§ 1.987-11. Suspended section 987 loss relating to certain elections; loss-to-the-extent-of-gain rule.

¶(i) $3 million; or

¶(ii) Two percent of the total amount of gross income of the owner and all members of the owner's controlled group for the taxable year.

¶(i) In general. Except as provided in paragraph (c)(3)(ii) of this section, for purposes of applying paragraph (c)(2) of this section with respect to an owner, suspended section 987 loss and gross income of a member of the owner's controlled group is determined by reference to the member's suspended section 987 loss and gross income for its taxable year ending with or within the owner's taxable year.

¶(ii) Owner is a CFC. For purposes of applying paragraph (c)(2) of this section with respect to an owner that is a CFC, suspended section 987 loss and gross income of a member of the owner's controlled group is determined by reference to the member's suspended section 987 loss and gross income for its taxable year ending with or within the owner's required year described in section 898(c)(1), without regard to section 898(c)(2).

¶(i) A current rate election was in effect for the immediately preceding taxable year; or

¶(ii) A current rate election was not in effect for the immediately preceding taxable year and, as of the beginning of the taxable year, the sum of the owner's net accumulated unrecognized section 987 loss and deferred section 987 loss exceeds the sum of the owner's net accumulated unrecognized section 987 gain and deferred section 987 gain by more than $5 million.

¶(i) Current year gain amount. The current year gain amount described in this paragraph (e)(3)(i) is equal to the section 987 gain in the recognition grouping that is recognized by the owner in the taxable year, reduced (including below zero) by section 987 loss (other than suspended section 987 loss) in the recognition grouping that is recognized by the owner in the taxable year.

¶(ii) Lookback gain amount. The lookback gain amount described in this paragraph (e)(3)(ii) is equal to the section 987 gain in the recognition grouping that was recognized by the owner in the lookback period, reduced (including below zero) by section 987 loss (other than suspended section 987 loss described in paragraph (e)(3)(iii) of this section) in the recognition grouping that was recognized by the owner in the lookback period. The total amount of suspended section 987 loss recognized by reason of the recognition of an amount of section 987 gain cannot, in any event, exceed the amount of section 987 gain recognized.

¶(iii) Suspended section 987 loss not taken into account—

¶(iv) Lookback period—

¶(v) Anti-abuse rule. If an owner recognizes section 987 gain with a principal purpose of reducing the Federal income tax liability of the owner (or its U.S. shareholders or partners, as applicable), including over multiple taxable years, the section 987 gain is disregarded for purposes of this paragraph (e)(3). For example, this paragraph (e)(3)(v) may apply if an owner that is a CFC recognizes section 987 gain that is offset by a tax attribute of one of the CFC's U.S. shareholders that would not otherwise be used (such as excess foreign tax credits with respect to section 951A category income, or a tested loss). In determining whether a principal purpose described in this paragraph (e)(3)(v) exists, all relevant facts and circumstances are considered, including the extent to which the transaction giving rise to the recognition of section 987 gain resulted in a sustained economic contraction of the section 987 QBU over a period of at least twelve months.

¶(i) In general. All members of a consolidated group are treated as a single owner for purposes of applying this paragraph (e).

¶(ii) Suspended section 987 losses arising in separate return limitation years. This paragraph (e)(6)(ii) applies to suspended section 987 losses arising in a separate return limitation year (SRLY, as defined in § 1.1502-1(f)) or treated as arising in a SRLY under the principles of § 1.1502-21(c) (SRLY section 987 losses). The aggregate of a member's SRLY section 987 losses that are included in the determination of consolidated taxable income for all consolidated return years of the group may not exceed the aggregate consolidated net income for all consolidated return years of the group determined by reference to only the member's items of section 987 gain or loss, including the member's section 987 losses actually absorbed by the group in the taxable year (whether or not absorbed by the member). For purposes of applying this paragraph (e)(6)(ii), the principles of § 1.1502-21(c) (including the SRLY subgroup principles of § 1.1502-21(c)(2)) apply with appropriate adjustments.

¶(i) U.S. source income; or

¶(ii) Foreign source income in a single section 904 category.

¶(i) Tentative tested income;

¶(ii) Each separate subpart F income group (as defined in § 1.960-1(d)(2)(ii)(B));

¶(iii) Income described in section 952(b) (ECI that is excluded from subpart F income); or

¶(iv) Income not described in paragraphs (f)(2)(i) through (iii) of this section.

¶(i) Facts. CFC is a controlled foreign corporation that has the U.S. dollar as its functional currency. CFC owns three section 987 QBUs, QBU1, QBU2, and QBU3. QBU1 has the euro as its functional currency, QBU2 has the pound as its functional currency, and QBU3 has the yen as its functional currency. CFC is subject to a current rate election but not an annual recognition election. CFC is also subject to an election under § 1.987-6(b)(2)(i)(C) (treating section 987 gain or loss relating to passive foreign personal holding company income as attributable to section 988 transactions). An election has not been made under § 1.951A-2(c)(7)(viii) (GILTI high-tax exclusion) with respect to CFC. In year 1, CFC did not have cumulative suspended section 987 loss with respect to any of its QBUs and did not have outstanding deferred section 987 gain or loss. In the three years before year 2, CFC did not recognize any section 987 gain or loss. In year 2, CFC has net unrecognized section 987 loss of $200 with respect to QBU1, net unrecognized section 987 loss of $1,000 with respect to QBU2, and net unrecognized section 987 gain of $1,000 with respect to QBU3. In year 2, each QBU makes a remittance, and CFC's remittance proportion (determined under § 1.987-5(b)(1)) is 25% with respect to QBU1, 15% with respect to QBU2, and 10% with respect to QBU3. For purposes of § 1.987-6(b)(2)(i), all of QBU1's assets generate foreign source passive category income that corresponds to one or more subpart F income groups described in § 1.960-1(d)(2)(ii)(B)(2)(i) through (v), and all of QBU2's and QBU3's assets generate foreign source general category tested income. Another member of CFC's controlled group owns a section 987 QBU with respect to which $10 million of net unrecognized section 987 loss becomes suspended section 987 loss under paragraph (c)(1) of this section in year 2.

¶(ii) Analysis—

¶(i) Facts. CFC is a controlled foreign corporation that has the U.S. dollar as its functional currency. CFC owns QBU1, a section 987 QBU with the euro as its functional currency, and CFC has no other QBUs. Assume that all section 987 gain or loss (including suspended section 987 loss) is assigned to the same recognition grouping. CFC is subject to a current rate election but not an annual recognition election. Before year 1, QBU1 does not have cumulative suspended section 987 loss. In year 1, CFC recognizes section 987 gain of $10 million with respect to QBU1. In year 3, CFC recognizes section 987 gain of $15 million with respect to QBU1. In year 4, QBU1 has net unrecognized section 987 loss, and $10 million of the net unrecognized section 987 loss becomes suspended section 987 loss under paragraph (c) of this section. In year 6, an additional $10 million of net unrecognized section 987 loss with respect to QBU1 becomes suspended section 987 loss under paragraph (c) of this section.

¶(ii) Analysis—

¶(iii) Alternative facts. Assume the facts are the same as described in paragraph (g)(2)(i) of this section, with the following modifications. In year 1, CFC recognizes section 987 gain of $10 million with respect to QBU1. CFC does not recognize section 987 gain in year 3. In year 4, $10 million of net unrecognized section 987 loss with respect to QBU1 becomes suspended section 987 loss under paragraph (c) of this section. In year 5, CFC recognizes section 987 gain of $15 million with respect to QBU1. In year 6, $10 million of net unrecognized section 987 loss with respect to QBU1 becomes suspended section 987 loss under paragraph (c) of this section.

¶(iv) Analysis of alternative facts—

¶(i) Facts. U.S. Corp is a domestic corporation that owns all of the interests in DE1. DE1 owns Business A, which is a section 987 QBU of U.S. Corp. In year 1, U.S. Corp made a current rate election but not an annual recognition election. In year 9, U.S. Corp has net unrecognized section 987 loss of $2 million with respect to Business A, which is not recognized or suspended in year 9. U.S. Corp revokes its current rate election effective for year 10. In year 10, before the application of this section, U.S. Corp has net accumulated unrecognized section 987 loss of $2 million.

¶(ii) Analysis. Under paragraph (d)(2) of this section, U.S. Corp's net accumulated unrecognized section 987 loss of $2 million with respect to Business A is converted into suspended section 987 loss at the beginning of year 10, the first taxable year in which the current rate election ceases to be in effect.