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Treasury Regulations · 26 CFR

§ 1.987-1. Scope, definitions, and special rules.

In effect eCFR current as of October 15, 2026

Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).

Regulation under 26 U.S.C. § 987

Cite as 26 CFR § 1.987-1

At a glance

Read from the text and its source citation. Not part of the regulation.

Status
In the current eCFR
Issued
December 11, 2024 by T.D. 10016
Last amended
January 17, 2025
Issued under
26 U.S.C. § 987
Length
7,739 words · about 34 min to read
Defines
2 terms
Cross-references
cites 19 Code sections and 30 regulations; cited by 25
(a) In general. Sections 1.987-1 through 1.987-15 (the section 987 regulations) provide rules for determining the taxable income or loss and earnings and profits of a taxpayer with respect to a qualified business unit (QBU) that is subject to section 987. Further, the section 987 regulations provide rules for determining the timing, amount, character, and source of section 987 gain or loss recognized with respect to a section 987 QBU. This section addresses the scope of the section 987 regulations and provides certain definitions, special rules, and procedures for making elections. Section 1.987-2 provides rules for attributing assets and liabilities and items of income, gain, deduction, and loss to an eligible QBU. It also provides rules regarding the translation of items transferred to a section 987 QBU. Section 1.987-3 provides rules for determining and translating the taxable income or loss of a taxpayer with respect to a section 987 QBU. Section 1.987-4 provides rules for determining net unrecognized section 987 gain or loss. Section 1.987-5 provides rules regarding the recognition of section 987 gain or loss. It also provides rules regarding the translation of items transferred from a section 987 QBU to its owner. Section 1.987-6 provides rules regarding the character and source of section 987 gain or loss. Section 1.987-7 provides rules relating to the application of the section 987 regulations with respect to a partnership or S corporation. Section 1.987-8 provides rules regarding the termination of a section 987 QBU. Section 1.987-9 provides rules regarding the recordkeeping required under section 987. Section 1.987-10 provides transition rules. Section 1.987-11 provides rules relating to suspended losses in connection with certain elections and the loss-to-the-extent-of-gain rule. Section 1.987-12 provides rules regarding when section 987 gain or loss is deferred, as well as when such deferred amounts are recognized. Section 1.987-13 provides rules relating to suspended section 987 loss of an owner with respect to a section 987 QBU that terminates. Section 1.987-14 provides rules relating to section 987 hedging transactions. Section 1.987-15 provides the applicability date of the section 987 regulations.
(b) Scope of section 987 and certain rules relating to QBUs—
(1) Persons subject to section 987—
(i) In general. Except as provided in paragraphs (b)(1)(ii) and (b)(6) of this section, any individual or corporation is subject to the section 987 regulations. See § 1.987-7 for rules relating to the application of the section 987 regulations in the case of a partnership or S corporation.
(ii) Inapplicability to certain entities. Section 987(3) and the section 987 regulations do not apply to individuals who are not United States persons and foreign corporations that either are not controlled foreign corporations or that are controlled foreign corporations in which no United States shareholders own (within the meaning of section 958(a)) stock.
(2) Application of the section 987 regulations to earnings and profits—
(i) In general. The rules and principles of the section 987 regulations also apply to the determination of earnings and profits, and any elections that apply pursuant to the section 987 regulations also apply for purposes of determining earnings and profits.
(ii) Timing. Earnings and profits are increased when section 987 gain is recognized and decreased when section 987 loss is recognized. As a result, converting net unrecognized section 987 gain or loss to deferred section 987 gain or loss or suspended section 987 loss does not affect earnings and profits because the amounts have not yet been recognized.
(3) Definition of a section 987 QBU—
(i) In general. For purposes of section 987, a section 987 QBU is an eligible QBU that has a functional currency different from its owner. A section 987 QBU will continue to be treated as a section 987 QBU of the owner until a sale or other termination of the section 987 QBU as described in § 1.987-8(b) and (c). See § 1.985-1 for rules determining the functional currency of an eligible QBU.
(ii) Section 987 QBU grouping election—
(A) In general. Solely for purposes of section 987, an owner may elect to treat all section 987 QBUs with the same functional currency as a single section 987 QBU except to the extent provided in paragraph (b)(3)(ii)(B) of this section. However, a QBU described in § 1.987-7(c)(1) may not be treated as part of the same QBU as a section 987 QBU that is not described in § 1.987-7(c)(1).
(B) [Reserved]
(4) Definition of an eligible QBU—
(i) In general. For purposes of section 987, an eligible QBU means a qualified business unit that is not subject to the United States dollar approximate separate transactions method rules of § 1.985-3.
(ii) Qualified business unit. For purposes of this paragraph (b)(4), a qualified business unit is defined in § 1.989(a)-1(b), except that a corporation, partnership, trust, estate, or disregarded entity is not itself a qualified business unit, but the activities of such entity may be a qualified business unit if they meet the requirements of § 1.989(a)-1(b)(1) and (b)(2)(ii). For example, if a corporation is solely engaged in activities that constitute a trade or business, and the corporation maintains only one set of books and records, the activities (but not the corporation) are a qualified business unit.
(5) Definition of an owner. For purposes of section 987, an owner is any person having direct ownership in an eligible QBU (including ownership through DEs). The term owner does not include an eligible QBU. For example, a section 987 QBU (QBU1) is not an owner of another section 987 QBU (QBU2) even if QBU1 wholly owns the DE that owns QBU2. A person that is not subject to the section 987 regulations under paragraph (b)(1)(ii) of this section can meet the definition of an owner under this paragraph (b)(5) for purposes of applying the section 987 regulations to other persons.
(i) Direct ownership. A person is a direct owner of an eligible QBU if the person is the owner for Federal income tax purposes of the assets and liabilities of the eligible QBU.
(ii) [Reserved]
(6) [Reserved]
(7) Examples illustrating paragraph (b) of this section. The following examples illustrate the principles of this paragraph (b). The following facts are assumed for purposes of the examples. U.S. Corp is a domestic corporation, has the U.S. dollar as its functional currency, and uses the calendar year as its taxable year. Except as otherwise provided: Business A and Business B are eligible QBUs and have the euro and the Japanese yen, respectively, as their functional currencies; and DE1 and DE2 are DEs, have no assets or liabilities, and conduct no activities.
(i) Example 1: Owner owns an eligible QBU and a DE holding company—
(A) Facts. U.S. Corp owns Business A and all of the interests in DE1. DE1 maintains a separate set of books and records that are kept in British pounds. DE1 owns pounds and all of the stock of a foreign corporation, FC. DE1 is liable to a lender on a pound-denominated obligation that was incurred to acquire the stock of FC. The FC stock, the pounds, and the liability incurred to acquire the FC stock are recorded on DE1's separate books and records. DE1 has no other assets or liabilities and conducts no activities (other than holding the FC stock and pounds and servicing its liability).
(B) Analysis—
(1) Pursuant to paragraph (b)(5) of this section, U.S. Corp is the owner of Business A because it has direct ownership of Business A, an eligible QBU. Because Business A is an eligible QBU with a functional currency that is different from the functional currency of its owner, U.S. Corp, Business A is a section 987 QBU under paragraph (b)(3)(i) of this section. As a result, U.S. Corp and its section 987 QBU, Business A, are subject to section 987.
(2) Holding the stock of FC and pounds and servicing a liability does not constitute a trade or business within the meaning of § 1.989(a)-1(c). Because the activities of DE1 do not constitute a trade or business within the meaning of § 1.989(a)-1(c), such activities are not an eligible QBU. In addition, pursuant to paragraph (b)(4)(ii) of this section, DE1 itself is not an eligible QBU. As a result, neither DE1 nor its activities qualify as a section 987 QBU of U.S. Corp. Therefore, neither the activities of DE1 nor DE1 itself is subject to section 987. For the foreign currency treatment of payments on DE1's pound-denominated liability, see § 1.988-2(b).
(ii) Example 2: Owner owns eligible QBUs through DEs—
(A) Facts. U.S. Corp owns all of the interests in DE1. DE1 owns Business A and all of the interests in DE2. The only activities of DE1 are Business A activities and holding the interests in DE2. DE2 owns Business B and Business C. For purposes of this example, Business B does not maintain books and records that are separate from DE2. Instead, the activities of Business B are reflected on the books and records of DE2, which are maintained in Japanese yen. In addition, Business C has the U.S. dollar as its functional currency, maintains books and records that are separate from the books and records of DE2, and is an eligible QBU.
(B) Analysis—
(1) Pursuant to paragraph (b)(4)(ii) of this section, DE1 and DE2 are not eligible QBUs. Moreover, pursuant to paragraph (b)(5) of this section, DE1 is not the owner of the Business A, Business B, or Business C eligible QBUs, and neither Business A nor DE2 is the owner of the Business B or Business C eligible QBUs. Instead, pursuant to paragraph (b)(5) of this section, U.S. Corp is the owner of the Business A, Business B, and Business C eligible QBUs.
(2) Because Business A and Business B are eligible QBUs with functional currencies that are different than the functional currency of U.S. Corp, Business A and Business B are section 987 QBUs under paragraph (b)(3)(i) of this section.
(3) The Business C eligible QBU has the same functional currency as U.S. Corp, the U.S. dollar. Therefore, the Business C eligible QBU is not a section 987 QBU under paragraph (b)(3)(i) of this section.
(iii) Example 3: Section 987 grouping election—
(A) Facts. U.S. Corp owns all of the interests in DE1. DE1 owns Business A and Business B. For purposes of this example, assume Business B has the euro as its functional currency.
(B) Analysis—
(1) Pursuant to paragraph (b)(4)(ii) of this section, DE1 is not an eligible QBU. Moreover, pursuant to paragraph (b)(5) of this section, DE1 is not the owner of the Business A or Business B eligible QBUs. Instead, pursuant to paragraph (b)(5) of this section, U.S. Corp is the owner of the Business A and Business B eligible QBUs.
(2) Business A and Business B constitute two separate eligible QBUs, each with the euro as its functional currency. Accordingly, Business A and Business B are section 987 QBUs of U.S. Corp under paragraph (b)(3)(i) of this section. U.S. Corp may elect to treat Business A and Business B as a single section 987 QBU pursuant to paragraph (b)(3)(ii) of this section. If such election is made, pursuant to paragraph (b)(5) of this section, U.S. Corp would be the owner of the Business AB section 987 QBU that would include the activities of both the Business A section 987 QBU and the Business B section 987 QBU. In addition, pursuant to paragraph (b)(5) of this section, DE1 would not be treated as the owner of the Business AB section 987 QBU.
(c) Exchange rates. Solely for purposes of section 987, the spot rate, the yearly average exchange rate, and the historic rate are determined as provided in paragraphs (c)(1) through (3) of this section.
(1) Spot rate—
(i) In general. Except as otherwise provided in this section, the spot rate means the rate determined under the rules of § 1.988-1(d)(1), (2), and (4) on the relevant date.
(ii) Election to use a spot rate convention. An owner may elect to use a spot rate convention that reasonably approximates the spot rate determined in paragraph (c)(1)(i) of this section. A spot rate convention may be based on the spot rate at the beginning of a reasonable period, the spot rate at the end of a reasonable period, the average of spot rates for a reasonable period, or spot and forward rates for a reasonable period. For this purpose, a reasonable period may not exceed three months. For example, in lieu of the spot rate determined in paragraph (c)(1)(i) of this section, the spot rate for all transactions during a monthly period may be determined pursuant to one of the following conventions: the spot rate at the beginning of the current month or at the end of the preceding month; the monthly average of daily spot rates for the current or preceding month; or an average of the beginning and ending spot rates for the current or preceding month. Similarly, in lieu of the spot rate determined in paragraph (c)(1)(i) of this section, the spot rate may be determined pursuant to an average of the spot rate and the 30-day forward rate on a day of the preceding month. Use of a spot rate convention that is consistent with the convention used for financial accounting purposes is generally presumed to reasonably approximate the rate in paragraph (c)(1)(i) of this section. However, the Commissioner may prescribe the spot rate as determined in paragraph (c)(1)(i) of this section or an appropriate spot rate pursuant to this paragraph (c)(1)(ii) if the Commissioner determines that the use of the convention would not clearly reflect income based on the facts and circumstances available at the time of the election. The election or revocation of a spot rate convention does not change the spot rate with respect to any day of a taxable year before the election or revocation becomes effective. See paragraph (g) of this section for rules relating to section 987 elections.
(2) Yearly average exchange rate. For purposes of section 987, the yearly average exchange rate is a rate that represents an average exchange rate for the taxable year (or, if the section 987 QBU existed for less than the full taxable year, the portion of the year during which the section 987 QBU existed) computed under any reasonable method. For example, an owner may determine the yearly average exchange rate based on a daily, monthly, or quarterly averaging convention, whether weighted or unweighted, and may take into account forward rates for a period not to exceed three months. Use of an averaging convention that is consistent with the convention used for financial accounting purposes is generally presumed to be a reasonable method. However, the Commissioner may prescribe an appropriate yearly average exchange rate if the Commissioner determines that the use of the convention would not have been expected to clearly reflect income based on the facts and circumstances available at the time of the election.
(3) Historic rate—
(i) In general. Except as otherwise provided in the section 987 regulations, the historic rate is determined as described in paragraphs (c)(3)(i)(A) through (E) of this section.
(A) Assets generally. In the case of an asset other than inventory that is acquired by a section 987 QBU (or otherwise becomes attributable to a section 987 QBU, including through a transfer), the historic rate is the yearly average exchange rate applicable to the year of acquisition (or the year in which the asset otherwise becomes attributable to the section 987 QBU).
(B) Inventory under the simplified inventory method. If a taxpayer has not elected under § 1.987-3(c)(2)(iv)(B) to use the historic inventory method, the historic rate for inventory is determined under this paragraph (c)(3)(i)(B).
(1) LIFO inventory. The historic rate for LIFO inventory is the yearly average exchange rate applicable to the year in which the inventory's LIFO layer arose.
(2) Non-LIFO inventory. The historic rate for non-LIFO inventory is the yearly average exchange rate for the relevant taxable year. For example, in determining the owner functional currency net value of a section 987 QBU on the last day of the current taxable year under § 1.987-4(d)(1)(i)(A), the historic rate for non-LIFO inventory is the yearly average exchange rate for the current taxable year. In determining the owner functional currency net value of a section 987 QBU on the last day of the preceding taxable year under § 1.987-4(d)(1)(i)(B), the historic rate for non-LIFO inventory is the yearly average exchange rate for the preceding taxable year.
(C) Inventory under the historic inventory method. If a taxpayer has elected under § 1.987-3(c)(2)(iv)(B) to use the historic inventory method, each inventoriable cost with respect to a section 987 QBU's inventory may have a different historic rate. The historic rate for each inventoriable cost is the exchange rate at which the cost would be translated under § 1.987-3 if it were not an inventoriable cost.
(D) Liabilities generally. In the case of a liability that is incurred or assumed by a section 987 QBU, the historic rate is the yearly average exchange rate applicable to the year the liability is incurred or assumed.
(E) Determination of historic rates after revocation of current rate election. If a current rate election is revoked or otherwise ceases to be in effect, the historic rate of all historic items (other than non-LIFO inventory subject to the simplified inventory method) that were attributable to a section 987 QBU on the last day of the last taxable year in which the current rate election was in effect is the spot rate applicable to that day. Similarly, except as provided in paragraph (c)(3)(i)(B)(2) of this section, if a marked item becomes a historic item (such as when an asset of an insurance company ceases to be a separate account asset), the historic rate for the historic item is equal to the spot rate applicable to the last day of the last taxable year in which it was treated as a marked item.
(ii) Date placed in service for depreciable or amortizable property. In the case of depreciable or amortizable property, an owner may determine the historic rate by reference to the date such property is placed in service by the section 987 QBU rather than the date the property was acquired, provided that this convention is consistently applied for all such property attributable to that section 987 QBU.
(iii) Changed functional currency. In the case of a section 987 QBU or an owner of a section 987 QBU that previously changed its functional currency, § 1.985-5(d)(1)(ii)(A) and (e)(4)(i)(A), respectively, are taken into account in determining the historic rate for an item reflected on the balance sheet of the section 987 QBU immediately before the year of change.
(d) Marked item—
(1) In general. Except as provided in paragraph (d)(2) of this section, a marked item is an asset (marked asset) or liability (marked liability) that is attributable to a section 987 QBU under § 1.987-2(b) and that—
(i) Is denominated in, or determined by reference to, the functional currency of the section 987 QBU and would be a section 988 transaction if such item were held or entered into directly by the owner of the section 987 QBU;
(ii) Is a prepaid expense or a liability for an advance payment of unearned income, in either case having an original term of one year or less on the date the prepaid expense or liability for an advance payment of unearned income arises;
(iii) Is a section 988 transaction of the section 987 QBU;
(iv) Is an insurance reserve; or
(v) Is a separate account asset.
(2) Current rate election. A taxpayer may elect to treat all assets and liabilities that are attributable to a section 987 QBU under § 1.987-2(b) as marked items (a current rate election). See § 1.987-11(c) for rules suspending section 987 loss if a current rate election is in effect.
(e) Historic item. A historic item is an asset (historic asset) or liability (historic liability) that is attributable to a section 987 QBU under § 1.987-2(b) and that is not a marked item.
(f) Example: Identification of marked and historic items. The following example illustrates the application of paragraphs (d) and (e) of this section.
(1) Facts. U.S. Corp is a domestic corporation with the U.S. dollar as its functional currency and is the owner of Business A, a section 987 QBU that has the pound as its functional currency. Items reflected on Business A's balance sheet include £10,000, $1,000, a building with a basis of £100,000, a light general purpose truck with a basis of £30,000, a computer with a basis of £1,000, a 60-day receivable for ¥15,000, an account payable of £5,000, and a foreign currency contract within the meaning of section 1256(g)(2) that requires Business A to exchange £100 for $125 in 90 days.
(2) Analysis. Under paragraph (d) of this section, the £10,000, the $1,000, the ¥15,000 receivable, the £5,000 account payable, and the £/$ section 1256 foreign currency contract are marked items. The other items are historic items under paragraph (e) of this section.
(g) Elections. This paragraph (g) provides rules for making and revoking elections under the section 987 regulations (the section 987 elections). A section 987 election is made for the owner and for a taxable year and applies to every section 987 QBU owned by the owner while the election is in effect. Once made, a section 987 election remains in effect until revoked.
(1) Persons making the election. A section 987 election is made or revoked by the authorized person. The authorized person is described in paragraph (g)(1)(i), (ii), (iii), or (iv) of this section. If there are multiple controlling domestic shareholders, references to “the authorized person” refer to all authorized persons acting in concert.
(i) United States persons. Except as provided in paragraph (g)(1)(iii) or (iv) of this section, if the owner of a section 987 QBU is a United States person, the owner is the authorized person.
(ii) CFCs. If the owner of a section 987 QBU is a controlled foreign corporation, the controlling domestic shareholders (determined under § 1.964-1(c)(5)(i)) of the controlled foreign corporation are treated as the authorized person.
(iii) Consolidated groups. If the owner is a member of a consolidated group, see § 1.1502-77.
(iv) Partnerships. If the owner of a section 987 QBU is a partnership, the election is made or revoked by the partnership. For a partnership that is not otherwise required to file a partnership return, see § 1.6031(a)-1(b)(5) for elections that can only be made by a partnership under section 703.
(2) Consistency rules—
(i) Consolidated groups. A section 987 election is made or revoked by a consolidated group and applies to all members of the group. Therefore, the same section 987 elections will be in effect for all members of a consolidated group at all times. If a corporation becomes a member of a consolidated group, it is deemed to make or revoke any section 987 election as necessary to be consistent with the consolidated group. If a corporation ceases to be a member of a consolidated group and does not join another group, its section 987 elections are unaffected by its departure from the group. All members of a consolidated group are treated as a single United States person for purposes of applying paragraph (g)(2)(ii) of this section.
(ii) CFCs and foreign partnerships. If the authorized person makes or revokes an election on behalf of any person (including the authorized person) described in paragraphs (g)(2)(ii)(A) through (C) of this section (the section 987 electing group), then the election must be made or revoked on behalf of all members of the section 987 electing group for the first taxable year of each entity that ends with or within the taxable year of the United States person described in paragraph (g)(2)(ii)(A) of this section in which the election or revocation became effective. If an entity that was not previously a member of the section 987 electing group becomes a member (for example, upon formation or acquisition), it is deemed to make or revoke any section 987 election as necessary to be consistent with the other members (without regard to the requirements of paragraph (g)(3)(ii) of this section). The following persons are described in this paragraph (g)(2)(ii):
(A) A United States person (the relevant United States person).
(B) Each controlled foreign corporation in which the relevant United States person owns (within the meaning of section 958(a)) more than fifty percent of the stock (by vote or value).
(C) In the case of an election that can be made by or for a partnership, each foreign partnership in which the relevant United States person owns (directly or indirectly) more than fifty percent of the capital and profits interest.
(iii) Section 381(a) transactions. If a corporation (acquiring corporation) acquires the assets of another corporation in a transaction described in section 381(a), the acquiring corporation's election status applies to all section 987 QBUs owned by the acquiring corporation after the transaction.
(3) Manner of making or revoking elections. The section 987 elections must be made in accordance with this paragraph (g)(3), except as provided in forms and instructions or other guidance as provided by the Secretary.
(i) Statement must be attached to a return. An authorized person that makes or revokes a section 987 election in accordance with this paragraph (g) must attach to its return the statement described in this paragraph (g)(3)(i) (or must provide the information described in this paragraph (g)(3)(i) in the manner prescribed in forms or instructions or other guidance). Each statement must include an identification of the election that is made or revoked (including the section and paragraph of the regulations under which the election is made); the name, address, and functional currency of each owner (or if the owner is a member of a consolidated group, the common parent of the consolidated group) for which the election is made or revoked; and the name, address, functional currency, and owner of each section 987 QBU to which the election applies. The elections provided in § 1.987-10 are made by reporting the election on the statement described in § 1.987-10(k). An election to use a spot rate convention under paragraph (c)(1)(ii) of this section must describe the convention.
(ii) Election requirements—
(A) Consent required. Except as provided in paragraph (g)(3)(ii)(B) or (C) of this section, a section 987 election may not be made or revoked without the consent of the Commissioner. A copy of the consent must be attached to the statement described in paragraph (g)(3)(i) of this section. For purposes of this paragraph (g)(3)(ii), the Commissioner's consent may be obtained only with a ruling or administrative pronouncement. See Revenue Procedure 2024-1, I.R.B. 2024-1 (or superseding guidance).
(B) Current rate election, annual recognition election, and section 988 mark-to-market election. Except as provided in paragraph (g)(3)(ii)(C) of this section, the authorized person may make a current rate election, an annual recognition election, or a section 988 mark-to-market election without the Commissioner's consent by filing the statement prescribed in paragraph (g)(3)(i) of this section with the Internal Revenue Service in accordance with the prescribed form or its instructions (or other guidance) on or before the first day of the taxable year to which the election applies, and attaching a copy of the statement to its return. Once made, a current rate election, annual recognition election, or section 988 mark-to-market election may not be revoked without the Commissioner's consent for any taxable year beginning within 60 months of the first day of the taxable year for which it was made. Once revoked, a new current rate election, annual recognition election, or section 988 mark-to-market election may not be made without the Commissioner's consent for any taxable year beginning within 60 months of the first day of the taxable year for which it was revoked.
(C) First year to which the section 987 regulations apply. The authorized person may make a section 987 election without the consent of the Commissioner on its original, timely filed (including extensions) return for the first taxable year of an owner in which both—
(1) The section 987 regulations apply (other than by applying solely to one or more terminating QBUs pursuant to § 1.987-15(a)(2)); and
(2) Either the owner or any member of its consolidated group or section 987 electing group is the owner of a section 987 QBU.
(iii) Elections made under the 2016 and 2019 section 987 regulations. Each section 987 election must be made by the authorized person under the rules of this section without regard to whether the election was in effect under the 2016 and 2019 final regulations or under prior § 1.987-8T. In the first taxable year in which the section 987 regulations apply, any elections made under the 2016 and 2019 final regulations cease to be effective.
(4) No change in method of accounting. An election under section 987 is not treated as a change in method of accounting for purposes of sections 446 and 481.
(5) Principles of § 1.964-1(c)(3) applicable to section 987 elections. Except as otherwise provided in this paragraph (g), if the authorized person makes or revokes a section 987 election on behalf of a controlled foreign corporation, the authorized person must make or revoke the section 987 election in accordance with the rules and principles of § 1.964-1(c)(3).
(h) Definitions. The definitions in this paragraph (h) apply for purposes of the section 987 regulations.

1991 proposed regulations. 1991 proposed regulations means proposed §§ 1.987-1 through 1.987-3 as contained in 56 FR 48457-01 (September 25, 1991).

2006 proposed regulations. 2006 proposed regulations means: proposed §§ 1.861-9T(g)(2)(ii)(A)(1) and (g)(2)(vi); 1.985-5; 1.987-1 through 1.987-11; 1.988-1(a)(3) and (4), (a)(10)(ii), and (i); 1.988-4(b)(2); and 1.989(a)-1(b)(2)(i), and (b)(4) as contained in 71 FR 52876-01 (September 7, 2006).

2016 and 2019 section 987 regulations. 2016 and 2019 section 987 regulations means the following regulations:

(i) Sections 1.861-9T(g)(2)(ii)(A)(1) and (g)(2)(vi); 1.985-5; 1.987-1 through 1.987-10; 1.988-1(a)(4), (a)(10)(ii), and (i); 1.988-4(b)(2); and 1.989(a)-1(b)(2)(i), (b)(4), (d)(3) and (4), as contained in 26 CFR in part 1 in effect on April 1, 2017.
(ii) Sections 1.987-2T(c)(9), 1.987-4T(c)(2) and (f), and 1.987-7T, as contained in 26 CFR in part 1 in effect on April 1, 2017 (until they were revoked on May 13, 2019).
(iii) Sections 1.987-2(c)(9) and 1.987-4(c)(2) and (f), as contained in 26 CFR in part 1 in effect on April 1, 2020 (beginning on May 13, 2019).
(iv) Sections 1.987-1T (other than §§ 1.987-1T(g)(2)(i)(B) and (g)(3)(i)(H)), 1.987-3T, 1.987-6T, 1.988-1T, and 1.988-2T(i), as contained in 26 CFR in part 1 in effect on April 1, 2017 (until they expired on December 6, 2019).

Adjusted balance sheet. Adjusted balance sheet means a tax basis balance sheet in the functional currency of the eligible QBU, determined by—

(i) Preparing a balance sheet for the relevant date from the section 987 QBU's books and records (within the meaning of § 1.989(a)-1(d)) recorded in the section 987 QBU's functional currency and showing all assets and liabilities attributable to the section 987 QBU under § 1.987-2(b) (the preliminary balance sheet); and
(ii) Making adjustments necessary to conform the items reflected on the preliminary balance sheet to United States tax accounting principles (including adjustments to reflect items that were not reflected on the preliminary balance sheet but should be reflected under United States tax accounting principles, and adjustments to eliminate items that are reflected on the preliminary balance sheet but should not be reflected under United States tax accounting principles).

Annual recognition election. Annual recognition election has the meaning provided in § 1.987-5(b)(2).

Authorized person. Authorized person has the meaning provided in paragraph (g)(1) of this section.

Combination. Combination has the meaning provided in § 1.987-2(c)(9)(i).

Combined QBU. Combined QBU has the meaning provided in § 1.987-2(c)(9)(i).

Combining QBU. Combining QBU has the meaning provided in § 1.987-2(c)(9)(i).

Consolidated group. Consolidated group has the meaning provided in § 1.1502-1(h).

Controlled foreign corporation. Controlled foreign corporation (or CFC) has the meaning provided in section 957 (or, if applicable, section 953(c)(1)(B)).

Controlled group. A controlled group means all persons with the relationships to each other specified in section 267(b) or section 707(b).

Cumulative suspended section 987 loss. Cumulative suspended section 987 loss has the meaning provided in § 1.987-11(b).

Current rate election. Current rate election has the meaning provided in paragraph (d)(2) of this section.

Current year gain amount. Current year gain amount has the meaning provided in § 1.987-11(e)(3)(i).

Deferral event. Deferral event has the meaning provided in § 1.987-12(g)(1).

Deferred section 987 gain or loss. Deferred section 987 gain or loss has the meaning provided in § 1.987-12(b)(2). Deferred section 987 gain or loss does not include net unrecognized section 987 gain or loss or suspended section 987 loss.

Disregarded entity. Disregarded entity (or DE) means an entity disregarded as an entity separate from its owner for Federal income tax purposes, including an entity described in § 301.7701-2(c)(2) of this chapter, a qualified subchapter S subsidiary under section 1361(b)(3), a qualified REIT subsidiary within the meaning of section 856(i)(2), and a trust all of which is treated (under subpart E of part I of subchapter J of Chapter 1 of the Code) as owned by the grantor or another person.

Disregarded transactions. Disregarded transactions has the meaning provided in § 1.987-2(c)(2)(ii).

Earnings only method. Earnings only method means a method of applying section 987 before the transition date under which gain or loss under section 987(3) is determined only with respect to the earnings of a section 987 QBU.

ECI. ECI means income that is effectively connected with the conduct of a trade or business within the United States.

Eligible pretransition method. Eligible pretransition method has the meaning provided in § 1.987-10(e)(4).

Eligible QBU. Eligible QBU has the meaning provided in paragraph (b)(4) of this section.

Financial instrument. Financial instrument has the meaning provided in § 1.1275-6(b)(3). It includes a financial instrument entered into between related parties or unrelated parties.

Foreign source income. Foreign source income means income from sources without the United States.

Generally accepted accounting principles. Generally accepted accounting principles means United States generally accepted accounting principles described in standards established and made effective by the Financial Accounting Standards Board.

Hedge. Hedge has the meaning provided in § 1.987-14(b)(1).

Hedged QBU. Hedged QBU has the meaning provided in § 1.987-14(b)(1).

Hedging gain or loss. Hedging gain or loss has the meaning provided in § 1.987-14(d)(1).

Historic asset. Historic asset has the meaning provided in paragraph (e) of this section.

Historic item. Historic item has the meaning provided in paragraph (e) of this section.

Historic liability. Historic liability has the meaning provided in paragraph (e) of this section.

Historic rate. Historic rate has the meaning provided in paragraph (c)(3) of this section.

Insurance reserve. Insurance reserve means an item that is a reserve under section 807(c) or section 953(b) (as applicable).

LIFO. LIFO means the last-in, first-out inventory method (as described in section 472).

LIFO inventory. LIFO inventory means inventory accounted for under the LIFO inventory method.

Liability. Liability means the amount of a liability on the adjusted balance sheet (or the amount that would be on the adjusted balance sheet if an adjusted balance sheet were prepared for that day).

Lookback gain amount. Lookback gain amount has the meaning provided in § 1.987-11(e)(3)(ii).

Lookback period. Lookback period has the meaning provided in § 1.987-11(e)(3)(iv).

Loss-to-the-extent-of-gain rule. Loss-to-the-extent-of-gain rule has the meaning provided in § 1.987-11(e)(1).

Marked asset. Marked asset has the meaning provided in paragraph (d) of this section.

Marked item. Marked item has the meaning provided in paragraph (d) of this section.

Marked liability. Marked liability has the meaning provided in paragraph (d) of this section.

Net accumulated unrecognized section 987 gain or loss. Net accumulated unrecognized section 987 gain or loss has the meaning provided in § 1.987-4(c).

Net unrecognized section 987 gain or loss. Net unrecognized section 987 gain or loss has the meaning provided in § 1.987-4(b). Net unrecognized section 987 gain or loss does not include deferred section 987 gain or loss or suspended section 987 loss.

Non-LIFO inventory. Non-LIFO inventory means inventory that is not accounted for under the LIFO inventory method.

Original deferral QBU. Original deferral QBU has the meaning provided in § 1.987-12(b).

Original deferral QBU owner. Original deferral QBU owner has the meaning provided in § 1.987-12(g)(3).

Original suspended loss QBU owner. Original suspended loss QBU owner has the meaning provided in § 1.987-13(l)(1).

Outbound loss event. Outbound loss event has the meaning provided in § 1.987-13(h)(2).

Outbound loss QBU. Outbound loss QBU has the meaning provided in § 1.987-13(h)(1).

Outbound section 987 loss. Outbound section 987 loss has the meaning provided in § 1.987-13(h)(4).

Owner. Owner has the meaning provided in paragraph (b)(5) of this section.

Prior § 1.987-1. Prior § 1.987-1 means § 1.987-1, as contained in 26 CFR in part 1 in effect on April 1, 2017.

Prior § 1.987-4. Prior § 1.987-4 means § 1.987-4, as contained in 26 CFR in part 1 in effect on April 1, 2017.

Prior § 1.987-5. Prior § 1.987-5 means § 1.987-5, as contained in 26 CFR in part 1 in effect on April 1, 2017.

Prior § 1.987-8T. Prior § 1.987-8T means § 1.987-8T, as contained in 26 CFR in part 1 in effect on April 1, 2017.

Prior § 1.987-10. Prior § 1.987-10 means § 1.987-10, as contained in 26 CFR in part 1 in effect on April 1, 2017.

Prior § 1.987-12. Prior § 1.987-12 means § 1.987-12, as contained in 26 CFR in part 1 in effect on April 1, 2020.

Prior § 1.987-12T. Prior § 1.987-12T means § 1.987-12T, as contained in 26 CFR in part 1 in effect on April 1, 2017.

QBU net value. QBU net value has the meaning provided in § 1.987-4(e)(2)(ii).

Recognition grouping. Recognition grouping has the meaning provided in § 1.987-11(f).

Remittance. Remittance has the meaning provided in § 1.987-5(c).

S corporation. S corporation has the meaning provided in section 1361(a)(1).

Section 904 category. Section 904 category means a separate category of income described in § 1.904-5(a)(4)(v).

Section 987 electing group. Section 987 electing group has the meaning provided in paragraph (g)(2)(ii) of this section.

Section 987 elections. Section 987 elections has the meaning provided in paragraph (g) of this section.

Section 987 gain or loss. Section 987 gain or loss means gain or loss that is recognized under § 1.987-5, deferred section 987 gain or loss, suspended section 987 loss, and pretransition gain or loss that is recognized under § 1.987-10(e)(5)(ii).

Section 987 hedging transaction. Section 987 hedging transaction has the meaning provided in § 1.987-14(b).

Section 987 QBU. Section 987 QBU has the meaning provided in paragraph (b)(3) of this section.

Section 987 regulations. Section 987 regulations has the meaning provided in paragraph (a) of this section.

Section 987 taxable income or loss. Section 987 taxable income or loss has the meaning provided in § 1.987-3(a).

Section 988 mark-to-market election. Section 988 mark-to-market election has the meaning provided in § 1.987-3(b)(4)(ii).

Separate account. Separate account means a separate set of financial records maintained with respect to an insurance contract or group of contracts to report assets and liabilities for specific products that are separated from the insurer's general account, provided the following requirements are met—

(i) Any liability of the separate account is the liability only of that account and not the liability of any other separate account or the general account;
(ii) The separate account is not part of the company's general account and is protected from the general creditors of the company; and
(iii) The value of each contract supported by the separate account is supported proportionately by each of the assets in such account.

Separate account asset. Separate account asset means an asset that is reflected on the books and records of an eligible QBU and held in a separate account with respect to a separate account insurance contract. A separate account asset does not include an asset held in the general account.

Separate account insurance contract. Separate account insurance contract means a contract that would be treated as an insurance contract for Federal income tax purposes (except to the extent provided in this definition with respect to the requirements in section 72(s), 101(f), 817(h), or 7702) for which some or all of the assets supporting the insurance reserves are required to be held in a separate account under the insurance regulatory rules of the jurisdiction in which the contract is issued, and either—

(i) The contract qualifies as a variable contract under section 817(d) (treating foreign law as a State law or regulation); or
(ii) The contract would qualify as a variable contract under section 817(d) (treating foreign law as a State law or regulation) but for its failure to meet one or more of the requirements in section 72(s), 101(f), 817(h), or 7702, provided that the following requirements are met—
(A) The contract is regulated as a life insurance or annuity contract in the foreign jurisdiction in which it is issued;
(B) The contract reserves are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest. For this purpose, the reflection of the investment return and the market value of assets in the separate account is considered an assumed rate of interest; and
(C) No policyholder, annuitant, insured, or beneficiary under the contract is a United States person.

Separated QBU. Separated QBU has the meaning provided in § 1.987-2(c)(9)(iii).

Separating QBU. Separating QBU has the meaning provided in § 1.987-2(c)(9)(iii).

Separation. Separation has the meaning provided in § 1.987-2(c)(9)(iii).

Separation fraction. In the case of a separated QBU, separation fraction means a fraction, the numerator of which is the aggregate adjusted basis of the gross assets attributable to the separated QBU immediately after the separation, and the denominator of which is the aggregate adjusted basis of the gross assets attributable to all separated QBUs immediately after the separation.

Spot rate. Spot rate has the meaning provided in paragraph (c)(1) of this section.

SRLY section 987 losses. SRLY section 987 losses has the meaning provided in § 1.987-11(e)(6)(ii).

Successor deferral QBU. Successor deferral QBU has the meaning provided in § 1.987-12(g)(2).

Successor deferral QBU owner. Successor deferral QBU owner has the meaning provided in § 1.987-12(c)(1).

Successor suspended loss QBU. Successor suspended loss QBU has the meaning provided in § 1.987-13(l)(2).

Successor suspended loss QBU owner. Successor suspended loss QBU owner has the meaning provided in § 1.987-13(l)(3).

Suspended section 987 loss. Suspended section 987 loss means section 987 loss that is subject to the limitations on recognition described in § 1.987-11(e). See §§ 1.987-10(e)(5), 1.987-11(c) and (d), 1.987-12(c), and 1.987-13(h) for rules regarding when net unrecognized section 987 loss or deferred section 987 loss becomes suspended section 987 loss. Suspended section 987 loss does not include net unrecognized section 987 loss or deferred section 987 loss.

Tentative tested income group. Tentative tested income group has the meaning provided in § 1.987-6(b)(2)(i)(D)(1).

Terminating QBU. Terminating QBU means a section 987 QBU, if both—

(i) The section 987 QBU terminates on any date on or after November 9, 2023, or the section 987 QBU terminates as a result of an entity classification election made under § 301.7701-3 of this chapter that is filed on or after November 9, 2023, and that is effective before November 9, 2023; and
(ii) When the section 987 QBU terminates, neither the section 987 regulations nor the 2016 and 2019 section 987 regulations would apply with respect to the section 987 QBU but for § 1.987-15(a)(2).

Termination. With respect to a section 987 QBU, termination has the meaning provided in § 1.987-8(b) and (c). With respect to a successor suspended loss QBU, the term termination has the meaning provided in § 1.987-13(j).

Trade or business. Trade or business has the meaning provided in § 1.989(a)-1(c).

Transfer. Transfer has the meaning provided in § 1.987-2(c).

Transition date. Transition date has the meaning provided in § 1.987-10(c).

United States person. United States person (or U.S. person) has the meaning provided in section 7701(a)(30).

United States shareholder. United States shareholder (or U.S. shareholder) has the meaning provided in section 951(b) (or, if applicable, section 953(c)(1)(A)).

U.S. source income. U.S. source income means income from sources within the United States.

Yearly average exchange rate. Yearly average exchange rate has the meaning provided in paragraph (c)(2) of this section.

[T.D. 10016, 89 FR 100165, Dec. 11, 2024; 90 FR 5607, Jan. 17, 2025]

Terms defined here

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Other regulations under § 987

Cross-references

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Cited by 25 other regulations

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Amendment history

From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.

  1. Amended (90 FR 5607)
  2. Issued by T.D. 10016 (89 FR 100165)

Where it sits in 26 CFR

  1. Subchapter A Income tax
  2. Part 1 Income taxes
  3. Foreign Currency Transactions

Nearby sections