§ 1.987-4T - Determination of net unrecognized section 987 gain or loss of a section 987 QBU (temporary).

§ 1.987-4T Determination of net unrecognized section 987 gain or loss of a section 987 QBU (temporary).

(a) through (c)

(1) [Reserved]. For further guidance, see § 1.987-4(a) through (c)(1).

(2) Coordination with § 1.987-12T. For purposes of paragraph (c)(1) of this section, amounts taken into account under § 1.987-5 are determined without regard to § 1.987-12T.

(d) through (e) [Reserved]. For further guidance, see § 1.987-4(d) through (e).

(f) Combinations and separations -

(1) Combinations. The net unrecognized section 987 gain or loss of a combined QBU (as defined in § 1.987-2T(c)(9)(i)) for a taxable year is determined under § 1.987-4(b) by taking into account the net accumulated unrecognized section 987 gain or loss of each combining QBU (as defined in § 1.987-2T(c)(9)(i)) for all prior taxable years to which the regulations under section 987 apply, as determined under § 1.987-4(c), and by treating the combining QBUs as having combined immediately prior to the beginning of the taxable year of combination.

(2) Separations. The net unrecognized section 987 gain or loss of a separated QBU (as defined in § 1.987-2T(c)(9)(iii)) for a taxable year is determined under § 1.987-4(b) by taking into account the separated QBU's share of the net accumulated unrecognized section 987 gain or loss of the separating QBU (as defined in § 1.987-2T(c)(9)(iii)) for all prior taxable years to which the regulations under section 987 apply, as determined under § 1.987-4(c), and by treating the separating QBU as having separated immediately prior to the beginning of the taxable year of separation. A separated QBU's share of the separating QBU's net accumulated unrecognized section 987 gain or loss for all such prior taxable years is determined by apportioning the separating QBU's net accumulated unrecognized section 987 gain or loss for all such prior taxable years to each separated QBU in proportion to the aggregate adjusted basis of the gross assets properly reflected on the books and records of each separated QBU immediately after the separation. For purposes of determining the owner functional currency net value of the separated QBUs on the last day of the taxable year preceding the taxable year of separation under § 1.987-5(d)(1)(B) and (e), the balance sheets of the separated QBUs on that day will be deemed to reflect the assets and liabilities reflected on the balance sheet of the separating QBU on that day, apportioned between the separated QBUs in a reasonable manner that takes into account the assets and liabilities reflected on the balance sheets of the separated QBUs immediately after the separation.

(3) Examples. The following examples illustrate the rules of paragraphs (f)(1) and (2) of this section.

Example 1.

Combination of two section 987 QBUs that have the same owner. (i) Facts. DC1, a domestic corporation, owns Entity A, a DE. Entity A conducts a business in France that constitutes a section 987 QBU (French QBU) that has the euro as its functional currency. French QBU has a net accumulated unrecognized section 987 loss from all prior taxable years to which the regulations under section 987 apply of $100. DC1 also owns Entity B, a DE. Entity B conducts a business in Germany that constitutes a section 987 QBU (German QBU) that has the euro as its functional currency. German QBU has a net accumulated unrecognized section 987 gain from all prior taxable years to which the regulations under section 987 apply of $110. During the taxable year, Entity A and Entity B merge under local law. As a result, the books and records of French QBU and German QBU are combined into a new single set of books and records. The combined entity has the euro as its functional currency.

(ii) Analysis. Pursuant to § 1.987-2T(c)(9)(i), French QBU and German QBU are combining QBUs, and their combination does not give rise to a transfer that is taken into account in determining the amount of a remittance (as defined in § 1.987-5(c)). For purposes of computing net unrecognized section 987 gain or loss under § 1.987-4 for the year of the combination, the combination is deemed to have occurred on the last day of the owner's prior taxable year, such that the owner functional currency net value of the combined section 987 QBU at the end of that taxable year described under § 1.987-4(d)(1)(B) takes into account items reflected on the balance sheets of both French QBU and German QBU at that time. Additionally, any transactions between French QBU and German QBU occurring during the year of the merger will not result in transfers to or from a section 987 QBU. Pursuant to paragraph (f)(1) of this section, the combined QBU will have a net accumulated unrecognized section 987 gain from all prior taxable years of $10 (the $100 loss from French QBU plus the $110 gain from German QBU).

Example 2.

Separation of two section 987 QBUs that have the same owner. (i) Facts. DC1, a domestic corporation, owns Entity A, a DE. Entity A conducts a business in the Netherlands that constitutes a section 987 QBU (Dutch QBU) that has the euro as its functional currency. The business of Dutch QBU consists of manufacturing and selling bicycles and scooters and is recorded on a single set of books and records. On the last day of Year 1, the adjusted basis of the gross assets of Dutch QBU is €1,000. In Year 2, the net accumulated unrecognized section 987 loss of Dutch QBU from all prior taxable years is $200. During Year 2, Entity A separates the bicycle and scooter business such that each business begins to have its own books and records and to meet the definition of a section 987 QBU under § 1.987-1(b)(2) (hereafter, “bicycle QBU” and “scooter QBU”). There are no transfers between DC1 and Dutch QBU before the separation. After the separation, the aggregate adjusted basis of bicycle QBU's assets is €600 and the aggregate adjusted basis of scooter QBU's assets is €400. Each section 987 QBU continues to have the euro as its functional currency.

(ii) Analysis. Pursuant to § 1.987-2T(c)(9)(iii), bicycle QBU and scooter QBU are separated QBUs, and the separation of Dutch QBU, a separating QBU, does not give rise to a transfer taken into account in determining the amount of a remittance (as defined in § 1.987-5(c)). For purposes of computing net unrecognized section 987 gain or loss under § 1.987-4 for Year 2, the separation will be deemed to have occurred on the last day of the owner's prior taxable year, Year 1. Pursuant to paragraph (f)(2) of this section, bicycle QBU will have a net accumulated unrecognized section 987 loss of $120 (€600/€1,000 × $200), and scooter QBU will have a net accumulated unrecognized section 987 loss of $80 (€400/€1,000 × $200).

(g) [Reserved]. For further guidance, see § 1.987-4(g).

(h) Effective/applicability date. This section applies to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016. Notwithstanding the preceding sentence, if a taxpayer makes an election under § 1.987-11(b), then this section applies to taxable years to which §§ 1.987-1 through 1.987-10 apply as a result of such election.

(i) Expiration date. The applicability of this section expires on December 6, 2019.

[T.D. 9795, 81 FR 88873, Dec. 8, 2016]