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The new proposed section 987 regulations.

On September 6, 2006, the U.S. Department of the Treasury and the Internal Revenue Service released proposed regulations under section 987 of the Internal Revenue Code (the "2006 proposed regulations"), which provide rules for determining income, gain, and loss attributable to a U.S. taxpayer's "Section 987 qualified business unit" ("Section 987 QBU"). The 2006 regulations, which are expected to become effective in 2009, withdraw previously proposed regulations issued in 1991 because of "serious concerns" about the extent to which taxpayers could recognize foreign currency loss under those rules.

Pending the promulgation of final regulations, the Treasury Department and IRS will treat positions consistent with the 2006 proposed regulations to be reasonable constructions of section 987. Moreover, because the 1991 proposed regulations have been withdrawn, certain section 987 positions may no longer be acceptable to the IRS, even if consistent with the 1991 proposed regulations. Therefore, taxpayers should take this opportunity to reconsider their section 987 methods, before the 2006 proposed regulations are issued in final form, and determine what changes, if any, may be necessary to the manner in which they account for their Section 987 QBUs. To this end, this article describes the 2006 proposed regulations and discusses what steps taxpayers should consider after their issuance. Part I describes who is subject to the 2006 proposed regulations, discussing in particular the rules as they apply to partnerships and the exclusion for financial institutions. Parts II and III discuss the determinations of section 987 taxable income, gain, and loss, and compare the methods provided for under the 2006 proposed regulations with the 1991 proposed regulations. Part IV describes the treatment of terminating Section 987 QBUs. Finally, Part V describes what transition methods are available to taxpayers who adopt the new rules.

Overview

Broadly speaking, a Section 987 QBU is a trade or business conducted in a currency different from its owner's currency, and for which a separate set of books and records is kept, on which the assets and liabilities of the trade or business are recorded. For example, a trade or business in Switzerland that a U.S. corporation conducts through either a branch, a disregarded entity, or even a partnership could be a Section 987 QBU, depending on the currency in which the activities are conducted.

Income, gain, or loss attributable to a Section 987 QBU typically is determined by reference to two different components. First, there is the taxable income or loss of the Section 987 QBU, determined by reference to U.S. tax principles, which a U.S. owner must immediately recognize. Both Section 987 and the 1991 proposed regulations require the taxable income or loss of a Section 987 QBU be computed in its functional currency and then translated at the average exchange rate (generally, an average of the daily exchange rates) into the functional currency of its owner. When translating the taxable income or loss of the Section 987 QBU into the functional currency of its owner, however, the 2006 proposed regulations do not translate the bottom line net taxable income or loss of the Section 987 QBU. Instead, the 2006 proposed regulations use an item by item approach. While most items are translated at the average exchange rate, there are some important exceptions for which a historic rate is used, such as cost of goods sold, depreciation and amortization deductions.

The second component of income--section 987 gain or loss--generally can be described as the portion of currency gain or loss recognized upon remittance from a Section 987 QBU. According to section 987's legislative history, taxpayers should adjust taxable income or loss to the extent the value of the local currency at the time of remittance differs from the value when the amount was earned or otherwise recorded in the QBU's capital.

To implement this adjustment, the 1991 proposed regulations required taxpayers to maintain both equity and basis pools. The equity pool consisted of both the earnings of the QBU and contributed capital, and was maintained in the functional currency of the QBU. The basis pool tracked the earnings and capital in the functional currency of the owner, based on the relevant rate at the time the amounts were earned by, or contributed to, the QBU. The 1991 proposed regulations generally measured currency gain or loss by the difference between the amount of the remittance from the QBU, translated into the taxpayer's functional currency at the spot rate on the date of remittance, and the portion of the basis pool attributable to the remittance. The portion of the basis pool attributable to the remittance was determined based on the amount of remittance relative to the equity of the QBU.

By pooling the foreign currency gains and losses of all assets together with earnings, in the equity pool, the 1991 proposed regulations effectively required recognition of currency gain or loss on all the assets of the QBU, including nonfinancial assets. The recognition of exchange-based gain or loss with respect to nonfinancial assets was problematic because, in the view of the IRS and Treasury, movements in exchange rates with respect to these assets often do not result in currency gains or losses to their owners.] To address this problem, the 2006 proposed regulations no longer take into account foreign currency gain or loss with respect to all assets for purposes of determining Section 987 gain or loss. Instead, foreign currency gain or loss is determined only with respect to financial assets and liabilities (e.g., local currency, a receivable, or a bond), and exchange rate movements with respect to nonfinancial assets and liabilities generally are disregarded.

Moreover, although the 2006 proposed regulations still require a taxpayer to recognize section 987 foreign currency gain or loss only as remittances are made, unrecognized foreign currency gain or loss is recognized only in the same proportion as the remittance bears to all of the assets of the Section 987 QBU. By contrast, the 1991 proposed regulations generally recognized foreign currency gain or loss based on the proportion of the remittance to the QBU's equity pool. Consequently, the approach provided for in the 2006 proposed regulations will generally result in less foreign exchange gain or loss, as compared with the approach in the 1991 proposed regulations.

Who Is Subject to the 2006 Section 987 Regulations?

Section 987 QBUs Generally

The 2006 proposed regulations generally apply to a "Section 987 QBU," which is defined to mean an entity that conducts trade or business activities in a functional currency different from the functional currency of its individual or corporate owner. (2) The functional currency of the QBU generally is determined by reference to the currency in which it derives its revenues and incurs its expenses, so most QBUs of a U.S. taxpayer that operate outside the United States will have a functional currency other than the U.S. dollar, and therefore different from their owner (3)

Generally, items of assets, liabilities, income, gain, or loss are attributable to a Section 987 QBU to the extent those items are reflected on its books and records, and therefore taken into account for purposes of determining income, gain, or loss of the Section 987 QBU. (4) There are, however, a few exceptions.

First, an interest in another corporation or partnership; related liabilities incurred to acquire those interests; and any related items of income, deduction, or loss are excluded from the items attributable to a Section 987 QBU. (5) Those items are excluded because they generally are not attributable to a trade or business, and, in the case of a partnership interest, might separately constitute a Section 987 QBU. (6)

In addition, the taxpayer's treatment of an item as either recorded or not recorded on the books and records of a Section 987 QBU will not necessarily be respected if a principal purpose of the taxpayer is to avoid U.S. tax. (7) The 2006 proposed regulations have a list of factors that would tend to indicate tax avoidance, including circular transfers, lack of economic substance, and offsetting positions. (8)

In the case of tiered QBUs, the 2006 proposed regulations view each Section 987 QBU as part of a "flat structure." Therefore, distributions from a lower-tier Section 987 QBU to a higher-tier Section 987 QBU will be deemed a remittance made to the U.S. taxpayer, which is then contributed back to the high-tier Section 987 QBU. (9) A grouping election is available to treat QBUs with the same functional currency as a single Section 987 QBU, assuming the QBUs are not owned through a partnership. (10) For those Section 987 QBUs owned through a partnership, the grouping election is available for Section 987 QBUs with the same functional currency, assuming the QBUs are owned through the same partnership. (11)

Treatment of Partnerships

Under the 2006 proposed regulations, the activities of a partnership can constitute a Section 987 QBU if the activities are conducted in a functional currency different from the functional currency of any of the partnership's owners and meet the other requirements set forth above for qualifying as a Section 987 QBU. (12) The issue of how to treat partnership activities was reserved in the 1991 proposed regulations, (13) and, like many other issues traversing Subchapter K and the international rules, a taxpayer is treated very differently depending on whether a partnership is viewed as an aggregate or an entity. The 2006 proposed regulations take an aggregate approach and treat each individual or corporation that is a partner in a partnership as owning indirectly a Section 987 QBU, to the extent assets and liabilities are allocated to it under the principles of the 2006 proposed regulations. (14)

There is a de minimis exception by which an individual or corporate owner of less than a five-percent interest in such a partnership can elect to turn off the 2006 proposed regulations for purposes of determining section 987 gain or loss only--the regulations still apply for purposes of determining the partner's share of the taxable income or loss of the partnership. (15) The five-percent threshold was seemingly chosen on the ground that, for a five-percent or greater owner, it is appropriate to ask a partner to comply with these rules.

The 2006 proposed regulations' treatment of partnerships as an aggregate may be difficult and controversial for most minority partners, despite the five-percent de minimis exception. The difficulties with the aggregate approach, especially for a five-percent or greater minority partner, will be determining the foreign currency gain or loss of the partnership, as specifically calculated under the 2006 proposed regulations, as well as the amounts of assets and liabilities allocable to its interest in the partnership. To make this calculation, taxpayers would need information that minority partners might not have access to. For example, taxpayers might need access to subsidiary ledgers supporting depreciation and amortization deductions, so they can determine when and at what historical rates the assets were acquired. Finally, the 2006 proposed regulations provide their own set of rules for determining the assets and liabilities of a Section 987 QBU of a partnership allocable to a partner, which might differ from the allocation required under section 704(b). (16)

Taxpayers in partnerships will likely face significant challenges when adopting the principles of the 2006 proposed regulations. In this regard, examples in the 2006 proposed regulations involve relatively simple real estate investment partnerships, with one or two assets or liabilities, and more guidance would be beneficial on how to apply the approach in the context of more complex operating partnerships, with numerous assets and liabilities acquired at different times and exchange rates. (17) Taxpayers with a five-percent or greater minority interest in a partnership also will likely require guidance on applying this approach when the information is not readily available to them.

Exclusion of Certain Financial Entities and Other Taxpayers

The 2006 proposed regulations do not apply to financial entities and certain other taxpayers. The list of financial entities that the regulations exclude is broad; excluded financial entities include banks, insurance companies, leasing companies, financial coordination centers, RICs, and REITs. The regulations also exclude trusts, estates, and S corporations. (18) According to the preamble, the IRS expects to apply the principles of the 2006 proposed regulations to financial entities in later guidance, but the regulations will need to be "specifically tailored" to the complexities associated with the businesses of those entities. Moreover, in their current form, the 2006 proposed regulations rely on certain simplifying assumptions that--while appropriate for most taxpayers--would likely be inconsistent with the business models of these financial entities.

For example, the 2006 proposed regulations allow taxpayers to use spot rate conventions that reasonably approximate the spot rate on a particular day, and generally, determine taxable income and loss by reference to the average exchanges rate for the year. (19) In addition, the 2006 proposed regulations use a netting rule to determine remittances, which permits the Section 987 QBU to determine the amount of remittances on a net annual basis, generally based on the exchange rate at the end of the year. For banks and many financial institutions, slight variations in exchange rates can be the difference between a large profit and a large loss, as managing such risks can be the very essence of their businesses. Therefore, reasonable approximations of the relevant exchange rates and annual netting of remittances could result in large distortions for these taxpayers.

Although the regulations exclude financial institutions from the 2006 proposed regulations, those taxpayers will need to use a reasonable method for purposes of determining section 987 gain or loss until rules can be established that meet their precise needs. Given IRS concern regarding the 1991 proposed regulations, and the withdrawal of those regulations by the 2006 proposed regulations, a bank or other financial institution applying the principles of the 2006 proposed regulations could be viewed as using a reasonable method. In contrast, the simplifying assumptions of the 2006 proposed regulations, such as exchange rate approximations, would not seem to be appropriate, so adjustments would likely be necessary. Moreover, since the IRS has promised guidance will be forthcoming on the section 987 treatment of financial institutions, there is little reason for a financial taxpayer to transition to an unspecified new method, if it now makes its section 987 determinations based on a method that is reasonable.

Section 987 Taxable Income or Loss.

The 2006 proposed regulations generally determine the taxable income or loss of a Section 987 QBU by translating its income and loss items at the average exchange rate for the year. A number of costs--including amortization, depreciation, and the adjusted basis of property sold--are recovered at their historical rates. (20) According to the preamble, this method will more accurately measure the taxpayer's economic gain or loss.

Notwithstanding the improved economic accuracy of the new rules, taxpayers may encounter difficulties complying with these rules, particularly as it relates to translation of certain items using historic rates. Under the 1991 proposed regulations, taxable Income or loss of a QBU would first be computed in local currency and then the taxable income or loss would be translated into the owner's functional currency. To make those calculations, taxpayers would obtain the books and records used for local country financial and tax reporting purposes, make certain adjustments to conform those books and records to U.S. tax principles (e.g., MACRS depreciation), and then translate the taxable income or loss computed in the local currency into the owner's functional currency. The process was relatively simple since one item--taxable income or loss, as the case may be--needed to be translated each year.

Under the 2006 proposed regulations, certain items (such as the adjusted basis of inventory and deductions for depreciation and amortization expenses) must be determined using historical exchange rates. The historical rate requirement is likely to create serious compliance challenges for some taxpayers. To comply fully with the historical rate requirement in the case of inventory and depreciation, taxpayers will likely need to maintain cost of goods sold and fixed asset schedules in the functional currency of the QBU owners, in addition to the schedules already maintained by the QBUs in their functional currencies.

The 2006 proposed regulations add what should be a welcome change to the treatment of section 988 transactions of the QBU denominated in the currency of the QBU's owner. Under the 2006 proposed regulations, even if a transaction is to a section 988 transaction to the QBU (i.e., the transaction is a section 988 transaction and is not in the functional currency of the QBU), the transaction will not be treated as a section 988 transaction if the transaction is denominated in the functional currency of the QBU owner, so and no currency gain or loss will be recognized with respect to the transaction. (21) Similarly, items of income, deduction, gain, or loss in a currency different from its own functional currency but the same as its owner's and that are not section 988 transactions are not translated, but rather are taken into account by the owner of the Section 987 QBU under U.S. tax principles in the owner's functional currency. (22)

On the other hand, if a Section 987 QBU earns items of income, deduction, gain, or loss denominated in a currency that is neither its own nor the same as its owner, the treatment depends on whether the transaction is a section 988 transaction. If it is not a section 988 transaction, related items of income, gain, deduction, or loss are translated into the Section 987 QBU's functional currency at the spot rate on the day the item is properly taken into account under U.S. tax principles. (23) The items would then be translated into the owner's functional currency and included in income generally based on the general rules described above. On the other hand, if it is a section 988 transaction, the Section 987 QBU would determine currency gain or loss in its own functional currency. Based on the rules in section 988, and the Section 987 QBU would generally translate that currency gain or loss into the owner's functional currency at the average exchange rate. (24)

Section 987 Gain or Loss.

In addition to determining and translating its taxable income or loss, under both the 1991 proposed regulations and 2006 proposed regulations, a Section 987 QBU must determine foreign currency gain or loss at the time it makes or is deemed to make remittances back to its owner. The 2006 proposed regulations develop a new methodology, referred to in the regulations as the "foreign exchange exposure pool method," for determining section 987 gain or loss.

Under this new method, the section 987 gain or loss is determined by reference to the Section 987 QBU's unrecognized section 987 gain or loss. The unrecognized section 987 gain or loss for each year is based on the difference between the "owner functional currency net value" of the Section 987 QBU on the last day of the current taxable year and the "owner functional currency net value" on the last day of the preceding taxable year. (25) The owner functional currency net value for a particular year is determined based on a balance sheet calculation in which the adjusted bases (or amount, in the case of a liability) of so-called marked items--which are generally financial items--are translated into the owner's functional currency at the spot rate on the last day of the taxable year, and historical items are translated into the owner's functional currency at their historical rates.

After this balance sheet has been created, the taxpayer then calculates the Section 987 QBU's owner functional currency net value at the close of the taxable year by subtracting the amount of liabilities from the value of the assets, both of which are determined in the owner's functional currency at the appropriate rate. Although the change in owner functional currency net value from year to year is the basis for determining the unrecognized foreign currency gain or loss for that year, certain adjustments are required. For example, since the year end balance sheet will reflect some items of income and loss already reflected in the income of the owner, these items need to be adjusted in order to prevent double counting (e.g., income is subtracted, losses are added).

After making these adjustments, the difference will be the unrecognized section 987 gain or loss for the taxable year. That amount would be added to the cumulative difference for all prior years for which the 2006 proposed regulations are effective, in order to determine the Section 987 QBU's unrecognized section 987 gain or loss. (26)

The unrecognized section 987 gain or loss is then multiplied by the owner's remittance proportion for the taxable year, to determine that year's section 987 gain or loss. (27) The owner's remittance proportion is the quotient of net remittances during the year divided by the total adjusted tax bases of the gross assets of the Section 987 QBU on the last day of the taxable year. (28) Remittances are determined in the owner's functional currency, using the adjusted basis of the assets remitted. (29) The adjusted tax basis of an asset is, again, determined in the owner's functional currency, using the spot or historical exchange rate, as appropriate, depending on the asset. (30)

The foreign exposure pool method addresses perceived abuses that existed under the 1991 proposed regulations in at least three ways.

First, and probably most important, the 2006 proposed regulations determine section 987 gain or loss only by reference to the so-called marked items, as historical items are kept at their historical rates. (31) Under the 1991 proposed regulations, foreign currency gain or loss was essentially determined based on all assets and liabilities of the Section 987 QBU.

Marked items generally include certain types of asset and liability transactions, to the extent denominated in the functional currency of the Section 987 QBU and that functional currency is different from the functional currency of its owner. (32) The relevant asset and liability transactions include (1) owning or being obligated on a debt instrument, (2) accruing receivables or payables for future income and expenses, and (3) entering into certain derivative transactions. (33)

The functional currency of the Section 987 QBU will also be a marked item included in the assets for which section 987 gain or loss is determined. (34) The currency of the Section 987 QBU's owner or another currency (different from the functional currency of a Section 987 QBU), however, is a historical item, for which no section 987 gain or loss is taken into account. (35)

For most non-financial businesses, the majority of their assets will not be marked items. Therefore, exchange rate movements will not cause foreign currency gain or loss to accrue with respect to a large number of their assets and liabilities, the so-called historical items. The Treasury and IRS believe this result is appropriate, mainly because foreign currency gains and losses with respect to assets and liabilities that are not financial assets are often, in their view, non-economic gains and losses.

Second, the 2006 proposed regulations determine remittances on a "net" basis over the course of a taxable year, rather than on a daily basis, as was the case in the 1991 proposed regulations. This change will make the determination of remittances easier, as well as prevent what the IRS considered to be an abuse that often occurred in connection with the 1991 proposed regulations. Under the 1991 proposed regulations, a taxpayer could make a remittance on a given day, taking the foreign currency gain or loss into account, and then contribute the assets back at a later date when general step transaction principles could not be applied to disregard the transfers.

Third, the 2006 proposed regulations use gross assets in the denominator, for purposes of determining the fractional amount of the remittance to be treated as section 987 gain or loss. The 1991 proposed regulations, on the other hand, used equity, which generally is the economic equivalent to net assets. (36) By using gross rather than net assets, the 2006 proposed regulations dilute the potential amount of section 987 foreign currency gain or loss recognized by the U.S. taxpayer because remittances are effectively deemed to come out of earnings and capital proportionately, and not just earnings.

Terminations of Section 987 QBUs.

Under the 2006 proposed regulations, if a Section 987 QBU terminates, it is deemed to have remitted all its assets to the taxpayer, in which case a U.S. taxpayer will recognize the full amount of the unrecognized section 987 gain or loss. The Section 987 QBU generally will terminate if either the owner of the Section 987 QBU no longer exists, the activities of the Section 987 QBU cease, or the Section 987 QBU transfers substantially all of its assets to its owner. (37)

Although the general rule is that a Section 987 QBU is terminated if the owner of that QBU ceases to exist, there is an applicable exception if the owner ceases to exist because of a section 381 transaction, such as a section 332 liquidation or certain types of reorganizations. In that case, the Section 987 QBU will not terminate, and the unrecognized section 987 gain or loss will be deemed to be preserved and carry over to the successor owner of the Section 987 QBU.

There are exceptions to this exception, applicable in cases where the owner of the Section 987 QBU ceases to exist because of a section 381 transaction that is an inbound or outbound liquidation or reorganization, or alternatively, in section 381 transactions in which both corporations are foreign corporations and the distributee/acquiring corporation has the same functional currency as the Section 987 QBU being transferred. In these cases, the Section 987 QBU will be deemed to be terminated and any section 987 gain or loss will be triggered.

Transitioning to the New Rules.

The 2006 regulations are proposed to be effective only for "taxable years beginning one year after the first day of the first taxable year following the publication of a Treasury Decision adopting the rule as a final regulation." (38) Therefore, if the regulations are finalized during 2007, they will be effective for calendar year taxpayers beginning January 1, 2009. Taxpayers can also elect to have the rules be effective one year earlier, so in the previously described circumstances, the effective date would be January 1, 2008. (39)

Since the effective date is likely to be relatively far off, taxpayers may think they need not concern themselves with these regulations until then. Indeed, the 2006 proposed regulations suggest a taxpayer would not transition to a new method until the effective date. See Prop. Reg. [section] 1.987-10(b) ("The transition date is the first day of the first taxable year to which these regulations apply to a taxpayer."). Yet, the 2006 proposed regulations have now withdrawn the 1991 proposed regulations. Taxpayers therefore may be unsure whether it is appropriate to rely on the 1991 proposed regulations during the interim period before the 2006 proposed regulations are effective.

Notwithstanding the withdrawal of the 1991 proposed regulations, we believe taxpayers may rely on the methodology of the 1991 proposed regulations until the 2006 proposed regulations are effective, provided taxpayers apply the 1991 regulations reasonably and avoid the abuses discussed above. If taxpayers do not want to continue using the 1991 proposed regulations method, then it would seem taxpayers could immediately transition to the principles of the 2006 proposed regulations, based on the statement in the preamble to the 2006 proposed regulations that taxpayers can apply the principles of those regulations immediately. A taxpayer's treatment of its section 987 items, however, is arguably a method of accounting. Because approval of the IRS is generally required to change a method of accounting, taxpayers must carefully consider early adoption, notwithstanding the regulations statement permitting taxpayers to do so.

The 2006 proposed regulations provide two different methods for a taxpayer to transition from its old section 987 method to the 2006 proposed regulations method: the deferral transition method and the fresh start method. (40) The deferral transition method is permitted only if the taxpayer's prior section 987 method was reasonable; the 1991 proposed regulations would be considered a reasonable method for this purpose. If a taxpayer has used a reasonable method in the past, it should be able to transition to the 2006 proposed regulations using either the deferral transition or the fresh start method.

As such, the transition rules are very taxpayer favorable and can permit the deferral of section 987 gain accrued under the taxpayer's old section 987 method with respect to nonfinancial assets. Since local currencies have appreciated relative to the U.S. dollar, many taxpayers will have unrecognized section 987 gain from earlier years. Moreover, because the 1991 proposed regulations determined unrecognized section 987 gain with respect to all of the Section 987 QBU's assets, for a taxpayer that has previously used the 1991 proposed regulations, some of the gain will probably relate to nonfinancial assets.

Under the deferral transition method, the unrecognized section 987 gain or loss is determined at the time of termination, based on the principles of the taxpayer's prior section 987 method, but it is not recognized. (41) Instead, that unrecognized amount--which could include gain from nonfinancial assets--becomes the owner's accumulated net unrecognized section 987 gain or loss for the first year for which the taxpayer uses the new method. The taxpayer then takes that amount into income using the principles of the new regulations. The assets of the Section 987 QBU are booked up from their historic rates to reflect that unrecognized gain.

By contrast, under the fresh start method, taxpayers transitioning to the 2006 proposed regulations do not determine unrecognized section 987 gain or loss, and taxpayers record the Section 987 QBU's assets and liabilities at the historic rates at which they were acquired. (42) Taxpayers would then determine their unrecognized section 987 gain or loss on the last day of the first taxable year for which they adopt the 2006 proposed regulations based on the differences between spot rates and historic rates. In that case, unrecognized section 987 gain or loss would accrue only with respect to marked items; historic items would continue to be recorded at their historic rates, so that no unrecognized section 987 gain or loss would be determined for those items, even if gain or loss had accrued on those items under the taxpayer's old method in periods before the transition date.

Therefore, if a taxpayer has unrecognized section 987 gain with respect to its Section 987 QBU, as will generally be the case because of the declining U.S. dollar, a taxpayer should consider electing the fresh start method and cleansing that section 987 gain with respect to any nonfinancial assets. Although any section 987 gain will still need to be recognized at the time the asset is disposed of, nonfinancial assets can have very long holding periods so it will often be very advantageous to defer the gain.

Alternatively, taxpayers in the unusual position of having unrecognized section 987 loss on the transition date should likely elect the deferral transition method, to preserve that unrecognized section 987 loss going forward. Taxpayers would then recognize that loss as remittances are made or the assets are sold, whichever is earlier.

(1.) See Notice 2000-20, 2000-1 C.B. 851 (expressing concerns about the extent to which currency gains and losses could be recognized under the proposed 1991 regulations).

(2.) Prop. Reg. [section] 1.987-1(b)(2). QBUs operating in a hyperinflationary environment are subject to a different method of accounting for currency gains and losses, and therefore are excluded from the section 987 regulations. Prop. Reg. [section] 1.987-1(b)(3)(i)(C).

(3.) Prop. Reg. [section] 1.987-1(b)(2); Treas. Reg. 5 1.985-1.

(4.) Prop. Reg. [section] 1.987-2(b).

(5.) Prop. Reg. [section] 1.987-2(b)(2).

(6.) See Preamble to the 2006 proposed regulations. Portfolio stock, defined as a less than 10-percent interest, by vote or value, in all classes of stock of a corporation, will be attributable to a Section 987 QBU. Prop. Reg. [section] 1.987-2(b)(2)(ii).

(7.) Prop. Reg. [section] 1.987-2(b)(3).

(8.) Prop. Reg. [section] 1.987-2(b)(3)(iii).

(9.) Prop. Reg. 5 1.987-1(b)(5) ("The term owner for section 987 purposes does not include an eligible QBU or section 987 QBU of an owner.").

(10.) Prop. Reg. [section] 1.987-1(b)(2)(ii).

(11.) Prop. Reg. [section] 1.987-1(b)(2)(ii)(B).

(12.) The 2006 proposed regulations also change the general rule that the partnership entity, by itself, is a QBU. Prop. Reg. [section] 1.989(a)-1(b)(2)(i).

(13.) 1991 Prop. Reg. [section] 1.987-2(g).

(14.) Prop. Reg. [subsection] 1.987-1(b)(3)(i), 1.987-7.

(15.) Prop. Reg. [section] 1.987-1(b)(1)(ii).

(16.) Prop. Reg. [section] 1.987-7(b).

(17.) Prop. Reg. [section] 1.987-7(d).

(18.) Prop. Reg. [section] 1.987-1(b)(1)(iii).

(19.) See Prop. Reg. [subsection] 1.987-1(c)(1)(i), 1.987-5(c).

(20.) Prop. Reg. [section] 1.987-3(b)(2)(i), (ii)(B).

(21.) Prop. Reg. [section] 1.987-3(e)(2).

(22.) Prop. Reg. [section] 1.987-3(c).

(23.) Prop. Reg. 5 1.987-3(d).

(24.) Prop. Reg. [subsection] 1.987-3(e), -3(f) Ex. 10.

(25.) Prop. Reg. [section] 1.987-4(d)(1).

(26.) Prop. Reg. [section] 1.987-4(b). In some cases, the transition rules also carryover amounts of unrecognized foreign currency gain or loss that will, for this purpose, be treated as unrecognized section 987 gain or loss.

(27.) Prop. Reg. [section] 1.987-5(a).

(28.) Prop. Reg. [section] 1.987-5(b).

(29.) Prop. Reg. [section] 1.987-5(d).

(30.) Prop. Reg. [section] 1.987-5(f).

(31.) Prop. Reg. [section] 1.987-4(e)(2).

(32.) Prop. Reg. [section] 1.987-1(d); I.R.C. [section] 988(c)(1).

(33.) I.R.C. [section] 988(c)(1)(B).

(34.) I.R.C. [section] 988(c)(1)(C); Prop. Reg. [section] 1.987-1(e)(2).

(35.) Prop. Reg. [subsection] 1.987-1(d)(3), 1.987-2(d)(2).

(36.) 1991 Prop. Treas. Reg. [section] 1.987-2(c)(1)(ii).

(37.) A Section 987 QBU owned by a controlled foreign corporation (CFC), within the meaning of section 957(a), will also terminate if the owner ceases to be a CFC, even if the none of the general conditions exist for terminating the Section 987 QBU.

(38.) Prop. Reg. [section] 1.987-11(a).

(39.) Prop. Reg. 5 1.987-11(b).

(40.) See generally Prop. Reg. [section] 1.987-10.

(41.) Prop. Reg. [section] 1.987-10(c)(3).

(42.) Prop. Reg. [section] 1.987-10(c)(4).

Howard A. Wiener is a principal with International Corporate Services, Tyson Corner, VA., at KPMG LLP. Kevin M. Cunningham is a senior manager with International Corporate Services, Washington National Tax, also at KPMG LLP. They may be contacted at hwiener@kpmg.com and kmcunningham@kpmg.com.
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Author:Cunningham, Kevin M.
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Date:Nov 1, 2006
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