspended section 987 loss with respect
to the Business A section 987 QBU under paragraph
(b)(2) of this section.
(3) Example 3: Outbound loss event—(i) Facts.
Entity A elects to be classified as a corporation under
§301.7701-3(c) of this chapter. As a result of the
election and pursuant to §301.7701-3(g)(1)(iv) of
this chapter, DC1 is treated as contributing all of the
assets and liabilities of Business A to newly formed
CFC1, which has the euro as its functional currency.
Immediately after the contribution, the assets and lia-
bilities of Business A are reflected on CFC1’s books
and records (which are the only books and records
maintained by CFC1). CFC1 continues to use those
assets in the same trade or business after the con-
tribution (Business B). Neither a current rate elec-
tion nor an annual recognition election is in effect.
Business A has net unrecognized section 987 loss of
$500x.
(ii) Analysis—(A) Under §1.987-2(c)(2)(ii),
DC1’s contribution of all of the assets and liabilities
of Business A to CFC1 is treated as a transfer of all
of the assets and liabilities of Business A to DC1, fol-
lowed immediately by DC1’s contribution of those
assets and liabilities to CFC1. Because the deemed
transfer from Business A to DC1 is a transfer of sub-
stantially all of Business A’s assets to DC1, the Busi-
ness A section 987 QBU terminates under §1.987-
8(b)(2). The contribution of Business A’s assets to
CFC1 is not a deferral event within the meaning
of §1.987-12(g)(1) because, immediately after the
transaction, no assets of Business A are reflected on
the books and records of a successor deferral QBU
within the meaning of §1.987-12(g)(2) due to the
fact that the assets of Business A are not reflected on
the books and records of a section 987 QBU imme-
diately after the termination, as well as the fact that
the requirement of §1.987-12(g)(2)(iii) is not met
because Business A was owned by a U.S. person and
the potential successor deferral QBU (Business B)
is not owned by a U.S. person. The termination of
the Business A section 987 QBU as a result of the
transfer of the assets of Business A by a U.S. person
(DC1) to a foreign person (CFC1) that is a member
of DC1’s controlled group is an outbound loss event
described in paragraph (h)(2) of this section.
(B) Under paragraphs (h)(1) and (3) of this sec-
tion, in the taxable year of the outbound loss event,
DC1 includes in taxable income section 987 loss
recognized with respect to Business A as determined
under §1.987-5, except that, for purposes of apply-
ing §1.987-5, all assets and liabilities of Business A
that are reflected on the books and records of CFC1,

January 13, 2025 402 Bulletin No. 2025–3
a related foreign person described in paragraph (h)
(2) of this section, are treated as not having been
transferred. Accordingly, DC1’s remittance propor-
tion with respect to Business A is 0, and DC1 recog-
nizes no section 987 loss with respect to Business A.
DC1’s outbound section 987 loss is $500x, which is
the amount of section 987 loss that DC1 would have
recognized under §1.987-5 without regard to para-
graph (h) of this section ($500x), less the amount of
section 987 loss recognized by DC1 under paragraph
(h)(3) of this section ($0). Under paragraph (h)(4) of
this section, the $500x of outbound section 987 loss
becomes suspended section 987 loss.
(C) Under paragraph (b)(1)(i) of this section,
Business B is a successor suspended loss QBU
because, immediately after the termination of the
Business A section 987 QBU, the Business A assets
are reflected on the books and records of Business
B (which is the only set of books and records main-
tained by CFC1), Business B was an eligible QBU
that continued to carry on the same trade or busi-
ness as Business A did before the contribution, and
Business B was owned by CFC1, a member of the
same controlled group as DC (which is the original
suspended loss QBU owner under paragraph (l)(1)
of this section). See §1.987-1(b)(4)(ii) (providing
that, if a corporation is solely engaged in activities
that constitute a trade or business, and the corpora-
tion maintains only one set of books and records, the
activities (but not the corporation) are a qualified
business unit). Therefore, under paragraph (b)(1)(ii)
of this section, all of Business A’s suspended sec-
tion 987 loss (including the suspended section 987
loss resulting from the termination of Business A) is
treated as suspended section 987 loss of DC1 with
respect to Business B.
§1.987-14 Section 987 hedging
transactions.
(a) Overview. This section provides
rules relating to section 987 hedging
transactions. Paragraph (b) of this sec-
tion provides the definition of a section
987 hedging transaction. Paragraph (c)
of this section provides identification
requirements for section 987 hedging
transactions. Paragraph (d) of this section
provides rules relating to the taxation of
section 987 hedging transactions. Para-
graph (e) of this section provides exam-
ples illustrating the rules of this section.
(b) Section 987 hedging transaction—
(1) In general. A section 987 hedging
transaction is a financial instrument or a
combination or series of financial instru-
ments (a hedge), that is entered into by
the owner of a section 987 QBU as part
of the normal course of the owner’s trade
or business for the purpose of managing
exchange rate risk with respect to all or
part of the owner’s net investment in the
section 987 QBU (the hedged QBU), pro-
vided that the requirements of paragraph
(b)(2) of this section are met. If only part
of a financial instrument (or combina-
tion or series of financial instruments) is
described in the preceding sentence, that
part is treated as a section 987 hedging
transaction for purposes of this section.
(2) Requirements. A transaction is a
section 987 hedging transaction described
in paragraph (b)(1) of this section for a
taxable year only if the following require-
ments are met.
(i) Identification. The hedge must be
identified as a section 987 hedging trans-
action with respect to the hedged QBU
under paragraph (c) of this section. The
financial instrument or instruments that
comprise the hedge must not be identified
as a section 987 hedging transaction with
respect to any other section 987 QBU.
If only part of a financial instrument (or
combination or series of financial instru-
ments) is a section 987 hedging transac-
tion, that part must be clearly identified.
(ii) Current rate election. A current rate
election must be in effect for the taxable
year.
(iii) Mark-to-market method of
accounting. Section 988 gain or loss of
the owner with respect to the hedge must
be accounted for under a mark-to-market
method of accounting (for example, under
section 1256). In addition, if a member of
the owner’s controlled group is a party to
the hedge, any section 988 gain or loss of
the controlled group member with respect
to the hedge must be accounted for under
a mark-to-market method of accounting.
(iv) Treatment under U.S. generally
accepted accounting principles. Foreign
currency gain or loss on the hedge must
be properly accounted for under generally
accepted accounting principles as a cumu-
lative foreign currency translation adjust-
ment to shareholders’ equity.
(v) Hedge entered into by owner of the
hedged QBU. The hedge must be entered
into by the owner of the hedged QBU (and
not by a section 987 QBU of the owner).
In the case of a hedged QBU that is owned
by a member of a consolidated group, the
hedge must be entered into by the member
that owns the hedged QBU.
(3) Anti-abuse rule. If a taxpayer enters
into a hedge or a related transaction with
a principal purpose of effectively con-
verting section 987 gain or loss into sec-
tion 988 gain or loss (or another type of
income or loss) of the owner or a related
party, the hedge is not treated as a section
987 hedging transaction.
(4) Partial termination of a section
987 hedging transaction. If only part of a
financial instrument is a section 987 hedg-
ing transaction, and a part of the financial
instrument is terminated or disposed of, a
proportionate part of the section 987 hedg-
ing transaction is treated as terminated or
disposed of.
(c) Identification requirements—(1) In
general. The owner of a hedged QBU must
clearly identify the hedge as a section 987
hedging transaction with respect to the
hedged QBU in its books and records on
or before the close of the day on which the
owner entered into the hedge. The iden-
tification must meet the requirements of
§1.1221-2(f)(4) and must include the fol-
lowing information—
(i) The date on which the hedge is
entered into by the owner of the hedged
QBU and the date on which the hedge is
identified as a section 987 hedging trans-
action;
(ii) A description of the hedge; and
(iii) Identification of the hedged QBU.
(2) Inadvertent error. If a hedge is not
identified under paragraph (c)(1) of this
section, but the hedge would otherwise
qualify as a section 987 hedging transac-
tion with respect to a hedged QBU within
the meaning of paragraph (b) of this sec-
tion and the taxpayer can demonstrate to
the satisfaction of the Commissioner that
its failure to identify the hedge was due to
inadvertent error, the taxpayer may treat
the hedge as a section 987 hedging transac-
tion if all of the owner’s hedges described
in paragraph (b) of this section in all open
years are being treated on either original
or, if necessary, amended returns as sec-
tion 987 hedging transactions subject to
the rules of paragraph (d) of this section.
(d) Taxation of section 987 hedging
transactions—(1) Hedging gain or loss
with respect to a hedged QBU. If the
owner of a section 987 QBU has entered
into a section 987 hedging transaction
with respect to the section 987 QBU, the
owner’s hedging gain or loss with respect
to the hedged QBU for a taxable year is
equal to the gain or loss that the owner
would (but for the application of this para-
graph (d)) recognize under section 988

Bulletin No. 2025–3 403 January 13, 2025
with respect to the section 987 hedging
transaction in the taxable year under the
mark-to-market method of accounting
described in paragraph (b)(2)(iii) of this
section (including gain or loss that would
be recognized in connection with a com-
plete or partial disposition or termination
of the section 987 hedging transaction).
If only part of a financial instrument is a
section 987 hedging transaction, a propor-
tionate part of the gain or loss that would
(but for the application of this paragraph
(d)) be recognized under section 988 with
respect to the financial instrument in the
taxable year is treated as hedging gain or
loss with respect to the hedged QBU. See
paragraph (d)(3) of this section for rules
relating to the determination of hedging
gain or loss in the taxable year in which
the hedged QBU terminates.
(2) Adjustment to unrecognized section
987 gain or loss for the taxable year—(i)
Hedging loss. In a taxable year in which
an owner has hedging loss with respect
to a hedged QBU and has unrecognized
section 987 gain for the taxable year with
respect to the hedged QBU (as determined
under §1.987-4(d), without regard to this
paragraph (d)), the unrecognized section
987 gain for the taxable year is reduced
(but not below zero) by the amount of the
hedging loss. The amount of hedging loss
that reduces unrecognized section 987
gain under this paragraph (d)(2)(i) is not
recognized under section 988. Any hedg-
ing loss that does not reduce unrecognized
section 987 gain under this paragraph (d)
(2)(i) is recognized under section 988.
(ii) Hedging gain. In a taxable year in
which an owner has hedging gain with
respect to a hedged QBU and has unrec-
ognized section 987 loss for the taxable
year with respect to the hedged QBU (as
determined under §1.987-4(d), without
regard to this paragraph (d)), the unrecog-
nized section 987 loss for the taxable year
is reduced (but not below zero) by the
amount of the hedging gain. The amount
of hedging gain that reduces unrecognized
section 987 loss under this paragraph (d)
(2)(ii) is not recognized under section 988.
Any hedging gain that does not reduce
unrecognized section 987 loss under this
paragraph (d)(2)(ii) is recognized under
section 988.
(3) Termination of a hedged QBU. If the
owner of a section 987 QBU has entered
into a section 987 hedging transaction
with respect to the section 987 QBU and
the hedged QBU terminates, the owner’s
hedging gain or loss with respect to the
hedged QBU for the taxable year is equal
to the hedging gain or loss that the owner
would (but for the application of this para-
graph (d)) recognize with respect to the
section 987 hedging transaction under
the mark-to-market method of accounting
described in paragraph (b)(2)(iii) of this
section if the taxable year ended on the
termination date. Appropriate adjustments
must be made to prevent the section 988
gain or loss from being taken into account
again after it is applied to reduce unrecog-
nized section 987 gain or loss under this
paragraph (d).
(e) Examples. The following examples
illustrate the application of this section.
For purposes of the examples, DC1 is a
domestic corporation that owns Business
A, a section 987 QBU that has the euro
as its functional currency. A current rate
election is in effect for years 1 and 2, but
no other elections are in effect. In year 1,
DC1 had net unrecognized section 987
loss (determined under §1.987-4(b)) of
$1,000x with respect to Business A, and
Business A did not make a remittance in
year 1. As a result, in year 2, DC1’s net
accumulated unrecognized section 987
loss from prior taxable years (determined
under §1.987-4(c)) was $1,000x. In year
2, DC1 had unrecognized section 987 loss
for the taxable year (determined under
§1.987-4(d) before the application of
paragraph (d) of this section) of $500x.
(1) Example 1: Section 987 hedging transac-
tion—(i) Facts. In year 2, DC1 entered into a six-
month foreign currency forward contract with an
unrelated bank in the normal course of DC1’s trade
or business for the purpose of managing exchange
rate risk with respect to DC1’s net investment in
Business A. On the same day, DC1 identified the
forward contract as a section 987 hedging transac-
tion with respect to Business A under paragraph (c)
of this section. Under generally accepted accounting
principles, currency gain or loss from the forward
contract is accounted for as a cumulative transla-
tion adjustment to shareholder’s equity. For Federal
income tax purposes, DC1 accounts for section 988
gain or loss with respect to the forward contract
under a mark-to-market method of accounting. But
for the application of paragraph (d) of this section,
DC1 would recognize $400x of section 988 gain
with respect to the forward contract.
(ii) Analysis—(A) Qualification of the hedge as
a section 987 hedging transaction. The forward con-
tract qualifies as a section 987 hedging transaction
under paragraph (b) of this section because it is a
financial instrument that manages DC1’s exchange
rate risk with respect to Business A (the hedged
QBU) as part of the normal course of DC1’s trade
or business, and the hedge meets the requirements of
paragraph (b)(2) of this section.
(B) Treatment of the section 987 hedging trans-
action. But for the application of paragraph (d) of
this section, DC1 would recognize $400x of section
988 gain with respect to the forward contract in year
2. Therefore, DC1 has $400x of hedging gain in year
2. In year 2, DC1 had unrecognized section 987 loss
of $500x for the taxable year (determined under
§1.987-4(d) before the application of paragraph (d)
of this section). Therefore, under paragraph (d)(2)(ii)
of this section, DC1’s unrecognized section 987 loss
for the taxable year of $500x is reduced by the $400x
of hedging gain. Accordingly, DC1 has unrecognized
section 987 loss of $100x for the taxable year with
respect to Business A. Under §1.987-4(b), DC1 has
$1,100x of net unrecognized section 987 loss in year
2 (equal to the sum of its net accumulated section
987 loss of $1,000x from prior taxable years and its
unrecognized section 987 loss for the taxable year
of $100x). DC1 does not recognize its hedging gain
under section 988 because all of the hedging gain
reduces unrecognized section 987 loss for the tax-
able year.
(2) Example 2: Excess hedging gain from a sec-
tion 987 hedging transaction—(i) Facts. The facts
are the same as in paragraph (e)(1) of this section
(Example 1) except that, but for the application of
paragraph (d) of this section, DC1 would recognize
$600x of section 988 gain with respect to the forward
contract.
(ii) Analysis. Under paragraph (d)(2)(ii) of this
section, DC1’s unrecognized section 987 loss for the
taxable year of $500x is reduced by the hedging gain,
but not below zero. Accordingly, $500x of the hedg-
ing gain is applied to reduce DC1’s unrecognized
section 987 loss for the taxable year to zero. DC1
has $1,000x of net unrecognized section 987 loss in
year 2 under §1.987-4(b) (equal to its net accumu-
lated section 987 loss of $1,000x from prior taxable
years). The $500x hedging gain that reduces unrec-
ognized section 987 loss for the taxable year is not
recognized under section 988. The excess amount of
hedging gain ($100x) is recognized by DC1 under
section 988.
§1.987-15 Applicability date.
(a) Applicability date of the section
987 regulations—(1) In general. Except
as provided in this section, the section 987
regulations apply to taxable years begin-
ning after December 31, 2024.
(2) Applicability date for a terminating
QBU. The section 987 regulations apply
to the owner of a terminating QBU imme-
diately before the section 987 QBU termi-
nates, but only with respect to the section
987 QBU, any successor deferral QBUs or
successor suspended loss QBUs (in their
capacity as such), and any net unrecog-
nized section 987 gain or loss, deferred

January 13, 2025 404 Bulletin No. 2025–3
section 987 gain or loss, or suspended
section 987 loss with respect thereto. See
§1.987-1(h) for the definition of a termi-
nating QBU.
(b) Application of the section 987 reg-
ulations to taxable years beginning on
or before December 31, 2024, and end-
ing after November 9, 2023. A taxpayer
(including a taxpayer that has applied the
2016 and 2019 section 987 regulations to
a prior taxable year under paragraph (c)
of this section) may choose to apply the
section 987 regulations to a taxable year
beginning on or before December 31,
2024, and ending after November 9, 2023,
provided the taxpayer and each member
of its consolidated group and section 987
electing group:
(1) Consistently apply the section 987
regulations in their entirety to the taxable
year and all subsequent taxable years
beginning on or before December 31,
2024; and
(2) Apply the section 987 regulations
on their original timely filed (including
extensions) returns for the first taxable
year to which the taxpayer chooses to
apply the section 987 regulations.
(c) Application of the 2016 and 2019
section 987 regulations—(1) In general.
A taxpayer may choose to apply the 2016
and 2019 section 987 regulations to a tax-
able year beginning after December 7,
2016, and beginning on or before Decem-
ber 31, 2024, provided the taxpayer and
each member of its consolidated group
and section 987 electing group:
(i) First apply the 2016 and 2019 sec-
tion 987 regulations to a taxable year end-
ing before November 9, 2023;
(ii) Consistently apply the 2016 and
2019 section 987 regulations in their
entirety to all section 987 QBUs (within
the meaning of prior §1.987-1(b)(2))
directly or indirectly owned (within the
meaning of prior §1.987-1(b)(4)) by the
taxpayer and each member of its con-
solidated group and section 987 elect-
ing group on the transition date for that
taxable year and all subsequent taxable
years before the taxable year in which
the taxpayer and each member of its con-
solidated group and section 987 electing
group apply the section 987 regulations
pursuant to paragraph (a) or (b) of this
section; and
(iii) Either—
(A) First applied the 2016 and 2019
section 987 regulations on their returns
filed before November 9, 2023; or
(B) First apply the 2016 and 2019 sec-
tion 987 regulations on their returns filed
on or after November 9, 2023 and apply
§1.987-10 in lieu of prior §1.987-10.
(2) Application to section 987 QBUs
not owned on the transition date. For any
taxable year in which a taxpayer applies
the 2016 and 2019 section 987 regulations
pursuant to paragraph (c)(1) of this sec-
tion, the taxpayer may choose to apply the
2016 and 2019 section 987 regulations to
any section 987 QBU (within the meaning
of prior §1.987-1(b)(2)) that the taxpayer
did not directly or indirectly own (within
the meaning of prior §1.987-1(b)(4)) on
the transition date, provided the taxpayer
applies the 2016 and 2019 section 987
regulations consistently to that QBU for
that taxable year and all subsequent tax-
able years before the taxable year in which
the taxpayer applies the section 987 regu-
lations pursuant to paragraph (a) or (b) of
this section and the taxpayer either—
(i) First applied the 2016 and 2019
section 987 regulations to the section 987
QBU on its return filed before November
9, 2023; or
(ii) First applies the 2016 and 2019
section 987 regulations to the section 987
QBU on its return filed on or after Novem-
ber 9, 2023, and applies §1.987-10 in lieu
of prior §1.987-10.
(3) Modifications of defined terms for
purposes of this paragraph (c). Solely for
purposes of this paragraph (c)—
(i) Application of §1.987-10 in lieu
of prior §1.987-10. For any taxpayer to
which paragraph (c)(1)(iii)(B) or (c)(2)
(ii) of this section applies, the term 2016
and 2019 section 987 regulations includes
§1.987-10 and not prior §1.987-10.
(ii) Partnerships not included in sec-
tion 987 electing group. The term section
987 electing group does not include for-
eign partnerships.
(iii) Transition date. The term tran-
sition date has the meaning provided in
prior §1.987-10.
(d) Prior §1.987-12. For the applica-
bility dates of prior §1.987-12, see prior
§1.987-12(j). Prior §1.987-12 applies
through the end of the taxable year imme-
diately preceding the first taxable year in
which a taxpayer applies §1.987-12 pursu-
ant to paragraph (a) or (b) of this section.
Par. 9. Section 1.988-1 is amended by:
a. Removing and reserving paragraph
(a)(4);
b. Revising paragraph (a)(10)(i);
c. Removing the language “1988” in
the fourth sentence of paragraph (a)(1)
(iii) and adding the language “2025” in its
place; and
d. Revising paragraph (i).
The revisions read as follows:
§1.988-1 Certain definitions and special
rules.
(a) * * *
(10) * * *
(i) In general. Except as provided in
paragraph (a)(10)(ii) of this section, disre-
garded transactions between or among the
taxpayer and/or qualified business units
of that taxpayer (“intra-taxpayer transac-
tions”) are not section 988 transactions.
See section 987 and the regulations there-
under.
* * * * *
(i) Applicability date—(1) In general.
Except as otherwise provided in this sec-
tion, this section applies to taxable years
beginning after December 31, 1986. Thus,
except as otherwise provided in this sec-
tion, any payments made or received with
respect to a section 988 transaction in tax-
able years beginning after December 31,
1986, are subject to this section.
(2) Paragraph (a)(10)(ii). Generally,
paragraph (a)(10)(ii) of this section applies
to taxable years beginning after Decem-
ber 31, 2024. However, if pursuant to
§1.987-15(b), a taxpayer chooses to apply
§§1.987-1 through 1.987-15 to a taxable
year before the first taxable year described
in §1.987-15(a)(1), then paragraph (a)(10)
(ii) of this section applies to that taxable
year. See §1.988-1(i), as contained in 26
CFR in part 1 in effect on April 1, 2024,
for a prior applicability date for paragraph
(a)(10)(ii) of this section.
Par. 10. Section 1.988-4 is amended
by revising paragraph (b)(2) to read as
follows:
§1.988-4 Source of gain or loss realized
on a section 988 transfer.
* * * * *

Bulletin No. 2025–3 405 January 13, 2025
(b) * * *
(2) Proper reflection on the books
of the taxpayer or qualified business
unit—(i) In general. For purposes of
paragraph (b)(1) of this section, the prin-
ciples of §1.987-2(b) apply in determin-
ing whether an asset, liability, or item
of income, gain, deduction, or loss is
reflected on the books and records of a
qualified business unit.
(ii) Applicability date. Generally, para-
graph (b)(2)(i) of this section applies to
taxable years beginning after Decem-
ber 31, 2024. However, if pursuant to
§1.987-15(b), a taxpayer chooses to apply
§§1.987-1 through 1.987-15 to a taxable
year before the first taxable year described
in §1.987-15(a)(1), then paragraph (b)(2)
(i) of this section applies to that taxable
year.
* * * * *
Par. 11. Section 1.989(a)-1 is amended
by:
a. Removing and reserving paragraph
(b)(2)(i)(C).
b. Revising paragraphs (b)(4), (d)(3)
and (4).
The revisions read as follows:
§1.989(a)-1 Definition of a qualified
business unit.
* * * * *
(b) * * *
(4) Applicability date. Generally, para-
graph (b)(2)(i) of this section applies to
taxable years beginning after Decem-
ber 31, 2024. However, if pursuant to
§1.987-15(b), a taxpayer chooses to apply
§§1.987-1 through 1.987-15 to a taxable
year before the first taxable year described
in §1.987-15(a)(1), then paragraph (b)(2)
(i) of this section applies to that taxable
year. See §1.989(a)-1(b)(4), as contained
in 26 CFR in part 1 in effect on April 1,
2024, for a prior applicability date for
paragraph (b)(2)(i) of this section.
* * * * *
(d) * * *
(3) Proper reflection on the books of
the taxpayer or qualified business unit.
The principles of §1.987-2(b) apply in
determining whether an asset, liability, or
item of income, gain, deduction, or loss is
reflected on the books of a qualified busi-
ness unit (and therefore is attributable to
such unit).
(4) Applicability date. Generally, para-
graph (d)(3) of this section applies to tax-
able years beginning after December 31,
2024. However, if pursuant to §1.987-
15(b), a taxpayer applies §§1.987-1
through 1.987-15 to a taxable year before
the first taxable year described in §1.987-
15(a)(1), then paragraph (d)(3) of this
section applies to that taxable year. See
§1.989(a)-1(d)(4), as contained in 26 CFR
in part 1 in effect on April 1, 2024, for a
prior applicability date for paragraph (d)
(3) of this section.
* * * * *
Par. 12. Section 1.1502–13 is amended
by revising paragraph (j)(9) and adding
paragraphs (j)(10) and (l)(7) to read as
follows:
§1.1502-13 Intercompany transactions.
* * * * *
(j) * * *
(9) Section 987 QBUs. No intercompany
transaction is attributable to a section 987
QBU (within the meaning of §1.987-2(b)).
That is, in order to produce single entity
treatment, an intercompany transaction that
otherwise would involve the section 987
QBU(s) of one or more members is treated
instead as occurring directly between the
members (without the involvement of
any section 987 QBUs), and transfers are
deemed to take place between each section
987 QBU and its owner (see §1.987-2(c)(2)
(ii)). For example, if a member (M1) lends
money to the section 987 QBU of another
member (M2), this intercompany transac-
tion is treated as a loan from M1 to M2 and
a contribution from M2 to its section 987
QBU.
(10) Examples. The operating rules of
this paragraph (j) are illustrated generally
throughout this section, and by the follow-
ing examples.
(i) Example 1. Intercompany sale followed by
section 351 transfer to member— (A) Facts. S holds
land for investment with a basis of $70. On January
1 of Year 1, S sells the land to M for $100. M also
holds the land for investment. On July 1 of Year 3,
M transfers the land to B in exchange for all of B’s
stock in a transaction to which section 351 applies.
Under section 358, M’s basis in the B stock is $100.
B holds the land for sale to customers in the ordi-
nary course of business and, under section 362(b),
B’s basis in the land is $100. On December 1 of Year
5, M sells 20% of the B stock to X for $22. In an
unrelated transaction on July 1 of Year 8, B sells 20%
of the land for $22.
(B) Definitions. Under paragraph (b)(1) of this
section, S’s sale of the land to M and M’s transfer
of the land to B are both intercompany transactions.
S is the selling member and M is the buying mem-
ber in the first intercompany transaction, and M is
the selling member and B is the buying member
in the second intercompany transaction. M has no
intercompany items under paragraph (b)(2) of this
section. Because B acquired the land in an intercom-
pany transaction, B’s items from the land are corre-
sponding items to be taken into account under this
section. Under the successor asset rule of paragraph
(j)(1) of this section, references to the land include
references to M’s B stock. Under the successor per-
son rule of paragraph (j)(2) of this section, references
to M include references to B with respect to the land.
(C) Timing and attributes resulting from the stock
sale. Under paragraph (c)(3) of this section, M is
treated as owning and selling B’s stock for purposes
of the matching rule even though, as divisions, M
could not own and sell stock in B. Under paragraph
(j)(3) of this section, both M’s B stock and B’s land
can cause S’s intercompany gain to be taken into
account under the matching rule. Thus, S takes $6
of its gain into account in Year 5 to reflect the $6
difference between M’s $2 gain taken into account
from its sale of B stock and the $8 recomputed gain.
Under paragraph (j)(4) of this section, the attributes
of this gain are determined by treating S, M, and B
as divisions of a single corporation. Under paragraph
(c)(1) of this section, S’s $6 gain and M’s $2 gain
are treated as long-term capital gain. The gain would
be capital on a separate entity basis (assuming that
section 341 does not apply), and this treatment is not
inconsistent with treating S, M, and B as divisions
of a single corporation because the stock sale and
subsequent land sale are unrelated transactions and
B remains a member following the sale.
(D) Timing and attributes resulting from the
land sale. Under paragraph (j)(3) of this section, S
takes $6 of its gain into account in Year 8 under the
matching rule to reflect the $6 difference between
B’s $2 gain taken into account from its sale of an
interest in the land and the $8 recomputed gain.
Under paragraph (j)(4) of this section, the attributes
of this gain are determined by treating S, M, and B
as divisions of a single corporation and taking into
account the activities of S, M, and B with respect to
the land. Thus, both S’s gain and B’s gain might be
ordinary income as a result of B’s activities. (If B
subsequently sells the balance of the land, S’s gain
taken into account is limited to its remaining $18 of
intercompany gain.)
(E) Sale of successor stock resulting in decon-
solidation. The facts are the same as in paragraph (j)
(10)(i)(A) of this section (Example 1), except that M
sells 60% of the B stock to X for $66 on December
1 of Year 5 and B becomes a nonmember. Under the
matching rule, M’s sale of B stock results in $18 of
S’s gain being taken into account (to reflect the differ-
ence between M’s $6 gain taken into account and the
$24 recomputed gain). Under the acceleration rule,
however, the entire $30 gain is taken into account (to
reflect B becoming a nonmember, because its basis
in the land reflects M’s $100 cost basis from the
prior intercompany transaction). Under paragraph
(j)(4) of this section, the attributes of S’s gain are
determined by treating S, M, and B as divisions of

January 13, 2025 406 Bulletin No. 2025–3
a single corporation. Because M’s cost basis in the
land will be reflected by B as a nonmember, all of S’s
gain is treated as from the land (rather than a portion
being from B’s stock), and B’s activities with respect
to the land might therefore result in S’s gain being
ordinary income.
(ii) Example 2. Intercompany sale of member
stock followed by recapitalization—(A) Facts.
Before becoming a member of the P group, S owns
P stock with a basis of $70. On January 1 of Year 1,
P buys all of S’s stock. On July 1 of Year 3, S sells
the P stock to M for $100. On December 1 of Year
5, P acquires M’s original P stock in exchange for
new P stock in a recapitalization described in section
368(a)(1)(E).
(B) Timing and attributes. Although P’s basis
in the stock acquired from M is eliminated under
paragraph (f)(4) of this section, the new P stock
received by M is exchanged basis property (within
the meaning of section 7701(a)(44)) having a basis
under section 358 equal to M’s basis in the original P
stock. Under the successor asset rule of paragraph (j)
(1) of this section, references to M’s original P stock
include references to M’s new P stock. Because it
is still possible to take S’s intercompany item into
account under the matching rule with respect to the
successor asset, S’s gain is not taken into account
under the acceleration rule as a result of the basis
elimination under paragraph (f)(4) of this section.
Instead, the gain is taken into account based on sub-
sequent events with respect to M’s new P stock (for
example, a subsequent distribution or redemption of
the new stock).
(iii) Example 3. Back-to-back intercompany
transactions—matching—(A) Facts. S holds land
for investment with a basis of $70. On January 1 of
Year 1, S sells the land to M for $90. M also holds the
land for investment. On July 1 of Year 3, M sells the
land for $100 to B, and B holds the land for sale to
customers in the ordinary course of business. During
Year 5, B sells all of the land to customers for $105.
(B) Timing. Under paragraph (b)(1) of this sec-
tion, S’s sale of the land to M and M’s sale of the
land to B are both intercompany transactions. S is the
selling member and M is the buying member in the
first intercompany transaction, and M is the selling
member and B is the buying member in the second
intercompany transaction. Under paragraph (j)(4) of
this section, S, M and B are treated as divisions of a
single corporation for purposes of determining the
timing of their items from the intercompany trans-
actions. See also paragraph (j)(2) of this section (B
is treated as a successor to M for purposes of taking
S’s intercompany gain into account). Thus, S’s $20
gain and M’s $10 gain are both taken into account in
Year 5 to reflect the difference between B’s $5 gain
taken into account with respect to the land and the
$35 recomputed gain (the gain that B would have
taken into account if the intercompany sales had
been transfers between divisions of a single corpora-
tion, and B succeeded to S’s $70 basis).
(C) Attributes. Under paragraph (j)(4) of this
section, the attributes of the intercompany items and
corresponding items of S, M, and B are also deter-
mined by treating S, M, and B as divisions of a single
corporation. For example, the attributes of S’s and
M’s intercompany items are determined by taking
B’s activities into account.
(iv) Example 4. Back-to-back intercompany
transactions—acceleration—(A) Facts. During
Year 1, S performs services for M in exchange for
$10 from M. S incurs $8 of employee expenses. M
capitalizes the $10 cost of S’s services under section
263 as part of M’s cost to acquire real property from
X. Under its separate entity method of accounting, S
would take its income and expenses into account in
Year 1. M holds the real property for investment and,
on July 1 of Year 5, M sells it to B at a gain. B also
holds the real property for investment. On December
1 of Year 8, while B still owns the real property, P
sells all of M’s stock to X and M becomes a non-
member.
(B) M’s items. M takes its gain into account
immediately before it becomes a nonmember.
Because the real property stays in the group, the
acceleration rule redetermines the attributes of M’s
gain under the principles of the matching rule as if
B sold the real property to an affiliated corporation
that is not a member of the group for a cash payment
equal to B’s adjusted basis in the real property, and
S, M, and B were divisions of a single corporation.
Thus, M’s gain is capital gain.
(C) S’s items. Under paragraph (b)(2)(ii) of this
section, S includes the $8 of expenses in determin-
ing its $2 intercompany income. In Year 1, S takes
into account $8 of income and $8 of expenses. Under
paragraph (j)(4) of this section, appropriate adjust-
ments must be made to treat both S’s performance
of services for M and M’s sale to B as occurring
between divisions of a single corporation. Thus, S’s
$2 of intercompany income is not taken into account
as a result of M becoming a nonmember, but instead
will be taken into account based on subsequent
events (e.g., under the matching rule based on B’s
sale of the real property to a nonmember, or under
the acceleration rule based on P’s sale of the stock
of S or B to a nonmember). See the successor person
rules of paragraph (j)(2) of this section (B is treated
as a successor to M for purposes of taking S’s inter-
company income into account).
(D) Sale of S’s stock. The facts are the same as
in paragraph (j)(9)(iv)(A) of this section (Example
4), except that P sells all of S’s stock (rather than
M’s stock) and S becomes a nonmember on July 1
of Year 5. S’s remaining $2 of intercompany income
is taken into account immediately before S becomes
a nonmember. Because S’s intercompany income is
not from an intercompany sale, exchange, or distri-
bution of property, the attributes of the intercompany
income are determined on a separate entity basis.
Thus, S’s $2 of intercompany income is ordinary
income. M does not take any of its intercompany
gain into account as a result of S becoming a non-
member.
(E) Intercompany income followed by intercom-
pany loss. The facts are the same as in paragraph (j)
(9)(iv)(A) of this section (Example 4), except that M
sells the real property to B at a $1 loss (rather than
a gain). M takes its $1 loss into account under the
acceleration rule immediately before M becomes a
nonmember. But see § 1.267(f)-1 (which might fur-
ther defer M’s loss if M and B remain in a controlled
group relationship after M becomes a nonmember).
Under paragraph (j)(4) of this section appropriate
adjustments must be made to treat the group as if
both intercompany transactions occurred between
divisions of a single corporation. Accordingly, P’s
sale of M stock also results in S taking into account
$1 of intercompany income as capital gain to offset
M’s $1 of corresponding capital loss. The remaining
$1 of S’s intercompany income is taken into account
based on subsequent events.
(v) Example 5. Successor group—(A) Facts. On
January 1 of Year 1, B borrows $100 from S in return
for B’s note providing for $10 of interest annually at
the end of each year, and repayment of $100 at the
end of Year 20. As of January 1 of Year 3, B has paid
the interest accruing under the note. On that date,
X acquires all of P’s stock and the former P group
members become members of the X consolidated
group.
(B) Successor. Under paragraph (j)(5) of this sec-
tion, although B’s note ceases to be an intercompany
obligation of the P group, the note is not treated as
satisfied and reissued under paragraph (g) of this sec-
tion as a result of X’s acquisition of P stock. Instead,
the X consolidated group succeeds to the treatment
of the P group for purposes of paragraph (g) of this
section, and B’s note is treated as an intercompany
obligation of the X consolidated group.
(vi) Example 6. Liquidation—80% distributee—
(A) Facts. X has had preferred stock described in
section 1504(a)(4) outstanding for several years. On
January 1 of Year 1, S buys all of X’s common stock
for $60, and B buys all of X’s preferred stock for
$40. X’s assets have a $0 basis and $100 value. On
July 1 of Year 3, X distributes all of its assets to S and
B in a complete liquidation. Under § 1.1502-34, sec-
tion 332 applies to both S and B. Under section 337,
X has no gain or loss from its liquidating distribution
to S. Under sections 336 and 337(c), X has a $40
gain from its liquidating distribution to B. B has a
$40 basis under section 334(a) in the assets received
from X, and S has a $0 basis under section 334(b) in
the assets received from X.
(B) Intercompany items from the liquidation.
Under the matching rule, X’s $40 gain from its liq-
uidating distribution to B is not taken into account
under this section as a result of the liquidation (and
therefore is not yet reflected under §§ 1.1502-32
and 1.1502-33). Under the successor person rule of
paragraph (j)(2)(i) of this section, S and B are both
successors to X. Under section 337(c), X recognizes
gain or loss only with respect to the assets distrib-
uted to B. Under paragraph (j)(2)(ii) of this section,
to be consistent with the purposes of this section, S
succeeds to X’s $40 intercompany gain. The gain
will be taken into account by S under the matching
and acceleration rules of this section based on sub-
sequent events. (The allocation of the intercompany
gain to S does not govern the allocation of any other
attributes.)
(vii) Example 7. Liquidation—no 80% distribu-
tee—(A) Facts. X has only common stock outstand-
ing. On January 1 of Year 1, S buys 60% of X’s stock
for $60, and B buys 40% of X’s stock for $40. X’s
assets have a $0 basis and $100 value. On July 1 of
Year 3, X distributes all of its assets to S and B in
a complete liquidation. Under § 1.1502-34, section
332 applies to both S and B. Under sections 336 and
337(c), X has a $100 gain from its liquidating distri-
butions to S and B. Under section 334(b), S has a $60
basis in the assets received from X and B has a $40
basis in the assets received from X.

Bulletin No. 2025–3 407 January 13, 2025
(B) Intercompany items from the liquidation.
Under the matching rule, X’s $100 intercompany
gain from its liquidating distributions to S and B is
not taken into account under this section as a result
of the liquidation (and therefore is not yet reflected
under §§ 1.1502-32 and 1.1502-33). Under the suc-
cessor person rule of paragraph (j)(2)(i) of this sec-
tion, S and B are both successors to X. Under para-
graph (j)(2)(ii) of this section, to be consistent with
the purposes of this section, S succeeds to X’s $40
intercompany gain with respect to the assets distrib-
uted to B, and B succeeds to X’s $60 intercompany
gain with respect to the assets distributed to S. The
gain will be taken into account by S and B under the
matching and acceleration rules of this section based
on subsequent events. (The allocation of the inter-
company gain does not govern the allocation of any
other attributes.)
(viii) Example 8: Loan by section 987 QBU—(A)
Facts. S owns all the interests in DE1, a disregarded
entity operating a business that is a section 987 QBU
(S QBU) whose functional currency is the euro. S has
net unrecognized section 987 gain with respect to S
QBU. In year 1, S QBU lends €100 to B with interest
due annually. B makes interest payments on the loan
to S QBU in years 1 through 3. In year 3, B repays
the loan and recognizes section 988 loss of $12 on the
loan repayment. All payments are made in euros, and
B recognizes no section 988 gain or loss on the euros
it uses to pay the interest and principal. B is never
insolvent within the meaning of section 108(d)(3).
Other than with respect to the loan, there are no trans-
fers between S and S QBU during years 1 through 3,
and neither S nor B had any other foreign currency
gain or loss. Neither S nor B has made an election
under section 988 or the section 988 regulations.
(B) Analysis—(1) Loan. Under paragraph (j)(9)
of this section, the loan is treated as a transfer from S
QBU to S and a loan directly between S and B. Spe-
cifically, S is treated as receiving a transfer of €100
from S QBU in year 1; S is then treated as lending
€100 directly to B. For purposes of §1.987-2, the
loan is attributable to S, not to S QBU. As an inter-
company loan, S’s loan to B is subject to the rules
of this section. Because there is a remittance from
S QBU to S in year 1, S recognizes section 987 gain
under §1.987-5.
(2) Interest payments. While the loan is out-
standing, each of B’s interest payments to S QBU is
treated as an interest payment from B to S, followed
by a transfer from S to S QBU. Under the matching
rule in paragraph (c) of this section, S’s intercom-
pany interest income offsets B’s corresponding inter-
est expense. See paragraph (g)(7)(ii)(A)(2) of this
section (Example 1). Since the functional currency
of both S and B is the dollar, if B recognizes any
section 988 gain or loss on the interest payments, S
will recognize an offsetting amount of section 988
loss or gain. Because the only transfer between S and
S QBU in year 2 is from S to S QBU, there is no
remittance from S QBU to S and S does not recog-
nize section 987 gain under §1.987-5.
(3) Repayment. Upon the year 3 repayment of
the loan, B is treated as repaying €100 to S, and S
is treated as transferring €100 to S QBU. Since the
functional currency of both S and B is the dollar,
and B recognizes section 988 loss of $12 on the loan
repayment, S will recognize an offsetting section 988
gain of $12. Because the only transfers between S
and S QBU in year 3 are from S to S QBU, there is
no remittance from S QBU to S and S does not rec-
ognize section 987 gain under §1.987-5.
(4) Summary. Overall, the group’s taxable
income includes S’s section 987 gain in year 1 (the
section 988 inclusions offset). This result is consis-
tent with the treatment of a single corporation that
borrows from its section 987 QBU.
(C) Loan sold to non-member. The facts are the
same as in paragraph (j)(10)(viii)(A) of this section,
except that, in year 3, S QBU sells the loan to unre-
lated X for €90, reflecting an increase in prevailing
market interest rates. Up until the sale, the analysis
is the same as in paragraphs (j)(10)(viii)(B)(1) and
(2) of this section. Because the loan is attributable
to S (see paragraphs (j)(9) and (j)(10)(viii)(B)(1) of
this section), the sale is treated as a sale by S. Under
paragraph (g)(3) of this section, immediately before
the sale, B is deemed to satisfy and reissue the loan
for its fair market value of €90. As a result, B takes
into account cancellation of indebtedness income,
and S takes into account an offsetting amount of
ordinary loss. See paragraph (g)(7)(ii) (Example 2)
of this section. If there is currency gain or loss, S
and B take into account offsetting amounts of gain
and loss under section 988 (subject to the limitation
of §1.988-2(b)(8)). Because S has a basis of €90 in
the new loan, S recognizes no gain or loss on the
sale to X. S is then treated as transferring the €90
to S QBU.
(D) Party becomes a nonmember. The facts are
the same as in paragraph (j)(10)(viii)(A) of this sec-
tion, except that, in year 3, B becomes a nonmember.
Up until B leaves the group, the analysis is the same
as in paragraphs (j)(10)(viii)(B)(1) and (2) of this
section. Immediately before B becomes a nonmem-
ber, B is deemed to satisfy and reissue the loan for
its fair market value under paragraph (g)(3) of this
section, with the same consequences as described in
paragraph (j)(10)(viii)(C) of this section. When B
becomes a nonmember, the loan (which is no longer
an intercompany obligation) ceases to be subject to
paragraph (j)(9) of this section. If the loan is attribut-
able to S QBU under §1.987-2, S is treated as trans-
ferring the loan to S QBU.
(ix) Example 9: Sale of property by section 987
QBU—(A) Facts. M1 owns all the interests in DE1,
a disregarded entity operating a business that is a
section 987 QBU (M1 QBU) whose functional cur-
rency is the euro. M1 has net unrecognized section
987 gain with respect to M1 QBU. M1 QBU sells
property to M2 for €100 in year 1.
(B) Analysis—(1) In general. Under paragraph
(j)(9) of this section, the sale of property is treated
as a transfer of the property from M1 QBU to M1,
followed by an exchange of the property for €100
directly between M1 and M2, and a transfer of the
€100 from M1 to M1 QBU.
(2) Distribution. M1 QBU is treated as transfer-
ring the property to M1.
(3) Exchange. M1 is then treated as selling the
property to M2 for €100. M1 takes into account its
intercompany gain or loss on the property under the
rules of this section. M2 recognizes intercompany
section 988 gain or loss on its exchange of €100 for
the property. See paragraph (b)(1)(iii) of this section
for property exchanges between members.
(4) Contribution. Finally, M1 is treated as trans-
ferring the €100 to M1 QBU. Because M1’s basis in
the €100 equals its fair market value, M1 has a cor-
responding section 988 gain or loss of zero upon the
contribution. See §1.988-1(a)(10). Both the transfer
of the property from M1 QBU to M1 and the trans-
fer of the €100 from M1 to M1 QBU are taken into
account in determining whether there is a remittance
from M1 QBU to M1 in year 1 and whether M1 rec-
ognizes section 987 gain under §1.987-5.
(5) Summary. Overall, in year 1, M1 may take
into account section 987 gain if the transfers between
M1 and M1 QBU result in a remittance, and M2
takes into account section 988 gain or loss on the
€100. This result is consistent with the treatment of
a single corporation that purchases property from its
section 987 QBU.
(l) * * *
(7) Applicability date. Generally,
paragraph (j)(9) of this section applies to
taxable years beginning after December
31, 2024, for which the original Federal
income tax return is due (without exten-
sions) after December 11, 2024. However,
if pursuant to §1.987-15(b), a taxpayer
chooses to apply §§1.987-1 through 1.987-
15 to a taxable year before the first taxable
year described in §1.987-15(a)(1), then
paragraph (j)(9) of this section applies to
that taxable year and subsequent years.
Douglas W. O’Donnell,
Deputy Commissioner.
Approved: November 20, 2024
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register Decem-
ber 10, 2024, 8:45 a.m., and published in the issue
of the Federal Register for December 11, 2024, 89
FR 100138)

January 13, 2025 408 Bulletin No. 2025–3
26 CFR 1.987-0 through 26 CFR 1.987-15
TD 10020
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Reissuance of State or
Local Bonds
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations that address when tax-ex-
empt bonds are treated as retired for cer-
tain Federal income tax purposes. The
final regulations are necessary to unify
and to clarify existing guidance on this
subject. The final regulations affect State
and local governments that issue tax-ex-
empt bonds.
DATES: Effective date: These regulations
are effective on December 30, 2024.
Applicability date: For dates of appli-
cability, see §1.150-3(f).
FOR FURTHER INFORMATION
CONTACT: Zoran Stojanovic, (202)
317-6980 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains final regula-
tions that amend the Income Tax Regula-
tions (26 CFR part 1) by adding final reg-
ulations under section 150 and amending
the regulations under section 1001 of the
Internal Revenue Code (Code) to provide
rules for determining when tax-exempt
bonds are treated as retired for purposes
of sections 103 and 141 through 150 of the
Code (final regulations).
These final regulations are promulgated
under the express delegation of author-
ity in section 7805(a) of the Code, which
authorizes the Secretary of the Treasury
or her delegate to “prescribe all needful
rules and regulations for the enforcement
of [the Code], including all rules and reg-
ulations as may be necessary by reason of
any alteration of law in relation to internal
revenue.”
Background
On December 31, 2018, a notice of
proposed rulemaking (REG-141739-08)
regarding retirement of tax-exempt bonds
was published in the Federal Register (83
FR 67701) (proposed regulations). No
public hearing was requested or held. Five
public comments responding to the pro-
posed regulations were received and are
available at https://www.regulations.gov
or upon request. After careful consider-
ation of all the written comments, the pro-
posed regulations are adopted as amended
by this Treasury decision in response to
such comments as described in the Sum-
mary of Comments and Explanation of
Revisions.
1. Overview
In general, under section 103, interest
received by the holders of certain bonds
issued by State and local governments is
exempt from Federal income tax. To qual-
ify for the tax exemption, a bond issued by
a State or local government must satisfy
various eligibility requirements under sec-
tions 141 through 150 at the time of issu-
ance of the bond. If the issuer and holder
agree after issuance to modify the terms of
a tax-exempt bond significantly, the orig-
inal bond may be treated as having been
retired and exchanged for a newly issued,
modified bond. Similarly, if the issuer or
its agent acquires and resells the bond, the
bond may be treated as having been extin-
guished upon acquisition and replaced
upon resale with a newly issued bond.
The term “reissuance” commonly
refers to the effect of a transaction in
which a new bond is deemed to be issued
in place of an old bond as a result of retire-
ment of the old bond pursuant to such an
exchange or extinguishment. In the case
of a reissuance, the reissued bond must be
retested for qualification under sections
103 and 141 through 150. The reissu-
ance of an issue of tax-exempt bonds may
result in various negative consequences
to the issuer, such as changes in yield for
purposes of the arbitrage investment yield
restrictions under section 148(a), acceler-
ation of arbitrage rebate payment obliga-
tions under section 148(f), and change-in-
law risk.
2. Tender Option Bonds
Tender option bonds and variable rate
demand bonds (collectively, tender option
bonds) have special features that present
reissuance questions. Specifically, tender
option bonds have original terms that pro-
vide for a tender option interest rate mode,
as described in this paragraph. Issuers of
tax-exempt bonds often preauthorize sev-
eral different interest rate modes in the
bond documents and retain an option to
switch interest rate modes under param-
eters set forth in the bond documents.
During a tender option mode, tender option
bonds have short-term interest rates that
are reset periodically at various short-term
intervals (typically, every seven days)
based on the current market rate necessary
to remarket the bonds at par. In connection
with each resetting of the interest rate, the
holder of a tender option bond has a right
or requirement to tender the bond back to
the issuer or its agent for purchase at par.
Tender option bonds generally are struc-
tured with these short-term features sup-
ported by put options to enable the bonds
to be eligible for purchase by tax-exempt
money market funds pursuant to 17 CFR
270.2a-7 (Rule 2a-7 under the Investment
Company Act of 1940).
Tender option bonds also may have
interest rate mode conversion options that
permit the issuer or conduit borrower to
change the interest rate mode on the bonds
from a tender option mode to another
short-term interest rate mode or to a fixed
interest rate to maturity. At the time of a
conversion to another interest rate mode,
the holder of a tender option bond typi-
cally has the right or requirement to tender
the bond for purchase at par.
Tender option bonds generally have
third-party liquidity facilities from banks
or other liquidity providers to ensure that
there is sufficient cash to repurchase the
bonds upon a holder’s tender, and they
also commonly have credit enhancement
from bond insurers or other third-party
guarantors. Upon a holder’s exercise of

Bulletin No. 2025–3 409 January 13, 2025
its tender rights in connection with either
a resetting of the interest rate during a
tender option mode or a conversion to
another interest rate mode, a remarketing
agent or a liquidity provider typically will
acquire the bonds subject to the tender and
resell the bonds either to the same bond-
holders or to others willing to purchase
such bonds.
3. Existing Guidance
To address reissuance questions related
to tax-exempt bonds, on December 27,
1988, the Department of the Treasury
(Treasury Department) and the IRS pub-
lished Notice 88-130, 1988-2 CB 543,
which provides rules for determining
when a tax-exempt bond is retired for
purposes of sections 103 and 141 through
150. Notice 88-130 provides in part that
a tax-exempt bond is retired when there
is a change to the terms of the bond that
results in a disposition of the bond for pur-
poses of section 1001. In addition, Notice
88-130 provides special rules for retire-
ment of certain tender option bonds that
meet a definition of the term “qualified
tender bond.”
On June 26, 1996, the Treasury Depart-
ment and the IRS published final regula-
tions under §1.1001-3 of the Income Tax
Regulations (1996 final regulations) in the
Federal Register (61 FR 32926). The 1996
final regulations provide rules for determin-
ing whether a modification of the terms of
a debt instrument, including a tax-exempt
bond, results in an exchange for purposes
of section 1001. In recognition of a need to
coordinate the interaction of the prior guid-
ance in Notice 88-130 with the 1996 final
regulations for particular tax-exempt bond
purposes, the Treasury Department and the
IRS stated their intention to issue regula-
tions under section 150 on this subject in
the preamble of the 1996 final regulations.
See 61 FR 32930.
On April 14, 2008, the Treasury Depart-
ment and the IRS published Notice 2008-
41, 2008-1 CB 742. Like Notice 88-130,
Notice 2008-41 provides rules for deter-
mining when a tax-exempt bond is retired
for purposes of sections 103 and 141
through 150 and includes special rules for
qualified tender bonds. While the retire-
ment standards provided in these two
notices are similar, Notice 2008-41 was
intended to coordinate the retirement stan-
dards for tax-exempt bond purposes with
the 1996 final regulations on modifica-
tions of debt instruments under §1.1001-3
and to be more administrable than Notice
88-130. In order to preserve flexibility and
to limit potential unintended consequences
during the 2008 financial crisis, Notice
2008-41 permitted issuers to apply either
notice. Generally, under Notice 2008-41,
a tax-exempt bond is retired when a sig-
nificant modification to the terms of the
bond occurs under §1.1001-3, the bond is
acquired by or on behalf of its issuer, or the
bond is otherwise redeemed or retired. The
notice clarifies that, for purposes of these
retirement standards, the purchase of a
tax-exempt bond by a third-party guaran-
tor or third-party liquidity facility provider
pursuant to the terms of the guarantee or
liquidity facility is not treated as a purchase
or other acquisition by or on behalf of a
governmental issuer. Although these gen-
eral rules apply to a qualified tender bond,
Notice 2008-41 also provides that certain
features of qualified tender bonds will not
result in a retirement. In Notice 2008-41,
the Treasury Department and the IRS reit-
erated their intention to provide guidance
on the retirement of tax-exempt bonds in
regulations under section 150.
The proposed regulations provide
rules for determining when tax-exempt
bonds are treated as retired for purposes
of sections 103 and 141 through 150. The
proposed regulations also amend §1.1001-
3(a)(2) of the 1996 final regulations to
conform that section to the special rules in
the proposed regulations for retirement of
qualified tender bonds.
Summary of Comments and
Explanation of Revisions
After consideration of the public com-
ments, the Treasury Department and the IRS
adopt the proposed regulations as amended
by this Treasury decision. This section of
the preamble discusses the public comments
and the revisions made in the final regula-
tions in response to those comments.
1. General Rules for Retirement of a Tax-
Exempt Bond
The proposed regulations generally
provide standards for determining when a
tax-exempt bond is retired for purposes of
sections 103 and 141 through 150, includ-
ing certain special rules for determining
when qualified tender bonds are retired.
One comment suggested expanding
the scope of the final regulations to cover
taxable tax-advantaged bonds, such as
direct pay build America bonds and tax
credit bonds, because some of those bonds
were also issued as tender option bonds
that would benefit from the special rules
for qualified tender bonds. The authori-
zations for these taxable tax-advantaged
bonds, however, have been very limited
in both time and amount, and very few
of these bonds have been issued as ten-
der option bonds. Furthermore, section
13404 of Public Law 115-97, 131 Stat.
2054, 2138 (December 22, 2017), com-
monly referred to as the Tax Cuts and Jobs
Act, repealed the existing authority in the
Code for taxable tax-advantaged bonds.
Because no taxable tax-advantaged bonds
currently may be issued and very few his-
torically have been issued as tender option
bonds, the Treasury Department and the
IRS have determined that expanding the
scope of the final regulations to include
those bonds lacks sufficient justification.
Accordingly, the final regulations do not
adopt this comment.
The proposed regulations generally
provide that a tax-exempt bond is retired
if a significant modification to the terms
of the bond occurs under §1.1001-3, the
issuer or an agent acting on its behalf
acquires the bond in a manner that liq-
uidates or extinguishes the bondholder’s
investment in the bond, or the bond is oth-
erwise redeemed (for example, redeemed
at maturity).
The final regulations make one tech-
nical change to the second general rule
regarding debt extinguishment to remove
the reference to the “bondholder’s invest-
ment” and thus to focus more clearly
on the merger of interests and attendant
extinguishment that occurs when an issuer
acquires its own bond either directly or
through an agent.
Two comments recommended allow-
ing an issuer to make an election to treat
a tax-exempt bond as retired and reis-
sued under the final regulations. These
comments noted that it is sometimes
unclear whether a transaction results in
the retirement and reissuance of a tax-ex-

January 13, 2025 410 Bulletin No. 2025–3
empt bond. The comments described sev-
eral specific situations in which such an
election could address this uncertainty.
The Treasury Department and the IRS
recognize that such an election could rea-
sonably reduce the burden on issuers in
certain specific situations. However, the
Treasury Department and the IRS have
concerns that an unrestricted right to
elect retirement and reissuance of tax-ex-
empt bonds could result in unintended
consequences. In response to this com-
ment and to provide flexibility to address
this issue in appropriate, tailored circum-
stances, the final regulations authorize
the Commissioner to publish guidance in
the Internal Revenue Bulletin that allows
issuers to elect to treat tax-exempt bonds
as retired and reissued in specific circum-
stances for purposes of sections 103 and
141 through 150.
2. Exceptions to Retirement of a Tax-
Exempt Bond
The proposed regulations provide three
exceptions to the operation of the general
rules that limit retirements of tax-exempt
bonds. Two of these exceptions prevent
the special features of tender option bonds
from resulting in a retirement. A third
exception applies to all tax-exempt bonds.
A. Definition of qualified tender bond
The first two exceptions in the pro-
posed regulations apply to qualified tender
bonds, which are defined to cover tender
option bonds that meet certain require-
ments. Specifically, a qualified tender
bond is subject to certain limitations on
interest rate, timing of interest payments,
and maturity. A qualified tender bond must
also include a qualified tender right. The
proposed regulations generally define a
qualified tender right as a right or obliga-
tion of the holder of a bond to tender the
bond for purchase by the issuer, its agent,
or another party at a purchase price equal
to par plus any accrued interest. Under
the proposed regulations, a qualified ten-
der right must also require the issuer or
its remarketing agent to redeem the bond
or to use reasonable best efforts to resell
the bond within the 90 days of the tender
at a purchase price equal to par plus any
accrued interest.
Four comments urged the Treasury
Department and the IRS to amend the
definition of a qualified tender right in
the final regulations to allow a bond to be
resold at a premium or discount price rel-
ative to the par amount of the bond (rather
than just at a price equal to par as under
the proposed regulations) when the quali-
fied tender right is exercised in connection
with a conversion of the interest rate mode
to a fixed rate for the remaining term of
the bond. The comments noted that, when
a long-term fixed rate bond is originally
issued at par, a sustained upward trend in
interest rates can result in the bond hav-
ing market discount as it is resold in the
secondary market. If that market discount
exceeds the permitted de minimis amount,
the discount will be taxed as ordinary
income to the holder. Premium included
in the sale price of a long-term fixed rate
tax-exempt bond serves as a buffer against
market discount as interest rates rise over
time. Accordingly, qualified tender bonds
resold at a premium upon conversion of
the interest rate mode on the bonds to
a fixed rate to maturity generally have
greater market demand and a lower yield
than they would have if resold at par. The
comments also noted that, even when an
issue of fixed rate tax-exempt bonds is
resold at an aggregate net premium price,
certain bonds within the issue may be
resold at a discount. The comments fur-
ther noted that Notice 2008-41 permitted
qualified tender bonds to be resold at a
premium or a discount upon conversion
of the interest rate mode to a fixed rate to
maturity and treated the premium received
by the issuer upon resale of the bonds as
additional sale proceeds for purposes of
the arbitrage investment restrictions under
section 148. The final regulations adopt
this comment.
One comment pointed out a technical
discrepancy in the proposed regulations
under which a bond may be purchased
pursuant to a qualified tender right by
the issuer, the issuer’s agent, or another
party, whereas the bond must be resold
under the terms of a qualified tender right
by the issuer or a remarketing agent. The
comment recommended that the final
regulations clarify this technical issue in
the definition of a qualified tender right
so that the parties that may purchase the
tendered bond (that is, the issuer, the issu-
er’s agent, or another party) are also per-
mitted to resell the bond. The comment
advised against use of the term “remarket-
ing agent” on the grounds that the party
charged with reselling the bond may not
be an agent of the issuer and the resale
may be a private placement rather than a
remarketing. The final regulations adopt
this comment.
B. Exceptions to retirement of a qualified
tender bond
A qualified tender bond has two fea-
tures that could result in retirement of the
bond under the general rules for retirement
in the proposed regulations. First, the exis-
tence or exercise of a qualified tender right
in connection with an alteration under the
terms of the bond could cause the alter-
ation to be a modification under §1.1001-3
and, if significant, that modification would
result in retirement of the qualified tender
bond under §1.150-3(b)(1) of the pro-
posed regulations. For example, when
accompanied by a tender right, an exercise
of the issuer’s option to change the inter-
est rate or the interest rate mode under the
terms of the bond could be a modification
under the rule in §1.1001-3(c)(2)(iii) for
alterations that result from the exercise of
an option because the holder’s resulting
right to put the bond to the issuer or its
agent under the qualified tender right upon
the interest rate conversion could cause
the issuer’s option to fail to qualify as a
unilateral option under §1.1001-3(c)(3)(i).
Similarly, an issuer may be uncertain as
to whether the periodic change in interest
rate that occurs pursuant to the terms of
a bond operating in a tender option mode
could be a modification under §1.1001-3
when accompanied by a tender right. To
address these circumstances, the proposed
regulations provide a special exception
that avoids retirement by disregarding
a qualified tender right for purposes of
applying §1.1001-3 to determine whether
an alteration of a qualified tender bond
constitutes a significant modification
under §1.1001-3 that results in retirement
of the bond.
One comment requested that the final
regulations clarify whether this exception
applies to a qualified tender right arising
in connection with any alteration of the
terms of the bond or only to a qualified

Bulletin No. 2025–3 411 January 13, 2025
tender right arising in connection with
a change in interest rate or interest rate
mode. The scope of the analogous provi-
sions in Notices 88-130 and 2008-41 was
limited to circumstances covering changes
in the interest rate or interest rate mode
only. The Treasury Department and the
IRS intended for this special rule to be sim-
ilarly limited in scope. In response to the
comment, the final regulations clarify that
the special rule for disregarding a quali-
fied tender right in applying §1.1001-3
to a qualified tender bond applies only
for the purpose of determining whether
an alteration of the interest rate or inter-
est rate mode pursuant to the terms of a
qualified tender bond results in a retire-
ment. The determination of whether any
other alteration to the terms of a qualified
tender bond, such as a change in maturity
or collateral, results in a retirement under
§1.150-3(b)(1)(i) is made under the gen-
eral rules in §1.1001-3 without the benefit
of the special exception in §1.150-3(c)(1),
even if the alteration occurs contempora-
neously with a change in interest rate or
interest rate mode on the bond.
One comment recommended that the
final regulations include several addi-
tional exceptions to the general rule under
§1.150-3(b)(1) that a bond is retired for
purposes of sections 103 and 141 through
150 when a significant modification
occurs under §1.1001-3. Specifically, this
comment requested that the final regula-
tions include a rule from Notice 2008-41
that a modification that changes the col-
lateral or credit enhancement on a non-
recourse tax-exempt bond is significant
only if the change results in a change in
payment expectations under §1.1001-
3(e)(4)(vi). This special rule involved an
accommodation for circumstances in the
2008 financial crisis. This comment also
requested that the final regulations retain
the exception in Notice 88-130 for qual-
ified corrective changes. This exception
from 1988 preceded the significant mod-
ification standard under §1.1001-3, which
was finalized in the 1996 final regulations.
In most circumstances, these qualified cor-
rective changes would not be significant
modifications under §1.1001-3. Further, a
significant purpose of the final regulations
is to improve administrability in a com-
plex area of law by integrating the rules
for retirement of a tax-exempt bond as
closely as possible with the existing rules
under §1.1001-3. Accordingly, the final
regulations do not adopt these comments.
The second feature of a qualified ten-
der bond that could result in retirement of
the bond under the general rules for retire-
ment in the proposed regulations is the
feature under which an issuer or its agent
may acquire the bond upon the holder’s
exercise of the qualified tender right. The
general rules for retirement treat an acqui-
sition of a bond by an issuer or an issu-
er’s agent in a manner that extinguishes
the bond as a retirement of the bond. To
address this circumstance, the proposed
regulations provide an exception under
which the acquisition of a qualified tender
bond pursuant to the exercise of a quali-
fied tender right will not result in retire-
ment, provided that neither the issuer nor
its agent holds the bond for longer than
90 days. One comment recommended
expanding this special rule to cover all
tax-exempt bonds rather than just quali-
fied tender bonds. This exception is lim-
ited to qualified tender bonds because the
rate-setting mechanism on those bonds
may require the issuer or its agent to pur-
chase a tendered bond if a buyer for the
bond cannot be found when the bond is
tendered. The Treasury Department and
the IRS have adopted this limited excep-
tion for the narrowly defined class of qual-
ified tender bonds because the acquisition
of those bonds occurs pursuant to the ordi-
nary operation of the rate-setting mecha-
nism on those bonds. In addition, qualified
tender bonds represent a significant struc-
tured type of bonds in the tax-exempt bond
market tailored to money market fund
investors and the Treasury Department
and the IRS have supported this structure
with accommodating special rules consis-
tently in all of the existing guidance in this
area. Other tax-exempt bonds do not rely
on this exception for the ordinary opera-
tion of their rate-setting mechanism. The
Treasury Department and the IRS decline
to expand this exception to allow issuers
to hold their own bonds more generally
because of concerns regarding the impli-
cations for the debt extinguishment prin-
ciple. Accordingly, the final regulations do
not adopt this comment.
One comment recommended continu-
ing a special rule from Notice 2008-41 that
modified the definition of program invest-
ment for purposes of arbitrage investment
restrictions under §1.148-1(b). Ordinarily,
this definition prohibits a conduit bor-
rower of tax-exempt bond proceeds from
purchasing the bonds that financed the
conduit loan in an amount that is related
to the conduit loan. Notice 2008-41 mod-
ified this rule so that a conduit borrower
could purchase any auction rate bonds
that financed the conduit loan, provided
the conduit borrower purchased the bonds
to facilitate liquidity under adverse mar-
ket conditions. This special rule permitted
conduit borrowers to buy those bonds to
address extraordinary circumstances in
the 2008 financial crisis and to increase
liquidity at a time of market crisis involv-
ing the collapse of the auction rate bond
market and downgrades of bond insurers.
The Treasury Department and the IRS
decline to extend this special rule beyond
the conditions under which the rule was
promulgated. Accordingly, the final regu-
lations do not adopt this comment.
C. Additional exceptions for all tax-
exempt bonds
The proposed regulations also pro-
vide an exception to the general rules of
retirement for all tax-exempt bonds. This
exception, carried forward from Notice
2008-41, provides that acquisition of a
tax-exempt bond by a guarantor or liquid-
ity facility provider acting as the issuer’s
agent does not result in retirement of the
bond if the acquisition is pursuant to the
terms of the guarantee or liquidity facility
and the guarantor or liquidity facility pro-
vider is not a related party (as defined in
§1.150-1(b)) to the issuer. No public com-
ments were received on this provision.
The final regulations adopt this provision
without change.
The proposed regulations provide that
a tax-exempt bond is retired for purposes
of sections 103 and 141 through 150
when a significant modification occurs
under §1.1001-3. Section 1.1001-3(e)(5)
(i) generally provides that, subject to the
special rule in §1.1001-3(f)(7), a modifi-
cation of a debt instrument that results in
an instrument or property right that is not
debt for Federal income tax purposes is a
significant modification. Section 1.1001-
3(f)(7)(ii)(A) generally provides that, in
determining whether a modification of a

January 13, 2025 412 Bulletin No. 2025–3
debt instrument results in an instrument or
property right that is not debt, any dete-
rioration in the financial condition of the
obligor between the issue date of the debt
instrument and the date of the modifica-
tion is not taken into account. One com-
ment recommended that, when new bonds
are issued and the proceeds are used to
currently refund outstanding bonds, issu-
ers be allowed to apply the credit dete-
rioration rule in §1.1001-3(f)(7) to treat
the new bonds as a continuation of the
refunded bonds for purposes of sections
103 and 141 through 150. The Treasury
Department and the IRS have concluded
that there is not sufficient justification to
expand the scope of the final regulations
to include rules for new issuances of
tax-exempt bonds. Accordingly, the final
regulations do not adopt this comment.
3. Effect of Retirement of a Tax-Exempt
Bond
The proposed regulations prescribe
certain consequences for a bond that is
retired pursuant to a deemed exchange
under §1.1001-3 or retired following the
acquisition of the bond by the issuer or the
issuer’s agent. Upon a deemed exchange
under §1.1001-3, the bond is treated as a
new bond issued at the time of the signif-
icant modification as determined under
§1.1001-3. Upon an issuer’s acquisition
of its own bond, absent any special rule,
the bond is extinguished and retired. One
comment recommended permitting an
issuer that purchases its own tax-exempt
bond to treat the resale of that bond as a
refunding of the bond extinguished by the
purchase. The comment suggested that
the issuer be permitted to allocate the pro-
ceeds from the resale of the bond to the
expenditure incurred in the purchase of
the bond under rules similar to the rules
for using proceeds of tax-exempt bonds to
“reimburse” previous expenditures under
the reimbursement expenditure rules in
§1.150-2. Section 1.150-2(g)(1), however,
specifically prohibits using bond proceeds
to reimburse expenditures incurred in
repayment of tax-exempt bonds. Mod-
ification of the reimbursement rules to
encompass refundings of extinguished
and retired bonds is beyond the scope of
the final regulations. The final regulations
do not adopt this comment.
4. Applicability Dates
Under the proposed regulations, the
final rules would apply to events and
actions taken with respect to bonds that
occur on or after the date that is 90 days
after the date of publication of the final
regulations in the Federal Register. The
proposed regulations further state that
issuers may apply the proposed regula-
tions to events and actions taken with
respect to bonds that occur before that
date. One comment recommended apply-
ing the final regulations only to bonds
issued after the applicability date of the
final regulations. This comment noted that
outstanding bonds are structured to avoid
retirement under the existing guidance
and potentially might not avoid retirement
under the final regulations. The Treasury
Department and the IRS are concerned
that this approach would continue the
application of the disparate existing guid-
ance in this area for a substantial period of
time for the entire current outstanding vol-
ume of tax-exempt bonds in the municipal
bond market. The principal goals of the
final regulations are to unify, clarify, and
improve the administrability of the exist-
ing guidance on retirement of tax-exempt
bonds. The Treasury Department and the
IRS have determined that publishing the
final regulations without also obsoleting
Notice 88-130 and Notice 2008-41 would
undermine the unifying and streamlin-
ing purposes of the final regulations. In
addition, the final regulations and Notice
2008-41 are similar and generally should
produce similar results in most cases out-
side of special circumstances involving
the 2008 financial crisis. Accordingly, the
final regulations do not adopt this com-
ment.
However, to provide a longer transition
period for outstanding tax-exempt bonds,
the final regulations provide a period of
one year from the date the final regula-
tions are published in the Federal Regis-
ter during which issuers may continue to
apply Notice 88-130 or Notice 2008-41.
As a result, the final regulations apply to
events occurring and actions taken with
respect to bonds on or after December
30, 2025, though an issuer may choose
to apply the final regulations to events
occurring and actions taken with respect
to bonds on or after December 30, 2024.
Effect on Other Documents
Notice 88-130 and Notice 2008-41 are
obsolete as of December 30, 2025.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of
Agreement, Review of Treasury Regula-
tions under Executive Order 12866 (June
9, 2023), tax regulatory actions issued by
the IRS are not subject to the requirements
of section 6 of Executive Order 12866, as
amended. Therefore, a regulatory impact
assessment is not required.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (RFA), it is hereby certified that these
final regulations will not have a signif-
icant economic impact on a substantial
number of small entities. The final regu-
lations affect State and local governments
that issue tax-exempt bonds. States are not
considered small entities for purposes of
the RFA but small governmental jurisdic-
tions (jurisdictions with populations less
than 50,000) are considered small entities.
The Treasury Department and the IRS do
not have data on how many small govern-
mental jurisdictions may be affected by
these regulations, but it may be a substan-
tial number.
Even if a substantial number of small
entities are affected, the economic impact
of these regulations will not be significant.
These final regulations consolidate and
clarify the existing guidance on retire-
ment and reissuance of tax-exempt bonds
published in Notices 88-130 and 2008-
41. Therefore, these final regulations will
not create additional obligations for, or
impose an economic impact on, a substan-
tial number of small entities. Accordingly,
a regulatory flexibility analysis is not
required.
Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
preceding this regulation was submitted to
the Chief Counsel for the Office of Advo-
cacy of the Small Business Administration
for comment on its impact on small gov-
ernmental jurisdictions and no comments
were received.

Bulletin No. 2025–3 413 January 13, 2025
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires that
agencies assess anticipated costs and ben-
efits and take certain other actions before
issuing a final rule that includes any Fed-
eral mandate that may result in expendi-
tures in any one year by a State, local, or
Tribal government, in the aggregate, or
by the private sector, of $100 million in
1995 dollars, updated annually for infla-
tion. These regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local gov-
ernments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Executive
order. The final regulations do not have
federalism implications and do not impose
substantial direct compliance costs on
State and local governments or preempt
State law within the meaning of the Exec-
utive order.
V. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs des-
ignated this rule as not a major rule, as
defined by 5 U.S.C. 804(2).
Statement of Availability of IRS
Documents
Any IRS Revenue Procedure, Revenue
Ruling, Notice, or other guidance cited in
this document is published in the Internal
Revenue Bulletin (or Cumulative Bul-
letin) and are available from the Super-
intendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
https://www.irs.gov.
Drafting Information
The principal author of these regula-
tions is Zoran Stojanovic of the Office of
Associate Chief Counsel (Financial Insti-
tutions and Products). However, other per-
sonnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.150-3 is added to read
as follows:
§1.150-3 Retirement standards for
state and local bonds.
(a) General purpose and scope. This
section provides rules to determine when
a tax-exempt bond is retired solely for
purposes of sections 103 and 141 through
150 of the Internal Revenue Code (Code).
(b) Retirement of a tax-exempt bond—
(1) General rules. Except as otherwise
provided in paragraph (c) of this section, a
tax-exempt bond is retired when:
(i) A significant modification of the
bond occurs under §1.1001-3;
(ii) The issuer or its agent acquires the
bond in a manner that extinguishes the
bond; or
(iii) The bond is otherwise redeemed
(for example, redeemed at maturity).
(2) Elective retirement. In guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(a) of this chapter),
the Commissioner may set forth specific
circumstances under which an issuer may
elect to treat a tax-exempt bond as retired
for purposes of sections 103 and 141
through 150 of the Code.
(c) Exceptions to general rules for
retirement of a tax-exempt bond—(1)
Qualified tender right disregarded for
certain purposes. In applying §1.1001-3
to a qualified tender bond for purposes of
paragraph (b)(1)(i) of this section, both
the existence and exercise of a qualified
tender right are disregarded for purposes
of determining whether an alteration of
the interest rate or interest rate mode that
occurs pursuant to the terms of the bond
is a modification. Thus, an issuer’s exer-
cise of an option to alter the interest rate
or interest rate mode on a qualified tender
bond generally is not a modification under
§1.1001-3 because the alteration occurs
by operation of the terms of the bond and
the holder’s resulting right to put the bond
to the issuer or the issuer’s agent pursuant
to the disregarded qualified tender right
does not prevent the issuer’s option from
qualifying as a unilateral option under
§1.1001-3(c)(3) that would not give rise
to a modification.
(2) Acquisition pursuant to a qualified
tender right. An acquisition of a qualified
tender bond by the issuer or its agent does
not result in the retirement of the bond
under paragraph (b)(1)(ii) of this section if
the acquisition is pursuant to the operation
of a qualified tender right and neither the
issuer nor its agent continues to hold the
bond after the close of the 90-day period
beginning on the date of the tender.
(3) Acquisition of a tax-exempt bond by
a guarantor or liquidity facility provider.
An acquisition of a tax-exempt bond by a
guarantor or liquidity facility provider act-
ing on the issuer’s behalf does not result in
the retirement of the bond under paragraph
(b)(1)(ii) of this section if the acquisition
is pursuant to the terms of the guarantee
or liquidity facility and the guarantor or
liquidity facility provider is not a related
party (as defined in §1.150-1(b)) to the
issuer.
(d) Effect of retirement. If a bond is
retired pursuant to paragraph (b)(1)(i) of
this section (that is, in a transaction treated
as an exchange of the bond for a bond with
modified terms), the bond is treated as a
new bond issued at the time of the modi-
fication as determined under §1.1001-3. If
the issuer or its agent resells a bond retired
pursuant to paragraph (b)(1)(ii) of this
section, the bond is treated as a new bond

January 13, 2025 414 Bulletin No. 2025–3
issued on the date of resale. The rules of
§1.150-1(d) apply to determine if the new
bond is part of a refunding issue.
(e) Definitions. For purposes of this
section, the following definitions apply:
(1) Issuer means the State or local
governmental unit (as defined in §1.103-
1) that actually issues the tax-exempt
bond and any related party (as defined in
§1.150-1(b)) to the actual issuer (as dis-
tinguished, for example, from a conduit
borrower that is not a related party to the
actual issuer).
(2) Qualified tender bond means a
tax-exempt bond that, pursuant to the
terms of the bond, has all of the following
features:
(i) During each authorized interest rate
mode, the bond bears interest at a fixed
interest rate, a qualified floating rate under
§1.1275-5(b), or an objective rate for a
tax-exempt bond under §1.1275-5(c)(5);
(ii) Interest on the bond is uncondition-
ally payable (as defined in §1.1273-1(c)
(1)(ii)) at periodic intervals of no more
than one year;
(iii) The bond has a stated maturity
date that is not later than 40 years after the
issue date of the bond; and
(iv) The bond includes a qualified ten-
der right.
(3) Qualified tender right means a right
or obligation of a holder of a tax-exempt
bond pursuant to the terms of the bond to
tender the bond for purchase as described
in this paragraph (e)(3). The purchaser
under the tender may be the issuer, its
agent, or another party. The tender right is
available on at least one date before the
stated maturity date. For each such tender,
the purchase price of the bond is equal to
par (plus any accrued interest). Following
each such tender, the issuer, its agent, or
another party either redeems the bond or
uses reasonable best efforts to resell the
bond within the 90-day period beginning
on the date of the tender. Upon any such
resale, the resale price of the bond is equal
to the par amount of the bond (plus any
accrued interest), except that, if the ten-
der right is exercised in connection with a
conversion of the interest rate mode on the
bond to a fixed rate for the remaining term
of the bond, the bond may be resold at any
price, including a premium price above
the par amount of the bond or a discount
price below the par amount of the bond
(plus any accrued interest). Any premium
received by the issuer pursuant to such
a resale is treated solely for purposes of
the arbitrage investment restrictions under
section 148 of the Code as additional sale
proceeds of the bonds.
(f) Applicability date—(1) General
applicability. This section applies to
events occurring and actions taken with
respect to bonds on or after December 30,
2025.
(2) Permissive applicability. An issuer
may choose to apply this section to events
occurring and actions taken with respect
to bonds on or after December 30, 2024.
Par. 3. Section 1.1001-3 is amended
by revising paragraph (a)(2) to read as fol-
lows:
§1.1001-3 Modifications of debt
instruments.
(a) * * *
(2) Tax-exempt bonds. For special rules
governing whether tax-exempt bonds are
retired for purposes of sections 103 and
141 through 150 of the Internal Revenue
Code, see §1.150-3.
* * * * *
Douglas W. O’Donnell,
Deputy Commissioner.
Approved: December 8, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register Decem-
ber 27, 2024, 8:45 a.m., and published in the issue of
the Federal Register for December 30, 2024)

Bulletin No. 2025–3 415 January 13, 2025
Part III
Update for Weighted
Average Interest Rates,
Yield Curves, and Segment
Rates
Notice 2025-1
This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used
under § 417(e)(3), and the 24-month aver-
age segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the inter-
est rate on 30-year Treasury securities
under § 417(e)(3)(A)(ii)(II) as in effect for
plan years beginning before 2008 and the
30-year Treasury weighted average rate
under § 431(c)(6)(E)(ii)(I).
YIELD CURVE AND SEGMENT
RATES
Section 430 specifies the minimum
funding requirements that apply to sin-
gle-employer plans (except for CSEC plans
under § 414(y)) pursuant to § 412. Section
430(h)(2) specifies the interest rates that
must be used to determine a plan’s target
normal cost and funding target. Under
this provision, present value is generally
determined using three 24-month average
interest rates (“segment rates”), each of
which applies to cash flows during speci-
fied periods. To the extent provided under
§ 430(h)(2)(C)(iv), these segment rates
are adjusted by the applicable percentage
of the 25-year average segment rates for
the period ending September 30 of the
year preceding the calendar year in which
the plan year begins.
1
However, an elec-
tion may be made under § 430(h)(2)(D)
(ii) to use the monthly yield curve in place
of the segment rates.
Section 1.430(h)(2)-1(d) provides
rules for determining the monthly cor-
porate bond yield curve,
2
and § 1.430(h)
(2)-1(c) provides rules for determining
the 24-month average corporate bond
segment rates used to compute the target
normal cost and the funding target. Con-
sistent with the methodology specified in
§ 1.430(h)(2)-1(d), the monthly corporate
bond yield curve derived from Novem-
ber 2024 data is in Table 2024-11 at the
end of this notice. The spot first, second,
and third segment rates for the month of
November 2024 are, respectively, 4.66,
5.25, and 5.57.
The 24-month average segment rates
determined under § 430(h)(2)(C)(i)
through (iii) must be adjusted pursuant to
§ 430(h)(2)(C)(iv) to be within the appli-
cable minimum and maximum percent-
ages of the corresponding 25-year aver-
age segment rates. Those percentages are
95% and 105% for plan years beginning
in 2023, 2024 and 2025. For this purpose,
any 25-year average segment rate that is
less than 5% is deemed to be 5%. The
25-year average segment rates for plan
years beginning in 2023, 2024 and 2025
were published in Notice 2022-40, 2022-
40 I.R.B. 266, Notice 2023-66, 2023-40
I.R.B. 992, and Notice 2024-67, 2024-41
I.R.B. 726, respectively.
24-MONTH AVERAGE CORPORATE
BOND SEGMENT RATES
The three 24-month average corpo-
rate bond segment rates applicable for
December 2024 without adjustment for
the 25-year average segment rate limits
are as follows:
24-Month Average Segment Rates Without 25-Year Average Adjustment
Applicable Month First Segment Second Segment Third Segment
December 2024 5.01 5.26 5.36
The adjusted 24-month average seg-
ment rates set forth in the chart below
reflect § 430(h)(2)(C)(iv) of the Code. The
24-month averages applicable for Decem-
ber 2024, adjusted to be within the appli-
cable minimum and maximum percent-
ages of the corresponding 25-year average
segment rates in accordance with § 430(h)
(2)(C)(iv) of the Code, are as follows:
Adjusted 24-Month Average Segment Rates
For Plan Years Begin-
ning InApplicable MonthFirst SegmentSecond SegmentThird Segment
2023December 20245.015.265.74
2024December 20245.015.265.59
2025December 20245.015.265.50
1
Pursuant to § 433(h)(3)(A), the third segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).
2
For months before February 2024, the monthly corporate bond yield curve was determined in accordance with Notice 2007-81, 2007-44 I.R.B. 899. Section 1.430(h)(2)-1(d) generally adopts
the methodology for determining the monthly corporate bond yield curve under Notice 2007-81 but includes two enhancements to take into account subsequent changes in the bond market.
Those enhancements are described in the preamble to TD 9986 (89 FR 2127).

January 13, 2025 416 Bulletin No. 2025–3
30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 431 specifies the minimum
funding requirements that apply to mul-
tiemployer plans pursuant to § 412. Sec-
tion 431(c)(6)(B) specifies a minimum
amount for the full-funding limitation
described in § 431(c)(6)(A), based on the
plan’s current liability. Section 431(c)
(6)(E)(ii)(I) provides that the interest
rate used to calculate current liability for
this purpose must be no more than 5 per-
cent above and no more than 10 percent
below the weighted average of the rates
of interest on 30-year Treasury securities
during the four-year period ending on the
last day before the beginning of the plan
year. Notice 88-73, 1988-2 C.B. 383,
provides guidelines for determining the
weighted average interest rate. The rate
of interest on 30-year Treasury securities
for November 2024 is 4.54 percent. The
Service determined this rate as the aver-
age of the daily determinations of yield
on the 30-year Treasury bond maturing
in August 2054 determined each day
through November 5, 2024 and the yield
on the 30-year Treasury bond maturing
in November 2054 determined each day
for the balance of the month. For plan
years beginning in December 2024, the
weighted average of the rates of interest
on 30-year Treasury securities and the
permissible range of rates used to calcu-
late current liability are as follows:
Treasury Weighted Average Rates
For Plan Years Beginning In30-Year Treasury Weighted AveragePermissible Range 90% to 105%
December 20243.763.38 to 3.95
MINIMUM PRESENT VALUE
SEGMENT RATES
In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates
computed without regard to a 24-month
average. Section 1.417(e)-1(d)(3) provides
guidelines for determining the minimum
present value segment rates. Pursuant to
that section, the minimum present value
segment rates determined for November
2024 are as follows:
Minimum Present Value Segment Rates
Month First Segment Second Segment Third Segment
November 2024 4.66 5.25 5.57
DRAFTING INFORMATION
The principal author of this notice
is Tom Morgan of the Office of Associ-
ate 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 notice, contact Mr. Morgan
at 202-317-6700 or Tony Montanaro at
626-927-1475 (not toll-free numbers).

Bulletin No. 2025–3 417 January 13, 2025
Table 2024-11
Monthly Yield Curve for November 2024
Derived from November 2024 Data
MaturityYieldMaturityYieldMaturityYieldMaturityYieldMaturityYield
0.54.6720.55.5340.55.5760.55.6280.55.65
1.04.6521.05.5341.05.5861.05.6281.05.65
1.54.6321.55.5341.55.5861.55.6281.55.65
2.04.6222.05.5342.05.5862.05.6282.05.65
2.54.6222.55.5342.55.5862.55.6382.55.65
3.04.6323.05.5343.05.5863.05.6383.05.65
3.54.6523.55.5343.55.5863.55.6383.55.65
4.04.6724.05.5344.05.5964.05.6384.05.65
4.54.7024.55.5344.55.5964.55.6384.55.65
5.04.7425.05.5345.05.5965.05.6385.05.65
5.54.7725.55.5345.55.5965.55.6385.55.65
6.04.8226.05.5246.05.5966.05.6386.05.65
6.54.8626.55.5246.55.5966.55.6386.55.65
7.04.9027.05.5247.05.5967.05.6387.05.65
7.54.9527.55.5247.55.6067.55.6387.55.65
8.04.9928.05.5248.05.6068.05.6388.05.65
8.55.0328.55.5248.55.6068.55.6388.55.65
9.05.0729.05.5249.05.6069.05.6389.05.65
9.55.1129.55.5249.55.6069.55.6389.55.65
10.05.1530.05.5250.05.6070.05.6490.05.65
10.55.1830.55.5350.55.6070.55.6490.55.65
11.05.2131.05.5351.05.6071.05.6491.05.65
11.55.2431.55.5351.55.6171.55.6491.55.65
12.05.2732.05.5452.05.6172.05.6492.05.66
12.55.3032.55.5452.55.6172.55.6492.55.66
13.05.3333.05.5453.05.6173.05.6493.05.66
13.55.3533.55.5453.55.6173.55.6493.55.66
14.05.3734.05.5554.05.6174.05.6494.05.66
14.55.3934.55.5554.55.6174.55.6494.55.66
15.05.4135.05.5555.05.6175.05.6495.05.66
15.55.4335.55.5555.55.6175.55.6495.55.66
16.05.4436.05.5656.05.6176.05.6496.05.66
16.55.4636.55.5656.55.6276.55.6496.55.66
17.05.4737.05.5657.05.6277.05.6497.05.66
17.55.4837.55.5657.55.6277.55.6497.55.66
18.05.4938.05.5758.05.6278.05.6498.05.66
18.55.5038.55.5758.55.6278.55.6498.55.66
19.05.5139.05.5759.05.6279.05.6499.05.66
19.55.5239.55.5759.55.6279.55.6599.55.66
20.05.5240.05.5760.05.6280.05.65100.05.66

January 13, 2025 418 Bulletin No. 2025–3
Additional Time for
Partnerships to Provide
Complete Forms 8308 for
Section 751(a) Exchanges
Occurring in Calendar Year
2024
Notice 2025-2
I. PURPOSE
This notice provides relief similar to
the relief provided in Notice 2024-19,
2024-5 I.R.B. 627, from penalties under
§ 6722 of the Internal Revenue Code
1
for
failures by certain partnerships to furnish
correct payee statements. Specifically, this
notice grants relief if a partnership with
unrealized receivables or inventory items
described in § 751(a) (§ 751 property) fails
to furnish Part IV of Form 8308, Report of
a Sale or Exchange of Certain Partner-
ship Interests, to the transferor and trans-
feree in a § 751(a) exchange (described in
section II of this notice) occurring in cal-
endar year 2024 by the due date specified
in § 1.6050K-1(c)(1). This relief applies
only if the partnership furnishes to the
transferor and transferee by the due dates
specified in section III of this notice (1) a
correct copy of Parts I, II, and III of Form
8308, or a statement that includes the
same information, and (2) a correct copy
of the complete Form 8308, including Part
IV, or a statement that includes the same
information and any additional informa-
tion required under § 1.6050K-1(c).
II. BACKGROUND
Generally, § 6050K and § 1.6050K-1
require a partnership with § 751 property
to provide information to each transferor
and transferee that are parties to a sale or
exchange of an interest in the partnership
(or portion thereof) in which any money
or other property received by a transferor
from a transferee in exchange for all or
part of the transferor’s interest in the part-
nership is attributable to § 751 property
(§ 751(a) exchange). Section 1.6050K-
1(a)(1) provides that partnerships are
required to report each § 751(a) exchange
on Form 8308. Generally, § 1.6050K-1(f)
(1) provides that a partnership is required
to file Form 8308 as an attachment to its
Form 1065, U.S. Return of Partnership
Income, for the taxable year of the partner-
ship that includes the last day of the calen-
dar year in which the § 751(a) exchange
took place. Form 8308 is due at the time
for filing the partnership return, including
extensions.
In addition, § 1.6050K-1(c)(1) provides
that each partnership that is required to file
a Form 8308 must furnish a statement to
the transferor and transferee by the later
of (1) January 31 of the year following
the calendar year in which the § 751(a)
exchange occurred, or (2) 30 days after
the partnership has received notice of the
exchange as specified under § 6050K and
§ 1.6050K-1. A partnership must use a
copy of the completed Form 8308 as the
required statement unless the Form 8308
contains information for more than one
§ 751(a) exchange. Section 1.6050K-1(c)
(1) provides that if the partnership does
not use the Form 8308 as the required
statement, the partnership must furnish
a statement that includes the information
required to be shown on the Form 8308
with respect to the § 751(a) exchange to
which the person to whom the statement
is furnished is a party.
Section 6722 imposes a penalty for
failure to furnish correct payee statements
on or before the required date, and for any
failure to include all of the information
required to be shown on the statement or
the inclusion of incorrect information. For
these purposes, payee statements include
statements required to be furnished to
transferors and transferees under § 6050K.
See § 6724(d)(2)(P). Section 6724 pro-
vides an exception to the imposition of a
penalty under § 6722 if it is shown that the
failure is due to reasonable cause and not
to willful neglect.
On November 30, 2020, the Depart-
ment of the Treasury (Treasury Depart-
ment) and the Internal Revenue Service
(IRS) published T.D. 9926, 85 FR 76910,
which amended § 1.6050K-1(c)(2) to
require a partnership to furnish to a trans-
feror partner the information necessary for
the transferor to make the transferor part-
ner’s required statement in § 1.751-1(a)
(3). Among other items, § 1.751-1(a)(3)
requires a transferor partner in a § 751(a)
exchange to submit with the transferor
partner’s income tax return a statement
setting forth the amount of gain or loss
attributable to § 751 property. In October
2023, the IRS released a revised version of
Form 8308. Consistent with the require-
ments in § 1.6050K-1(c)(2), Part IV of
the October 2023 Form 8308 requires a
partnership to report, among other items,
the partnership’s deemed sale § 751 gain
or loss, deemed sale § 1(h)(5) collectibles
gain, and deemed sale § 1(h)(6) unrecap-
tured § 1250 gain, as well as the trans-
feror partner’s share of such amounts. In
October 2024, the IRS released a revised
version of Form 8308. Part IV of the
October 2024 Form 8308 still requires a
partnership to report, among other items,
the partnership’s deemed sale § 751 gain
or loss, deemed sale § 1(h)(5) collectibles
gain, and deemed sale § 1(h)(6) unrecap-
tured § 1250 gain, as well as the transferor
partner’s share of such amounts.
Since the issuance of the October 2023
Form 8308, concerns have been expressed
to the Treasury Department and the IRS
that many partnerships will be unable to
furnish the information required in Part
IV of the Form 8308 to transferors and
transferees by the January 31 due date,
because, in many cases, partnerships will
not have all of the information required by
Part IV of the Form 8308 by January 31
of the year following the calendar year in
which the § 751(a) exchange occurred. On
January 11, 2024, the IRS released Notice
2024-19, which provided relief from pen-
alties under § 6722 for partnerships with
§ 751(a) exchanges occurring during cal-
endar year 2023.
III. GRANT OF RELIEF
.01 The Treasury Department and the
IRS are aware that many partnerships con-
tinue to lack information needed to com-
ply with the reporting requirements in a
timely manner. As a result, with respect to
§ 751(a) exchanges occurring during cal-
1
Unless otherwise specified, all “section” or “§” references are to sections of the Internal Revenue Code or to the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2025–3 419 January 13, 2025
endar year 2024, the IRS will not impose
penalties under § 6722 solely for failure to
furnish Form 8308 with a completed Part
IV by the due date specified in § 1.6050K-
1(c)(1) for a partnership that meets the fol-
lowing requirements.
(1) The partnership must timely and
correctly furnish to the transferor and
transferee a copy of Parts I, II, and III of
Form 8308, or a statement that includes
the same information, by the later of—
(a) January 31, 2025, or
(b) 30 days after the partnership is noti-
fied of the § 751(a) exchange.
(2) The partnership must furnish to the
transferor and transferee a copy of the
complete Form 8308, including Part IV, or
a statement that includes the same infor-
mation and any additional information
required under § 1.6050K-1(c), by the
later of—
(a) the due date of the partnership’s
Form 1065 (including extensions), or
(b) 30 days after the partnership is noti-
fied of the § 751(a) exchange.
.02 The relief provided in this notice
applies only with respect to a partnerships’
furnishing of a Form 8308 to the transferor
and transferee in a § 751(a) exchange
made during calendar year 2024. This
notice does not provide relief with respect
to a transferor partner’s failure to furnish
the notification to the partnership required
by § 1.6050K-1(d). In addition, this notice
does not provide relief with respect to
filing Form 8308 as an attachment to a
partnership’s Form 1065; as such, this
notice does not provide relief from penal-
ties under § 6721 for failure to file correct
information returns.
IV. DRAFTING INFORMATION
The principal authors of this notice
are Jeremy M. Brown and Benjamin H.
Weaver of the Office of Associate Chief
Counsel (Partnerships and Special Indus-
tries). Other personnel from the Treasury
Department and IRS participated in its
development. For further information
please call (202) 317-5279 (not a toll-free
number).
Application of the
Simplified and Streamlined
Approach under Section
482
Notice 2025-4
SECTION 1. PURPOSE
The purpose of this notice is to
announce that the Department of the Trea-
sury (“Treasury Department”) and the
Internal Revenue Service (“IRS”) intend
to issue proposed regulations that, for pur-
poses of applying section 482, provide a
new method for pricing certain controlled
transactions involving baseline marketing
and distribution activities. The approach
for pricing these activities, referred to
herein as the simplified and streamlined
approach (“SSA”), is described in a report
of the Organization for Economic Cooper-
ation and Development (“OECD”) titled,
“Pillar One – Amount B: Inclusive Frame-
work on BEPS”
1
and published on Feb-
ruary 19, 2024 (the “Report”). Because
some aspects of the SSA may require
updating over time with respect to the eco-
nomic analysis that underlies the SSA (see
section 5.4 of the Report), some aspects
of the SSA may be addressed more appro-
priately in sub-regulatory guidance (such
as, for example, a revenue procedure) that
would be incorporated by reference into
the regulations. The Treasury Department
and the IRS expect that the proposed reg-
ulations would not substantively diverge
from any aspect of the Report. There-
fore, while this notice does not restate or
address every element of the Report, the
Treasury Department and IRS intend the
proposed regulations to implement the
substance of the Report in its entirety.
This notice also provides guidance con-
cerning application of the SSA to in-scope
transactions undertaken by parties subject
to U.S. tax with respect to those transac-
tions before issuance of those proposed
regulations. As discussed in sections 3.01
and 6.02 of this notice, U.S. taxpayers
may rely on the SSA, as set forth in the
Report (as supplemented by the State-
ments, described in section 2.02 of this
notice), and subject to the rules described
in sections 3 and 4 of this notice, for
their U.S. tax reporting for taxable years
beginning on or after January 1, 2025, and
before proposed regulations are published
in the Federal Register.
SECTION 2. BACKGROUND
.01 Section 482
Section 482 of the Internal Revenue
Code permits the Commissioner of the
IRS (“Commissioner”) to make alloca-
tions necessary to clearly reflect income
or prevent tax avoidance with respect to
controlled transactions. See also Treas.
Reg. § 1.482-1(a)(1) (first sentence). The
authority to make adjustments under sec-
tion 482 is broad. For example, the Com-
missioner may make such adjustments
with respect to transactions that otherwise
qualify for nonrecognition under other
provisions of the Code (see, e.g., Treas.
Reg. § 1.482-1(f)(1)(iii)). For adjustments
under section 482 to which the arm’s length
standard applies, that standard is set forth
in Treasury Regulation section 1.482-
1(b). In addition to establishing the arm’s
length standard under section 482 through
regulations, the Treasury Department and
IRS have also promulgated detailed guid-
ance for the application of the arm’s length
standard with respect to specific types of
transactions. See Treas. Reg. §§ 1.482-2
through 1.482-9. That guidance includes
simplification measures, including the
safe haven interest rate under Treasury
Regulation section 1.482-2(a)(2)(iii) and
the services cost method under Treasury
Regulation section 1.482-9(b).
.02 The Development of the SSA
In an increasingly globalized econ-
omy, multinational enterprises manage
extensive value chains across multiple
jurisdictions that frequently involve base-
line marketing and distribution activities.
Disputes regarding the pricing of these
activities can impose significant financial
and compliance burdens on taxpayers and
significant administrative burdens on tax
authorities, and the costs of such disputes
1
Available at https://www.oecd.org/en/publications/pillar-one-amount-b_21ea168b-en/full-report.html (last accessed Dec.16, 2024).

January 13, 2025 420 Bulletin No. 2025–3
are sometimes disproportionate to the
amounts at stake and the difficulty of the
pricing challenges. For some jurisdictions,
these problems can be exacerbated when
tax administrations are under-resourced.
The Report addresses these concerns by
providing guidance designed to simplify
and streamline the application of transfer
pricing rules for baseline marketing and
distribution activities.
The SSA is similar to the comparable
profits method under Treasury Regula-
tion sections 1.482-3(a)(4), 1.482-5, and
1.482-9(a)(5) and (f) (referred to in the
Report as the transactional net margin
method as that method is known in the
Guidelines). Like the safe haven interest
rate and the services cost method, the SSA
is a simplification measure that reflects a
carefully balanced tradeoff between reli-
ability and administrability. However,
unlike those other simplification mea-
sures, the SSA determines a return based
on comparables and is sensitive to mate-
rial factual differences between the com-
parables and tested parties. As a result,
the SSA is expected to closely approx-
imate the result under the best method
in most cases, and material differences
in the results (under the SSA versus the
best method), if they occur, are further
expected to be minimal and uncommon.
The SSA aims to alleviate administrative
burdens, reduce compliance costs, reduce
the likelihood of lengthy, expensive, and
unnecessary cross-border tax disputes,
and resolve more efficiently any disputes
that nonetheless arise, thereby increasing
tax certainty for both tax administrations
and taxpayers. Accordingly, to the extent
that the SSA may be less reliable than the
best method in some cases, that reduction
in reliability is expected to be modest and
offset by the benefits of simplification and
streamlining arising from the SSA.
The guidance in the Report regarding
“Special considerations for baseline dis-
tribution activities” has been incorporated
into the OECD Transfer Pricing Guide-
lines for Multinational Enterprises
2
(the
“Guidelines”) as an Annex to Chapter
IV. See Report, p.5 (first paragraph). The
Report was subsequently supplemented
by two statements on June 17, 2024, the
“Statement on the definitions of quali-
fying jurisdiction within the meaning of
section 5.2 and section 5.3 of the simpli-
fied and streamlined approach”
3
and the
“Statement on the definition of covered
jurisdiction for the Inclusive Framework
political commitment on Amount B”
4

(collectively the “Statements”). The for-
mer Statement provides text that has been
incorporated into the Guidelines to replace
placeholder definitions in the Report. The
latter Statement clarifies the Introduction
of the Report.
5

SECTION 3. IMPLEMENTATION OF
THE SSA
.01 General Overview
This section 3 provides an overview of
what transactions may be within the scope
of the SSA, in general, as well as the rules
that future regulations would provide for
when and how the SSA can be applied to
such transactions for U.S. tax purposes.
The Report states that every jurisdic-
tion may choose whether to implement
the SSA. A jurisdiction that implements
the SSA may choose from two options.
Under Option 1, the SSA can apply only
if, among other considerations, a taxpayer
elects for it to apply. Under Option 2, a
taxpayer can elect to apply the SSA as
under Option 1, but the tax administration
of the Distributor Country that has imple-
mented the SSA also has the right to apply
the SSA even if the taxpayer does not elect
to apply it.
Under both options, taxpayers retain
flexibility when structuring their trans-
actions to fall within or outside of the
scope of the SSA. For example, if the
United States were to promulgate final
rules consistent with the SSA, U.S. fed-
eral income tax principles would apply in
evaluating the substance and form of the
relevant transactions under all facts and
circumstances for the purpose of deter-
mining whether such transactions are in
scope. As is always the case under general
U.S. federal income tax principles, before
applying the section 482 regulations to
determine whether a transfer price with
respect to a purported controlled transac-
tion is arm’s length, it would first need to
be determined whether a controlled trans-
action has occurred and, if so, what the
terms of that transaction are. This analysis
is required regardless of whether the rele-
vant transactions are the same as transac-
tions that occurred before the adoption of
the SSA, or whether a taxpayer has restruc-
tured or otherwise purported to change the
nature or terms of its distribution activi-
ties in order to come within the scope of
the SSA. Similarly, U.S. tax rules would
apply in requiring arm’s length compen-
sation for any controlled transactions that
occur in connection with a restructuring,
regardless of whether such transactions
accomplish the restructuring itself or are
ongoing following the restructuring.
The Treasury Department and the
IRS intend to issue proposed regulations
that, at minimum, are consistent with the
Option 1 version of the SSA, which would
permit taxpayers that are subject to U.S.
tax with respect to in-scope transactions
(that is, both U.S. Distributors and U.S.
Related Suppliers) to elect (as described
in section 4.06 of this notice) to apply
the SSA for taxable years beginning on
or after January 1, 2025. The Treasury
Department and the IRS continue to con-
sider whether proposed regulations should
also permit the IRS to apply the SSA to
in-scope transactions consistent with
Option 2.
Section 5 of this notice contains a list
of defined terms. Terms used in this notice
that are not defined in section 5 and that
are also used in the Report have the same
meaning as that provided in the Report.
For purposes of this notice, references to
2
Available at https://www.oecd.org/en/publications/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-2022_0e655865-en.html (last accessed Dec. 16,
2024).
3
Available at https://www.oecd.org/content/dam/oecd/en/publications/support-materials/2024/02/pillar-one-amount-b_41a41e1e/statement-qualifying-jurisdiction-definitions-section-5-
2-section-5-3-simplified-streamlined-approach.pdf (last accessed Dec. 16, 2024).
4
Available at https://www.oecd.org/content/dam/oecd/en/publications/support-materials/2024/02/pillar-one-amount-b_41a41e1e/statement-covered-jurisdiction-definition-inclusive-frame-
work-commitment-amount-b.pdf (last accessed Dec. 16, 2024).
5
Because a version of the Guidelines containing the content of the Report and supplemented by the Statements has not been published as of the publication of this notice (the current version
of the Guidelines was published in January 2022), references herein to the contents of the Report and Statements are made to those latter documents directly.

Bulletin No. 2025–3 421 January 13, 2025
the Commissioner shall be to the director
of field operations or other applicable del-
egate.
.02 Qualification for Application of the
SSA
For U.S. taxpayers, the process of
applying the SSA with respect to a con-
trolled transaction would involve several
key steps:
(1) First, the controlled transaction
must fit within a category of qualifying
transactions.
(2) Second, if the transaction is a
qualifying transaction, it must also be
an in-scope transaction. For purposes of
determining whether a qualifying transac-
tion is also an in-scope transaction under
section 482, the upper bound of the oper-
ating expenses-to-revenues scoping cri-
terion in paragraph 13.b. of the Report is
30% if (a) the Distributor is a U.S. Dis-
tributor or (b) the Distributor Country has
not adopted the SSA. If the Distributor is
a non-U.S. Distributor, and the Distribu-
tor Country has adopted the SSA, then the
upper bound is the upper bound specified
by the law of the Distributor Country, but
no lower than 20% and no higher than
30%.
(3) Third, if the qualifying transaction
is determined to be an in-scope transac-
tion, then for purposes of applying the
SSA for U.S. law, an election would need
to be made as described in section 4.06 of
this notice.
(4) Fourth, the taxpayer must maintain
permanent books of account and records
that are adequate to permit verification
by the Commissioner that the controlled
transactions with respect to which the
election is made are in-scope transactions
and must maintain sufficient documenta-
tion to allow verification that the taxpayer
properly determined its income under the
SSA. See the documentation requirements
in section 4.07, below, which apply for
purposes of Treasury Regulation section
1.6662-6.
.03 Application of the SSA to In-Scope
Transactions
If it is established that the controlled
transaction is an in-scope transaction and
that an election has been made, then the
appropriate return to the tested party is
determined under the SSA by applying
the guidance in section 5 of the Report.
The following paragraphs clarify the
guidance in section 5 of the Report for
purposes of applying the SSA for U.S.
tax purposes.
(1) Identification of Relevant Matrix
Cell
(a) In general, under section 5.1 of the
Report, a return-on-sales percentage for
the Distributor is determined mechan-
ically by reference to a pricing matrix
(derived from the results of a global data-
set of comparables), the columns of which
correspond to three industry groupings,
and the rows of which correspond to var-
ious net operating asset intensities and
operating expense intensities. See also
page 12 of the Report for definitions of
those terms. For purposes of identifying
the applicable column of the matrix under
paragraph 47.a. of the Report with respect
to an in-scope transaction, if a sale could
be categorized under more than one indus-
try grouping, the more specific grouping
must be used.
(b) Paragraph 47.b. of the Report
requires identification of the applicable
row of the matrix by reference to differ-
ent levels of net operating asset intensity
and operating expense intensity. Para-
graphs 47.c. and 48 of the Report, in
combination, determine the applicable
range by first identifying the intersection
of the column and row identified under
paragraphs 47.a. and 47.b., respectively,
and then adding 0.5 to the return-on-
sales percentage specified in the relevant
matrix cell to determine the upper bound,
and subtracting 0.5 from the specified
percentage to determine the lower bound
of the range. The range so determined
applies pursuant to the rules set forth
in this section 3.03(1)(b); therefore, the
arm’s length range and interquartile range
concepts set forth in Treasury Regulation
section 1.482-1(e) do not apply under the
SSA. Subject to sections 5.2 and 5.3 of
the Report (as explained further below),
if the tested party’s reported return-on-
sales percentage falls within that range,
then no adjustment will be made by the
tax administration; if it falls outside that
range, then an adjustment to the transfer
price may be made by the tax adminis-
tration as necessary to cause the reported
return-on-sales percentage to become
equal to the return-on-sales percentage
specified in the applicable matrix cell as
identified under paragraph 47.c. See ¶ 50
of the Report. For example, assume a
Distributor elects to apply the SSA and
reports income consistent with a return
on sales of 3.3% based on its determina-
tion that the applicable industry grouping
is group 2 under paragraph 47.a. and the
applicable factor intensity row is row C
under paragraph 47.b., which intersect at
the matrix cell that indicates a 3% return
on sales and a range of 2.5%-3.5%.
However, on audit the tax administra-
tion determines that while the applicable
factor intensity row is C, the applicable
industry grouping is group 1 instead of
group 2, and therefore the pricing matrix
return is 2.5% with a range under para-
graph 47.c. of 2%-3%. Under paragraph
50, the tax administration may make an
adjustment to reduce the Distributor’s
return on sales to the appropriate pricing
matrix cell return of 2.5%.
(2) Operating Expense Cross-Check
(a) After the return-on-sales percent-
age has been determined under section 5.1
of the Report—that is, either the reported
percentage (if it was within the range) or
the adjusted percentage (if the reported
percentage was outside the range)—an
operating expense cross-check mecha-
nism, as provided in section 5.2 of the
Report, is used to ensure that the applica-
tion of the SSA under section 5.1 remains
appropriate with regard to implied returns
on operating expenses. Table 5.2 of the
Report provides applicable return-on-op-
erating expense “cap-and-collar” ranges
by net operating asset intensity of the
tested party to establish an upper and
lower bound, respectively, and ensure
appropriate results for earnings before
interest and taxes (“EBIT”)-to-operating
expenses ratios. If the equivalent return
on operating expenses derived from the
return-on-sales percentage determined
under section 5.1 falls above the cap rate,
paragraph 52.d. of the Report requires
adjusting such return-on-sales percent-
age downward so that the EBIT-to-op-
erating expenses ratio is lowered until
it equals the cap rate, to prevent excess
profitability from being attributed to low-
er-risk, routine functions. Conversely,
if the equivalent return on operating
expenses derived from such return-on-
sales percentage falls below the collar
rate, an upward adjustment must be made
to increase EBIT and, thus, the return-on-

January 13, 2025 422 Bulletin No. 2025–3
sales percentage, so that the EBIT-to-op-
erating expenses ratio is increased to the
collar rate to prevent under-remuneration
of such activities.
(b) For this purpose, there are two sets
of cap rates—alternative cap rates that
apply only when the Distributor Country
is a qualifying jurisdiction and default cap
rates that apply in all other cases. Solely
for purposes of the alternative cap rates
under section 5.2 of the Report, “quali-
fying jurisdiction” means a jurisdiction
that is classified by the World Bank Group
as low income, lower-middle income, or
upper-middle income based on the latest
available World Bank Group country clas-
sifications by income level (hereinafter
“section 5.2 qualifying jurisdictions”). See
section 3.03(4) of this notice.
(c) Building on the prior example in
section 3.03(1)(b) of this notice, if the
reported return-on-sales percentage of
3.3% was outside the range and, thus,
adjusted to 2.5% under section 5.1 of the
Report, and if section 5.2 of the Report
requires a further adjustment, such further
adjustment is made to the 2.5% return-on-
sales percentage that was determined after
application of the range under section
5.1. (Note: if the reported return-on-sales
percentage had been 2.7% and, therefore,
had been within the range specified in
paragraph 48, then there would have been
no adjustment under section 5.1, and the
starting point for the adjustment under
section 5.2 would have been 2.7%.). In the
case of an adjustment under section 5.2,
whether the adjusted return-on-sales per-
centage falls within the range described
and applied in section 5.1 is not relevant.
(3) Data Availability Mechanism for
Qualifying Jurisdictions
(a) Finally, the return-on-sales per-
centage determined under section 5.1
of the Report (and then adjusted, if nec-
essary, under section 5.2 of the Report),
may require a separate adjustment under
the data availability mechanism of sec-
tion 5.3 of the Report, which provides an
additional return for a Distributor located
in a qualifying jurisdiction. Solely for pur-
poses of section 5.3 and subject to the fol-
lowing sentence, “qualifying jurisdiction”
means jurisdictions (other than members
of the European Union) that have both (i)
a publicly available long term sovereign
credit rating of BBB+ (or equivalent) or
lower from a recognized independent
credit rating agency, and (ii) fewer than
five comparables in the global dataset
(hereinafter “section 5.3 qualifying juris-
diction”). In the case of a jurisdiction that
does not have a long term sovereign credit
rating from a recognized independent
credit rating agency but has fewer than
five comparables in the global dataset, it
will nevertheless be regarded as a section
5.3 qualifying jurisdiction if it is classified
by the World Bank Group as low income,
lower-middle income, or upper-middle
income based on the World Bank Group
country classifications by income level.
See section 3.03(4) of this notice.
(b) Building further on the prior
examples in sections 3.03(1)(b) and (2)
(c) of this notice, if the Distributor is a
section 5.3 qualifying jurisdiction, then
an adjustment under paragraph 54 of
the Report may be required, using as the
starting point the return-on-sales per-
centage that was determined under sec-
tion 5.2. (Note: if an adjustment had not
been required under section 5.2, then the
section 5.3 adjustment would be made
using the return-on-sales percentage that
was determined under section 5.1 as the
starting point.) As under section 5.2 (see
section 3.03(2)(c), above), whether the
return-on-sales percentage as adjusted
under section 5.3 falls within the range
described and applied in section 5.1 is
not relevant.
(4) Qualifying Jurisdictions for Pur-
poses of Sections 5.2 and 5.3 of the Report
The definitions of “section 5.2 quali-
fying jurisdiction” and “section 5.3 qual-
ifying jurisdiction” are taken from the
“Statement on the definitions of quali-
fying jurisdiction within the meaning of
section 5.2 and section 5.3 of the simpli-
fied and streamlined approach,” which
supplemented the Report. The provision
of those definitions in that statement was
anticipated by the incomplete definitions
of “Qualifying jurisdiction(s) within the
meaning of Section 5.2” and “Qualify-
ing jurisdiction(s) within the meaning of
Section 5.3” that are provided on page
13 of the Report. The lists of section 5.2
qualifying jurisdictions and section 5.3
qualifying jurisdictions will be fixed pro-
spectively based on those definitions, and
published and updated every five years on
the OECD website.
SECTION 4. CREATION OF A SSA
SAFE HARBOR: REQUIREMENTS
AND CONSIDERATIONS
.01 Overview
This section 4 describes the proposed
rules that the Treasury Department and the
IRS intend to issue which would, at a min-
imum, incorporate the SSA as a safe har-
bor application of the arm’s length stan-
dard under the section 482 regulations,
as well as the administrative steps that a
taxpayer must take to make the election
and retain necessary documentation with
respect to the SSA. It also describes the
extent to which the Commissioner would
respect the election for U.S. taxpayers.
The Guidelines or the Report may be sub-
ject to future revisions and updates. Com-
pliance with this section 4 will be deter-
mined based on the guidance in the Report
(and as supplemented by the Statements)
in effect as of the date of publication of
this notice. The Treasury Department and
the IRS expect to incorporate updates to
the Report in future guidance.
.02 Deemed Satisfaction of the Arm’s
Length Standard
(1) Subject to the other provisions of
this section 4.02, if a valid election to
apply the SSA has been made with respect
to an in-scope transaction, the Commis-
sioner will consider the SSA to be the
best method under the best method rule in
Treasury Regulation section 1.482-1(c).
Therefore, in such cases, it is not neces-
sary to demonstrate that the SSA is the
best method, nor can the Commissioner
or an electing taxpayer oppose the appli-
cation of the SSA on the basis that it is
not the best method. In the case of an
application of the SSA as described in this
section 4.02(1), the SSA will be consid-
ered a specified method for purposes of
Treasury Regulation section 1.6662-6(d)
(2). See section 4.04(1) of this notice
regarding revisions of the applicable
requirements under Treasury Regulation
section 1.6662-6(d)(2)(ii)(A) for purposes
of the SSA.
(2) Notwithstanding section 4.02(1) of
this notice, the SSA will not be treated as
the best method if any relevant party (that
is, the Distributor, the Related Supplier,
or either tax administration) demonstrates
that the comparable uncontrolled price
method described in Treasury Regula-

Bulletin No. 2025–3 423 January 13, 2025
tion section 1.482-3(b) using one or more
internal comparables can be applied more
reliably than the SSA and chooses to apply
such method instead of the SSA. See also
¶ 42 of the Report.
(3) In any case in which a taxpayer
determines a transfer price by reference to
the SSA other than as described in section
4.02(1), whether the price so calculated
satisfies the arm’s length standard would
be determined under the section 482 reg-
ulations, including the best method rule,
and without regard to any guidance in
the Report or this notice. The SSA will
be considered an unspecified method for
that purpose. See section 4.04(2) of this
notice regarding the applicable require-
ments under Treasury Regulation sec-
tion 1.6662-6(d)(3)(ii).
.03 Section 482 Adjustments When the
SSA Has Been Applied
(1) The Commissioner may challenge
whether a controlled transaction is an
in-scope transaction, whether an elec-
tion to apply the SSA has been made,
and whether the income allocation has
been properly calculated under the SSA.
If the Commissioner determines that a
controlled transaction is not an in-scope
transaction or otherwise that a valid elec-
tion was not made, then section 4.02(1)
of this notice would not apply. For such
transactions, any adjustments would be
determined under the otherwise applicable
best method analysis set forth in Treasury
Regulation section 1.482-1(c).
(2) If the Commissioner determines
that a controlled transaction is an in-scope
transaction, the exception described in
section 4.02(2) does not apply, a valid
election to apply the SSA was made, and
the transfer price was properly calculated
under the SSA, then the Commissioner
would not make an adjustment under sec-
tion 482 with respect to that transaction. If
the Commissioner determines that a con-
trolled transaction is an in-scope transac-
tion and that a valid election was made,
but the transfer price was not properly cal-
culated under the SSA, then the Commis-
sioner’s allocations in such cases under
section 482 would be limited to adjusting
(i) the amount charged for the in-scope
transaction to the amount properly deter-
mined under the SSA and (ii) any related
amounts properly determined under other
rules under section 482.
(3) A taxpayer’s valid election to apply
the SSA to an in-scope transaction for a
taxable year shall constitute consent to the
IRS’s use of the SSA in calculating any
applicable adjustment to such transaction
in such taxable year. Thus, a taxpayer that
has availed itself of the simplification ben-
efits of the SSA cannot subsequently dis-
avow its reliance on the SSA.
.04 Satisfaction of the Specified and
Unspecified Method Requirements under
Treasury Regulation Section 1.6662-6(d)
(2)(ii)(A) and (3)(ii)
(1) In the case of any controlled trans-
action to which section 4.02(1) of this
notice applies (or to which section 4.02(2)
applies where the taxpayer made an elec-
tion to apply the SSA, but a comparable
uncontrolled price method using one or
more internal comparables was subse-
quently properly applied instead), the
taxpayer will be deemed to have met the
requirements of section 6662(e)(3)(B)
(i)(I) and Treasury Regulation section
1.6662-6(d)(2)(ii)(A) if it reasonably con-
cluded that it elected to apply the SSA
(including determining that the relevant
controlled transaction was an in-scope
transaction) as described in the Report
and section 3.02 of this notice, and that
it correctly applied the mechanics of the
SSA as described in the Report and sec-
tion 3.03 of this notice. Whether the tax-
payer’s conclusions were reasonable will
be determined from all relevant facts and
circumstances. The factors relevant to this
determination include those described in
Treasury Regulation section 1.6662-6(d)
(2)(ii)(A) to the extent applicable. In addi-
tion, section 4.07 of this notice addresses
satisfaction of the documentation require-
ment under Treasury Regulation sec-
tion 1.6662-6(d)(2)(iii) in such cases.
(2) In the case of any controlled trans-
action for which a taxpayer determines a
transfer price by reference to the SSA and
to which section 4.04(1) of this notice
does not apply, the requirements of Trea-
sury Regulation section 1.6662-6(d)(3)(ii)
(A) apply without modification.
.05 Scope of Election
Under this notice, a taxpayer elects to
apply the SSA on a transaction-by-trans-
action basis with respect to the taxable
year for which the election is filed. A
taxpayer that wishes to elect to apply the
SSA to the same transaction with respect
to future taxable years must file a new
election statement as described in section
4.06 of this notice for each taxable year.
The Treasury Department and the IRS
are considering whether, under proposed
regulations, the SSA should include a
requirement of consistent treatment such
that a taxpayer’s election to apply the SSA
would be applied in some manner other
than on a transaction-by-transaction and
taxable year-by-taxable year basis.
.06 Procedure to Elect
A taxpayer elects to apply the SSA by
filing with its original return for the tax-
able year for which the election is made
a statement indicating the transaction(s)
to which the taxpayer elects to apply the
SSA. The statement must be titled “Elec-
tion to apply the SSA,” include a basic
description of each transaction, identify
the entities participating in each transac-
tion (both name and taxpayer identifica-
tion number, if applicable), and specify
the entities’ respective places of incor-
poration (or jurisdiction of tax residence,
if different from place of incorporation).
Solely for the purpose of identifying the
transactions to which an election applies,
transactions may be grouped on the basis
of products, product lines, or similar
groupings if such grouping basis reason-
ably enables the Commissioner to distin-
guish transactions covered by the election
from transactions not covered by the elec-
tion while also avoiding the impracticality
of listing each individual transaction that
is covered.
.07 Documentation
(1) For controlled transactions with
respect to which a valid election to apply
the SSA applies, the documentation
requirements provided in section 4.07(2)
of this notice supplant the requirements
contained in Treasury Regulation section
1.6662-6(d)(2)(iii)(B) and (C).
(2) The documentation requirements
for taxpayers electing to apply the SSA
to in-scope transactions are met if the tax-
payer maintains sufficient documentation
to establish that the taxpayer reasonably
concluded that, given the available data,
any transaction(s) to which it has elected
to apply the SSA were in-scope and that
the taxpayer properly calculated the return
under the SSA, and provides that docu-
mentation to the IRS within 30 days of a
request for it in connection with an exam-

January 13, 2025 424 Bulletin No. 2025–3
ination of the taxable year to which the
documentation relates. The documenta-
tion must be in existence when the return
is filed. A minor or inadvertent failure
to provide required documents may be
excused at the Commissioner’s discretion,
but only if the taxpayer has made a good
faith effort to comply, and the taxpayer
promptly remedies the failure when it
becomes known. The taxpayer must main-
tain books and records that are sufficiently
detailed to verify that it has complied with
the SSA. Such records shall include:
i. A description of the taxpayer’s orga-
nizational structure (including an
organization chart), including the
name(s), employee identification
number(s), and U.S. tax classification
(where applicable) of all related par-
ties engaged in the transaction(s) to
which the SSA is applied;
ii. A copy of the intercompany agree-
ment(s) between the Distributor
applying the SSA and its Related
Supplier, the terms of which support
the statement described in section
4.07(2)iii. of this notice both in form
and in substance;
iii. A statement explaining the eligibility
of the subject transaction under the
SSA scoping criteria set forth in sec-
tion 3 of the Report;
iv. All underlying data necessary to
apply the scoping criterion set forth in
paragraph 13.b. of the Report, and the
corresponding calculated three-year
weighted average operating expense-
to-net revenue ratio described in para-
graph 24 of the Report;
v. The following financial information,
as defined in the Report, for the tax-
able year for which the return is filed
and three preceding taxable years:
1. Distributor net revenue,
2. Distributor cost of goods sold,
3. Distributor net operating assets
average balances, including all
underlying data, and any appli-
cable adjustments for accounts
payable, for each respective tax-
able year,
4. Distributor operating expenses,
5. Distributor EBIT, and
6. Distributor return on sales;
vi. A statement regarding whether the
financial statements of the Distrib-
utor required separation of distribu-
tion and non-distribution activities
as specified in paragraph 14.b of the
Report in order to reliably apply the
SSA. If a separate basis of the Dis-
tributor’s financial statements was
required, the taxpayer must include
an explanation of the methodology
used to reliably separate distribution
and non-distribution data in the finan-
cial statements for net revenues, net
operating assets and its components,
operating expenses, and earnings
before interest and taxes;
vii. Information necessary to apply the
pricing matrix and any other appli-
cable provisions of section 5 of the
Report, including:
1. A description of the relevant pro-
duct(s) distributed,
2. A statement identifying the
industry grouping (1, 2, or 3)
selected for each product, includ-
ing any applicable weighted
average calculations,
3. A statement identifying the fac-
tor intensity (A, B, C, D, or E)
for each product, including data
and calculations for net operat-
ing asset intensity and operating
expense intensity under section
5.1 of the Report, to the extent
such data is not already provided
in section 4.07(2)iv. or v. of this
notice,
4. A statement demonstrating
application of section 5.2 of the
Report and providing conclu-
sions, including all data and cal-
culations required to apply the
operating expense cross-check,
and
5. A statement demonstrating
application of section 5.3 of the
Report, if relevant, and including
all data and calculations required
to apply the data availability
mechanism, if applicable.
Upon examination of an in-scope trans-
action, the Commissioner may request
that the taxpayer submit additional infor-
mation or translate specific documents
within 30 days. The Commissioner may
extend this period for good cause.
.08 Competent Authority Consider-
ations
Other jurisdictions may vary both in
whether they will respect the application
of the SSA as a general matter and, if they
do respect it, in their interpretation of the
SSA’s requirements.
6
Further, although
a taxpayer is permitted in the MAP con-
text to assert any argument in support of
its position (including an argument based
on the SSA), the competent authority of
one government cannot support a taxpay-
er’s position based on the SSA if the other
government has not implemented the SSA
or agreed to accept the application of the
SSA in that case. See generally section
8 of the Report. Taxpayers should care-
fully consider section 8 of the Report and
potential inconsistencies between juris-
dictions’ policies with respect to the SSA
in deciding (i) whether to elect the SSA
under U.S. law or foreign law, (ii) whether
to otherwise rely on the SSA, or (iii) the
extent and nature of documentation to cre-
ate and maintain.
SECTION 5. DEFINITIONS
The following definitions apply solely
for purposes of this notice.
“Controlled transaction” is defined in
Treasury Regulation section 1.482-1(i)(8).
“Distributor” has the meaning provided
on page 10 of the Report. Thus, a Distrib-
utor is also the tested party referenced in
the Report.
The “Distributor Country” is the juris-
diction in which the Distributor is subject
to tax with respect to income derived from
a qualifying transaction.
An “in-scope transaction” is a quali-
fying transaction that meets the scoping
criteria established in section 3.2 of the
6
In limited circumstances, the members of the Inclusive Framework have made a political commitment to respect the application of the SSA for in-scope transactions when the Distributor
Country is a “covered jurisdiction,” as defined and enumerated in the OECD’s “Statement on the definition of covered jurisdiction for the Inclusive Framework political commitment on
Amount B.” See the Introduction to the Report, p.6, fourth paragraph, third sentence. Under this commitment, a member of the Inclusive Framework that is a Related Supplier Country should
respect the proper application of the SSA pursuant to the law of the Distributor Country if the Distributor Country is a covered jurisdiction. The intention of the United States to respect the
proper application of the SSA by U.S. taxpayers regardless of whether the Distributor Country is a covered jurisdiction, as described in this notice, satisfies the political commitment.

Bulletin No. 2025–3 425 January 13, 2025
Report, as further elaborated in section 3.3
of the Report. For purposes of the scoping
criterion set forth in paragraph 13.b. of
the Report, the annual operating expenses
incurred by a tested party in a qualifying
transaction must be no lower than 3%
and must not exceed an upper bound of
between 20% and 30% of the tested par-
ty’s annual net revenues, with such upper
bound to be determined by the rules of the
Distributor Country.
“Inclusive Framework” refers to the
OECD/G20 Inclusive Framework on Base
Erosion and Profit Shifting.
A “qualifying transaction” is a con-
trolled transaction that is a qualifying
transaction within the meaning of section
3.1 of the Report.
A “non-U.S. Distributor” is a Distrib-
utor that is subject to tax in a jurisdiction
other than the United States with respect
to income derived from a qualifying trans-
action.
A “Related Supplier” is the party to a
qualifying transaction that is the associ-
ated enterprise as described in paragraph
10 of the Report. Thus, a Related Supplier
is the controlled taxpayer (as defined in
Treasury Regulation section 1.482-1(i)
(5)) in the transaction that is not the Dis-
tributor or the tested party referenced in
the Report.
The “Related Supplier Country” is the
jurisdiction in which the Related Supplier
is subject to tax with respect to income
derived from a qualifying transaction.
A “U.S. Distributor” is a Distributor
that is subject to tax in the United States
with respect to income derived from a
qualifying transaction.
A “U.S. Related Supplier” is the coun-
terparty to the non-U.S. Distributor with
respect to a qualifying transaction.
SECTION 6. APPLICABLITY DATE
AND RELIANCE
.01 Applicability Date
It is anticipated that the proposed reg-
ulations would provide that rules consis-
tent with the rules described in sections 3
and 4 of this notice apply to taxable years
beginning on or after January 1, 2025.
.02 Reliance
Taxpayers may rely on the guidance
provided in sections 3 and 4 of this notice,
if they apply such guidance in its entirety
and in a consistent manner, for taxable
years beginning on or after January 1,
2025, and before the proposed regulations
are published in the Federal Register. For
taxable years beginning on or after Janu-
ary 1, 2025, and before proposed regula-
tions are published in the Federal Register,
taxpayers may rely on the text of the SSA
for their U.S. tax reporting, as set forth in
the Report (and as supplemented by the
Statements) if they also apply the rules
described in Sections 3 and 4 pursuant to
the prior sentence.
SECTION 7. REQUEST FOR
COMMENTS
.01 General Overview
The Treasury Department and the IRS
request comments from interested persons
on this notice. The Treasury Department
and the IRS contemplate updating this
guidance as appropriate, including by
issuing a notice of proposed rulemaking
further implementing the safe harbor cre-
ated by this notice, consistent with Option
1, or implementing a revised version of
the SSA that is consistent with Option 2.
Comments on all SSA-related topics are
welcome and are solicited in particular on
the following subjects:
• Whether application of the SSA
should be determined solely by an
election by taxpayers, or whether
other considerations should also be
taken into account, such as the abil-
ity of the IRS to apply the SSA in
the absence of a taxpayer election
(as described in section 3.01 of this
notice) and whether the availability
of the SSA for U.S. taxpayers should
depend on whether the SSA has been
implemented by the counterparty
jurisdiction in order to ensure sym-
metry of tax treatment;
• Whether the possibility posed in sec-
tion 4.05 of this notice of requiring
elections other than on a transac-
tion-by-transaction and taxable year-
by-taxable year basis should be sub-
ject to any limitations that serve the
interests of simplicity or sound tax
administration. Possible limitations
on electivity may include requiring
that elections apply consistently to all
in-scope transactions, to categories
of in-scope transactions, to a single
in-scope transaction for multiple tax-
able years, or in a similarly consistent
manner.
• the selection of 30% as the upper
boundary of the operating expense-
to-net revenue ratio scoping criterion
pursuant to section 3.2 of the Report.
.02 Procedures for Submitting Com-
ments.
(1) Deadline. Written comments should
be submitted by March 7, 2025. Consider-
ation will be given, however, to any writ-
ten comment submitted after March 7,
2025, if such consideration will not delay
the issuance of proposed regulations.
(2) Form and manner. The subject line
for the comments should include a refer-
ence to Notice 2025-04. All commenters
are strongly encouraged to submit com-
ments electronically. However, comments
may be submitted in one of two ways:
(a) Electronically via the Federal
eRulemaking Portal at www.regulations.
gov (type IRS-2024-0061 in the search
field on the regulations.gov homepage to
find this notice and submit comments); or
(b) By mail to: Internal Revenue Ser-
vice, CC:PA:LPD:PR (Notice 2025-04),
Room 5203, P.O. Box 7604, Ben Franklin
Station, Washington, D.C., 20044
(3) Publication of comments. The Trea-
sury Department and the IRS will publish
for public availability any comments sub-
mitted electronically or on paper to its
public docket on regulations.gov.
SECTION 8. NO INFERENCE
No inference should be drawn from
any provision of this notice concerning
any other provision of section 482 or the
regulations issued thereunder. See also ¶ 4
of the Report. Because the design choices
reflected in the SSA are the result of a
negotiated construction of a simplifica-
tion measure that is intended to be applied
across a relatively broad range of fact pat-
terns, it should not be inferred that any sin-
gle design choice or combination thereof
in the SSA implies the proper design of a
best method for any transaction under the
rest of the section 482 regulations regard-
less of whether it is an in-scope trans-
action. See also ¶ 43 of the Report. The
mere fact that an activity does not qualify
for the SSA should not be interpreted to
mean that such activity generates lower or

January 13, 2025 426 Bulletin No. 2025–3
higher returns than is permissible under
the SSA or that the returns provided by
the SSA for in-scope taxpayers represent a
floor or a ceiling for returns to distribution
activities in general. See also ¶ 9 of the
Report.
SECTION 9. PAPERWORK
REDUCTION ACT
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520) (PRA) generally
requires that a federal agency obtain the
approval of the Office of Management and
Budget (OMB) before collecting infor-
mation from the public, whether such
collection of information is mandatory,
voluntary, or required to obtain or retain
a benefit. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the OMB. The collections of
information in this notice are in sections
4.06 and 4.07. This information is required
to enable the IRS to verify that a taxpayer
is reporting the correct amount of taxable
income. The collections of information
will be used by the IRS for tax compli-
ance purposes. The likely respondents are
business and other for-profit institutions.
This notice includes a reporting
requirement to provide the IRS with a
statement indicating the transactions to
which the taxpayer elects to apply the
SSA, as described in section 4.06 of
this notice. The recordkeeping require-
ments include that taxpayers keep books
of account and records that are adequate
to permit verification that the controlled
transactions are within scope, that the SSA
has been properly applied, and that a tax-
payer is reporting the correct amount of
taxable income. These collection require-
ments supplement the existing collection
requirements within Treasury Regulation
section 1.6662-6 (referenced in section
4.07 of this notice), which are included in
the OMB Control Number 1545-0123 for
business filers.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. § 6103.
SECTION 10. DRAFTING AND
CONTACT INFORMATION
The principal authors of this notice
are Lorraine Saxton Rodriguez and Rob-
ert Z. Kelley of the Office of Associate
Chief Counsel (International). For further
information regarding this notice contact
Lorraine Saxton Rodriguez or Robert Z.
Kelley at (202) 317-6939 (not a toll-free
number).
2025 Standard Mileage
Rates
Notice 2025-5
SECTION 1. PURPOSE
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 calculat-
ing reductions to basis for depreciation
taken under the business standard mileage
rate, and the maximum standard automo-
bile cost that may be used in computing
the allowance under a fixed and variable
rate (FAVR) plan. Additionally, this notice
provides the maximum fair market value
(FMV) of employer-provided automobiles
first made available to employees for per-
sonal use in calendar year 2025 for which
employers may use the fleet-average val-
uation rule in § 1.61-21(d)(5)(v) or the
vehicle cents-per-mile valuation rule in §
1.61-21(e).
1
SECTION 2. BACKGROUND
Rev. Proc. 2019-46, 2019-49 I.R.B.
1301, provides rules for computing the
deductible costs of operating an automo-
bile for business, charitable, medical, or
moving expense purposes, and for sub-
stantiating, under § 274(d) and § 1.274-
5, the amount of ordinary and necessary
business expenses of local transportation
or travel away from home. Taxpayers
using the standard mileage rates must
comply with Rev. Proc. 2019-46. How-
ever, a taxpayer is not required to use
the substantiation methods described in
Rev. Proc. 2019-46, but instead may sub-
stantiate using actual allowable expense
amounts if the taxpayer maintains ade-
quate records or other sufficient evidence.
An independent contractor conducts
an annual study for the Internal Revenue
Service of the fixed and variable costs
of operating an automobile to determine
the standard mileage rates for business,
medical, and moving use reflected in this
notice. The standard mileage rate for char-
itable use is set by § 170(i).
Longstanding regulations under § 61
provide special valuation rules for employ-
er-provided automobiles. The amount
that must be included in the employee’s
income and wages for the personal use
of an employer-provided automobile
generally is determined by reference to
the automobile’s FMV. If an employer
chooses to use a special valuation rule, the
special value is treated as the FMV of the
benefit for income tax and employment
tax purposes. Section 1.61-21(b)(4). Two
such special valuation rules, the fleet-av-
erage valuation rule and the vehicle cents-
per-mile valuation rule, are set forth in §
1.61-21(d)(5)(v) and § 1.61-21(e), respec-
tively. These two special valuation rules
are subject to limitations, including that
they may be used only in connection with
automobiles having values that do not
exceed a maximum amount set forth in
the regulations.
SECTION 3. STANDARD MILEAGE
RATES
The standard mileage rate for trans-
portation or travel expenses for 2025 is
70 cents per mile for all miles of business
use (business standard mileage rate). See
section 4 of Rev. Proc. 2019-46. How-
ever, § 11045 of Public Law 115-97, 131.
Stat. 2054 (December 22, 2017), com-
1
Unless otherwise specified, all “section” or “§” references are to sections of the Internal Revenue Code (Code) or the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2025–3 427 January 13, 2025
monly known as the Tax Cuts and Jobs
Act (TCJA) suspends all miscellaneous
itemized deductions that are subject to
the two-percent of adjusted gross income
floor under § 67, including unreimbursed
employee travel expenses, for taxable
years beginning after December 31, 2017,
and before January 1, 2026. Thus, the
business standard mileage rate provided
in this notice cannot be used to claim an
itemized deduction for unreimbursed
employee travel expenses during the sus-
pension. Notwithstanding the foregoing
suspension of miscellaneous itemized
deductions, deductions for expenses that
are deductible in determining adjusted
gross income are not suspended. For
example, members of a reserve component
of the Armed Forces of the United States
(Armed Forces), state or local government
officials paid in whole or in part on a fee
basis, and certain performing artists are
entitled to deduct unreimbursed employee
travel expenses as an adjustment to total
income on line 12 of Schedule 1 of Form
1040 (2024), U.S. Individual Income Tax
Return, not as an itemized deduction on
Schedule A of Form 1040 (2024), and
therefore may continue to use the business
standard mileage rate.
The standard mileage rate is 14 cents
per mile for use of an automobile in ren-
dering gratuitous services to a charitable
organization under § 170. See section 5 of
Rev. Proc. 2019-46.
The standard mileage rate for 2025 is
unchanged from 2024 at 21 cents per mile
for use of an automobile: (1) for medical
care described in § 213; or (2) as part of a
move for which the expenses are deductible
under § 217(g). See section 5 of Rev. Proc.
2019-46. Section 11049 of the TCJA sus-
pends the deduction for moving expenses
for taxable years beginning after Decem-
ber 31, 2017, and before January 1, 2026.
However, the suspension does not apply
to members of the Armed Forces on active
duty who move pursuant to a military order
and incident to a permanent change of sta-
tion. Thus, except for taxpayers to whom
§ 217(g) applies, the standard mileage rate
provided in this notice is not applicable for
the use of an automobile as part of a move
occurring during the suspension.
SECTION 4. BASIS REDUCTION
AMOUNT
For automobiles a taxpayer uses for
business purposes, the portion of the
business standard mileage rate treated as
depreciation is 26 cents per mile for 2021,
26 cents per mile for 2022, 28 cents per
mile for 2023, and 30 cents per mile for
2024, and 33 cents per mile for 2025. See
section 4.04 of Rev. Proc. 2019-46.
SECTION 5. MAXIMUM
STANDARD AUTOMOBILE COST
For purposes of computing the allow-
ance under a FAVR plan, the standard
automobile cost may not exceed $61,200
for automobiles (including trucks and
vans). See section 6.02(6) of Rev. Proc.
2019-46.
SECTION 6. MAXIMUM VALUE
OF EMPLOYER-PROVIDED
AUTOMOBILES
For purposes of the fleet-average val-
uation rule in § 1.61-21(d)(5)(v) and the
vehicle cents-per-mile valuation rule in §
1.61-21(e), the maximum FMV of auto-
mobiles (including trucks and vans) first
made available to employees in calendar
year 2025 is $61,200.
SECTION 7. EFFECTIVE DATE
This notice is effective for: (1) deduct-
ible transportation expenses paid or
incurred on or after January 1, 2025; (2)
mileage allowances or reimbursements
paid to a charitable volunteer or a member
of the Armed Forces to whom § 217(g)
applies: (a) on or after January 1, 2025,
and (b) for transportation expenses the
charitable volunteer or such member of
the Armed Forces pays or incurs on or
after January 1, 2025; and (3) for purposes
of the maximum FMV of employer-pro-
vided automobiles for which employers
may use the fleet-average valuation rule
in § 1.61-21(d)(5)(v) or the vehicle cents-
per-mile rule in § 1.61-21(e), automobiles
first made available to employees for per-
sonal use on or after January 1, 2025.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Notice 2024-08 is superseded.
DRAFTING INFORMATION
The principal author of this notice is
Christian Lagorio of the Office of Asso-
ciate Chief Counsel (Income Tax and
Accounting). For further information
on this notice regarding the use of an
employee-provided automobile, contact
Mr. Lagorio at (202) 317-7005 (not a
toll-free number). For further informa-
tion on this notice regarding the use of an
employer-provided automobile, contact
Stephanie Caden of the Office of Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes), at (202) 317-4774 (not a toll-free
number).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also, Part 1, §§ 174, 446; 1.446-1.)
Rev. Proc. 2025-8
SECTION 1. PURPOSE
This revenue procedure modifies sec-
tion 7 of Rev. Proc. 2024-23, 2024-23
I.R.B. 1334, to modify the procedures
under § 446 of the Internal Revenue Code
(Code)
1
and § 1.446-1(e) for obtaining
automatic consent of the Commissioner
of Internal Revenue (Commissioner) to
change methods of accounting for expen-
ditures paid or incurred in taxable years
beginning after December 31, 2021, to
comply with § 174 or to rely on interim
guidance provided in sections 3 through
7 of Notice 2023-63, 2023-39 I.R.B. 919,
as modified by Notice 2024-12, 2024-5
I.R.B. 616. References in this revenue
procedure to “former § 174” refer to that
section as in effect for research or exper-
imental expenditures paid or incurred
in taxable years beginning before Janu-
ary 1, 2022, that is, prior to the effective
date of the amendments made to § 174
1
Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

January 13, 2025 428 Bulletin No. 2025–3
by § 13206(a) of Public Law 115-97, 131
Stat. 2054 (Dec. 22, 2017), commonly
referred to as the Tax Cuts and Jobs Act
(TCJA). References to “§ 174” in this rev-
enue procedure refer to § 174 as amended
by the TCJA.
SECTION 2. BACKGROUND
.01 Treatment of research and experi-
mental expenditures under former § 174.
Former § 174 allowed taxpayers to
deduct research or experimental expendi-
tures paid or incurred in connection with
a trade or business as current expenses, or
alternatively, charge such expenditures to
capital account and amortize them ratably
over a period of not less than 60 months.
.02 Treatment of SRE expenditures
under § 174.
(1) Section 13206(a) of the TCJA
amended former § 174. For amounts paid
or incurred in taxable years beginning after
December 31, 2021, that meet the defini-
tion of specified research or experimen-
tal (SRE) expenditures under § 174(b),
§ 174(a)(1) disallows deductions for such
amounts, except as provided in § 174(a)
(2). Section 174(a)(2) requires taxpayers
to charge SRE expenditures to capital
account and allows amortization deduc-
tions of such capitalized expenditures rat-
ably over a 5-year period in the case of
SRE expenditures attributable to domestic
research, or a 15-year period in the case of
SRE expenditures attributable to foreign
research, beginning with the midpoint of
the taxable year in which such expendi-
tures are paid or incurred. For additional
background on former § 174 and the TCJA
amendments to former § 174, see section
2 of Notice 2023-63.
(2) Section 13206(b) of the TCJA
requires taxpayers to treat the amend-
ments made by § 13206(a) of the TCJA
as a change in method of accounting for
purposes of § 481 that is (i) initiated by
the taxpayer, (ii) made with the consent of
the Secretary of the Treasury or her del-
egate, and (iii) applied on a cut-off basis
to SRE expenditures paid or incurred in
taxable years beginning after December
31, 2021. Thus, no adjustments under
§ 481(a) are required or permitted with
respect to research or experimental expen-
ditures paid or incurred in taxable years
beginning before January 1, 2022.
.03 Procedural guidance under Rev.
Proc. 2023-11.
On December 29, 2022, the Depart-
ment of the Treasury (Treasury Depart-
ment) and the Internal Revenue Service
(IRS) issued Rev. Proc. 2023-11, 2023-3
I.R.B. 417, modifying and superseding
Rev. Proc. 2023-8, 2023-3 I.R.B. 407, to
provide procedures to obtain automatic
consent to change methods of account-
ing for SRE expenditures to comply with
§ 174. The change in method of account-
ing provided by Rev. Proc. 2023-11 was
subsequently included in section 7.02
of Rev. Proc. 2023-24, 2023-28 I.R.B.
1207.
.04 Interim guidance under Notice
2023-63, as modified by Notice 2024-12.
Notice 2023-63 was issued on Septem-
ber 8, 2023, to announce that the Treasury
Department and the IRS intend to issue
proposed regulations addressing (1) the
capitalization and amortization of SRE
expenditures under § 174, (2) the treat-
ment of SRE expenditures under § 460,
and (3) the application of § 482 to cost
sharing arrangements involving SRE
expenditures. Sections 3 through 9 of
Notice 2023-63 provide interim guidance
regarding issues intended to be addressed
by forthcoming proposed regulations.
Notice 2024-12 was issued on December
22, 2023, to provide additional interim
guidance to clarify and modify Notice
2023-63.
.05 Procedural guidance under Rev.
Proc. 2024-9.
Revenue Procedure 2024-9, 2024-5
I.R.B. 628, was issued on December 22,
2023, to provide procedures for taxpay-
ers to obtain automatic consent to change
methods of accounting for expenditures
paid or incurred in taxable years beginning
after December 31, 2021, to comply with
§ 174 or to rely on interim guidance under
§§ 174 and 460 provided in Notice 2023-
63, as modified by Notice 2024-12. The
change in method of accounting for § 174
provided in section 3 of Rev. Proc. 2024-9
modified section 7.02 of Rev. Proc. 2023-
24. Rev. Proc. 2023-24 was subsequently
superseded in part by Rev. Proc. 2024-23.
Rev. Proc. 2024-23 renumbered section
7.02 as section 7.01 and removed former
section 7.01 as obsolete.
.06 Procedural guidance under Rev.
Proc. 2024-34.
(1) Revenue Procedure 2024-34, 2024-
38 I.R.B. 604, was issued on August 29,
2024, to provide procedures for taxpay-
ers to obtain automatic consent to change
methods of accounting for expenditures
paid or incurred in taxable years begin-
ning after December 31, 2021, to comply
with § 174 or to rely on interim guidance
provided in sections 3 through 7 of Notice
2023-63, as modified by Notice 2024-12.
Section 3 of Rev. Proc. 2024-34 modi-
fied section 7.01(5) and (6) of Rev. Proc.
2024-23.
(2) Section 7.01(5)(a) of Rev. Proc.
2024-23, as modified by section 3.01 of
Rev. Proc. 2024-34, waives the eligibil-
ity rules in section 5.01(1)(d) (regard-
ing changes made in the final year of a
trade or business) and section 5.01(1)(f)
(regarding changes made in the previous
five years for the same item) of Rev. Proc.
2015-13 for a change described in section
7.01(1)(a) of Rev. Proc. 2024-23 made by
a taxpayer for any taxable year beginning
in 2022 or 2023.
(3) Section 7.01(5)(b) of Rev. Proc.
2024-23, as modified by section 3.01 of
Rev. Proc. 2024-34, provides that a tax-
payer may make a change described in
section 7.01(1)(a) of Rev. Proc. 2024-23
for a taxable year beginning in 2022 or
2023, regardless of whether the taxpayer
made a change for the same item for any
previous taxable year beginning in 2022
or 2023.
(4) Section 7.01(6) of Rev. Proc. 2024-
23, as modified by section 3.01 of Rev.
Proc. 2024-34, provides the following:
First, a taxpayer does not receive audit
protection under section 8.01 of Rev.
Proc. 2015-13 for a change under section
7.01(1)(a) of Rev. Proc. 2024-23 with
respect to expenditures paid or incurred
in taxable years beginning on or before
December 31, 2021. Second, a taxpayer
does not receive audit protection under
section 8.01 of Rev. Proc. 2015-13 for a
change under section 7.01(1)(a) of Rev.
Proc. 2024-23 made for any taxable year
beginning in 2022 or 2023 (other than the
first taxable year beginning after Decem-
ber 31, 2021), with respect to expendi-
tures paid or incurred in the first taxable
year beginning after December 31, 2021,
if the taxpayer did not change its method
of accounting under section 7.01(1)(a) in
an effort to comply with § 174 for the first

Bulletin No. 2025–3 429 January 13, 2025
taxable year beginning after December 31,
2021. See section 8.02(2) of Rev. Proc.
2015-13.
.07 Changing methods of accounting
under § 446(e).
(1) Except as otherwise expressly
provided in the Code and the regulations
thereunder, § 446(e) and § 1.446-1(e)(2)
require a taxpayer to secure the consent
of the Commissioner before changing a
method of accounting for Federal income
tax purposes. Section 1.446-1(e)(3)(i)
states, in part, that except as otherwise
provided under the authority of § 1.446-
1(e)(3)(ii), to secure the Commissioner’s
consent to a taxpayer’s change in method
of accounting the taxpayer generally must
file a Form 3115, Application for Change
in Accounting Method, with the Commis-
sioner during the taxable year in which
the taxpayer desires to make the change
in method of accounting. Section 1.446-
1(e)(3)(ii) authorizes the Commissioner
to prescribe administrative procedures
under which taxpayers will be permitted
to change their method of accounting. The
administrative procedures will prescribe
those terms and conditions necessary to
obtain the Commissioner’s consent to
effect the change and to prevent amounts
from being duplicated or omitted.
(2) Rev. Proc. 2015-13, 2015-5 I.R.B.
419, as clarified and modified by Rev.
Proc. 2015-33, 2015-24 I.R.B. 1067, and
as modified by Rev. Proc. 2021-34, 2021-
35 I.R.B. 337, Rev. Proc. 2021-26, 2021-
22 I.R.B. 1163, Rev. Proc. 2017-59, 2017-
48 I.R.B. 543, and section 17.02(b) and (c)
of Rev. Proc. 2016-1, 2016-1 I.R.B. 1, sets
forth the general administrative proce-
dures by which a taxpayer may obtain the
automatic consent of the Commissioner to
change a method of accounting described
in the List of Automatic Changes. Rev.
Proc. 2024-23 contains the current List of
Automatic Changes.
(3) A change in a taxpayer’s treatment
of expenditures paid or incurred in taxable
years beginning after December 31, 2021,
to comply with § 174 or to rely on the
interim guidance in sections 3 through 7
of Notice 2023-63 is generally a change in
method of accounting to which §§ 446(e)
and 481, and the corresponding regula-
tions, apply. A taxpayer that changes its
method of accounting to comply with
§ 174 or to rely on the interim guidance
in sections 3 through 7 of Notice 2023-63
must use the accounting method change
procedures in Rev. Proc. 2015-13 or its
successor. Section 3 of this revenue pro-
cedure modifies the eligibility rules in
section 7.01 of Rev. Proc. 2024-23 to
allow taxpayers to obtain automatic con-
sent to change their method of accounting
to comply with § 174 or to rely on the
interim guidance provided in sections 3
through 7 of Notice 2023-63 for taxable
years beginning after December 31, 2021.
(4) Specifically, the Treasury Depart-
ment and the IRS are aware that certain
taxpayers may not be eligible to file auto-
matic changes in methods of accounting
under section 7.01 of Rev. Proc. 2024-23
for a taxable year beginning in 2024. This
is because the waiver of the eligibility
rules in section 5.01(1)(d) and (f) of Rev.
Proc. 2015-13 applies only to a change
described in section 7.01(1)(a) of Rev.
Proc. 2024-23 made by a taxpayer for any
taxable year beginning in 2022 or 2023.
Therefore, the procedures in section 3 of
this revenue procedure modify the eligi-
bility rules in section 7.01(5)(a) of Rev.
Proc. 2024-23 to provide that the eligi-
bility rules in section 5.01(1)(d) and (f)
of Rev. Proc. 2015-13 do not apply to a
change described in section 7.01(1)(a) of
Rev. Proc. 2024-23 made by a taxpayer
for any taxable year beginning in 2022,
2023, or 2024. The procedures in section
3 of this revenue procedure also modify
the rules for changes made in successive
taxable years in section 7.01(5)(b) of Rev.
Proc. 2024-23 to provide that a taxpayer
may make a change described in section
7.01(1)(a) of Rev. Proc. 2024-23 for a
taxable year beginning in 2022, 2023, or
2024, regardless of whether the taxpayer
made a change for the same item for any
previous taxable year beginning in 2022,
2023, or 2024.
SECTION 3. MODIFICATIONS TO
REV. PROC. 2024-23
.01 Modification of section 7.01(5) of
Rev. Proc. 2024-23. Section 7.01(5) of
Rev. Proc. 2024-23, is modified to read as
follows:
(5) Certain eligibility rules inapplica-
ble.
(a) In general. The eligibility rules in
section 5.01(1)(d) and (f) of Rev. Proc.
2015-13, 2015-5 I.R.B. 419, do not apply
to a change described in section 7.01(1)
(a) of this revenue procedure made by a
taxpayer for any taxable year beginning in
2022, 2023, or 2024.
(b) Changes made in successive tax-
able years. A taxpayer may make a change
described in section 7.01(1)(a) of this rev-
enue procedure for a taxable year begin-
ning in 2022, 2023, or 2024, regardless of
whether the taxpayer made a change for
the same item for any previous taxable
year beginning in 2022, 2023, or 2024.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
This revenue procedure modifies sec-
tion 7.01 of Rev. Proc. 2024-23.
SECTION 5. EFFECTIVE DATE
.01 In general. Except as otherwise
provided under this section 5, this revenue
procedure is effective for Forms 3115 filed
on or after December 17, 2024.
.02 Limited time period to convert a
Form 3115 filed under the non-automatic
change procedures in Rev. Proc. 2015-13.
(1) If, before December 17, 2024, a
taxpayer properly filed a Form 3115 under
the non-automatic change procedures
in Rev. Proc. 2015-13 requesting the
Commissioner’s consent for a change in
method of accounting described in section
7.01(1)(a) of Rev. Proc. 2024-23, and the
Form 3115 is pending with the national
office on December 17, 2024, the taxpayer
may choose to make the change in method
of accounting under the automatic change
procedures in Rev. Proc. 2015-13 if the tax-
payer is now eligible to use the automatic
accounting method change described in
section 7.01(1)(a) of Rev. Proc. 2024-23
as a result of the modifications made by
this Rev. Proc. 2025-8 (and is otherwise
eligible to use section 7.01(1)(a) of Rev.
Proc. 2024-23 and the automatic change
procedures in Rev. Proc. 2015-13). The
taxpayer must notify the national office
contact person (if unknown, fax the noti-
fication to 855-574-9031 or send the noti-
fication to the attention of Control Clerk,
CC:ITA, Room 4512 at the address speci-
fied in section 9.08(6) of Rev. Proc. 2024-
1, 2024-1 I.R.B. 1 (or its successor)) for
the Form 3115 of the taxpayer’s intent to

January 13, 2025 430 Bulletin No. 2025–3
make the change in method of accounting
under the automatic change procedures
in Rev. Proc. 2015-13 before the later
of (a) January 17, 2025, or (b) the issu-
ance of a letter ruling granting or denying
consent for the change. The notification
should indicate that the taxpayer chooses
to convert the Form 3115 to the automatic
change procedures in Rev. Proc. 2015-13.
If the taxpayer timely notifies the national
office that it chooses to convert the Form
3115 to the automatic change procedures
in Rev. Proc. 2015-13, the national office
will send a letter to the taxpayer acknowl-
edging its request and will return the user
fee submitted with the Form 3115.
(2) A taxpayer converting a Form 3115
to the automatic change procedures in
Rev. Proc. 2015-13 for a change in method
of accounting described in this revenue
procedure must resubmit a Form 3115 that
conforms to the automatic change proce-
dures, with a copy of the national office
letter sent acknowledging the taxpayer’s
request attached, to the IRS in Ogden, UT
by the earlier of (a) the 30th calendar day
after the date of the national office’s letter
acknowledging the taxpayer’s request, or
(b) the date the taxpayer is required to file
the duplicate copy of the Form 3115 under
section 6.03(1)(a)(i)(B) of Rev. Proc.
2015-13. See section 6.03(3) of Rev. Proc.
2015-13 regarding additional required
copies of Form 3115.
(3) For purposes of the eligibility rules
in section 5 of Rev. Proc. 2015-13, the
duplicate copy of the timely resubmitted
Form 3115 will be considered filed as of
the date the taxpayer originally filed the
converted Form 3115 under the non-au-
tomatic change procedures in Rev. Proc.
2015-13. This section 5.02 does not extend
the date the taxpayer must file the origi-
nal (converted) Form 3115 under section
6.03(1)(a)(i)(A) of Rev. Proc. 2015-13.
(4) A Form 3115 filed under the
non-automatic change procedures in Rev.
Proc. 2015-13 before December 17, 2024,
for a change in method of accounting
described in this revenue procedure, will
be disregarded for purposes of the prior
five-year change rules in section 5.04 and
5.05 of Rev. Proc. 2015-13 if the taxpayer
converts the Form 3115 pursuant to this
section 5.02.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget under OMB
control numbers 1545-0074 for individ-
ual filers, 1545-0123 for business filers,
and 1545-0047 for tax-exempt filers, in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. § 3507(d)). An agency
may not conduct or sponsor, and a person
is not required to respond to, a collection
of information unless the collection of
information displays a valid OMB control
number. The collection of information in
this revenue procedure is in section 5.02 of
this revenue procedure. This information
is necessary and will be used to determine
whether the taxpayer properly changed to
a permitted method of accounting. The
collection of information is required for
the taxpayer to obtain consent to change
its method of accounting.
SECTION 7. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Jeremy Pfeifer of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, please
contact Mr. Pfeifer at (202) 317-4176 (not
a toll-free number).

Bulletin No. 2025–3 431 January 13, 2025
Part IV
Announcement of
Disciplinary Sanctions
From the Office of
Professional Responsibility
Announcement 2025-1
The Office of Professional Respon-
sibility (OPR) announces recent disci-
plinary sanctions involving attorneys, cer-
tified public accountants, enrolled agents,
enrolled actuaries, enrolled retirement
plan agents, appraisers, and unenrolled/
unlicensed return preparers (individuals
who are not enrolled to practice and are
not licensed as attorneys or certified pub-
lic accountants). Licensed or enrolled
practitioners are subject to the regulations
governing practice before the Internal
Revenue Service (IRS), which are set out
in Title 31, Code of Federal Regulations,
Subtitle A, Part 10, and which are released
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. Unenrolled/
unlicensed return preparers are subject to
Revenue Procedure 81-38 and supersed-
ing guidance in Revenue Procedure 2014-
42, which govern a preparer’s eligibility
to represent taxpayers before the IRS in
examinations of tax returns the preparer
both prepared for the taxpayer and signed
as the preparer. Additionally, unenrolled/
unlicensed return preparers who volun-
tarily participate in the Annual Filing Sea-
son Program under Revenue Procedure
2014-42 agree to be subject to the duties
and restrictions in Circular 230, including
the restrictions on incompetent or disrep-
utable conduct.
The disciplinary sanctions to be
imposed for violation of the applicable
standards are:
Disbarred from practice before the
IRS—An individual who is disbarred
is not eligible to practice before the IRS
as defined at 31 C.F.R. § 10.2(a)(4) for a
minimum period of five (5) years.
Suspended from practice before the
IRS—An individual who is suspended is
not eligible to practice before the IRS as
defined at 31 C.F.R. § 10.2(a)(4) during
the term of the suspension.
Censured in practice before the
IRS—Censure is a public reprimand.
Unlike disbarment or suspension, censure
does not affect an individual’s eligibility
to practice before the IRS, but OPR may
subject the individual’s future practice
rights to conditions designed to promote
high standards of conduct.
Monetary penalty—A monetary pen-
alty may be imposed on an individual who
engages in conduct subject to sanction,
or on an employer, firm, or entity if the
individual was acting on its behalf and it
knew, or reasonably should have known,
of the individual’s conduct.
Disqualification of appraiser—An
appraiser who is disqualified is barred
from presenting evidence or testimony in
any administrative proceeding before the
Department of the Treasury or the IRS.
Ineligible for limited practice—An
unenrolled/unlicensed return preparer
who fails to comply with the require-
ments in Revenue Procedure 81-38 or
to comply with Circular 230 as required
by Revenue Procedure 2014-42 may be
determined ineligible to engage in lim-
ited practice as a representative of any
taxpayer.
Under the regulations, individuals
subject to Circular 230 may not assist, or
accept assistance from, individuals who
are suspended or disbarred with respect
to matters constituting practice (i.e., rep-
resentation) before the IRS, and they may
not aid or abet suspended or disbarred
individuals to practice before the IRS.
Disciplinary sanctions are described in
these terms:
Disbarred by decision, Suspended by
decision, Censured by decision, Mone-
tary penalty imposed by decision, and
Disqualified after hearing—An adminis-
trative law judge (ALJ) issued a decision
imposing one of these sanctions after the
ALJ either (1) granted the government’s
summary judgment motion or (2) con-
ducted an evidentiary hearing upon OPR’s
complaint alleging violation of the regula-
tions. After 30 days from the issuance of
the decision, in the absence of an appeal,
the ALJ’s decision becomes the final
agency decision.
Disbarred by default decision, Sus-
pended by default decision, Censured
by default decision, Monetary penalty
imposed by default decision, and Dis-
qualified by default decision—An ALJ,
after finding that no answer to OPR’s com-
plaint was filed, granted OPR’s motion for
a default judgment and issued a decision
imposing one of these sanctions.
Disbarment by decision on appeal,
Suspended by decision on appeal, Cen-
sured by decision on appeal, Mone-
tary penalty imposed by decision on
appeal, and Disqualified by decision
on appeal—The decision of the ALJ was
appealed to the agency appeal authority,
acting as the delegate of the Secretary
of the Treasury, and the appeal authority
issued a decision imposing one of these
sanctions.
Disbarred by consent, Suspended by
consent, Censured by consent, Mone-
tary penalty imposed by consent, and
Disqualified by consent—In lieu of a
disciplinary proceeding being instituted
or continued, an individual offered a con-
sent to one of these sanctions and OPR
accepted the offer. Typically, an offer of
consent will provide for: suspension for
an indefinite term; conditions that the
individual must observe during the sus-
pension; and the individual’s opportu-
nity, after a stated number of months, to
file with OPR a petition for reinstatement
affirming compliance with the terms of
the consent and affirming current fitness
and eligibility to practice (i.e., an active
professional license or active enrollment
status, with no intervening violations of
the regulations).
Suspended indefinitely by decision in
expedited proceeding, Suspended indef-
initely by default decision in expedited
proceeding, Suspended by consent in
expedited proceeding—OPR instituted
an expedited proceeding for suspension
(based on certain limited grounds, includ-
ing loss of a professional license for cause,
and criminal convictions).
Determined ineligible for limited
practice—-There has been a final deter-
mination that an unenrolled/unlicensed

January 13, 2025 432 Bulletin No. 2025–3
return preparer is not eligible for limited
representation of any taxpayer because the
preparer violated standards of conduct or
failed to comply with any of the require-
ments to act as a representative.
A practitioner who has been dis-
barred or suspended under 31 C.F.R. §
10.60, or suspended under § 10.82, or
a disqualified appraiser may petition
for reinstatement before the IRS after
the expiration of 5 years following such
disbarment, suspension, or disqualifi-
cation (or immediately following the
expiration of the suspension or disqual-
ification period if shorter than 5 years).
Reinstatement will not be granted unless
the IRS is satisfied that the petitioner is
not likely to engage thereafter in con-
duct contrary to Circular 230, and that
granting such reinstatement would not
be contrary to the public interest.
Reinstatement decisions are published
at the individual’s request, and described
in these terms:
Reinstated to practice before the
IRS—-The individual’s petition for
reinstatement has been granted. The
agent, and eligible to practice before the
IRS, or in the case of an appraiser, the
individual is no longer disqualified.
Reinstated to engage in limited prac-
tice before the IRS—-The individual’s
petition for reinstatement has been granted.
The individual is an unenrolled/unlicensed
return preparer and eligible to engage in
limited practice before the IRS, subject to
requirements the IRS has prescribed for
limited practice by tax return preparers.
OPR has authority to disclose the
grounds for disciplinary sanctions in these
situations: (1) an ALJ or the Secretary’s
delegate on appeal has issued a final deci-
sion; (2) the individual has settled a dis-
ciplinary case by signing OPR’s “consent
to sanction” agreement admitting to one
or more violations of the regulations and
consenting to the disclosure of the admit-
ted violations (for example, failure to file
Federal income tax returns, lack of due
diligence, conflict of interest, etc.); (3)
OPR has issued a decision in an expedited
proceeding for indefinite suspension; or
(4) OPR has made a final determination
(including any decision on appeal) that an
unenrolled/unlicensed return preparer is
ineligible to represent any taxpayer before
the IRS.
Announcements of disciplinary sanc-
tions appear in the Internal Revenue Bul-
letin at the earliest practicable date. The
sanctions announced below are alphabet-
ized first by state and second by the last
names of the sanctioned individuals.
City & StateNameProfessional
Designation
Disciplinary SanctionEffective Date(s)
California
Iheke, Chuks L.,
see Texas
Florida
Lapensohn, Howard C.,
see Pennsylvania
Georgia
MiltonTarantino, Peter J.C PASuspended by decision in
expedited proceeding under
31 C.F.R. § 10.82(b)
Indefinite from
July 22, 2024
Iowa
HamptonWiechmann, Jr.,
Daniel F.
AttorneySuspended by default decision
in expedited proceeding under
31 C.F.R. § 10.82(b)
Indefinite from
July 18, 2024
Missouri
St. LouisVan De Riet, Richard L.C PASuspended by default decision
in expedited proceeding under
31 C.F.R. § 10.82(b)
Indefinite from
August 20, 2024
New York
White PlainsSavignano, John J.C PAReinstated to practice
before the IRS, effective
July 17, 2024
New CitySilverman, George J.C PASuspended by decision in
expedited proceeding under
31 C.F.R. § 10.82(b)
Indefinite from
August 14, 2024

Bulletin No. 2025–3 433 January 13, 2025
City & StateNameProfessional
Designation
Disciplinary SanctionEffective Date(s)
North Carolina
ShelbyRoberts II, Walter
“Terry” D.
AppraiserDisqualified by consent for
admitted violations of
31 C.F.R. §§ 10.51(a)(2)
and 10.51(a)(4)
Indefinite from
August 2, 2024
Pennsylvania
PhiladelphiaLapensohn,
Howard C.
C PASuspended by default decision
in expedited proceeding under
31 C.F.R. § 10.82(b)
Indefinite from
July 22, 2024
Tennessee
Signal MountainFulton, David J.AttorneySuspended by default decision
in expedited proceeding under
31 C.F.R. § 10.82(b)
Indefinite from
August 8, 2024
Texas
Round RockIheke, Chuks L.C PASuspended by decision in expedited
proceeding under
31 C.F.R. § 10.82(b)
Indefinite from
August 21, 2024
United States’ Notification
of Partial Suspension,
by Mutual Agreement, of
1973 Tax Convention with
the USSR as it relates to
Belarus
Announcement 2025-5
The U.S. Department of the Treasury
announced that the United States provided
formal notice to the Republic of Belarus
on December 17, 2024, to confirm 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 Social-
ist Republics on Matters of Taxation,
with related letters, signed at Washington
June 20, 1973 (the “Convention”), as it
relates to Belarus, by mutual agreement.
See Press Release, United States’ Notifi-
cation of Partial Suspension, by Mutual
Agreement, of 1973 Tax Convention with
the USSR as it relates to Belarus (Decem-
ber 17, 2024), https://home.treasury.gov/
news/press-releases/jy2754.
The suspension is effective Decem-
ber 17, 2024, until December 31, 2026,
or earlier if mutually determined by the
two governments. This action responds to
notification by the Republic of Belarus on
March 21, 2024, of its desire to suspend
paragraph 1, subparagraph (g), of Article
III of the Convention until December 31,
2026.
For further information regarding this
announcement contact the Office of Asso-
ciate Chief Counsel (International) at
(202) 317-3800 (not a toll-free number).
Notice of Proposed
Rulemaking
Accounting for Disregarded
Transactions Between a
Qualified Business Unit and
Its Owner
REG-117213-24
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to the
determination of taxable income or loss
and foreign currency gain or loss with
respect to a qualified business unit. The
proposed regulations include an elec-
tion that is intended to reduce the com-
pliance burden of accounting for cer-
tain disregarded transactions between
a qualified business unit and its owner.
This document also includes a request
for comments relating to the treatment
of partnerships and controlled foreign
corporations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 11, 2025.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically via the Federal eRulemak-
ing Portal at https://www.regulations.gov
(indicate IRS and REG-117213-24) by
following the online instructions for sub-
mitting comments. Requests for a public
hearing must be submitted as prescribed
in the “Comments and Requests for a
Public Hearing” section. Once submitted
to the Federal eRulemaking Portal, com-
ments cannot be edited or withdrawn. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comments submit-
ted to the IRS’s public docket. Send paper
submissions to: CC:PA:01:PR (REG-
117213-24), Room 5203, Internal Reve-

January 13, 2025 434 Bulletin No. 2025–3
nue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Adam G. Province at (865)
329-4546; concerning submissions of
comments, requests for a public hearing,
and access to a public hearing, Publica-
tions and Regulations Section at (202)
317-6901 (not toll-free numbers) or by
e-mail to publichearings@irs.gov (pre-
ferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed addi-
tions and amendments to 26 CFR part 1
(Income Tax Regulations) addressing the
application of section 987 of the Internal
Revenue Code (Code) and related provi-
sions (the “proposed regulations”). The
additions and amendments are issued
under sections 987 and 989, pursuant to
the express delegations of authority pro-
vided under those sections. The express
delegations relied upon are referenced in
the Background section of this preamble.
The proposed regulations are also issued
under the express delegation of authority
under section 7805 of the Code.
Background
This document contains proposed reg-
ulations under section 987 of the Code.
Section 987 applies to any taxpayer that
has a qualified business unit (QBU) with
a functional currency other than the dol-
lar. Section 987(1) and (2) provide rules
for determining and translating tax-
able income or loss (“section 987 tax-
able 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 dif-
ferent functional currencies.
Sections 987 and 989 provide several
explicit grants of regulatory authority. The
statute does not specify how the proper
adjustments should be made under sec-
tion 987(3), but instead directs the Sec-
retary to prescribe the proper adjustments
needed to determine the taxable income of
the owner of a section 987 QBU. 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 grants of authority in
section 989(c) include regulations provid-
ing for the appropriate treatment of related
party transactions (including transactions
between QBUs of the same taxpayer).
Section 989(c)(5).
Concurrently with the publication of
these proposed regulations, the Treasury
Department and the IRS are publish-
ing in the rules and regulations section
of this edition of the Federal Regis-
ter (RIN 1545-BO07) final regulations
under sections 861, 985, 987 through
989, and 1502 of the Code (the “final
regulations”). On November 14, 2023,
the Treasury Department and the IRS
published proposed regulations (REG-
132422-17) under those same sections
of the Code (the “2023 proposed reg-
ulations”) in the Federal Register (88
FR 78134). The comments received in
response to the 2023 proposed regula-
tions, and the revisions made in response
to those comments, are summarized in
the Summary of Comments and Expla-
nation of Revisions in the preamble to
the final regulations. In response to cer-
tain comments, the Treasury Department
and the IRS are publishing this notice of
proposed rulemaking to provide addi-
tional proposed rules under section 987
and to request comments relating to the
application of section 987 to partner-
ships and controlled foreign corporations
(“CFCs”).
Explanation of Provisions
The proposed regulations provide an
election under which, in certain cases, tax-
payers can translate a group of frequently
recurring transfers between a section 987
QBU and its owner using the yearly aver-
age exchange rate (rather than the spot
rate applicable on the date of each trans-
fer). The proposed regulations also would
simplify the computation of unrecognized
section 987 gain or loss under § 1.987-4
for taxpayers that make this election.
I. Rules of the Final Regulations Relating
to Disregarded Transactions
A. Accounting for disregarded
transactions between a section 987 QBU
and its owner
Under the final regulations, an asset
is treated as transferred to a section 987
QBU from its owner if, because of a disre-
garded transaction, the asset is reflected on
the books and records of the section 987
QBU. See § 1.987-2(c)(2)(i). Similarly, an
asset is treated as transferred from a sec-
tion 987 QBU to its owner if, because of
a disregarded transaction, the asset ceases
to be reflected on the books and records of
the section 987 QBU. Thus, for example,
if a section 987 QBU purchases inventory
from its owner (or another eligible QBU
of its owner) in a disregarded transaction,
the section 987 QBU is treated as distrib-
uting cash to its owner, and the owner is
treated as contributing the inventory to the
section 987 QBU. Disregarded transac-
tions, however, 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. See § 1.987-2(c)(2)(iii).
The final regulations provide rules for
determining the basis of an asset or the
amount of a liability that has been trans-
ferred by an owner to a section 987 QBU.
In general, marked items are translated
into the section 987 QBU’s functional
currency at the spot rate applicable on the
date of the transfer, while historic items
are translated at the applicable historic
rate. See § 1.987-2(d). Similarly, when an
asset or liability is transferred from a sec-
tion 987 QBU to its owner, marked items
are translated into the owner’s functional
currency at the spot rate applicable on the
date of transfer, while historic items are
translated at the applicable historic rate.
See § 1.987-5(f). These rules apply to all
transfers of assets and liabilities between a
section 987 QBU and its owner, including
1
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. 2025–3 435 January 13, 2025
transfers made in connection with ordi-
nary course disregarded transactions (for
example, sales of inventory).
The definition of a marked item under
the final regulations includes an asset or
liability denominated in, or determined by
reference to, the functional currency of the
section 987 QBU that would be a section
988 transaction if it were held or entered
into directly by the owner of the section
987 QBU; it also includes several other
categories of assets and liabilities. See §
1.987-1(d)(1). However, the final regula-
tions provide an election to treat all items
of a section 987 QBU as marked items
(the “current rate election”). See § 1.987-
1(d)(2).
B. Determination of unrecognized section
987 gain or loss with respect to a section
987 QBU
Section 1.987-4 provides rules for com-
puting net unrecognized section 987 gain
or loss with respect to a section 987 QBU.
Under § 1.987-4(b), net unrecognized sec-
tion 987 gain or loss is equal to the sum
of (i) the unrecognized section 987 gain
or loss for the current taxable year and (ii)
net accumulated unrecognized section 987
gain or loss for all prior taxable years.
Section § 1.987-4(d) provides a ten-step
formula for computing unrecognized sec-
tion 987 gain or loss for the current taxable
year. The first step of this formula is to
determine the change in owner functional
currency net value (“OFCNV”) of the sec-
tion 987 QBU for the taxable year, com-
puted using end-of-year exchange rates for
marked items and historic rates for historic
items. See § 1.987-4(d)(1) and (e). The
other steps adjust for amounts compris-
ing the separate components of the annual
change in OFCNV (other than 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 items of income or
loss of the section 987 QBU. See § 1.987-
4(d)(2) through (9). Step 10 is a residual
adjustment for any remaining increase or
decrease to the section 987 QBU’s func-
tional currency balance sheet. This residual
adjustment is translated into the owner’s
functional currency using the yearly aver-
age exchange rate for the taxable year. See
§ 1.987-4(d)(10).
In applying steps 2 through 5, an owner
must account for all transfers of assets and
liabilities between a section 987 QBU
and its owner, including transfers made
in connection with ordinary course dis-
regarded transactions. See § 1.987-4(d)
(2) through (5). For this purpose, marked
items are translated into the owner’s func-
tional currency at the spot rate applicable
on the date of the transfer, while historic
items are translated at the applicable his-
toric rate.
II. Proposed Rules Relating to
Disregarded Transactions
A. Comment concerning the compliance
burden of accounting for disregarded
transactions
A comment to the 2023 proposed reg-
ulations asserted that it is burdensome
for taxpayers to track and translate dis-
regarded transactions between a section
987 QBU and its owner (or between
different section 987 QBUs of the same
owner) that arise in the ordinary course
of a section 987 QBU’s trade or business.
The comment recommended that, for tax-
payers that make a current rate election,
unrecognized section 987 gain or loss for
the taxable year should be computed by
applying only two of the steps provided
in § 1.987-4(d): step 1 (determining the
change in OFCNV) and step 10 (reducing
or increasing 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 comment asserted that, under
this approach, it would not be necessary
to track ordinary course disregarded
transactions between a section 987 QBU
and its owner (or different section 987
QBUs of the same owner), because those
transactions would be eliminated from
the computation of unrecognized section
987 gain or loss.
As explained in the preamble to the
final regulations, the effect of the com-
ment’s recommended rule would be to
translate the net amount of all transfers
between a section 987 QBU and its owner
at the yearly average exchange rate under
step 10. See part V.A.3 of the Summary of
Comments and Explanation of Revisions
in the preamble to the final regulations.
By contrast, § 1.987-4(d) requires each
transfer to be translated at the appropriate
exchange rate in applying steps 2 through
5. Under the final regulations, if a cur-
rent rate election is in effect, the basis of
each asset and the amount of each liabil-
ity transferred is translated at the spot rate
applicable on the date of transfer (because
all assets and liabilities are treated as
marked items). The final regulations do
not adopt the rule recommended by the
comment because the applicable spot rate
could be significantly higher or lower
than the yearly average exchange rate, in
which case the comment’s recommended
rule could substantially distort the compu-
tation of unrecognized section 987 gain or
loss.
B. Recurring transfer group election
Notwithstanding the concern described
in part II.A of this Explanation of Provi-
sions, the Treasury Department and the
IRS are of the view that, in certain cases,
a group of frequently recurring transfers
between a section 987 QBU and its owner
could be translated using the yearly aver-
age exchange rate without creating signif-
icant distortions. Further, permitting tax-
payers to use the yearly average exchange
rate in lieu of the applicable spot rate
would reduce the compliance burden of
the section 987 regulations.
Therefore, the proposed regulations
would provide that a taxpayer that has
made a current rate election may elect
to use the yearly average exchange rate
to translate assets that are transferred
between a section 987 QBU and its owner
as part of a recurring transfer group (a
“recurring transfer group election”).
Proposed § 1.987-2(f)(1). The recurring
transfer group election would be subject
to the general timing and consistency
requirements provided in § 1.987-1(g) of
the final regulations.
If a recurring transfer group election
is in effect, assets transferred between a
section 987 QBU and its owner as part
of a recurring transfer group (“grouped
assets”) are translated under §§ 1.987-
2(d), 1.987-4(d)(2), and 1.987-5(f) using
the yearly average exchange rate in lieu of
the applicable spot rate. Proposed § 1.987-
2(f)(4). In addition, proposed § 1.987-2(f)
(5)(i) would provide that transfers made as

January 13, 2025 436 Bulletin No. 2025–3
part of a recurring transfer group are dis-
regarded for purposes of § 1.987-4(d)(2)
and (3) (steps 2 and 3). Proposed § 1.987-
2(f)(5). That is, because all transfers that
are part of a recurring transfer group are
translated at the yearly average exchange
rate, these transfers do not need to be sep-
arately tracked and translated for purposes
of determining unrecognized section 987
gain or loss.
Transfers that are part of a recurring
transfer group are also disregarded when
applying steps 2 and 3 in the functional
currency of the section 987 QBU for pur-
poses of determining the residual increase
or decrease to net assets under § 1.987-
4(d)(10). Proposed § 1.987-4(d)(10)(ii)
(D). To the extent that these transfers
increase or reduce the year-end net assets
of the section 987 QBU (determined in the
section 987 QBU’s functional currency),
the residual increase or decrease to net
assets will be translated at the yearly aver-
age exchange rate under § 1.987-4(d)(10)
(step 10).
Under the proposed regulations, if a
recurring transfer group election is in
effect, and the only transfers between a
section 987 QBU and its owner are part
of a recurring transfer group, the owner
would determine unrecognized section
987 gain or loss for the taxable year by
applying only steps 1 and 10 (as recom-
mended by the comment). Transfers that
are not part of a recurring transfer group
must be taken into account at the appli-
cable spot rate under steps 2 through 5.
However, the final regulations permit tax-
payers to use a spot rate convention based
on the average of spot rates for a reason-
able period (which can be as long as three
months), which should reduce the compli-
ance burden of accounting for these trans-
fers. See § 1.987-1(c)(1)(ii).
The special rule for computing unrec-
ognized section 987 gain or loss in pro-
posed § 1.987-2(f)(5)(i) would not apply
if the owner of a section 987 QBU deter-
mines QBU net value using the formula
provided in § 1.987-4(e)(2)(iii). Proposed
§ 1.987-2(f)(5)(ii). Taxpayers using this
formula must separately track each trans-
fer for purposes of computing QBU net
value, and therefore disregarding the
transfers for purposes of § 1.987-4(d)(2)
and (3) would not reduce the compliance
burden for these taxpayers.
The proposed regulations also would
modify the recordkeeping requirements
in § 1.987-9 to provide that taxpayers are
not required to maintain records concern-
ing amounts transferred between an owner
and a section 987 QBU unless the trans-
ferred amounts are taken into account in
applying § 1.987-4 or § 1.987-5. Proposed
§ 1.987-9(b)(5) and (6). Therefore, if a
taxpayer makes a recurring transfer group
election and uses the alternative calcula-
tion provided in § 1.987-5(c)(2) (under
which the remittance for a taxable year
is determined by reference to the change
in QBU net value, adjusted for income or
loss of the section 987 QBU), the taxpayer
generally would not be required to main-
tain records with respect to transfers of
grouped assets.
C. Definition of a recurring transfer
group
Under the proposed regulations, a recur-
ring transfer group would be defined as
a group of frequently recurring transfers
between a section 987 QBU and its owner
(or another eligible QBU of the owner) that
are made in the ordinary course of a trade or
business. Proposed § 1.987-2(f)(2)(i). Only
transfers made in connection with sales of
inventory, payments for services, or rent or
royalty transactions in which arm’s length
compensation (determined by applying the
principles of the arm’s length standard of
§ 1.482-1(b)(1)) has been paid would be
included in a recurring transfer group. Pro-
posed § 1.987-2(f)(2)(ii). For this purpose,
the principles of the arm’s length standard
apply as if the section 987 QBU were a
corporation that is separate from its owner
and, thus, as if the disregarded transaction
were a controlled transfer within the mean-
ing of § 1.482-1(i)(8). A recurring transfer
group would not include a transfer between
the section 987 QBU and its owner if the
transfer (or a portion of the transfer) would
be treated as a distribution with respect to
stock, or an exchange for stock (or a con-
tribution to capital), for U.S. tax purposes
if the QBU were treated as a separate cor-
poration. Proposed § 1.987-2(f)(2)(iii).
Those transfers are unlikely to be made in
the ordinary course of a trade or business
and could be used to manipulate the com-
putation of unrecognized section 987 gain
or loss.
The definition of a recurring transfer
group in proposed § 1.987-2(f)(2) is tai-
lored to identify ordinary business trans-
actions for which the use of the yearly
average exchange rate would not cause
significant distortions and which could
be burdensome to account for under the
rules of the final regulations. The Treasury
Department and the IRS request com-
ments as to whether other transfers should
be included in a recurring transfer group.
For example, comments are requested as
to whether intercompany lending transac-
tions (or other transactions) of a bank or
other financial entity should be included
in a recurring transfer group and, if so,
how the scope of the covered transactions
should be defined. Although lending trans-
actions are made in the ordinary course
of a bank’s trade or business, it may be
difficult to distinguish between ordinary
course loans and extraordinary transac-
tions that could be used to manipulate a
taxpayer’s unrecognized section 987 gain
or loss.
D. Exception for disproportionate
transfers
The rules of proposed § 1.987-2(f)
(4) and (5) would not apply in a taxable
year in which a disproportionate amount
of the assets transferred as part of a recur-
ring transfer group are transferred during
one or more quarters of the taxable year.
Proposed § 1.987-2(f)(6). In particular,
proposed § 1.987-2(f)(4) and (5) would
not apply if either (i) more than 50 per-
cent of the total amount transferred during
the taxable year is transferred during one
quarter of the taxable year or (ii) more
than 80 percent of the total amount trans-
ferred during the taxable year is trans-
ferred during two quarters of the taxable
year.
The exception in proposed § 1.987-2(f)
(6) is intended to prevent significant dis-
tortions that could arise from using the
yearly average exchange rate to translate
transfers that primarily occur in only part
of the taxable year, while being flexible
enough to accommodate ordinary course
disregarded transactions between a sec-
tion 987 QBU and its owner. The Trea-
sury Department and the IRS request
comments as to whether other standards
could be used to identify transfers that can

Bulletin No. 2025–3 437 January 13, 2025
appropriately be translated at the yearly
average exchange rate. For example, com-
ments are requested as to whether more
flexibility should be provided in taxable
years in which exchange rates do not sig-
nificantly fluctuate.
Applicability Dates
Once finalized, the regulations would
apply to taxable years beginning after the
date the Treasury Decision adopting these
rules as final regulations is published in
the Federal Register. A taxpayer may
rely on these proposed regulations for a
taxable year in which the final regulations
(that is, the final regulations that are being
published concurrently with the proposed
regulations) apply, provided the taxpayer
and each member of its consolidated
group and section 987 electing group, as
applicable, consistently follow the pro-
posed regulations in their entirety and in a
consistent manner.
In addition, for a taxable year in which
the final regulations apply, a taxpayer may
continue to rely on the parts of the pro-
posed regulations published in the Federal
Register (REG-128276-12, 81 FR 88882)
on December 8, 2016 (the “2016 proposed
regulations”) that have not been finalized
or withdrawn, provided that the taxpayer
and each member of its consolidated
group and section 987 electing group, as
applicable, consistently follow these parts
in their entirety and in a consistent man-
ner. The following parts of the 2016 pro-
posed regulations have not been finalized
or withdrawn: (1) rules regarding QBUs
with the U.S. dollar as their functional
currency (see §§ 1.987-1 and 1.987-6 of
the 2016 proposed regulations); and (2)
rules requiring the deferral of certain sec-
tion 988 loss that arises with respect to
related-party loans (see § 1.988-2 of the
2016 proposed regulations).
Comments and Request for Public
Hearing
I. In General
Before these proposed regulations are
adopted as final regulations, consideration
will be given to comments that are submit-
ted timely to the IRS as prescribed in this
preamble under the ADDRESSES head-
ing. In addition to the specific requests
for comments in parts II.C and II.D of the
Explanation of Provisions, the Treasury
Department and the IRS request com-
ments on all other aspects of the proposed
regulations as well as on the specific issues
identified in part II of this Comments and
Request for Public Hearing section. Any
comments submitted will be made avail-
able at https://www.regulations.gov or
upon request.
A public hearing concerning the pro-
posed regulations will be scheduled if
requested in writing by any person who
timely submits electronic or written com-
ments. Requests for a public hearing are
also encouraged to be made electroni-
cally. If a public hearing is scheduled,
notice of the date and time for the public
hearing will be published in the Federal
Register.
II. Additional Requests for Comments
A. Treatment of partnerships for
purposes of sections 987 and 989(a)
The final regulations do not provide
detailed rules concerning the application
of section 987 to partnerships, and they
reserve on the treatment of a partnership
as a QBU under section 989(a). See part
VIII.B.1 of the Summary of Comments
and Explanation of Revisions in the pre-
amble to the final regulations. See also
part VIII of the Explanation of Provisions
in the preamble to the 2023 proposed reg-
ulations. The Treasury Department and
the IRS continue to study those issues and
therefore request comments on the follow-
ing topics:
1. Should section 987 be applied to part-
nerships using an entity approach,
an aggregate approach, or a hybrid
approach? Comments recommending
an entity approach should address the
concerns raised in the preamble to the
2023 proposed regulations regarding
the potential for unrecognized section
987 gain or loss to be shifted between
partners upon a sale of a partnership
interest. See part VIII.C of the Expla-
nation of Provisions in the preamble
to the 2023 proposed regulations.
2. Should a partnership be treated as a
per se QBU under section 989(a) and
§ 1.989(a)-1(b)(2)(i)?
3. Should different rules be provided for
purposes of sections 987 and 989(a)
depending on whether the partners
in the partnership are related parties?
Comments recommending an entity
approach for partnerships owned
by related parties should address
the concerns raised in the preamble
to the 2023 proposed regulations
regarding the potential for a group
of related parties to hold an eligible
QBU through a partnership (rather
than directly) in order to alter the
section 987 treatment of the eligible
QBU without meaningfully altering
the group’s economic position. See
part VIII.E of the Explanation of Pro-
visions in the preamble to the 2023
proposed regulations.
4. Under an entity approach, if a part-
nership’s functional currency differs
from that of its partners, how should
the partners account for currency gain
or loss with respect to their partner-
ship interests?
Comments submitted in response to the
2023 proposed regulations do not need to
be resubmitted in response to these pro-
posed regulations.
B. Application of section 987 to CFCs
As discussed in part II.A.3 of the
Summary of Comments and Explana-
tion of Revisions in the preamble to the
final regulations, a comment on the 2023
proposed regulations recommended that
the application of section 987 be simpli-
fied by applying rules similar to section
986(c) to section 987 QBUs owned by
CFCs in lieu of applying section 987. In
response to this comment, the preamble
to the final regulations explained that the
Treasury Department and the IRS are of
the view that it would not be feasible to
adopt this comment, but nonetheless are
studying whether there are instances in
which it would be possible to simplify
the application of section 987 by mod-
ifying 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.
In considering the appropriateness of
such a rule, it is helpful to consider United
States persons (“U.S. persons”) and for-

January 13, 2025 438 Bulletin No. 2025–3
eign persons separately. In the case of a
U.S. person, except to the extent that the
Code specifically provides otherwise, the
taxable income of the U.S. person should
reflect that person’s accession to wealth, as
measured in the U.S. dollar. Accordingly,
when the amount of the U.S. person’s
basis in its assets or the amount of its lia-
bilities fluctuates as a result of fluctuations
in the functional currency of a section
987 QBU, section 987(3) is necessary to
ensure that currency gain or loss is taken
into account to prevent these fluctuations
from artificially increasing or decreasing
the taxpayer’s income, gain, deduction,
and loss, as measured in the U.S. dollar.
In contrast, in the case of a foreign person,
such as a CFC or a partnership with only
foreign partners, the Treasury Department
and the IRS are studying whether the U.S.
tax system appropriately tracks and taxes
the foreign person’s accession to wealth
given that its functional currency may not
be the U.S. dollar.
The Treasury Department and the IRS
agree with the comment that the compli-
ance and administrative burdens of the
section 987 regulations would be substan-
tially reduced if section 987(3) and the
related regulations did not apply to CFCs
or to partnerships with only foreign part-
ners. Under such an approach, a CFC or
a partnership with only foreign partners
would not calculate net unrecognized
section 987 gain or loss with respect to a
section 987 QBU and would not recognize
section 987 gain or loss on a remittance or
termination. Instead, if a section 987 QBU
owned by the CFC or partnership trans-
ferred assets or liabilities to its owner, the
CFC or partnership would merely take a
basis in the assets or measure the amount
of the liabilities by translating from the
section 987 QBU’s functional currency
into the CFC or partnership’s functional
currency at the spot rate on the date of the
transfer.
Relatedly, the Treasury Department
and the IRS are concerned about the abil-
ity of foreign entities to manipulate the
recognition of section 987 gain and loss
under section 987(3) and the related regu-
lations. This concern is not entirely allevi-
ated by the loss-to-the-extent-of-gain-rule
in § 1.987-11, which suspends the recog-
nition of section 987 loss for taxpayers
that make a current rate election.
Accordingly, the Treasury Department
and the IRS are studying whether, in cer-
tain cases, it would be appropriate to not
apply section 987(3) and the related reg-
ulations to CFCs and partnerships with
only foreign partners. However, the Trea-
sury Department and the IRS have a num-
ber of concerns, including that, under this
approach, the amount of currency gain
(or loss) that would have been taken into
account under section 987(3) would give
rise to an increase (or decrease) in a CFC’s
aggregate inside asset basis without a cor-
responding change in the CFC’s earnings
and profits, and the resulting mismatch
between inside asset basis and earnings
and profits could produce inappropriate
results.
For example, over time, it would be
common for a CFC’s aggregate inside
asset basis to be greater or less than the sum
of its (i) earnings and profits determined
under the principles of § 1.367(b)-2(d) but
without regard to whether the exchang-
ing shareholder is a U.S. person or for-
eign person, (ii) total basis in the stock
of the CFC; and (iii) the amount of the
CFC’s liabilities. Although it is possible
for a CFC to have aggregate inside asset
basis in excess of these amounts (“excess
asset basis”)
2
under current law, the Trea-
sury Department and the IRS are con-
cerned that, if CFCs were not required
to recognize currency gain or loss under
section 987(3), excess asset basis would
become more prevalent. If the United
States shareholder (“U.S. shareholder”)
ultimately sells its stock in the CFC, the
U.S. shareholder would generally recog-
nize the appropriate amount of gain or loss
on the sale of stock (notwithstanding the
potential excess asset basis of the CFC).
However, if, in lieu of a sale of stock, the
CFC merges or liquidates into a domestic
corporation pursuant to an inbound asset
reorganization or liquidation described in
§ 1.367(b)-3, the excess asset basis could
be imported into the United States without
a corresponding inclusion of income or
gain under § 1.367(b)-3, and thus perma-
nently escape U.S. taxation.

Accordingly, the Treasury Department
and the IRS request comments concerning
the following topics:
1. Should the final regulations be modi-
fied to provide that section 987(3) and
the related regulations do not apply
to CFCs or to partnerships with only
foreign partners? If so, how should
currency gain or loss be recognized
with respect to the section 987 QBU
(if at all)?
2. If section 987(3) did not apply to
CFCs and partnerships with only for-
eign partners, what other rules would
be needed to prevent value equal to
the amount of excess asset basis from
permanently escaping U.S. taxation
upon an inbound transaction such as
an asset reorganization or liquida-
tion described in § 1.367(b)-3? For
example, should the importation of
excess asset basis trigger the recog-
nition of gain in the same manner
that § 1.367(b)-3 triggers a deemed
dividend to a shareholder? If so, are
there circumstances in which excess
asset basis should not trigger gain
(such as excess asset basis arising by
reason of section 362(e) or by reason
of minority interests)? How should
excess asset basis be computed? What
additional rules would be needed
to similarly prevent taxpayers from
planning into the permanent avoid-
ance or indefinite deferral of gain or
acceleration of losses?
3. If section 987(3) and the related regu-
lations continue to apply to CFCs and
partnerships with only foreign part-
ners generally, are any modifications
needed to the calculation of section
987 gain and loss for these entities?
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Pursuant to the Memorandum of
Agreement, Review of Treasury Regula-
tions under Executive Order 12866 (June
9, 2023), tax regulatory actions issued by
the IRS are not subject to the requirements
of section 6 of Executive Order 12866, as
2
For a discussion of “excess asset basis,” see the preambles accompanying issuance of § 1.367(b)-3(g) (TD 10004, 89 FR 58275) and proposed § 1.367(b)-3(g) (88 FR 69559), respectively.

Bulletin No. 2025–3 439 January 13, 2025
amended. Therefore, a regulatory impact
assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520) (PRA) requires
that a Federal agency obtain the approval
of the Office of Management and Bud-
get (OMB) before collecting information
from the public, whether such collection
of information is mandatory, voluntary, or
required to obtain or retain a benefit. An
agency may not conduct or sponsor, and
a person is not required to respond to, a
collection of information unless it dis-
plays a valid control number assigned by
the OMB.
The collections of information in the
proposed regulations with respect to sec-
tion 987 are in proposed § 1.987-2(f)(1)
(and the related election rules in § 1.987-
1(g) of the final regulations). The likely
respondents are individuals who file a
Form 1040 and businesses that file a Form
1065 or Form 1120.
The collection of information in pro-
posed § 1.987-2(f)(1) is required only
when a taxpayer makes or revokes a
recurring transfer group election under
proposed § 1.987-2(f)(1). In the first year
in which the section 987 regulations apply
to a taxpayer, or the first year in which the
taxpayer or a member of its consolidated
group or section 987 electing group is the
owner of a section 987 QBU, the taxpayer
is permitted to make a recurring transfer
group election without the Commission-
er’s consent. Thereafter, the taxpayer
may make or revoke a recurring transfer
group election only with the consent of
the Commissioner, which may be granted
with a private letter ruling. When a tax-
payer makes or revokes an election, the
collection of information is mandatory.
The collection of information required by
proposed § 1.987-2(f)(1) will be used by
the IRS for tax compliance purposes.
The Treasury Department and the IRS
intend that the information required by
§ 1.987-1(g) with respect to a recurring
transfer group election under proposed §
1.987-2(f)(1) will be collected by attach-
ing a statement to a taxpayer’s return (such
as the appropriate Form 1040, Form 1120,
Form 1065, or other appropriate forms).
For purposes of the PRA, the reporting
burden associated with those collections
of information will be reflected in the
PRA submissions associated with those
forms. The OMB Control Numbers for the
forms will be approved under 1545–0074
for individuals and under 1545–0123 for
business entities.
To the extent that a taxpayer makes or
revokes an election by obtaining a private
letter ruling, the reporting burden associ-
ated with those collections of information
will be reflected in the PRA submissions
associated with revenue procedures gov-
erning private letter rulings. The OMB
Control Number for those revenue proce-
dures is control number 1545-1522. The
proposed regulations would only require
taxpayers to follow the procedures under
Revenue Procedure 2024-1, IRB 2024-1
(or future revenue procedures govern-
ing private letter rulings) and would not
change the collection requirements of the
Revenue Procedure.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any Internal
Revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby cer-
tified that this rulemaking will not have a
significant economic impact on a substan-
tial number of small entities within the
meaning of section 601(6) of the Regula-
tory Flexibility Act. The proposed regula-
tions affect individuals and corporations
(other than S corporations) with foreign
branch operations.
The number of small entities poten-
tially affected by the proposed regulations
is unknown; however, it is unlikely to be
a substantial number because taxpayers
with wholly owned foreign operations are
typically larger businesses. The Treasury
Department and the IRS estimate that the
total number of corporations (other than S
corporations) with a foreign branch subject
to section 987 is approximately 2,000. This
estimate is based on the number of corpo-
rations (other than S corporations) that filed
a Form 8858 in 2022 that showed that the
filer: (1) owned at least one disregarded
entity or branch with a functional currency
different from the functional currency of the
owner, and (2) indicated that the disregarded
entity or branch was a section 989 QBU. As
shown in the following table, only a small
percentage of those filers are small entities.
Total Receipts/Positive Income (2022)Percentage of Filers
Under $5 Million7%
$5 Million to $10 Million2%
$10 Million to $25 Million4%
Over $25 Million87%
The number of affected corporations
(other than S corporations) with total
receipts of less than $25 million rep-
resents 0.02% of all corporations (other
than S corporations) with total receipts of
less than $25 million.
These proposed regulations generally
modify the rules that would otherwise
apply under the final regulations by pro-
viding taxpayers with an election that
reduces the compliance burden of apply-
ing section 987. Small entities generally
would not be affected by these rules unless
they choose to make an election to reduce
their compliance burden.
A portion of the economic impact of
the proposed regulations may derive from
the collection of information require-

January 13, 2025 440 Bulletin No. 2025–3
ments imposed under proposed § 1.987-
2(f)(1) (and the related election rules in §
1.987-1(g) of the final regulations). The
Treasury Department and the IRS have
determined that the average burden is 1.95
hours per response. The IRS’s Research,
Applied Analytics, and Statistics divi-
sion estimates that the appropriate wage
rate for this set of taxpayers is $99.87 per
hour. Thus, the annual burden per tax-
payer from each collection of information
requirement is $194.75. The requirements
of proposed § 1.987-2(f)(1) apply only if
a taxpayer chooses to make or revoke an
election (and only in the year of the elec-
tion or revocation).
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code,
this proposed regulation will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a State, local, or Tribal gov-
ernment, in the aggregate, or by the pri-
vate sector, of $100 million in 1995 dol-
lars, updated annually for inflation. The
proposed regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
State and local governments, and is not
required by statute, or preempts State law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive order. The proposed regu-
lations do not have federalism implica-
tions and do not impose substantial direct
compliance costs on State and local gov-
ernments or preempt State law within the
meaning of the Executive order.
Drafting Information
The principal authors of these pro-
posed regulations are Adam G. Province
and Raphael J. Cohen of the Office of
Associate Chief Counsel (International).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 ***
* * * * *
Section 1.987-2 also issued under 26
U.S.C. 987, 989, and 1502.
****
Section 1.987-4 also issued under 26
U.S.C. 987 and 989.
*****
Section 1.987-9 also issued under 26
U.S.C. 987, 989, and 6001.
*****
Section 1.987-15 also issued under 26
U.S.C. 987 and 989.
*****
Par. 2. Section 1.987-2 is amended by
adding paragraph (f) to read as follows:
§ 1.987-2 Attribution of items to
eligible QBUs; definition of a transfer
and related rules.
* * * * *
(f) Recurring transfer group election—
(1) In general. For a taxable year in which
a current rate election is in effect, the
owner of a section 987 QBU may elect to
use the yearly average exchange rate to
translate all assets that are transferred to
or from the section 987 QBU in a taxable
year as part of a recurring transfer group
(a recurring transfer group election). The
rules of this paragraph (f) apply to all
transfers that are part of a recurring trans-
fer group in any taxable year to which the
recurring transfer group election applies
(regardless of whether transfers of the
same kind occurred in the first year to
which the election applied).
(2) Recurring transfer group. A recur-
ring transfer group is a group of frequently
recurring transfers made between a section
987 QBU and its owner (or another eligi-
ble QBU of the owner) in a taxable year
that meet the requirements of paragraphs
(f)(2)(i) through (iii) of this section.
(i) Ordinary course transfers. The trans-
fers must be made in the ordinary course
of a trade or business.
(ii) Specified transactions. The trans-
fers must be made as part of one or more
disregarded transactions described in para-
graphs (f)(2)(ii)(A) through (C) of this
section between the section 987 QBU and
its owner (or another eligible QBU of the
owner), the compensation for which would
satisfy the principles of the arm’s length
standard (within the meaning of § 1.482-
1(b)) if the section 987 QBU were treated
as a separate corporation. Transfers made
in connection with different disregarded
transactions described in paragraphs (f)(2)
(ii)(A) through (C) of this section in the
same taxable year are treated as part of a
single recurring transfer group.
(A) Sales of inventory;
(B) Payments for services;
(C) Rents or royalties.
(iii) Distributions and contributions
excluded. A transfer is not included in a
recurring transfer group if the transfer
(or any portion of the transfer) would
be treated as a distribution with respect
to stock, or an exchange for stock (or a
contribution to capital), if the section 987
QBU were treated as a separate corpora-
tion.
(3) Consistency requirement. The
determination as to which transfers are
included in a recurring transfer group
must be made consistently from year to
year. However, this determination may
change from one year to the next based
on changes in the nature and timing of the
relevant transfers.

Bulletin No. 2025–3 441 January 13, 2025
(4) Effect of recurring transfer group
election. Except as provided in paragraph
(f)(6) of this section, in a taxable year in
which a recurring transfer group election
is in effect, assets that are transferred to
or from a section 987 QBU in a taxable
year as part of a recurring transfer group
(grouped assets) are translated under para-
graph (d) of this section and §§ 1.987-4(d)
(2) and 1.987-5(f) by deeming the spot
rate applicable on the date of each transfer
to be equal to the yearly average exchange
rate for the taxable year. However, if the
Commissioner determines that the use of
the yearly average exchange rate to trans-
late grouped assets in a taxable year does
not clearly reflect income, the Commis-
sioner may require some or all transfers
of the grouped assets to be excluded from
the recurring transfer group or may pre-
scribe the use of a different exchange rate
to translate the grouped assets.
(5) Accounting for a disregarded trans-
fer group in determining unrecognized
section 987 gain or loss for the taxable
year—(i) In general. Except as provided in
paragraph (f)(5)(ii) or (f)(6) of this section,
in a taxable year in which a recurring trans-
fer group election is in effect, transfers of
grouped assets are disregarded for purposes
of § 1.987-4(d)(2) and (3) (steps 2 and 3).
(ii) Exception. Paragraph (f)(5)(i) of
this section does not apply to a section 987
QBU in a taxable year in which the owner
determines QBU net value with respect to
the section 987 QBU under the steps pro-
vided in § 1.987-4(e)(2)(iii) (alternative
formula for determining QBU net value
without preparing an adjusted balance
sheet).
(6) Exception for taxable years in
which a disproportionate amount of
grouped assets is transferred in one or
more quarters of the taxable year—(i) In
general. Paragraphs (f)(4) and (5) of this
section do not apply to a section 987 QBU
in a taxable year in which—
(A) More than 50 percent of the total
amount of grouped assets transferred to or
from the section 987 QBU during the tax-
able year is transferred during one quarter
of the taxable year; or
(B) More than 80 percent of the total
amount of grouped assets transferred to or
from the section 987 QBU during the tax-
able year is transferred during two quar-
ters of the taxable year.
(ii) Amount of grouped assets trans-
ferred. For the purpose of applying para-
graph (f)(6)(i) of this section, the amount
of grouped assets transferred to or from
a section 987 QBU in a taxable year and
in each quarter of the taxable year is
determined in the functional currency of
the section 987 QBU by reference to the
aggregate of the amount of functional
currency transferred and the basis of
the other assets transferred (taking into
account the total gross amount of both
the transfers from the section 987 QBU
to the owner or another eligible QBU
of the owner and the transfers from the
owner or another eligible QBU of the
owner to the section 987 QBU). For
this purpose, amounts transferred from
the owner (or another eligible QBU of
the owner) to the section 987 QBU are
translated into the section 987 QBU’s
functional currency at the yearly average
exchange rate.
(iii) Short taxable year. For purposes
of applying this paragraph (f)(6) in a short
taxable year, each quarter comprises a
number of days equal to one fourth of the
total number of days in the taxable year.
If a section 987 QBU did not exist for the
full taxable year of the owner, this para-
graph (f)(6) is applied with respect to the
section 987 QBU by treating the taxable
year as comprising the portion of the tax-
able year in which the section 987 QBU
existed.
(7) Examples. The following examples
illustrate the application of this paragraph
(f). For purposes of the examples, DC1 is
a domestic corporation that owns Busi-
ness A, a section 987 QBU that has the
euro as its functional currency. In year 1,
DC1’s home office provides services to
Business A in exchange for arm’s length
cash payments (within the meaning of §
1.482-1(b)). The payments are made in the
ordinary course of the Business A trade
or business. A current rate election and
a recurring transfer group election are in
effect for year 1. DC1 does not determine
QBU net value with respect to Business A
under the steps provided in § 1.987-4(e)
(2)(iii).
(i) Example 1: Transfers treated as part of a
recurring transfer group—(A) Facts. In year 1,
Business A made 50 payments for services to DC1’s
home office, totaling €30,000x. Of this amount,
Business A paid €5,000x in the first quarter of year 1,
€7,500x in the second quarter of year 1, €10,000x in
the third quarter of year 1, and €7,500x in the fourth
quarter of year 1. No other transfers were made
between Business A and DC1 for year 1.
(B) Analysis—(1) Recurring transfer group.
Under paragraph (c)(2) of this section, each pay-
ment for services is treated as a transfer of assets
from Business A to DC1. These transfers qualify as
a recurring transfer group under paragraph (f)(2) of
this section because they are frequently recurring
payments for services made in the ordinary course
of the Business A trade or business that would satisfy
the principles of the arm’s length standard (within
the meaning of § 1.482-1(b)) if Business A were
treated as a separate corporation. In addition, the
exception in paragraph (f)(6) of this section does
not apply because Business A did not transfer more
than 50 percent of the total amount of grouped assets
transferred in year 1 in any one quarter, and Business
A did not transfer more than 80 percent of the total
amount of grouped assets transferred in year 1 in any
two quarters.
(2) Effect of recurring transfer group election.
Under paragraph (f)(4) of this section, because Busi-
ness A’s transfers to DC1 comprise a recurring trans-
fer group, DC1 applies § 1.987-5(f) by deeming the
spot rate applicable on the date of each transfer to be
equal to the yearly average exchange rate for year
1. As a result, DC1 determines its basis in the euros
received from Business A by translating the total
amount of euros transferred in year 1 at the yearly
average exchange rate for year 1. In addition, under
paragraph (f)(5) of this section, the transfers are dis-
regarded for purposes of determining unrecognized
section 987 gain or loss for year 1 under § 1.987-4(d)
(2).
(ii) Example 2: Disproportionate transfers—(A)
Facts. The facts are the same as in paragraph (f)(7)
(i) of this section (Example 1), except that most of
the payments are made in the fourth quarter of year 1
to compensate DC1’s home office for additional ser-
vices provided at the end of year 1. Specifically, of
the €30,000 paid by Business A for services in year
1, €18,000x is transferred in the fourth quarter of
year 1, and €4,000x is transferred in each of the first
three quarters of year 1.
(B) Analysis. The amount of grouped assets
transferred in the fourth quarter (€18,000x) exceeds
50 percent of the total amount of grouped assets
transferred in year 1 (€30,000x). Therefore, under
paragraph (f)(6) of this section, paragraphs (f)(4)
and (5) of this section do not apply. As a result, DC1
determines its basis in the euros received from Busi-
ness A by translating each transfer at the applicable
spot rate under § 1.987-5(f), and DC1 must take
each transfer into account for purposes of determin-
ing unrecognized section 987 gain or loss for year 1
under § 1.987-4(d)(2).
(iii) Example 3: Determination of the transfers
including in a recurring transfer group over multi-
ple taxable years—(A) Facts. The facts in year 1
are the same as in paragraph (f)(7)(i) of this section
(Example 1). The recurring transfer group election
remains in effect in years 2 and 3. In year 2, DC1’s
home office continues to provide services to Busi-
ness A in exchange for arm’s length cash payments
made in the ordinary course of the Business A trade
or business. Additionally, in year 2, Business A
begins to sell Product X inventory to Business B, an

January 13, 2025 442 Bulletin No. 2025–3
eligible QBU of DC1 that is not a section 987 QBU,
in exchange for arm’s length cash payments. In year
3, DC1’s home office no longer provides services
to Business A, but Business A continues to sell
Product X inventory to Business B in exchange for
arm’s length cash payments. Additionally, in year
3, Business A begins to sell Product Y inventory to
Business B in exchange for arm’s length cash pay-
ments. In each of years 1, 2, and 3, the transfers to
and from Business A are made on a frequent basis
in the ordinary course of the Business A trade or
business.
(B) Analysis. In year 1, the cash payments for ser-
vices made by Business A to DC1’s home office are
part of a recurring transfer group. In year 2, the recur-
ring transfer group includes the cash payments for
services made by Business A to DC1’s home office,
the transfers of Product X inventory from Business A
to Business B, and the cash payments made by Busi-
ness B to Business A in connection with the inventory
sales. In year 3, the recurring transfer group includes
the transfers of Product X inventory and Product Y
inventory from Business A to Business B and the cash
payments made by Business B to Business A in con-
nection with the inventory sales. Therefore, in each of
years 1, 2, and 3, unless the exception in paragraph (f)
(6) of this section applies, the grouped assets are trans-
lated at the yearly average exchange under paragraph
(f)(4) of this section, and the transfers of the grouped
assets are disregarded for purposes of determining
unrecognized section 987 gain or loss under § 1.987-
4(d)(2) and (3).
* * * * *
Par. 3. Section 1.987-4 is amended by
adding paragraph (d)(10)(ii)(D) to read as
follows:
§ 1.987-4 Determination of net
unrecognized section 987 gain or loss of
a section 987 QBU.
* * * * *
(d) * * *
(10) * * *
(ii) * * *
(D) Recurring transfer group. In order
to determine the residual increase or
decrease to net assets under this paragraph
(d)(10) in a taxable year in which transfers
of grouped assets are disregarded under §
1.987-2(f)(5), the transfers of grouped
assets are disregarded for purposes of
applying steps 2 and 3 (paragraphs (d)(2)
and (3) of this section) in the functional
currency of the section 987 QBU.
* * * * *
4. Section 1.987-9 is amended by revis-
ing paragraphs (b)(5) and (6) to read as
follows:
§ 1.987-9 Recordkeeping requirements.
* * * * *
(b) * * *
(5) The amount of assets and liabilities
transferred by the owner to the section
987 QBU determined in the functional
currency of the owner and the section
987 QBU (to the extent those amounts are
taken into account in applying § 1.987-4
or § 1.987-5).
(6) The amount of assets and liabili-
ties transferred by the section 987 QBU
to the owner determined in the functional
currency of the owner and the section 987
QBU (to the extent those amounts are
taken into account in applying § 1.987-4
or § 1.987-5).
* * * * *
5. Section 1.987-15 is amended by add-
ing paragraph (e) to read as follows:
§ 1.987-15 Applicability date.
* * * * *
(e) Recurring transfer group election.
Sections 1.987-2(f),1.987-4(d)(10)(ii)(D),
and 1.987-9(b)(5) and (6) apply to taxable
years beginning after [DATE OF PUBLI-
CATION OF THE FINAL RULE IN THE
FEDERAL REGISTER].
Douglas W. O’Donnell,
Deputy Commissioner.
(Filed by the Office of the Federal Register Decem-
ber 10, 2024, 8:45 a.m., and published in the issue
of the Federal Register for December 11, 2024, 89
FR 99782)

Bulletin No. 2025–3 i January 13, 2025
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.
—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

January 13, 2025 ii Bulletin No. 2025–3
Numerical Finding List
1
Bulletin 2025–3
Announcements:
2025-2, 2025-2 I.R.B. 305
2025-3, 2025-2 I.R.B. 306
2025-4, 2025-2 I.R.B. 306
2025-1, 2025-3 I.R.B. 431
2025-5, 2025-3 I.R.B. 433
Notices:
2025-1, 2025-3 I.R.B. 415
2025-2, 2025-3 I.R.B. 418
2025-4, 2025-3 I.R.B. 419
2025-5, 2025-3 I.R.B. 426
Proposed Regulations:
REG-117213-24, 2025-3 I.R.B. 433
Revenue Procedures:
2025-1, 2025-01 I.R.B. 1
2025-2, 2025-01 I.R.B. 118
2025-3, 2025-01 I.R.B. 142
2025-4, 2025-01 I.R.B. 158
2025-5, 2025-01 I.R.B. 260
2025-7, 2025-01 I.R.B. 301
2025-8, 2025-03 I.R.B. 427
Revenue Rulings:
2025-1, 2025-3 I.R.B. 307
2025-2, 2025-3 I.R.B. 309
Treasury Decisions:
10016, 2025-3 I.R.B. 313
10020, 2025-3 I.R.B. 408
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2024–27 through 2024–52 is in Internal Revenue Bulletin
2024–52, dated December 23, 2024.

Bulletin No. 2025–3 iii January 13, 2025
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2025–3
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2024–27 through 2024–52 is in Internal Revenue Bulletin
2024–52, dated December 23, 2024.

Internal Revenue Service
Washington, DC 20224
Official Business
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