Section 987 Regulations

March 2025

In than waning days of the Biden Administration, Treasury issued final regulations under section 987.  These regulations appeared in the Federal Register on December 11, 2024, and are effective for tax years starting after 12/31/24.

In a memorandum published on January 20, 2025, the Trump Administration issued a memorandum titled “Regulatory Freeze Pending Review.”  Because the new 987 regulations were published and took effect prior to the issuance of this memorandum, they are not subject to the first two paragraphs of that memorandum.  But paragraph (3) directs agency heads to consider:

postponing for 60 days from the date of this memorandum the effective date for any rules that have been published in the Federal Register, or any rules that have been issued in any manner but have not taken effect, for the purpose of reviewing any questions of fact, law, and policy that the rules may raise.  During this 60-day period, where appropriate and consistent with applicable law, consider opening a comment period to allow interested parties to provide comments about issues of fact, law, and policy raised by the rules postponed under this memorandum . . .

There is no provision that specifies how far back in time the agency heads are supposed to go.  But regulations published in December 2024 strike us as ripe for reconsideration.  Thus, the question of whether the final regulations are really final depends on what happens in the 60 days following January 20, 2025 (which is March 22, 2025 by our calculation (10 in January, 28 in February, and 22 in March)). 

We are not aware of any decisions that have been made with regard to these final regulations, but note that they are to some extent in limbo.  Our comments in this article are all based on the assumption that they come out of limbo as written. 

There is a bit of a horse race created by the regulations.  Is one better off staying in the familiar territory of recognizing section 987 gain or loss based on “actual remittances” or better off with a new “annual recognition election” (meaning that 100% of a taxpayer’s “unrealized section 987 gain or loss” is subject to recognition even if the QBU has a zero remittance)?   Is one better off making a new “current rate election election,” even though realized losses get “suspended” (i.e., can only be used against section 987 gains recognized in future years). 

The good news is that a taxpayer is only bound by its election for 5 years.  The bad news is that the ultimate answer depends on two unpredictable facts:  (i) future FX rates, and (ii) future growth or shrinkage of a QBU’s business. 

As practitioners, we have developed our own sense about how the world works, and we have noted that branch structures are most frequently encountered in the financial services industry and in foreign sales operations.  One is less likely to find branches that engage in manufacturing. 

We are grateful for elections, but have wondered under what circumstances would we advise a client to make either the “current rate election” or the “annual recognition election.”  The current rate election offers the most “simplification” to foreign QBUs that hold significant depreciable assets. The price that one pays for this simplification the suspension of losses, and this could be a steep price.  Happily, losses are not disallowed and if you have a 987 gain year following a 987 loss year, you get immediate netting.  But if you have a 987 loss year following a 987 gain year, there is no carryback of the loss.  It is suspended until the next gain year materializes. 

Presumably, there are some “planning levers” within this set of rules to the extent that one can control the direction of net inflows and outflows in relation to a QBU.  But there are probably better ways to spend one’s time.  For this reason, we would generally steer clear of this election, except the case of QBUs with significant depreciable assets. 

The annual recognition election does not entail a specific trade-off (as compared to the current rate election).  This likewise offers a kind of simplification because one does not have to compute a remittance percentage.  In loss years, there is a big loss.  In gain years, there is a big gain.  There is one thing of which a taxpayer has no control whatsoever, and that is FX rates.  For this reason, we prefer world in which one has a little more control of the tax cost. 

The bottom line is that we like the world that we know, and we like things that we can control.  So for most taxpayers, we suspect that the best election is no election. 

On February  25, we gathered to share our insights on the Section 987 Regulations, including the following.  Link  to the recording is below.

– Purposes of IRC 987 and Effective Date of the Final 987 Regulations
– Foreign Exchange Exposure Pool Accounting
– Annual Recognition Election
– Guidance on eligible pre-transition methods
– Current Rate Election
– Sourcing of 987 Gains and Losses
– Treatment of §987 within VantagePoint