Background
Notice 2026-17 (the notice) announces the Department of Treasury and IRS’ intent to issue forthcoming proposed regulations regarding computing taxable income or loss and foreign currency gain or loss under Section 987. The notice aims to simplify the operations of the §987 regulations, ease compliance, and refine the scope of certain rules to limit their effect on routine transactions. The notice describes three primary areas of proposed changes.
Proposed Election to Use Equity and Basis Pool Method
In response to taxpayer feedback following the 2024 final regulations, the forthcoming regulations will provide an election to use an "equity and basis pool method" to determine §987 gain or loss and taxable income or loss. This method is substantially similar to the one described in the 1991 proposed regulations; however, the equity and basis pool method would provide for a single annual computation of the net remittance from a §987 qualified business unit (QBU) to its owner rather than the daily netting convention. A taxpayer making this election will maintain an “equity pool” in the QBU’s functional currency (FC) and a “basis pool” in the owner’s FC.
Other Proposed Modifications to Section 987 Rules
The notice describes several other proposed modifications to the 2024 final regulations.
- Modification to Loss Suspension Rules
- Simplification of Consolidated Recognition Groupings
- Clarification of Successor Deferral QBU
- Expansion of §987 Hedging Transactions beyond GAAP hedging requirement
Proposed Election for Application of Section 987(3) to Controlled Foreign Corporations (CFCs)
The notice announces upcoming guidance allowing CFCs to elect not to compute or recognize foreign currency gain or loss under §987(3). With this election, CFCs would not need to recognize §987(3) gains or losses on remittances from their QBUs. However, the rules of §987(1) and (2) would continue to apply for computing the CFC’s taxable income and earnings and profits. Unrecognized §987 gain or loss that arose before the election was made would be recognized pro-rata over a period of 120 months.
Action Items
Taxpayers may rely on the rules surrounding the equity and basis pool method and other proposed modifications for a taxable year ending before the proposed regulations are finalized, provided the 2024 final regulations apply to that year and the taxpayer and all members of its Section 987 electing group apply the rules in their entirety and in a consistent manner. However, taxpayers may not currently rely on the rules surrounding the CFC election; the IRS and Treasury expect to permit such reliance in future guidance.