SUPPLEMENTARY INFORMATION:

Authority

This document contains proposed additions and amendments to 26 CFR part 1 (Income Tax Regulations) addressing the application of section 987 of the Internal Revenue Code (“Code”) and related provisions (the “proposed regulations”). The additions and amendments are issued under sections 987 and 989, pursuant to the express delegations of authority provided under those sections. The express delegations relied upon are referenced in the Background section of this preamble. The proposed regulations are also issued under the express delegation of authority under section 7805(a).

Background

I. Overview

Section 987 applies to any taxpayer that has a qualified business unit (“QBU”) with a functional currency ( printed page 52554) other than the dollar. Section 987(1) and (2) provide rules for determining and translating taxable income or loss (“section 987 taxable income or loss”) with respect to a QBU that is subject to section 987 (“section 987 QBU”). In addition, section 987(3) requires proper adjustments (as prescribed by the Secretary) for transfers of property between QBUs of the taxpayer having different functional currencies (including transfers of property between a controlled foreign corporation (“CFC”) and its QBUs). Under section 987(3), a taxpayer that owns a QBU generally must recognize foreign currency gain or loss (“section 987 gain or loss”) upon a remittance from the QBU.

Sections 987 and 989 provide several explicit grants of regulatory authority. Section 987(3) directs the Secretary to prescribe proper adjustments for transfers of property between QBUs of the taxpayer having different functional currencies. 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]

On December 11, 2024, the Treasury Department and the IRS published Treasury Decision 10016, which contained final regulations under sections 861, 985, 987 through 989, and 1502 (the “2024 final regulations”), in the Federal Register (89 FR 100138). Concurrently with the publication of the 2024 final regulations, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-117213-24) under section 987, which addressed the treatment of frequently recurring disregarded transactions (the “2024 proposed regulations”), in the Federal Register (89 FR 99782).

On February 25, 2026, the Treasury Department and the IRS issued Notice 2026-17, 2026-12 IRB 698, which announced that proposed regulations would be issued under section 987 for the purpose of simplifying the operation of the 2024 final regulations, reducing compliance burdens, and refining the scope of certain rules under section 987 to limit their effect on ordinary course transactions.

II. Application of Section 987 to Controlled Foreign Corporations

A. 2024 Final Regulations

The 2024 final regulations provide that section 987(3) and the related regulations apply to CFCs in which at least one United States shareholder (“U.S. shareholder”), within the meaning of section 951(b), directly or indirectly owns stock, within the meaning of section 958(a). See § 1.987-1(b)(1).

B. 2024 Proposed Regulations

The preamble to the 2024 proposed regulations requested comments as to whether the final regulations should be modified to provide that section 987(3) does not apply to CFCs. The preamble explained that, when a United States person (“U.S. person”) owns a section 987 QBU, foreign currency gain or loss must be recognized under section 987(3) in order to accurately measure the U.S. person's accession to wealth in U.S. dollars. By contrast, alternative rules may be appropriate in the case of a section 987 QBU owned by a CFC, because a CFC is permitted to compute its income in a functional currency other than the dollar. See section 985(b).

In the preamble to the 2024 proposed regulations, however, the Treasury Department and the IRS also expressed concern that, if section 987(3) were not applied to a section 987 QBU owned by a CFC, the CFC's basis in assets distributed from the section 987 QBU could be increased or reduced due to exchange rate fluctuations. This is because, in the absence of special rules requiring the CFC to track basis in the section 987 QBU's assets using historic exchange rates, the CFC's basis in assets distributed by the section 987 QBU would be translated at the spot rate on the date of the distribution. If the U.S. shareholders of the CFC were then to ultimately sell their CFC stock in a taxable transaction, the gain or loss recognized on the sale generally would reflect any economic foreign currency gain or loss attributable to the distributed assets. However, in the case of an inbound liquidation or reorganization, asset basis attributable to appreciation in the value of the section 987 QBU's functional currency could be imported into the United States without a corresponding income inclusion. As a result, economic foreign currency gain with respect to the assets distributed by the section 987 QBU would permanently escape U.S. taxation.

C. Comments Received in Response to the 2024 Proposed Regulations

The Treasury Department and the IRS received several comments in response to the 2024 proposed regulations. Two of the commenters requested that CFCs be excluded completely from the application of section 987(3). The commenters noted that section 987(3) provides the Secretary with discretion to determine the nature of the proper adjustments required to account for foreign currency gain or loss with respect to a QBU. The commenters asserted that, if section 987(3) did not apply to CFCs, foreign currency gain or loss with respect to a section 987 QBU of a CFC typically would be accounted for under other provisions of the Code (for example, under section 301(c)(3)). Therefore, according to the commenters, it would not be necessary for a CFC to separately recognize section 987 gain or loss.

D. Notice 2026-17

Notice 2026-17 announced that the Treasury Department and the IRS intend to issue forthcoming proposed regulations that would provide an election under which CFCs generally would not compute or recognize section 987 gain or loss with respect to their section 987 QBUs. The Notice described the rules and procedures for making the election (including consistency requirements) that would apply under the proposed regulations. The Notice explained that, under the rules of the proposed regulations, unrecognized section 987 gain or loss of a CFC arising before the election was made would be amortized over a period of 120 months, consistent with the elective rules for amortizing pretransition gain or loss under the 2024 final regulations. See § 1.987-10(e)(5)(ii). The Notice further explained that the proposed regulations would require taxpayers to account for foreign currency gain (but not loss) in the case of an inbound liquidation or reorganization described in § 1.367(b)-3(a) of a CFC that is subject to the election.

Although Notice 2026-17 summarized the rules that would be provided in the proposed regulations relating to the CFC election and its consequences, the Notice did not describe these rules in detail. In addition, the Notice did not permit taxpayers to rely on the rules relating to the CFC election.

Notice 2026-17 also announced that the proposed regulations would (i) permit taxpayers to determine section 987 taxable income or loss and section 987 gain or loss using an equity and basis pool method that is substantially similar to the method provided in regulations proposed in 1991; (ii) narrow the scope of the loss suspension rules; (iii) simplify the loss-to-the-extent-of-gain rule under which suspended section 987 loss is recognized; (iv) modify the definition of a successor for purposes of the deferral rules; and (v) expand the definition of a section 987 hedging transaction. The Notice described rules expected to be included in the proposed regulations regarding these issues and provided that ( printed page 52555) taxpayers are permitted to rely on these rules. Proposed regulations addressing these provisions of Notice 2026-17 will be included in a future notice of proposed rulemaking.

E. Comments Received in Response to Notice 2026-17

The Treasury Department and the IRS received a number of comments in response to Notice 2026-17. The commenters generally requested that guidance relating to the CFC election be issued as quickly as possible, so that taxpayers have sufficient time to make the election for the 2025 taxable year. Several of the recommendations made by the commenters are addressed in the Explanation of Provisions section of this preamble. The Treasury Department and the IRS are continuing to evaluate the remaining comments and will address these comments in future guidance.

III. Election To Amortize Pretransition Gain or Loss

The 2024 final regulations provide transition rules for the determination and recognition of section 987 gain or loss that arose before the 2024 final regulations became applicable (“pretransition gain or loss”). See § 1.987-10. In particular, under § 1.987-10(e)(5)(ii)(A), taxpayers can elect to recognize pretransition gain or loss ratably over the transition period (the “amortization election”). Under the 2024 final regulations, the transition period is a period of ten taxable years beginning with the first taxable year in which the section 987 regulations apply. Therefore, a taxpayer that makes the amortization election recognizes one tenth of its pretransition gain or loss in each year of the transition period, including short taxable years.

In Notice 2025-72, 2025-51 IRB 840, the Treasury Department and the IRS announced that proposed regulations would modify the effect of the amortization election for short taxable years by providing that pretransition gain or loss is recognized ratably over a period of 120 months. Thus, for example, in a one-month short taxable year, the owner would recognize 1/120th (rather than one tenth) of its pretransition gain or loss.

Explanation of Provisions

I. CFC Exemption Election

A. Overview

Consistent with Notice 2026-17, the proposed regulations would permit taxpayers to make an election (“CFC exemption election”) that would limit the application of section 987(3) and the related regulations with respect to CFCs. Proposed § 1.987-15. In a taxable year to which the election applies, a CFC generally would not compute or recognize section 987 gain or loss, except in connection with certain inbound nonrecognition transactions. Proposed § 1.987-15(b). However, the rules of section 987(1) and (2) would continue to apply, for example, for purposes of computing the taxable income and earnings and profits of the CFC.

The CFC exemption election is intended to reduce the compliance and administrative burdens of applying section 987(3) with respect to section 987 QBUs owned by CFCs. Additional flexibility is warranted in this context because, under section 985, many CFCs have a functional currency other than the U.S. dollar; thus, a CFC's income is not necessarily measured by its accession to wealth in U.S. dollar terms. Moreover, if a CFC does not recognize section 987 gain or loss with respect to a section 987 QBU, the economic currency gain or loss with respect to the section 987 QBU generally should be taken into account by the CFC's U.S. shareholders under other provisions of the Code (for example, in the case of a taxable sale of the CFC stock, under section 1001), such that the U.S. shareholders would, over time, recognize the correct amount of total income with respect to the CFC.

Section 987(3) provides broad authority to prescribe proper adjustments for transfers of property between QBUs of the taxpayer having different functional currencies. Section 989(c) also provides broad authority to “prescribe such regulations as may be necessary or appropriate to carry out the purposes” of subpart J. The Treasury Department and the IRS are of the view that this authority allows for special elective rules to be prescribed with respect to CFCs that are different from the rules applicable to U.S. persons.

The proposed regulations would provide that, for taxable years in which the CFC exemption election is in effect, a CFC generally would not compute or recognize section 987 gain or loss. However, as explained in parts I.E and I.G of this Explanation of Provisions, a CFC would continue to compute and recognize section 987 gain or loss that arises in taxable years for which the CFC exemption election is not in effect, and a CFC would be required to recognize section 987 gain in connection with certain inbound transactions when a CFC exemption election is in effect.

B. Rules for Making and Revoking the Election

1. In General

A CFC exemption election would be a section 987 election within the meaning of § 1.987-1(g) and, therefore, would be subject to the general rules for making and revoking elections under § 1.987-1(g). In general, the election would be made by filing an election statement before the start of the taxable year. Proposed § 1.987-1(g)(3)(ii)(D)( 3). However, as described in part I.B.2 of this Explanation of Provisions, the proposed regulations would provide special rules for taxable years beginning after December 31, 2024, and ending on or before December 31, 2027. The CFC exemption election could not be revoked without the consent of the Commissioner. See § 1.987-1(g)(3)(ii)(A).

2. Taxable Years Beginning After December 31, 2024, and Ending on or Before December 31, 2027

Notice 2026-17 stated that the CFC exemption election would generally be made on an original, timely filed return (including extensions). Commenters noted that many calendar year taxpayers will already have finished preparing their original tax returns for the 2025 taxable year by the time the proposed regulations are issued. The commenters asserted that it may be difficult for these taxpayers to make the computations needed to account for the CFC exemption election on their timely filed original tax returns for the 2025 taxable year. Two commenters recommended that, for taxable years beginning in 2025, taxpayers should be permitted to make the CFC exemption election on an amended return filed before a specified date (either the original tax return due date, with extensions, for the 2026 taxable year, or when final regulations are published).

The Treasury Department and the IRS agree that additional flexibility is appropriate in making the CFC exemption election for the 2025 taxable year. In addition, the Treasury Department and the IRS acknowledge that transition issues may also arise for the 2026 and 2027 taxable years. Accordingly, the proposed regulations provide special election timing rules for taxable years beginning after December 31, 2024, and ending on or before December 31, 2027.

In general, for taxable years beginning after December 31, 2024, and ending on or before December 31, 2026, the authorized person (within the meaning of § 1.987-1(g)(1)) would make the CFC exemption election by attaching an ( printed page 52556) election statement to its original, timely filed (including extensions) return. Proposed § 1.987-1(g)(3)(ii)(D)( 1). Alternatively, for taxable years beginning in 2025, taxpayers would be permitted to make the CFC exemption election on an amended return filed by October 15, 2027. Id.

For taxable years ending in 2027, the authorized person would make the CFC exemption election by filing the election statement on or before October 15, 2027. Proposed § 1.987-1(g)(3)(ii)(D)( 2). Thus, until October 15, 2027, a calendar year taxpayer would be permitted to make the election for the 2025, 2026, or 2027 taxable years.

This timetable is intended to provide sufficient time for taxpayers to determine whether to make the CFC exemption election after the issuance of final regulations providing for the election, while ensuring that the deadline for any of these three taxable years does not fall earlier than the deadline for a preceding taxable year. The general rule contained in proposed § 1.987-1(g)(3)(ii)(D)( 3) would apply for taxable years ending after December 31, 2027. Thus, a calendar year taxpayer would be required to make a CFC exemption election for the 2028 taxable year on or before December 31, 2027.

3. Taxable Year for Which the CFC Exemption Election First Becomes Relevant

As an alternative to the rules described in parts I.B.1 and I.B.2 of this Explanation of Provisions, for the taxable year in which the CFC exemption election first becomes relevant, the authorized person could also make a CFC exemption election by attaching an election statement to its original, timely filed (including extensions) return. Proposed § 1.987-1(g)(3)(ii)(D)( 4). This rule would provide additional time to make the election if the CFC exemption election first becomes relevant for a taxable year ending after December 31, 2026.

For this purpose, the CFC exemption election first becomes relevant in the first taxable year beginning after December 31, 2024, in which the authorized person's section 987 electing group includes a CFC that is the owner of a section 987 QBU. Thus, for example, the alternative rule in proposed § 1.987-1(g)(3)(ii)(D)( 4) could apply to a taxable year beginning after December 31, 2024, in which a domestic corporation acquired all the stock of a CFC that owned a section 987 QBU, but only if the domestic corporation did not own a majority of the stock of any other CFC that owned a section 987 QBU in any previous taxable year beginning after December 31, 2024.

C. Consistency Requirements

1. In General

Under § 1.987-1(g)(2)(ii), section 987 elections must be made consistently for all members of a section 987 electing group, including all CFCs in which a majority of the stock, by vote or value, is owned (within the meaning of section 958(a)) by the same U.S. shareholder. When a CFC joins a section 987 electing group, it is deemed to make or revoke any section 987 election as necessary to be consistent with the other group members.

The proposed regulations would provide additional consistency requirements to ensure that this election is made on a uniform basis for all CFCs that are commonly controlled by affiliated U.S. shareholders. Under proposed § 1.987-15(c)(2)(i), all domestic corporations that are affiliated (within the meaning of § 1.904(i)-1(b)) would be required to make consistent CFC exemption elections with respect to their majority-owned CFCs. This rule would require consistent CFC exemption elections between certain related but non-consolidated domestic corporations. For example, proposed § 1.987-15(c)(2)(i) would require consistency between separate consolidated groups that are commonly owned by a foreign parent corporation, and between domestic corporations that would be members of the same consolidated group but for the interposition of a partnership. In addition, under proposed § 1.987-15(c)(2)(ii), a U.S. person would be treated as owning CFC stock that it holds indirectly through a domestic partnership (by treating a domestic partnership in the same manner as a foreign partnership in applying section 958(a)).

The proposed regulations also would provide anti-avoidance rules to prevent taxpayers from entering into related-party transactions designed to avoid the consistency requirements or trigger a deemed revocation of a CFC exemption election. Proposed § 1.987-15(c)(3).

2. Acquisitions

A commenter requested additional guidance regarding the application of the consistency rules when a CFC that is not subject to a CFC exemption election (or its U.S. shareholder) is acquired by an unrelated party that has made a CFC exemption election (or vice versa). The commenter noted that, when an acquirer with minimal section 987 exposure acquires a CFC that owns a substantial number of section 987 QBUs, it may not be appropriate for the acquirer's elections to remain in effect. The commenter suggested that guidance be provided either solely with respect to the CFC exemption election or with respect to section 987 elections more generally.

The Treasury Department and the IRS are continuing to study the appropriate application of the consistency rules in § 1.987-1(g) and proposed § 1.987-15(c) to cases in which a CFC (or another domestic or foreign entity) is acquired by an unrelated party. The Treasury Department and the IRS request comments on this issue in general, including whether special rules should be provided for cases in which an acquired CFC's taxable year does not end at the time of the acquisition and to coordinate the consistency rules with the statutory changes (including the modifications to the pro rata share rules) in Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), and the related regulations.

D. Effect of the CFC Exemption Election

1. In General

If a CFC is subject to a CFC exemption election (an “exempt CFC”), the rules of the section 987 regulations relating to the determination and recognition of section 987 gain or loss (for example, §§ 1.987-4 through 1.987-6 and 1.987-11 through 1.987-14) generally would not apply to the exempt CFC. Proposed § 1.987-15(b)(2). However, other parts of the section 987 regulations (for example, § 1.987-3, which relates to the determination of section 987 taxable income or loss) would continue to apply to the exempt CFC. Thus, for example, a taxpayer could make an election to use a spot rate convention under § 1.987-1(c)(1)(ii) or a section 988 mark-to-market election under § 1.987-3(b)(4)(ii) with respect to an exempt CFC.

The applicable rules of the section 987 regulations would be applied by deeming a current rate election to be in effect with respect to each exempt CFC, so that exempt CFCs would not be required to track historic exchange rates. Proposed § 1.987-15(b)(3)(i). As a result, the amount of a section 987 QBU's taxable income or loss would be translated into the owner's functional currency at the yearly average exchange rate, and transfers between a section 987 QBU and its owner would be translated at the spot rate applicable on the date of the transfer. ( printed page 52557)

2. Partnerships Owned by CFCs

a. Rules of the 2024 Final Regulations Relating to Partnerships

The 2024 final regulations do not provide detailed rules concerning the determination of section 987 taxable income or loss and section 987 gain or loss in the case of a partnership. Thus, taxpayers must apply sections 987 and 989(a) with respect to partnerships using a reasonable method consistent with the statute, and this method must be applied consistently from year to year. See § 1.987-7(b).

For example, assume a CFC with the U.S. dollar as its functional currency owns an interest in a foreign partnership that would be viewed as using the euro as its functional currency if the partnership were treated as a QBU under section 989(a), and the partnership owns an eligible QBU that uses the Swiss franc as its functional currency. The CFC could apply section 987 using an aggregate approach, under which the CFC is treated as the indirect owner of its proportionate interest in the eligible QBU. Alternatively, under an entity approach, the partnership itself could be treated as a section 987 QBU of the CFC, and the eligible QBU could be treated as a section 987 QBU of the partnership.

b. Rules of the Proposed Regulations Relating to Partnerships Owned by CFCs

The proposed regulations would provide rules relating to the effect of a CFC exemption election when an exempt CFC is a partner in a partnership. These rules generally are intended to provide parity between the treatment of a section 987 QBU that is directly owned by an exempt CFC and the treatment of a section 987 QBU that is owned by (or through) a partnership whose partners are exempt CFCs.

Under proposed § 1.987-7(b)(2), an exempt CFC generally would not compute or recognize section 987 gain or loss with respect to an “exempt partnership QBU,” which would be defined to include (i) a partnership that is treated as a section 987 QBU of an exempt CFC or (ii) a section 987 QBU that is indirectly owned by an exempt CFC through a partnership. Proposed § 1.987-7(b)(2)(iii). However, an exempt CFC would be required to continue to apply the rules of sections 987(1) and (2) and 989(a) with respect to its exempt partnership QBUs in a reasonable manner using a method that is applied consistently from year to year. Proposed § 1.987-7(b)(2).

Similarly, if a partnership is treated as the owner of a section 987 QBU, and at least 80 percent of the capital or profits interests in the partnership are owned by exempt CFCs that are members of the same controlled group (an “exempt partnership”), the section 987 QBU would be an exempt partnership QBU, and the exempt partnership generally would not compute or recognize section 987 gain or loss with respect to the exempt partnership QBU. Proposed § 1.987-7(b)(2)(iii) and (iv). However, the exempt partnership would be required to continue to apply the rules of sections 987(1) and (2) and 989(a) in a reasonable manner using a method that is applied consistently from year to year. Proposed § 1.987-7(b)(2). Thus, an exempt partnership generally would be treated in the same manner as an exempt CFC for purposes of section 987. For this purpose, an exempt CFC would be treated as owning a partnership interest that it holds indirectly through one or more other partnerships. Proposed § 1.987-7(b)(2)(ii).

If a partnership meets the definition of an exempt partnership in the taxable year in which a CFC exemption election is made, the rules of proposed § 1.987-15 would apply to the exempt partnership beginning in that taxable year. If a partnership becomes an exempt partnership in a later taxable year (for example, because an exempt CFC acquires an interest in the partnership), the rules of proposed § 1.987-15 would be applied to the exempt partnership by treating the CFC exemption election as having been made for that taxable year. Proposed § 1.987-15(g)(3)(iii). Similarly, in a taxable year in which a partnership ceases to be treated as an exempt partnership (for example, because an exempt CFC disposes of its partnership interest), the rules of proposed § 1.987-15 would be applied to the partnership by treating the CFC exemption election as having been revoked for that taxable year. Proposed § 1.987-15(g)(3)(iv).

E. Pre-Election Section 987 Gain or Loss

1. Requirement To Compute and Amortize Pre-Election Section 987 Gain or Loss

a. Comments Received in Response to Notice 2026-17

Notice 2026-17 explained that, beginning in the first taxable year in which a CFC exemption election is made, unrecognized section 987 gain or loss that arose in previous taxable years (“pre-election section 987 gain or loss”) would be amortized over a period of 120 months. The Treasury Department and the IRS received several comments recommending that taxpayers be permitted to elect whether or not to compute and recognize pre-election section 987 gain or loss. The commenters posited that, if the CFC exemption election is intended to prevent the application of section 987(3) with respect to exempt CFCs, then exempt CFCs should not be required to account for section 987 gain or loss that arose before the CFC exemption election was made. Further, the comments asserted that the computation of pre-election section 987 gain or loss would be burdensome for taxpayers.

b. Proposed Rules Requiring Computation and Amortization of Pre-Election Section 987 Gain or Loss

In general, the proposed regulations would require taxpayers to compute and amortize pre-election section 987 gain or loss, and they would not permit taxpayers to elect out of this requirement.^[2] See parts I.E.3 and I.E.4 of this Explanation of Provisions for a detailed description of the proposed rules for computing and amortizing pre-election section 987 gain or loss.

Contrary to the commenters' suggestion, the CFC exemption election is intended to narrow, rather than wholly prevent, the application of section 987(3) to exempt CFCs. Thus, the proposed regulations would leave in place the default rule of § 1.987-1(b)(1), which provides that section 987(3) applies to CFCs. However, pursuant to the authority to prescribe proper adjustments under section 987(3), the proposed regulations would provide an election that would limit the circumstances in which an exempt CFC would recognize section 987 gain or loss. An exempt CFC generally would not be required to recognize section 987 gain or loss in taxable years for which the election applies, but it would be required to amortize pre-election section 987 gain or loss, and it may also be required to recognize section 987 gain in the case of an inbound reorganization or liquidation.

The Treasury Department and the IRS are concerned that the election requested by the commenters would allow taxpayers to eliminate previously computed amounts of section 987 gain or loss in a manner similar to the elective “fresh start” transition method that was provided in earlier proposed regulations under section 987 (the “2006 proposed regulations”) that were published in the Federal Register in 2006 (71 FR 52876, September 7, 2006). In response to the 2006 proposed ( printed page 52558) regulations, a commenter asserted that this election was overly favorable to taxpayers and would have one-sided effects that would be detrimental to the fisc. Consistent with this comment, the 2024 final regulations require taxpayers to account for pretransition gain or loss under § 1.987-10 and do not permit use of the fresh start transition method on an elective basis. For similar reasons, the Treasury Department and the IRS are of the view that the election requested by the commenters would expose the government to whipsaw. Taxpayers with substantial pre-election section 987 gain could choose to eliminate the gain, while taxpayers with substantial pre-election section 987 loss could amortize the loss over 120 months.

Accordingly, proposed § 1.987-15(e) generally would require taxpayers that make a CFC exemption election to compute pre-election section 987 gain or loss and amortize this gain or loss over a ten-year period. This rule would ensure that section 987 gain or loss arising before the taxable year of the CFC exemption election is properly taken into account.

c. Exception for QBUs With Assets of Less Than $50 Million

Although proposed § 1.987-15(e) generally would require taxpayers to compute and recognize pre-election section 987 gain or loss, the Treasury Department and the IRS acknowledge that, depending on the size of a QBU, the burden of this computation may outweigh its rationale. Therefore, the proposed regulations would provide an exception to the general rule of proposed § 1.987-15(e) for QBUs that hold assets of less than $50 million.

Under proposed § 1.987-15(e)(2)(iii), an exempt CFC would be deemed to have zero pre-election section 987 gain or loss with respect to a QBU that has average assets of less than $50 million for the three-year period preceding the first taxable year for which the election is made. See proposed § 1.987-15(e)(2)(iii)(B)( 1). The three-year averaging requirement is intended to prevent inappropriate shifting of assets between QBUs. All QBUs of an exempt CFC or exempt partnership with the same country of residence (as defined in section 988(a)(3)(B)) would be aggregated for purposes of the $50 million threshold. Proposed § 1.987-15(e)(2)(iii)(B)( 3).

For this purpose, the amount of a QBU's assets for each of the three years preceding the first taxable year for which the CFC exemption election is made would be equal to the amount of total assets reflected on the QBU's U.S. GAAP balance sheet on the last day of the relevant taxable year (which is reported annually on Form 8858, Schedule F). Proposed § 1.987-15(e)(2)(iii)(B)( 2). Unlike the items attributable to an eligible QBU under § 1.987-2(b)(1), these amounts are not adjusted to conform to Federal income tax principles. Based on available data, the Treasury Department and the IRS anticipate that this exception would substantially reduce the overall compliance burden of computing pre-election section 987 gain or loss.

2. Coordination With the Transition Rules of § 1.987-10

The rules for computing and recognizing pre-election section 987 gain or loss under proposed § 1.987-15(e) generally would not apply if the CFC exemption election is made for the taxable year beginning on the transition date described in § 1.987-10(c)(1) (that is, the first day of the first taxable year to which the 2024 final regulations apply). In this case, because unrecognized section 987 gain or loss arising before the transition date is already accounted for under the transition rules of § 1.987-10, taxpayers would not be required to separately account for pre-election section 987 gain or loss under proposed § 1.987-15(e). However, because the transition rules of § 1.987-10 do not apply to partnerships, an exempt CFC or exempt partnership would compute pre-election section 987 gain or loss under proposed § 1.987-15(e) with respect to an exempt partnership QBU even when the CFC exemption election is made in the taxable year beginning on the transition date. Proposed § 1.987-15(g)(1)(i).

In general, a CFC exemption election would not affect the application of the transition rules in § 1.987-10. Thus, in the taxable year beginning on the transition date, an exempt CFC would apply § 1.987-10 to determine pretransition gain or loss with respect to its section 987 QBUs. Additionally, the rules cross-referenced in § 1.987-10 (for example, the rules of § 1.987-4 that are cross-referenced in § 1.987-10(e)(3)(iii)) would apply for purposes of the transition rules. However, if the CFC exemption election is made for the taxable year beginning on the transition date, an exempt CFC would be deemed to have no pretransition gain or loss with respect to a QBU that does not meet the $50 million asset threshold under proposed § 1.987-15(e)(2)(iii). Proposed § 1.987-15(d)(2).

A taxpayer that makes a CFC exemption election for the taxable year beginning on the transition date would be deemed to also make the amortization election under § 1.987-10(e)(5)(ii) with respect to its exempt CFCs. Proposed § 1.987-15(d)(1)(i). Because an exempt CFC does not recognize section 987 gain or loss under § 1.987-5 at the time of a remittance, this deemed election is needed to provide a mechanism for recognizing an exempt CFC's pretransition gain or loss. A taxpayer that is deemed to make the amortization election by reason of a CFC exemption election would not be required to make the amortization election with respect to QBU owners that are not exempt CFCs. Proposed § 1.987-15(d)(1)(ii).

3. Computation of Pre-Election Section 987 Gain or Loss if the CFC Exemption Election Is Made After the Taxable Year Beginning on the Transition Date

a. In General

If a CFC exemption election is made for a taxable year beginning after the transition date, an exempt CFC (or an exempt partnership) generally would be required to compute pre-election section 987 gain or loss with respect to its section 987 QBUs, successor deferral QBUs, and successor suspended loss QBUs as of the last day of the preceding taxable year. Proposed § 1.987-15(e)(2). An exempt CFC's pre-election section 987 gain or loss with respect to a QBU would be equal to the sum of the CFC's net unrecognized section 987 gain or loss, outstanding deferred section 987 gain or loss, and cumulative suspended section 987 loss with respect to the QBU on the last day of the preceding taxable year, reduced by amounts recognized in the preceding taxable year. Id.

b. Interaction With the Annual Recognition Election

Commenters requested clarification concerning the interaction of an annual recognition election with a CFC exemption election. Under proposed § 1.987-15(e)(2), any section 987 gain or loss recognized before the first taxable year in which the CFC exemption election applies would not be taken into account in computing pre-election section 987 gain or loss. Therefore, if a CFC is subject to an annual recognition election before the CFC exemption election is made, and the CFC does not have any outstanding deferred section 987 gain or loss or cumulative suspended section 987 loss, the CFC's pre-election section 987 gain or loss would be zero (because the CFC's net unrecognized section 987 gain or loss would have been recognized in prior taxable years as a result of the annual recognition election). ( printed page 52559)

4. Recognition of Pre-Election Section 987 Gain or Loss

An exempt CFC would recognize pre-election section 987 gain or loss ratably over a period of 120 months beginning with the first day of the first taxable year in which the election applies. Proposed § 1.987-15(e)(3)(i). In general, the source and character of pre-election section 987 gain or loss would be determined by applying the rules of § 1.987-6 in the last taxable year before the CFC exemption election takes effect. Proposed § 1.987-6(b)(1)(v). However, deferred section 987 gain or loss and suspended section 987 loss would retain the source and character determined in the taxable year of deferral or suspension, respectively. See § 1.987-6(b)(1)(ii) and (iii).

It is possible that a CFC would amortize both pre-election section 987 gain or loss (under § 1.987-15(e)(3)(i)) and pretransition gain or loss (under § 1.987-10(e)(5)(ii)) in certain years. This would be the case, for example, if a calendar year CFC with a transition date of January 1, 2025, made the election to amortize pretransition gain or loss under § 1.987-10(e)(5)(ii) but did not make the CFC exemption election for 2025, and then made the CFC exemption election for 2026. However, if the CFC described in the preceding sentence owned a QBU that held assets of less than $50 million (as determined under proposed § 1.987-15(e)(2)(iii)(B)), the exempt CFC would continue to amortize pretransition gain or loss under § 1.987-10(e)(5)(ii) in 2026 and subsequent years, but would not amortize pre-election section 987 gain or loss with respect to the QBU under proposed § 1.987-15(e)(2)(iii).

5. Conversion of Pre-Election Section 987 Gain or Loss Into Suspended Section 987 Loss

In two cases, pre-election section 987 loss would be converted into suspended section 987 loss. First, under proposed § 1.987-15(e)(3)(iv), if pre-election section 987 loss of an exempt CFC is attributable to a QBU that is owned by a different member of the exempt CFC's controlled group (for example, a successor deferral QBU), and the exempt CFC ceases to be related to the owner of the QBU due to a transfer of the exempt CFC's stock, the pre-election section 987 loss would become suspended section 987 loss. This rule is intended to prevent taxpayers from engaging in loss trafficking by selling an exempt CFC with a pre-election section 987 loss attribute to an unrelated person that does not also acquire ownership of the QBU to which the loss is attributable. When this rule applies, the CFC would recognize the suspended section 987 loss only to the extent of section 987 gain recognized in a taxable year in which it is no longer subject to the CFC exemption election.

Second, under proposed § 1.987-15(f)(2)(ii), pre-election section 987 loss would be suspended if the CFC exemption election is revoked (or deemed to be revoked) during the first 60 months of the amortization period. This rule is intended to prevent taxpayers from making the CFC exemption election for a limited period of time in order to accelerate the recognition of section 987 loss.

6. Exempt Partnerships

An exempt partnership generally would be required to compute pre-election section 987 gain or loss in the same manner as an exempt CFC. Proposed § 1.987-15(g)(3)(i). However, the exempt partnership itself would not recognize the pre-election section 987 gain or loss. Instead, each partner in the exempt partnership would take into account its share of the pre-election section 987 gain or loss ratably over a period of 120 months. Proposed § 1.987-15(g)(3)(ii). This rule is designed to prevent pre-election section 987 gain or loss from being shifted to a new partner upon a sale or transfer of a partnership interest.

7. Partnership Basis Adjustments

Under the existing final regulations, when a partner recognizes section 987 gain or loss with respect to a partnership or an eligible QBU of a partnership, the partner's adjusted basis in the partnership must be adjusted under the principles of sections 704(d) and 705. See § 1.987-7(e). Therefore, partnership basis adjustments would be made for each taxable year in which an exempt CFC recognizes pre-election section 987 gain or loss with respect to an exempt partnership QBU (including a taxable year in which an exempt CFC recognizes pre-election section 987 gain or loss of an exempt partnership under proposed § 1.987-15(g)(3)(ii)(A)). The Treasury Department and the IRS request comments on this issue in general, including: whether it would be appropriate for an exempt CFC to instead adjust the basis of its partnership interest by the full amount of its pre-election section 987 gain or loss in the first taxable year in which the CFC exemption election applies; whether the recognition of pre-election section 987 gain or loss should be accelerated when an exempt CFC sells its partnership interest during the 120-month amortization period (including whether rules are needed to ensure that capital loss on the sale of a partnership interest is not converted into ordinary loss); and whether special rules should be provided for cases in which an exempt CFC transfers its partnership interest in a transaction described in section 351 or 721.

F. First Year for Which the Election Is Revoked

In the first year in which a CFC exemption election ceases to apply (for example, because the election is deemed to be revoked under the consistency rules in § 1.987-1(g)(2)), any section 987 QBU owned by the CFC would be deemed to be newly formed on the first day of the taxable year. Proposed § 1.987-15(f)(1). As a result, taxpayers would not be required to compute net unrecognized section 987 gain or loss under § 1.987-4 for previous taxable years in which the CFC exemption election was in effect.

G. Special Rules for Inbound Nonrecognition Transactions

1. Requirement To Account for Foreign Currency Gain

Notice 2026-17 explained that, under the rules to be provided in the proposed regulations, taxpayers would be required to account for foreign currency gain (but not loss) in the case of an inbound liquidation or reorganization of an exempt CFC. In response to the Notice, some commenters asserted that special rules for inbound transactions were not necessary and should not be included in the proposed regulations, or should be narrowly scoped to address transactions entered into with a principal purpose of abuse. Alternatively, the commenters suggested that symmetrical rules should be provided to account for foreign currency loss when the functional currency of a section 987 QBU depreciates in value. However, one commenter acknowledged that inbound transactions of exempt CFCs could present opportunities for importation of excess asset basis attributable to exchange rate fluctuations, which would implicate longstanding concerns of the Treasury Department and the IRS.

The Treasury Department and the IRS are of the view that rules are needed to prevent the importation of excess asset basis resulting from unrecognized foreign currency gains when the assets of an exempt CFC are acquired in an inbound reorganization or liquidation described in § 1.367(b)-3(a) (an “inbound nonrecognition transaction”). In the absence of such rules, an exempt CFC would not currently recognize ( printed page 52560) section 987 gain pursuant to the CFC exemption election, and could also permanently escape U.S. taxation with respect to economic foreign currency gain in the case of an inbound nonrecognition transaction. The related excess asset basis would be imported into the United States and could allow the domestic acquiring corporation to claim excessive deductions or losses in subsequent taxable years. See part II.B of the Background section.

Accordingly, under proposed § 1.987-16, when the assets of an exempt CFC (a “transferor CFC”) are acquired in an inbound nonrecognition transaction, the transferor CFC would compute and recognize gain equal to the amount of its “section 987 asset basis.” Conceptually, section 987 asset basis is intended to reflect the amount by which the aggregate basis of the assets acquired in the inbound nonrecognition transaction has been increased due to appreciation in the value of a section 987 QBU's functional currency. This rule is consistent with one of the purposes of § 1.367(b)-3, which is to ensure that any asset basis repatriated in an inbound nonrecognition transaction either reflects earnings and profits that have already been subject to tax, or gives rise to an inclusion of income or recognition of gain at the time of the inbound nonrecognition transaction.

The Treasury Department and the IRS are of the view that an anti-abuse rule tied to a taxpayer's subjective intent would not sufficiently address concerns regarding the importation of excess asset basis. Because a CFC does not recognize section 987 gain on remittances from a section 987 QBU when a CFC exemption election is in effect, the CFC should recognize foreign currency gain when excess asset basis attributable to the section 987 QBU is imported into the United States, regardless of the taxpayer's reason for entering into the inbound nonrecognition transaction.

In addition, the proposed regulations do not provide rules under which a transferor CFC would recognize foreign currency loss in connection with an inbound nonrecognition transaction. The Treasury Department and the IRS are concerned that, if such rules were adopted, taxpayers could choose to enter into inbound nonrecognition transactions for the purpose of triggering substantial foreign currency losses. This approach is also consistent with the longstanding treatment under § 1.367(b)-3, which, upon an inbound nonrecognition transaction, requires an inclusion of income or recognition of gain and does not permit a deduction or recognition of loss. See §§ 1.367(b)-3(b)(3)(i) and (c)(2) and 1.367(b)-2(d)(1).

2. Computation of Section 987 Asset Basis

a. Comments Received in Response to Notice 2026-17

Notice 2026-17 identified two potential options for computing section 987 asset basis. Under the first option described in the Notice, section 987 asset basis would equal the transferor CFC's aggregate net unrecognized section 987 gain computed for a lookback period of ten taxable years preceding the inbound transaction, using the simplified method provided in § 1.987-10(e)(3). Under the second option, section 987 asset basis would be equal to the amount of the transferor CFC's excess asset basis computed under § 1.367(b)-3(g)(2)(i).

Two commenters recommended a modified version of the first option described in Notice 2026-17, under which the simplified method provided in § 1.987-10(e)(3) would be applied for only five years (rather than ten) unless taxpayers elected to utilize a ten-year lookback period. Another commenter asserted that the lookback period should not exceed ten years, but did not suggest a shorter period. Some commenters recommended that the simplified method provided in § 1.987-10(e)(3) should be applied using financial statement balance sheets. The commenters requested clarification as to whether adjustments would need to be made to the financial statement balance sheets for this purpose.

Other commenters suggested that section 987 asset basis be computed using a simplified version of the equity and basis pool method described in Notice 2026-17. One commenter requested that taxpayers be provided the option to compute section 987 asset basis by applying the rules of § 1.987-4(d) in their entirety to all taxable years preceding the inbound nonrecognition transaction.

Some commenters criticized the second option described in Notice 2026-17 (which looks to excess asset basis computed under § 1.367(b)-3(g)(2)(i)) because it does not isolate excess asset basis attributable to foreign currency gain with respect to a section 987 QBU. The commenters requested guidance as to how the foreign currency-related component of excess asset basis (“EAB”) could be identified for this purpose. Another commenter, however, asserted that the EAB method would be appropriate for taxpayers that are unable to use other methodologies due to data limitations.

Several commenters suggested that the cumulative translation adjustment (“CTA”) computed under GAAP could be used as a reasonable proxy for the amount of section 987 asset basis. The commenters requested guidance as to adjustments that would need to be made to the CTA amount for this purpose. One commenter recommended that taxpayers be permitted to use the CTA to compute section 987 asset basis only if the CTA methodology used for GAAP purposes is substantially similar to the computations required under section 987. However, the Treasury Department and the IRS also received feedback indicating that, as a result of remittances, disregarded transactions, and other factors, there can be significant book-to-tax differences between the CTA amount and section 987 gain or loss amounts, and it may not be feasible to provide administrable rules for making the necessary book-to-tax adjustments.

b. Proposed Rules for Computing Section 987 Asset Basis

The proposed regulations would provide rules for determining a transferor CFC's section 987 asset basis using administrable proxies based on information that is expected to be readily available at the time of the inbound nonrecognition transaction. These rules are intended to avoid the need for retroactive application of the rules of § 1.987-4 (for determining net unrecognized section 987 gain or loss) to prior taxable years based on historical information. The Treasury Department and the IRS are of the view that an approximation is appropriate in this context, given the limited circumstances under which the determination would be necessary (in light of the likely nonrecurring aspect of an inbound nonrecognition transaction) and the potential compliance and administrative burdens of requiring a precise calculation.

In particular, proposed § 1.987-16(c) would require the transferor CFC to determine its section 987 asset basis under one of two methodologies. The transferor CFC would establish its choice of methodology with respect to an inbound nonrecognition transaction by applying that methodology in computing the amount of section 987 asset basis (if any) to be recognized under proposed § 1.987-16(d)(1) with respect to the inbound nonrecognition transaction.

Under the first methodology (the “lookback methodology”), section 987 asset basis would be equal to the aggregate net amount of unrecognized section 987 gain computed using the simplified method provided in § 1.987-10(e)(3) for taxable years ending within the 72-month period preceding the ( printed page 52561) inbound nonrecognition transaction (excluding any taxable year predating the CFC exemption election). Proposed § 1.987-16(c)(2). This approach is expected to capture the appropriate amount of foreign currency gain for those taxable years with a reasonable degree of accuracy. In response to comments, the proposed regulations would provide for a lookback period of only 72 months (rather than ten years) in order to reduce the compliance burden of computing section 987 asset basis.

Under the second methodology, section 987 asset basis would be equal to the amount of EAB with respect to the transferor CFC determined under the rules of § 1.367(b)-3(g)(2)(i) (but without regard to the application of proposed § 1.987-16). Proposed § 1.987-16(c)(3). This approach relies on asset basis amounts determined at the time of the inbound nonrecognition transaction, rather than historical section 987 computations, and therefore may be simpler for taxpayers to apply in some cases. The other components of the EAB formula—earnings and profits and outside stock basis—are also expected to be available at the time of the inbound nonrecognition transaction. However, the Treasury Department and the IRS acknowledge that this approach can result in an imprecise amount of section 987 asset basis (for example, when the transferor CFC has excess asset basis for reasons unrelated to, or in addition to, exchange rate fluctuations).

The Treasury Department and the IRS are continuing to study whether, in addition to the two methodologies described in proposed § 1.987-16(c), other alternative methodologies recommended by commenters could be used to compute a transferor CFC's section 987 asset basis. Accordingly, the comments described in part I.G.2.a of this Explanation of Provisions may be addressed further in future guidance.

3. Gain Recognition

a. In General

Under proposed § 1.987-16(d)(1), a transferor CFC would recognize section 987 gain equal to the amount of its section 987 asset basis immediately before the inbound nonrecognition transaction. This rule aligns with the rules that apply when a CFC exemption election is not in effect. In particular, under § 1.987-8, all section 987 QBUs owned by a CFC are treated as terminated immediately before an inbound nonrecognition transaction, and any net unrecognized section 987 gain is recognized by the CFC at that time.

An example in the proposed regulations would confirm that section 987 gain recognized under proposed § 1.987-16(d)(1) is not gain recognized with respect to property distributed in a liquidation within the meaning of section 334(b)(1)(A) (or gain recognized on a transfer of property within the meaning of section 362(b)). See proposed § 1.987-16(f)(2)(iii). Under proposed § 1.987-16(d)(1), the section 987 gain would be recognized immediately before the inbound nonrecognition transaction, but not as part of the inbound nonrecognition transaction. Therefore, the domestic acquiring corporation's basis in the property received would not be affected by the recognition of section 987 gain under proposed § 1.987-16(d)(1).^[3]

This result is appropriate because section 987 gain recognized under proposed § 1.987-16(d) is intended to reflect the amount by which a CFC's inside asset basis has previously been increased due to exchange rate fluctuations without gain recognition. If the domestic acquiring corporation's asset basis were increased under section 334(b)(1)(A) (or section 362(b)) due to the recognition of section 987 gain under proposed § 1.987-16(d), that would reintroduce the misalignment between asset basis and taxable income or gain that the rules of proposed § 1.987-16 are meant to address.

b. Source and Character

The source and character of section 987 gain recognized under § 1.987-16(d) would be determined under § 1.987-6 in the taxable year of recognition. Proposed § 1.987-6(b)(1)(vi). In general, source and character would be determined based on the relative tax book value of all of the transferor CFC's assets. Proposed § 1.987-16(d)(2)(ii). However, stock of a lower-tier subsidiary held by the transferor CFC would not be taken into account for this purpose, because this stock is not attributable to a section 987 QBU under § 1.987-2(b)(2)(i)(A).

c. Comments Received in Response to Notice 2026-17

In response to Notice 2026-17, the Treasury Department and the IRS received a number of comments regarding the manner in which section 987 asset basis should be taken into account. One commenter recommended that, immediately before the inbound nonrecognition transaction, the basis of the transferor CFC's assets should be reduced by the amount of its section 987 asset basis. Other commenters requested that taxpayers be permitted to elect between different methods for taking into account section 987 asset basis, including (i) gain recognition, (ii) adjustments to asset basis, and (iii) adjustments to the domestic acquiring corporation's net unrecognized section 987 gain or loss following the inbound nonrecognition transaction. The Treasury Department and the IRS are continuing to evaluate these comments. Accordingly, these comments may be addressed in future guidance.

4. De Minimis Rule

Under the proposed regulations, taxpayers would not be required to compute a transferor CFC's section 987 asset basis, or recognize an amount of section 987 gain equal to the section 987 asset basis, if the aggregate tax basis of the transferor CFC's assets is less than $25 million. Proposed § 1.987-16(e). This de minimis rule is intended to reduce the compliance and administrative burdens of applying § 1.987-16 when a CFC is unlikely to have a significant amount of section 987 asset basis. It is anticipated that the de minimis rule will relieve burdens on small businesses by eliminating the need for taxpayers to determine section 987 asset basis for a significant number of transactions.

In general, the $25 million de minimis threshold is applied with respect to all of a transferor CFC's assets, regardless of whether the assets are attributable to a section 987 QBU at the time of the inbound nonrecognition transaction. This rule is intended to ensure that any assets that may have been previously owned by a section 987 QBU are taken into account for purposes of the de minimis threshold, even if the assets were distributed to the transferor CFC (or the section 987 QBU terminated) before the inbound nonrecognition transaction.

Non-portfolio stock held by the transferor CFC generally would not be taken into account for purposes of the de minimis threshold, because this stock is not attributable to a section 987 QBU under § 1.987-2(b)(2)(i)(A). Proposed § 1.987-16(e)(2). Non-portfolio stock would, however, be taken into account to the extent that other assets of the transferor CFC had been exchanged for such stock (whether or not gain or loss was recognized on the exchange) during the 120-month period preceding the inbound nonrecognition transaction. Thus, for example, if a transferor CFC contributes a section 987 QBU to a lower-tier subsidiary in a section 351 transaction, the basis of the subsidiary ( printed page 52562) stock received by the transferor CFC in exchange for the section 987 QBU would be taken into account under proposed § 1.987-16(e)(2).

The Treasury Department and the IRS received several comments relating to potential de minimis exceptions. One commenter suggested a de minimis rule tied to the amount of the CTA determined for GAAP purposes. Another commenter recommended that a de minimis exception should apply if the transferor CFC's inside asset basis does not exceed 10 percent of the aggregate gross basis of all of the domestic acquiring corporation's assets, or if the amount of section 987 asset basis is less than 10 percent of the transferor CFC's inside asset basis. The Treasury Department and the IRS are continuing to study these comments and will address them in future guidance.

5. Coordination With § 1.367(b)-3(g)

As described in part I.G.2.b of this Explanation of Provisions, the proposed regulations under § 1.987-16 would provide that excess asset basis has the meaning provided in § 1.367(b)-3(g)(2)(i) but is determined prior to the application of § 1.987-16(d). Proposed § 1.987-16(c)(3). To ensure that amounts that give rise to excess asset basis are not double counted (once in applying the proposed regulations under § 1.987-16(d) and again in applying § 1.367(b)-3(g)), § 1.367(b)-3(g)(2)(i) would be modified to provide that excess asset basis generally is determined after the application of § 1.987-16(d).

II. Amortization of Pretransition Gain or Loss in a Short Taxable Year

Consistent with Notice 2025-72, proposed § 1.987-10(e)(5)(ii)(A) would provide that an owner that is subject to an amortization election would recognize pretransition gain or loss ratably over a period of 120 months beginning with the first day of the first taxable year in which the section 987 regulations apply. This rule is intended to prevent distortions that could arise from the accelerated recognition of pretransition gain or loss in a short taxable year.

Applicability Dates

The proposed regulations generally are proposed to apply to taxable years ending on or after the date final regulations are filed with the Federal Register (the “finalization date”). Proposed § 1.987-10(e)(5)(ii) (relating to the amortization election for pretransition gain or loss) is proposed to apply to taxable years beginning after December 31, 2024, and ending on or after November 25, 2025.

Except as provided in the following sentence, a taxpayer may rely on the proposed regulations for a taxable year beginning after December 31, 2024, and ending before the finalization date, provided that the taxpayer and all members of its consolidated group and section 987 electing group consistently follow the proposed regulations for the taxable year and all subsequent taxable years ending before the finalization date. A taxpayer may rely separately on proposed § 1.987-10(e)(5)(ii) for a taxable year beginning after December 31, 2024, and ending before the finalization date, provided that the taxpayer and all members of its consolidated group and section 987 electing group consistently follow proposed § 1.987-10(e)(5)(ii) for the taxable year and all subsequent taxable years ending before the finalization date.

Special Analyses

I. Regulatory Planning and Review—Economic Analysis

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. This rule is expected to be an Executive Order 14192 deregulatory action.

The proposed regulations have been designated by the Office of Management and Budget's (OMB's) Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, July 4, 2025) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. OIRA has determined that the proposed rulemaking is a significant regulatory action and subject to review under section 3(f) of Executive Order 12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by OMB.

A. Background

Section 987 applies when a taxpayer owns a qualified business unit, or QBU, that has a functional currency different from the taxpayer's functional currency. In general, section 987(1) and (2) provide rules for determining and translating the QBU's taxable income or loss, while section 987(3) requires proper adjustments for transfers of property between QBUs with different functional currencies. In practical terms, section 987(3) generally requires the owner of a section 987 QBU to recognize foreign currency gain or loss when the QBU makes a remittance to its owner or is terminated.

The Treasury Department and the IRS have issued several sets of regulations and proposed regulations under section 987. In 1991, Treasury and the IRS issued proposed regulations that provided an earnings and capital method for determining section 987 gain or loss. Under that approach, taxpayers maintained an equity pool in the QBU's functional currency and a basis pool in the owner's functional currency; the equity pool generally represented the QBU's branch equity, and the basis pool generally represented the owner's basis in that branch equity. The pools were adjusted for the QBU's taxable income or loss and for contributions and remittances. During the years following the 1991 proposed regulations, many taxpayers became familiar with this framework.

In 2006, Treasury and the IRS issued new proposed regulations and withdrew the 1991 proposed regulations. The new proposed regulations were later finalized with modifications in 2016. Unlike the 1991 pool-based approach, the 2016 final regulations adopted a more detailed balance-sheet-based framework that required the recognition of currency gain or loss only on financial assets and liabilities, referred to as “marked items,” and not other assets and liabilities, referred to as “historic items.” In general, that framework required taxpayers to determine the items of income, gain, deduction, and loss attributable to a section 987 QBU in the QBU's functional currency and translate those items into the owner's functional currency, with the marked items referencing a spot exchange rate and the historic items referencing the historic exchange rate at which the item was acquired or incurred. The rules also required taxpayers to compute and maintain net unrecognized section 987 gain or loss with respect to each section 987 QBU, based on changes in the QBU's balance sheet, and to recognize a portion of that accumulated currency gain or loss when the QBU made a remittance to its owner. However, the applicability date of the 2016 final regulations was deferred several times, and taxpayers continued to face ( printed page 52563) uncertainty about how to apply section 987 to their QBUs.

In December 2024, Treasury and the IRS finalized regulations under section 987 that retained the balance-sheet-based framework of the 2016 final regulations, with modifications intended to improve administrability, including an election (the current rate election) to recognize currency gain or loss with respect to all of a QBU's assets and liabilities, which eliminates the need to track historic exchange rates for historic items. The 2024 final regulations generally apply to taxable years beginning after December 31, 2024, and apply to CFCs that own section 987 QBUs. Under those rules, a CFC generally must determine section 987 taxable income or loss with respect to a section 987 QBU, compute net unrecognized section 987 gain or loss, and recognize section 987 gain or loss when the QBU makes a remittance or in connection with certain terminations. The 2024 final regulations also provide elections and related rules, including the current rate election, an annual recognition election, loss suspension rules, and transition rules for preexisting section 987 gain or loss.

At the same time, Treasury and the IRS issued 2024 proposed regulations addressing frequently recurring disregarded transactions between a section 987 QBU and its owner. Those proposed regulations also requested comments on the application of section 987 to partnerships and CFCs. In particular, Treasury and the IRS requested comments on whether section 987(3) and the related regulations should apply to CFCs, noting both the potential compliance burden of applying section 987(3) to section 987 QBUs of CFCs and the need to address concerns about excess asset basis in inbound transactions if section 987(3) were not applied to section 987 QBUs of CFCs.

In February 2026, Treasury and the IRS issued Notice 2026-17. The Notice announced forthcoming proposed regulations intended to simplify the operation of the 2024 final regulations, reduce compliance burdens, and limit the effect of certain section 987 rules on ordinary course transactions. In particular, the Notice described an election to use an equity and basis pool method for determining section 987 taxable income or loss and section 987 gain or loss, in lieu of certain balance-sheet-based computations under the 2024 final regulations. Under that method, taxpayers would generally maintain an equity pool in the section 987 QBU's functional currency and a basis pool in the owner's functional currency, with those pools adjusted for QBU income or loss and transfers between the QBU and its owner. In addition, the Notice announced that forthcoming proposed regulations would provide an election under which CFCs generally would not compute or recognize section 987 gain or loss under section 987(3), except in connection with certain inbound nonrecognition transactions.

The proposed regulations in this NPRM implement that CFC exemption election. Under the proposed regulations, taxpayers may elect to not apply section 987(3) and the related regulations generally to CFCs covered by the election (except to the extent provided in the proposed regulations). Section 987(1) and (2) would continue to apply, so CFCs would still determine and translate section 987 taxable income or loss as necessary for Federal income tax purposes. The proposed regulations also provide rules for making and revoking the election, consistency requirements for commonly controlled CFCs, treatment of pre-election section 987 gain or loss, and special rules for inbound nonrecognition transactions. The inbound nonrecognition transaction rules are intended to prevent exchange-rate-driven asset basis increases from being imported into the United States without appropriate recognition of section 987 gain. The other parts of Notice 2026-17 regarding the simplification of the 2024 final regulations will be addressed in other forthcoming proposed regulations.

B. Need for Proposed Regulations

Proposed regulations are needed to provide taxpayers with operative rules for making and applying the CFC exemption election, in order to reduce the compliance and administrative burdens of applying section 987(3) with respect to section 987 QBUs owned by CFCs. Notice 2026-17 announced that Treasury and the IRS intended to issue rules allowing CFCs generally not to compute or recognize section 987 gain or loss under section 987(3), except in connection with certain inbound nonrecognition transactions, but the Notice functioned as a preview of future guidance rather than a complete set of rules taxpayers could rely on to make the election.

Sections 987 and 989 provide regulatory authority for these rules. Section 987(3) directs the Secretary to prescribe the proper adjustments needed for transfers between QBUs with different functional currencies, and section 989(c) authorizes regulations necessary or appropriate to carry out the purposes of the foreign currency rules, including rules for related-party and QBU transactions.

Absent proposed regulations, taxpayers would not have the specific rules needed to implement the CFC exemption election on tax returns. Taxpayers need guidance on which CFCs are covered, who makes the election, when and how the election is made, whether the election must be applied consistently across commonly controlled CFCs, how pre-election section 987 gain or loss is treated, and what happens in inbound nonrecognition transactions or revocations of the election.

C. The Proposed Regulations

The proposed regulations provide an election, referred to as the CFC exemption election, under which an electing CFC generally would not compute or recognize section 987 gain or loss with respect to its section 987 QBUs, i.e., branches or disregarded entities with functional currencies different from the CFC's functional currency. The election is intended to reduce the compliance and administrative burdens associated with applying the 2024 final regulations to CFCs that own section 987 QBUs.

The proposed regulations do not exempt CFCs from section 987 entirely. Section 987(1) and (2) would continue to apply for purposes of determining and translating section 987 taxable income or loss, including for purposes of computing taxable income and earnings and profits. Thus, the election is targeted at section 987(3) gain or loss recognition, rather than the broader rules for determining QBU income. For example, in taxable years in which the CFC exemption election is in effect, a CFC would continue to translate section 987 taxable income or loss under the applicable section 987 rules, generally using the yearly average exchange rate and by deeming a current rate election to be in effect. But if property is transferred from a section 987 QBU to the CFC owner in a transaction that would be treated as a remittance, the CFC generally would not compute or recognize section 987 gain or loss under section 987(3) as a result of that transfer.

The proposed regulations provide rules for making and revoking the CFC exemption election. In general, the election would be made by the authorized person for the relevant section 987 electing group. Special timing rules would apply for early years to allow taxpayers sufficient time to evaluate the election after issuance of the proposed and final regulations. The proposed regulations also provide that the election generally could not be ( printed page 52564) revoked without the consent of the Commissioner. These rules are intended to make the election administrable and to reduce uncertainty for taxpayers preparing returns for the first years in which the 2024 final regulations apply.

The proposed regulations also include consistency requirements. The CFC exemption election generally must be made consistently for commonly controlled CFCs, including majority-owned CFCs of affiliated domestic corporations. The proposed regulations also include rules addressing CFC stock owned through domestic partnerships and an anti-avoidance rule for related-party transactions designed to avoid the consistency requirements or trigger an inappropriate deemed revocation. These rules are intended to prevent taxpayers from selectively applying the election to CFCs with expected section 987 gains while leaving other CFCs with expected section 987 losses outside the election.

The proposed regulations address section 987 gain or loss that arose before the CFC exemption election became effective. In general, an exempt CFC would compute its pre-election section 987 gain or loss and recognize that amount ratably over a 120-month period beginning with the first month of the taxable year for which the CFC exemption election is made. This rule preserves the tax consequences of section 987 gain or loss that accrued before the election by requiring both pre-election gain and pre-election loss to be taken into account over the same 120-month period. The proposed regulations would provide a mandatory asset basis test for certain smaller section 987 QBUs. Under this test, a QBU with assets of less than $50 million would not be required to compute or recognize pre-election unrecognized section 987 gain or loss in connection with the CFC exemption election. The $50 million threshold would be applied separately to each QBU (or to each group of same-country QBUs), based on the QBU's average assets for the three-year period preceding the first taxable year for which the election is made. This rule is intended to reduce transition-related compliance burdens for smaller QBUs for which the cost of computing pre-election section 987 pools may be relatively high compared to the potential tax amounts at issue.

The proposed regulations also provide rules for partnerships owned by exempt CFCs. If an exempt CFC owns a section 987 QBU through a partnership, or if a partnership is sufficiently owned by exempt CFCs, the proposed regulations generally would extend the CFC exemption election to the relevant QBU as if the QBU were owned directly by an exempt CFC. These rules are intended to provide similar treatment for section 987 QBUs owned directly by exempt CFCs and section 987 QBUs owned through partnerships by exempt CFCs, while continuing to require reasonable and consistent application of section 987(1), section 987(2), and section 989(a).

Finally, the proposed regulations include an important limitation on the election for certain inbound nonrecognition transactions. If an exempt CFC engages in an inbound liquidation or reorganization, the proposed regulations would require the CFC to recognize section 987 gain to the extent exchange-rate fluctuations have increased the basis of assets transferred to a domestic corporation in the transaction. This rule is intended to prevent unrecognized currency gain from increasing the basis of assets transferred to a domestic corporation without a corresponding income inclusion. For this purpose, the proposed regulations would provide two proxy methods for computing the amount of section 987 asset basis, giving taxpayers flexibility to use the method that is more administrable in their circumstances. The first method is based on net unrecognized section 987 gain over a specified historical period, and the second one is based on excess asset basis concepts under section 367(b). The proposed regulations would not provide a corresponding rule allowing an exempt CFC to recognize section 987 loss in an inbound transaction.^[4] This limitation is intended to prevent taxpayers from using elective inbound transactions to selectively recognize losses, and is consistent with the longstanding treatment of inbound nonrecognition transactions under section 367(b), which does not permit the recognition of a deduction or loss. A de minimis rule would exclude certain smaller inbound transactions from the requirement to compute and recognize section 987 asset basis.

D. Baseline

The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations.

E. Economic Effects of the Proposed Regulations

1. Affected Taxpayers

The proposed regulations would affect U.S. taxpayers that own CFCs with section 987 QBUs. Based on 2023 filing-year data from the IRS Research, Applied Analytics, and Statistics Division, the Treasury Department and the IRS estimate that approximately 1,500 taxpayers would be affected by the proposed regulations. This estimate is based on the number of entities that own at least one CFC with a section 987 QBU.

The taxpayers most directly affected are multinational groups with CFCs that conduct foreign branch operations in currencies different from the functional currency of the CFC owner. These taxpayers may otherwise be required under the 2024 final regulations to compute and track section 987 gain or loss, remittances, transition amounts, and related attributes for their CFC-owned section 987 QBUs. Taxpayers that do not own CFCs with section 987 QBUs, or that do not make the CFC exemption election, generally would not be materially affected by the election rules.

2. Reduction in Compliance and Administrative Burden From the CFC Exemption Election

The principal economic effect of the proposed regulations is expected to be a reduction in recurring compliance and administrative burden for taxpayers that make the CFC exemption election. Under the baseline, CFCs generally must compute net unrecognized section 987 gain or loss and recognize section 987 gain or loss on remittances or certain terminations. These computations can require detailed information about section 987 QBU assets and liabilities, transfers between a QBU and its owner, exchange rates, remittances, suspended losses, deferred amounts, and transition items. By contrast, once the CFC exemption election applies, an electing CFC generally would not compute or recognize section 987 gain or loss under section 987(3) for ordinary CFC branch operations.

Public comments on prior section 987 regulations indicate that these computations can impose meaningful taxpayer-specific burdens. One commenter, a public company with approximately 10 to 15 QBUs using a functional currency different from their owner, stated that its historical section 987 monitoring and calculation burden had been approximately 20 hours or less per year, but that the 2016 section 987 regulations would require substantially ( printed page 52565) more work.^[5] The commenter estimated at least 80 hours merely to obtain a working knowledge of the rules, elections, and calculations, and at least 80 hours for a single QBU to transition to the Foreign Exchange Exposure Pool (FEEP) method in one example involving historic asset and exchange-rate tracking. The same commenter stated that annual calculations and disclosures would be needed for each QBU and would require weeks of work.

By allowing CFCs covered by the election generally not to compute or recognize section 987 gain or loss under section 987(3), the proposed regulations would reduce the need for ongoing section 987(3) computations for ordinary CFC branch operations. Taxpayers would still need to apply section 987(1) and (2) to determine and translate section 987 taxable income or loss, and certain computations would remain necessary for pre-election gain or loss and inbound nonrecognition transactions.^[6] However, for electing taxpayers, the proposed regulations are expected to reduce recurring compliance costs and reduce the administrative burden on the IRS associated with reviewing routine CFC remittance computations.

The exact magnitude of these compliance cost savings is uncertain. Although the compliance burden reduction may encourage some taxpayers to make the CFC exemption election, it is possible not all eligible taxpayers will do so.^[7] Further, available tax return data do not directly measure the number of hours taxpayers spend applying section 987(3) to each affected QBU, nor the exact cost associated with those hours worked. Treasury and the IRS therefore consider a range of estimates using three inputs: the number of affected section 987 QBUs, the hours saved per affected QBU, and the hourly labor cost of the tax professionals performing the work.

As noted above, it is estimated that approximately 1,500 entities own at least one CFC with a section 987 QBU. For a lower bound on the number of affected QBUs, it is assumed that two-thirds of the entities make the CFC exemption election, and that each entity owns only one CFC with one section 987 QBU, yielding 1,000 affected QBUs. However, many of these entities in fact own multiple CFCs with section 987 QBUs, and their compliance costs are therefore higher, as they must be incurred for each section 987 QBU. For an upper bound on the number of affected QBUs, it is assumed that all of the entities make the election, and that each owns three QBUs on average, yielding 4,500 affected QBUs.

For the number of hours saved per affected QBUs, Treasury and the IRS consider the compliance activities avoided and the public comment described above. These imply that the proposed regulations may reduce recurring compliance work by approximately 20-60 hours per affected QBU per year. The lower end reflects a conservative recurring burden estimate; the higher end reflects the greater complexity of applying the section 987 regulations to taxpayers with multiple currencies, multiple CFCs, frequent disregarded transactions, remittances, or more complex branch balance sheets. The hourly cost of this work is estimated using a monetization rate of $88.50 per hour, which IRS Research, Applied Analytics, and Statistics applies for certain information collection burdens specifically related to tax filing.

Using a central estimate of 4,500 affected QBUs, 40 hours saved per QBU, and $88.50 per hour of tax professional work, the Treasury and the IRS estimate that the proposed regulations would generate approximately $16 million in annual compliance cost savings.

This estimate should be interpreted as an order-of-magnitude estimate rather than a precise measurement. The actual savings will depend on the number of CFCs and QBUs for which taxpayers make the election, the extent of existing section 987 compliance systems, the number and complexity of currencies and disregarded transactions, the frequency of remittances and restructurings, and the amount of residual work required for pre-election section 987 gain or loss and inbound transactions.

3. Effects of Pre-Election Gain or Loss Amortization and the QBU-Level Asset-Based Test

The proposed regulations would require pre-election section 987 gain or loss to be recognized ratably over a 120-month period. This rule applies to taxpayers that make the CFC exemption election after unrecognized section 987 gain or loss has already accrued. It is intended to preserve the tax consequences of currency gain or loss that arose before the election became effective and to prevent asymmetric results under which taxpayers with accrued gains could elect out of section 987(3) and eliminate those gains, while taxpayers with accrued losses could preserve or accelerate those losses.

The 120-month period also smooths the transition into the CFC exemption election. Relative to immediate recognition, ratable recognition reduces ( printed page 52566) the likelihood that making the election would produce a large one-year tax effect for taxpayers with substantial pre-election section 987 gain. Similarly, taxpayers with substantial pre-election section 987 loss would not receive an immediate deduction for the full amount. This treatment reduces the extent to which the election itself creates a timing benefit or cost unrelated to current business operations.

Using months rather than taxable years also avoids acceleration in short taxable years. For a taxpayer with full 12-month taxable years, a 120-month period generally produces the same annual recognition pattern as a 10-year period. For a taxpayer with a one-month short taxable year, however, the monthly rule would require recognition of 1/120th of the relevant amount rather than one-tenth. This reduces the extent to which the occurrence or timing of a short taxable year affects the tax consequences of entering the election.

The proposed regulations would also include a mandatory QBU-level asset-based test intended to reduce transition burden for smaller QBUs. Under this test, a QBU with average assets of less than $50 million for the three-year period preceding the election would not be required to compute or recognize pre-election unrecognized section 987 gain or loss in connection with the CFC exemption election. Because reconstructing historical or pretransition section 987 pools may involve fixed costs per QBU, the test is expected to reduce entry costs for smaller QBUs for which those fixed costs may be large relative to the expected future compliance savings from the election.

Based on Form 8858 returns for tax year 2021, the Treasury Department and the IRS estimate that a $50 million threshold would exempt about 75 percent of section 987 QBUs from calculating pre-election pools, while excluding less than 5 percent of reported QBU assets. Thus, the test would provide broad compliance relief by QBU count while retaining the transition rules for larger QBUs, where the potential tax consequences are more likely to be material.

For QBUs above the asset threshold, taxpayers making the election would need to compute pre-election section 987 gain or loss and track the recognized and remaining unrecognized amounts over the 120-month period.^[8] These costs are likely to be greatest for taxpayers that make the CFC exemption election after the transition date, taxpayers with multiple CFC-owned section 987 QBUs, taxpayers with outstanding deferred section 987 gain or loss or cumulative suspended section 987 loss, and taxpayers that own section 987 QBUs through partnerships. These costs are transitional and targeted; they are linked to preserving pre-election amounts while the CFC exemption election generally reduces ongoing section 987(3) computations for ordinary CFC branch operations after the election takes effect.

Overall, the 120-month amortization rule and the QBU-level asset-based test are expected to make the CFC exemption election more administrable while limiting selective tax effects from accrued section 987 positions. The amortization rule preserves pre-election amounts and reduces incentives to time the election to eliminate gains or accelerate losses. The asset-based test reduces the principal transition cost for smaller QBUs—the need to compute historical or pre-election section 987 pools—while retaining the transition rules for QBUs for which the potential tax consequences are more likely to be material.

4. Effects of the Inbound Transaction Rules

The proposed regulations include special rules for certain inbound nonrecognition transactions involving exempt CFCs. These rules are intended to prevent exchange-rate-driven increases in asset basis from being imported into the United States without corresponding gain recognition. Without these rules, a CFC exemption election could reduce the compliance burden for ordinary CFC branch operations but also create an opportunity for untaxed section 987 currency gain to be reflected in the basis of assets transferred to a domestic corporation in an inbound liquidation or reorganization. That imported basis could then reduce U.S. taxable income through depreciation, amortization, gain reduction, or loss recognition in later years.

The economic effect of these rules is expected to be targeted. The rules apply only when assets of an exempt CFC are acquired in an inbound nonrecognition transaction, rather than to ordinary-course remittances or ongoing CFC branch operations. In addition, the gain-recognition rule generally approximates the treatment that would apply if the CFC exemption election were not in effect, because the 2024 final regulations generally treat section 987 QBUs owned by a CFC as terminated immediately before an inbound nonrecognition transaction and require recognition of any net unrecognized section 987 gain at that time. Thus, relative to the baseline, the inbound transaction rules principally prevent the CFC exemption election from changing the treatment of a targeted class of restructuring transactions in a way that could allow excess asset basis to enter the U.S. tax system.

The proposed regulations would require recognition of section 987 gain based on two alternative methods for determining section 987 asset basis. These methods are intended to serve as administrable proxies that reduce the need for full historical section 987 computations while preserving gain recognition in transactions where the basis-importation concern is most significant. The first methodology would generally use a six-year lookback computation of net unrecognized section 987 gain, while the second methodology would use excess asset basis concepts under section 367(b). These alternatives may reduce compliance costs by allowing taxpayers to use the method that is more administrable in their circumstances, although either method may be imprecise for some taxpayers. The proposed regulations also include a de minimis rule, which reduces compliance burden for smaller inbound transactions of CFCs with less than $25 million in assets, where any potential basis-importation concern is less likely to be economically significant.

Consistent with the 2024 final regulations' treatment of suspended section 987 losses in inbound nonrecognition transactions, the proposed regulations would not provide a special rule allowing an exempt CFC to recognize section 987 loss in an inbound transaction. This asymmetric treatment may deny loss recognition in some cases, but it reduces the risk that taxpayers could selectively enter into elective inbound transactions to trigger foreign currency losses. This approach is also consistent with the longstanding treatment of inbound nonrecognition transactions under section 367(b), which does not permit the recognition of a deduction or loss.

For these reasons, the inbound transaction rules are expected to have limited effects on ordinary business operations and investment decisions, while reducing opportunities for tax-motivated basis importation in a narrow class of transactions. ( printed page 52567)

5. Effects of Consistency and Anti-Avoidance Requirements

The proposed regulations require the CFC exemption election to be made consistently for commonly controlled CFCs and include anti-avoidance rules for related-party transactions designed to avoid those consistency requirements or produce inappropriate deemed revocations. These rules are intended to reduce selective use of the election. In particular, they limit the ability of a taxpayer group to apply the CFC exemption election selectively for tax-motivated reasons. This helps ensure that the election functions as a simplification rule, rather than as a tool for one-sided gain avoidance or loss preservation.

The consistency requirements may reduce flexibility for taxpayers with CFCs that have different section 987 profiles. A taxpayer may have some CFCs with expected section 987 gains and others with expected section 987 losses, or some CFCs with relatively simple branch operations and others with more complex currency exposures. A consistent election rule may therefore cause some taxpayers to forgo the election, especially if the taxpayer values flexibility to recognize losses under the baseline rules or is uncertain about future currency movements, acquisitions, dispositions, or restructurings. The constraint is targeted, however: taxpayers remain able to choose whether to make the election, and the rules primarily limit selective use of the election within commonly controlled groups, where the potential for tax-motivated sorting is greatest.

Absent consistency requirements, taxpayers would have stronger incentives to organize CFC ownership and branch structures around expected section 987 outcomes. A taxpayer could elect exempt treatment for CFCs with built-in or expected section 987 gains while declining the election for CFCs with built-in or expected section 987 losses, producing one-sided results across CFCs that are economically part of the same multinational group. The rules also reduce incentives to alter ownership chains, branch structures, or related-party transactions to separate gain-producing and loss-producing section 987 QBUs into different election groups. By requiring the taxpayer to evaluate the election across its commonly controlled CFC structure, the rules reduce the extent to which tax outcomes depend on formal ownership structure rather than underlying economic activity.

The anti-avoidance rules reinforce the consistency requirements by addressing controlled-group transactions undertaken with a principal purpose of avoiding the requirement to make the CFC exemption election, causing an inappropriate deemed revocation, or causing a partnership to cease to be an exempt partnership. These rules reduce the value of related-party restructuring designed to change election status without a corresponding change in the group's economic position. As a result, they are expected to preserve the compliance-cost reduction objective of the election while limiting the use of related-party transactions to obtain one-sided section 987 outcomes.

Overall, the consistency and anti-avoidance requirements are expected to improve the integrity and administrability of the CFC exemption election. Although they may reduce election uptake at the margin, they also reduce opportunities for selective gain avoidance and loss recognition, limit incentives for tax-motivated restructuring, and promote more consistent treatment among taxpayer groups with similar CFC branch operations and common control relationships.

6. Summary

Overall, the proposed regulations are expected to be taxpayer-favorable and burden-reducing relative to the 2024 final regulations. The principal economic effects are expected to be reduced annual compliance costs of approximately $16 million, greater certainty for return preparation, reduced administrative burden, and targeted protection against basis importation in inbound nonrecognition transactions. The Treasury Department and the IRS invite public comments and additional data on the economic effects that would result from these proposed regulations.

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 Budget (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 displays a valid control number assigned by the OMB.

The collection of information in the proposed regulations is in proposed § 1.987-1(g)(3). The likely respondents are U.S. shareholders of CFCs that own section 987 QBUs.

The collection of information in proposed § 1.987-1(g)(3) is required only when a taxpayer makes or revokes a CFC exemption election under proposed § 1.987-15. In general, taxpayers can make a CFC exemption election without the Commissioner's consent, but consent is required to revoke the election. The Commissioner's consent may be granted with a private letter ruling. When a taxpayer makes or revokes a CFC exemption election, the collection of information is mandatory. The collection of information required by proposed § 1.987-1(g)(3) will be used by the IRS for tax compliance purposes.

The Treasury Department and the IRS intend that the information described in proposed § 1.987-1(g)(3) will be collected by attaching a statement to Form 8964-ELE. For purposes of the PRA, the reporting burden associated with those collections of information will be reflected in the PRA submissions associated with Form 8964-ELE. The OMB Control Number for Form 8964-ELE will be included within 1545-0123 for business filers, 1545-0074 for individual filers, and 1545-0092 for trust and estate filers in accordance with the PRA procedures under 5 CFR 1320.10.

To the extent that a taxpayer makes or revokes an election by obtaining a private letter ruling, the reporting burden associated with those collections of information will be reflected in the PRA submissions associated with revenue procedures governing private letter rulings. The OMB Control Number for those revenue procedures is control number 1545-1522. The proposed regulations would require taxpayers merely to follow the procedures under Revenue Procedure 2026-1, IRB 2026-1 (or future revenue procedures governing private letter rulings) and would not change the collection requirements of the Revenue Procedure.

Books or records relating to a collection of information must be retained as long as their contents may become material 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 certified that this rulemaking will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act. ( printed page 52568)

The proposed regulations affect U.S. shareholders of CFCs with foreign branch operations. The number of small entities potentially affected by the proposed regulations is unknown; however, it is unlikely to be a substantial number because taxpayers that are U.S. shareholders of CFCs are typically larger businesses. The Treasury Department and the IRS estimate that the total number of entities that own a CFC with a foreign branch subject to section 987 is approximately 1,500 (many of which may not make the CFC exemption election). This estimate is based on the number of corporations and partnerships that filed a Form 8858 in 2023 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, (2) indicated that the disregarded entity or branch was a section 989 QBU, and (3) indicated that the disregarded entity or branch was owned by a CFC. As shown in the following table, only a small percentage of those filers are small entities.

A portion of the economic impact of the proposed regulations may derive from the collection of information requirements imposed under proposed § 1.987-1(g)(3). 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 division estimates that the appropriate wage rate for this set of taxpayers is $88.50 per hour. Thus, the annual burden per taxpayer from each collection of information requirement is $172.60.

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 comment 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 mandate 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 proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, 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 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 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 Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at www.irs.gov.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all other aspects of the proposed regulations. Any comments submitted will be made available at www.regulations.gov or upon request. Pursuant to the Administrative Procedure Act at 5 U.S.C. 553(b)(4), a plain language summary of the proposed rule is also available at www.regulations.gov.

A public hearing concerning the proposed regulations will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register .

Drafting Information

The principal authors of these proposed regulations are Raphael J. Cohen and Mark T. Terrell of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development.

Proposed Adoption of Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.367(b)-3 is amended by:

1. Revising the introductory text of paragraph (g)(2)(i); and

2. Adding a sentence to the end of paragraph (g)(7)(i).

The revisions and addition read as follows:

Par. 3. Section 1.987-1 is amended by:

1. In paragraph (a):

a. In the first sentence, removing the language “1.987-15” and adding the language “1.987-17” in its place; ( printed page 52569)

b. Revising the current last sentence of the paragraph and adding two sentences to the end of the paragraph;

2. In paragraph (g):

a. Adding paragraphs (g)(2)(iv) and (v);

b. Revising the first sentence of paragraph (g)(3)(ii)(A); and

c. Adding paragraph (g)(3)(ii)(D).

3. In paragraph (h), adding definitions for “CFC exemption election”, “Domestic acquiring corporation,” “Exempt CFC”, “Exempt partnership”, “Exempt partnership QBU”, “Inbound nonrecognition transaction”, “Pre-election section 987 gain or loss”, “Pre-transaction period”, “Pre-transaction taxable year,” and “transferor CFC” in alphabetical order.

The revisions and additions read as follows:

Par. 4. Section 1.987-6 is amended by adding paragraphs (b)(1)(v) and (vi) to read as follows:

Par. 5. Section 1.987-7 is amended by:

1. Revising paragraph (b);

2. In paragraph (c)(2)(i), removing the language “1.987-15” and adding the language “1.987-17” in its place; and

3. Adding paragraphs (c)(2)(iv) and (d)(2)(iv).

The revisions and additions read as follows:

Par. 6. Section 1.987-10 is amended by:

1. In paragraph (c)(1), removing the language “1.987-15(a)(1)” and adding the language “1.987-17(a)(1)” in its place;

2. Revising paragraph (e)(5)(ii)(A) and the last sentence of paragraph (e)(5)(ii)(C); and

3. Adding paragraph (e)(5)(ii)(D).

The revisions and addition read as follows:

Par. 7. Section 1.987-15 is redesignated as § 1.987-17 and new § 1.987-15 is added to read as follows:

Par. 8. Section 1.987-16 is added to read as follows:

Par. 9. Newly redesignated § 1.987-17 is amended by adding paragraphs (e) and (f) to read as follows:

91 FR 52553