# Prop. Treas. Reg. § 1.987-15: CFC exemption election. Proposed regulation, not in force. REG-103844-26, 91 FR 52553, published 2026-08-14 . Interprets 26 U.S.C. § 987. Par. 7. Section 1.987-15 is redesignated as § 1.987-17 and new § 1.987-15 is added to read as follows: (a) Overview. This section provides rules for an election ( CFC exemption election ) under which section 987(3) applies to a CFC only to the extent provided in this section and § 1.987-16. Paragraph (b) of this section provides rules regarding the effect of making a CFC exemption election. Paragraph (c) of this section provides consistency requirements for making the election. Paragraph (d) of this section provides rules for coordinating the CFC exemption election with the transition rules of § 1.987-10. Paragraph (e) of this section provides rules under which a CFC that is subject to the CFC exemption election (an exempt CFC ) must account for pre-election section 987 gain or loss. Paragraph (f) of this section provides rules that apply if a CFC exemption election is revoked. Paragraph (g) of this section provides rules for applying this section with respect to a partnership. Paragraph (h) of this section provides examples that illustrate the application of the rules of this section. (b) Effect of CFC exemption election —(1) In general. Except as otherwise provided in this section or § 1.987-16, section 987(3) does not apply to an exempt CFC. In addition, the rules of the section 987 regulations apply to an exempt CFC only to the extent provided in this section or § 1.987-16. See § 1.987-7(b)(2), (c)(2)(iv), and (d)(2)(iv) for rules relating to the effect of a CFC exemption election on partnerships and eligible QBUs directly owned by partnerships. (2) Applicable provisions. The rules of this section, and the rules of the section 987 regulations listed in this paragraph (b)(2), apply to an exempt CFC, subject to the modifications described in paragraph (b)(3) of this section. (i) Section 1.987-1 (scope, definitions, and special rules); (ii) Section 1.987-2 (attribution of items to eligible QBUs and other rules); (iii) Section 1.987-3 (determination of section 987 taxable income or loss); (iv) Section 1.987-5(f) (determination of the owner's adjusted basis in transferred assets and the amount of transferred liabilities); (v) Section 1.987-7 (rules relating to partnerships); (vi) Section 1.987-8 (QBU terminations), subject to the modifications described in paragraph (b)(3)(ii) of this section; (vii) Section 1.987-9 (recordkeeping requirements), subject to the modifications described in paragraph (b)(3)(iii) of this section; (viii) Section 1.987-10 (transition rules), including the application (for purposes of § 1.987-10) of rules cross-referenced in § 1.987-10; (ix) Section 1.987-16 (inbound nonrecognition transactions involving an exempt CFC); and (x) Section 1.987-17 (applicability dates). (3) Modifications to applicable provisions —(i) Current rate election. With respect to an exempt CFC, the rules described in paragraph (b)(2) of this section are applied as if a current rate election were in effect. (ii) QBU terminations. An exempt CFC does not recognize section 987 gain or loss under § 1.987-8(e) when a section 987 QBU terminates. (iii) Recordkeeping requirements. With respect to an exempt CFC, the recordkeeping requirements set forth in § 1.987-9(b)(2), (b)(4) through (12), and (b)(14) do not apply. A taxpayer must retain the records necessary to substantiate the determinations required under this section and § 1.987-16, including the records needed to support the chosen methodology for computing section 987 asset basis under § 1.987-16(c). (iv) Partnerships. See § 1.987-7(c)(2) for the rules that apply to an exempt partnership QBU. (c) Consistency requirements —(1) In general. The consistency rules of § 1.987-1(g)(2) apply with respect to a CFC exemption election, subject to the modifications described in paragraph (c)(2) of this section and the anti-avoidance rule provided in paragraph (c)(3) of this section. (2) Modifications —(i) Affiliates treated as a single United States person. All domestic corporations that are affiliates described in § 1.904(i)-1(b) on the last day of the taxable year described in § 1.904(i)-1(c) are treated as a single United States person. Thus, in applying § 1.987-1(g)(2)(ii) for purposes of the CFC exemption election, all such domestic corporations are part of the same section 987 electing group. (ii) Ownership through domestic partnerships. For purposes of determining whether a United States person (other than a partnership) owns stock of a CFC within the meaning of section 958(a), stock of a foreign corporation owned by a domestic partnership is treated in the same manner as stock of a foreign corporation owned by a foreign partnership. (3) Anti-avoidance rule —(i) In general —(A) No deemed revocation. Notwithstanding the rules of § 1.987-1(g)(2), if a transaction involving two or more members of the same controlled group is entered into with a principal purpose of causing a deemed revocation of a CFC exemption election under § 1.987-1(g)(2) or otherwise causing a CFC exemption election to cease to be effective, the CFC exemption election is not deemed to be revoked and remains in effect. (B) Deemed election. If a transaction involving two or more members of the same controlled group is entered into with a principal purpose of avoiding the requirement to make a CFC exemption election with respect to one or more CFCs under § 1.987-1(g)(2) and paragraph (c)(2) of this section, the CFC exemption election is deemed to be made with respect to those CFCs. (C) Exempt partnerships. If a transaction involving two or more members of the same controlled group is entered into with a principal purpose of causing an exempt partnership to cease to be an exempt partnership, the CFC exemption election is deemed to be made with respect to any CFC that is a partner in the partnership and is a member of the controlled group. (ii) Subsequent application of the consistency rule. If a CFC is subject to a deemed CFC exemption election under paragraph (c)(3)(i) of this section, the CFC exemption election is also deemed to be made with respect to the other members of the CFC's section 987 electing group. (d) Coordination with transition rules provided in § 1.987-10 —(1) Deemed election to recognize pretransition gain or loss ratably over the transition period —(i) In general. If a CFC exemption election is made for the taxable year beginning on the transition date described in § 1.987-10(c)(1), the election to recognize pretransition gain or loss ratably over the transition period under § 1.987-10(e)(5)(ii) is deemed to be made with respect to each CFC for which the CFC exemption election is made. (ii) Consistency rules. Notwithstanding the rules of § 1.987-1(g)(2), the election described in § 1.987-10(e)(5)(ii) is not required to be made with respect to the members of an exempt CFC's section 987 electing group (other than exempt CFCs) solely by reason of a deemed election described in paragraph (d)(1)(i) of this section. (2) Pretransition gain or loss with respect to QBUs that hold assets of less than $50 million. Notwithstanding the rules of § 1.987-10, if a CFC exemption election is made for the taxable year beginning on the transition date described in § 1.987-10(c)(1), an exempt CFC is treated as having no pretransition gain or loss with respect to any QBU described in paragraph (e)(2)(iii)(B) of this section. (e) Election made in a subsequent taxable year —(1) In general. This paragraph (e) provides rules under which an exempt CFC must compute and recognize pre-election section 987 gain or loss if the CFC exemption election is made for a taxable year other than the taxable year beginning on the transition date described in § 1.987-10(c)(1) (or, in the case of a QBU described in § 1.987-10(f)(1), if the election is made for any taxable year). (2) Computation of pre-election section 987 gain or loss —(i) In general. Except as provided in paragraph (e)(2)(ii) or (iii) of this section, an exempt CFC's pre-election section 987 gain or loss with respect to a section 987 QBU, successor deferral QBU, or successor suspended loss QBU is equal to— (A) The exempt CFC's net unrecognized section 987 gain or loss (as determined under § 1.987-4) with respect to a section 987 QBU for the taxable year immediately preceding the first taxable year in which the CFC exemption election applies, reduced by the amount of the net unrecognized section 987 gain or loss that is recognized, suspended, or deferred in the preceding taxable year; (B) The exempt CFC's outstanding deferred section 987 gain or loss (as determined under § 1.987-12) with respect to a successor deferral QBU for the taxable year immediately preceding the first taxable year in which the election applies, reduced by the amount of the outstanding deferred section 987 gain or loss that is recognized, suspended, or attributed to a different successor deferral QBU in the preceding taxable year; and (C) The exempt CFC's cumulative suspended section 987 loss (as determined under § 1.987-11) with respect to a section 987 QBU or successor suspended loss QBU for the taxable year immediately preceding the first taxable year in which the election applies, reduced by the amount of the suspended section 987 loss that is recognized, eliminated, or attributed to a different successor suspended loss QBU in the preceding taxable year. Suspended section 987 loss described in § 1.987-13(e) is not taken into account in determining pre-election section 987 gain or loss. (ii) Adjustments required if a current rate election is not in effect for the preceding taxable year. Except as provided in paragraph (e)(2)(iii) of this section, if a current rate election is not in effect for the taxable year immediately preceding the first taxable year in which the CFC exemption election applies, pre-election section 987 gain or loss with respect to a section 987 QBU is adjusted to account for any change to the owner functional currency net value of the section 987 QBU attributable to the CFC exemption election. The amount of the adjustment is equal to— (A) The owner functional currency net value of the section 987 QBU, determined under § 1.987-4(e) on the last day of the preceding taxable year as though a current rate election was in effect; minus (B) The owner functional currency net value of the section 987 QBU, determined under § 1.987-4(e) on the last day of the preceding taxable year based on the elections in effect for the preceding taxable year. (iii) Pre-election section 987 gain or loss with respect to QBUs that hold assets of less than $50 million —(A) In general. An exempt CFC is treated as having no pre-election section 987 gain or loss with respect to a section 987 QBU, successor deferral QBU, or successor suspended loss QBU described in paragraph (e)(2)(iii)(B) of this section. (B) QBUs that hold assets of less than $50 million —( 1 ) In general. A QBU is described in this paragraph (e)(2)(iii)(B) if the average amount of the QBU's assets for the last three taxable years before the first taxable year in which the CFC exemption election applies is less than $50 million. Any taxable year in which a QBU did not exist is not taken into account in computing the average amount of the QBU's assets for purposes of this paragraph (e)(2)(iii)(B). ( 2 ) Amount of assets. For purposes of this paragraph (e)(2)(iii)(B), the amount of a QBU's assets for a taxable year is equal to the amount of total assets reflected on the QBU's balance sheet in accordance with generally accepted accounting principles on the last day of the taxable year (without regard to whether the assets are properly attributable to the QBU under § 1.987-2 and without adjustment to conform to federal income tax principles). ( 3 ) Aggregation rule. All section 987 QBUs, successor deferral QBUs, and successor suspended loss QBUs of an exempt CFC that have the same country of residence (as defined in section 988(a)(3)(B)) are treated as a single QBU for purposes of this paragraph (e)(2)(iii). (3) Recognition of pre-election section 987 gain or loss —(i) In general. An exempt CFC's pre-election section 987 gain or loss is recognized ratably over a period of 120 months under the rules of § 1.987-10(e)(5)(ii) (treating pre-election section 987 gain or loss in the same manner as pretransition gain or loss), subject to the modifications described in this paragraph (e)(3). (ii) Transition date. In applying § 1.987-10(e)(5)(ii) with respect to pre-election section 987 gain or loss, the first taxable year in which a CFC exemption election applies is treated as the taxable year beginning on the transition date described in § 1.987-10(c)(1). Thus, in general, pre-election section 987 gain or loss is recognized ratably over a period of 120 months beginning with the first month of the first taxable year in which the CFC exemption election applies. (iii) Source and character —(A) Net unrecognized section 987 gain or loss. The source and character of net unrecognized section 987 gain or loss that is recognized as pre-election section 987 gain or loss under this paragraph (e)(3) is determined under § 1.987-6. See § 1.987-6(b)(1)(v). (B) Deferred section 987 gain or loss and suspended section 987 loss. The source and character of deferred section 987 gain or loss or suspended section 987 loss that is recognized as pre-election section 987 gain or loss under this paragraph (e)(3) is the same as the source and character determined under § 1.987-6 in the taxable year of deferral or suspension. See § 1.987-6(b)(1)(ii) and (iii). (iv) QBU ceases to be owned by a member of the exempt CFC's controlled group —(A) Scope. This paragraph (e)(3)(iv) applies if pre-election section 987 loss of an exempt CFC is computed under paragraph (e)(2) of this section with respect to a section 987 QBU, successor deferral QBU, or successor suspended loss QBU, and, as result of a direct or indirect transfer, or an issuance or redemption, of an ownership interest in the exempt CFC during the 120-month period described in paragraph (e)(3)(i) of this section, the exempt CFC ceases to be a member of the same controlled group as the direct owner of the QBU (or the QBU's successor, determined under the principles of § 1.987-13(b) and (c)). For example, this paragraph (e)(3)(iv) applies if an exempt CFC is sold to an unrelated party, and the exempt CFC has unrecognized pre-election section 987 gain or loss with respect to a QBU that had previously been transferred by the exempt CFC to a member of its controlled group (either before or after the CFC exemption election took effect). (B) Pre-election section 987 loss suspended. In the case of a transaction described in paragraph (e)(3)(iv)(A) of this section, the exempt CFC does not recognize any pre-election section 987 loss with respect to the QBU in the taxable year of the transaction and subsequent taxable years under this paragraph (e)(3). However, the exempt CFC continues to recognize pre-election section 987 gain with respect to the QBU under this paragraph (e)(3). Any pre-election section 987 loss that is not recognized under this paragraph (e)(3)(iv) is treated as suspended section 987 loss of the exempt CFC described in § 1.987-13(e). (f) First taxable year in which the election ceases to apply —(1) In general. In the first taxable year in which a CFC exemption election ceases to apply to a CFC, each section 987 QBU of the CFC is deemed to be newly formed on the first day of the taxable year, and the assets and liabilities attributable to the section 987 QBU are deemed to be transferred from the owner to the section 987 QBU on that day. (2) Unrecognized pre-election section 987 gain or loss —(i) In general. Except as provided in paragraph (e)(3)(iv) or (f)(2)(ii) of this section, if a CFC exemption election ceases to apply to a CFC, the CFC continues to recognize pre-election section 987 gain or loss under paragraph (e)(3) of this section. (ii) Revocation within sixty months. If a CFC exemption election ceases to apply to a CFC within sixty months after the first day of the first taxable year for which the election applied to the CFC, any pre-election section 987 loss of the CFC that was not recognized under paragraph (e)(3) of this section before the taxable year in which the election ceases to apply is treated as suspended section 987 loss and is not recognized by the CFC under paragraph (e)(3) of this section. (g) Partnerships. This paragraph (g) provides rules for applying this section with respect to an exempt partnership QBU. (1) Taxable year beginning on the transition date. An exempt CFC or exempt partnership must compute and recognize pre-election section 987 gain or loss with respect to an exempt partnership QBU under paragraph (e) of this section regardless of whether the CFC exemption election is made for the taxable year beginning on the transition date described in § 1.987-10(c)(1) or a later taxable year. (2) Pre-election section 987 gain or loss. For purposes of determining pre-election section 987 gain or loss under paragraph (e)(2)(i) of this section, net unrecognized section 987 gain or loss with respect to an exempt partnership QBU is equal to the amount of gain or loss that the owner would recognize under section 987(3) if the exempt partnership QBU terminated on the last day of the preceding taxable year and no section 987 gain or loss was deferred or suspended. (3) Exempt partnership —(i) In general. An exempt partnership that is treated as the owner of a section 987 QBU (or is treated as an original deferral QBU owner or an original suspended loss QBU owner) must compute pre-election section 987 gain or loss in the same manner as an exempt CFC. (ii) Recognition of pre-election section 987 gain or loss —(A) In general. An exempt partnership does not recognize pre-election section 987 gain or loss under paragraph (e)(3) of this section. Instead, each partner in the exempt partnership (other than a partner that is itself a partnership) treats its share of the exempt partnership's pre-election section 987 gain or loss as pre-election section 987 gain or loss of the partner that is recognized by the partner in accordance with paragraph (e)(3) of this section. See § 1.987-7(b)(2)(ii) (treating an indirect partner as a partner for purposes of the section 987 regulations). (B) Partner's share of pre-election section 987 gain or loss. A partner's share of an exempt partnership's pre-election section 987 gain or loss with respect to a QBU is determined based on the amount of section 987 gain or loss with respect to the QBU that would be included in the partner's distributive share of profits or losses if the exempt partnership recognized the entire amount of pre-election section 987 gain or loss in the first taxable year for which the CFC exemption election applies. The principles of section 706(d) apply in making this determination. (iii) Partnership becomes an exempt partnership. In a taxable year in which a partnership becomes an exempt partnership (for example, because 80 percent of the capital or profits interests in the partnership are acquired by an exempt CFC), the rules of this section are applied with respect to the exempt partnership by treating that taxable year as the first taxable year in which the CFC exemption election applies. (iv) Partnership ceases to be an exempt partnership. In a taxable year in which a partnership ceases to be an exempt partnership, the rules of this section are applied with respect to the partnership by treating that taxable year as the first taxable year in which the CFC exemption ceases to apply. (h) Examples. The following examples illustrate the rules of this section. The examples are not intended to illustrate the appropriate determination of any QBU's functional currency. (1) Example 1: CFC exemption election —(i) Facts. U.S. Corp is a domestic corporation that uses the calendar year as its taxable year and has the U.S. dollar as its functional currency. U.S. Corp owns 100 percent of the stock of CFC 1, a controlled foreign corporation within the meaning of section 957(a), which has the U.S. dollar as its functional currency. CFC 1 operates Branch, a section 987 QBU which has the euro as its functional currency. Branch held assets of at least $50 million within the meaning of paragraph (e)(2)(iii)(B) of this section for each of the three taxable years preceding Year 1. In Year 1 (a taxable year beginning after the transition date described in § 1.987-10(c)(1)), a current rate election is in effect. As of December 31, Year 1, CFC 1 has net unrecognized section 987 gain of $1,200x with respect to Branch; CFC 1 does not have any outstanding deferred section 987 gain or loss or cumulative suspended section 987 loss. For Year 2, U.S. Corp makes a CFC exemption election with respect to CFC 1. Branch does not make a remittance to U.S. Corp in Year 1. On July 1, Year 2, Branch transfers an asset with a basis of €400x to CFC 1. CFC 1 does not make any transfers to Branch in Year 2. The spot rate on July 1, Year 2, is €1 = $1.10. (ii) Analysis— (A) Pre-election section 987 gain or loss. Under paragraph (e)(2) of this section, CFC 1's pre-election section 987 gain or loss with respect to Branch equals a gain of $1,200x (the amount of net unrecognized section 987 gain or loss at the end of Year 1). Under paragraph (e)(3) of this section, CFC 1 must recognize the $1,200x of pre-election section 987 gain ratably over 120 months ($10x per month), beginning on January 1, Year 2. Accordingly, CFC 1 recognizes $120x of pre-election section 987 gain in Year 2 ($10x per month × 12 months). (B) Effect of election. Under paragraph (b) of this section, CFC 1 does not compute or recognize any section 987 gain or loss under § 1.987-5 for Year 2, notwithstanding the transfer of the asset from Branch to CFC 1 on July 1, Year 2. Under paragraph (b)(3)(i) of this section, the applicable rules of the section 987 regulations are applied as if a current rate election was in effect. As a result, the asset transferred from Branch to CFC 1 is treated as a marked item under § 1.987-1(d)(2). Under § 1.987-5(f)(2), CFC 1's basis in the transferred asset is determined by translating its basis (€400x) into dollars at the spot rate applicable on the date of the transfer (€1 = $1.10). Therefore, CFC 1's basis in the asset equals $440x. (2) Example 2: Consistency rule —(i) Facts. FP is a foreign partnership which directly owns 100 percent of the stock of US 1 and US 2, each of which is a domestic corporation that uses the calendar year as its taxable year and has the U.S. dollar as its functional currency. US 1 and US 2 are not affiliates within the meaning of § 1.904(i)-1(b). US 1 directly owns 100 percent of the stock of CFC 1, and US 2 directly owns 100 percent of the stock of CFC 2. CFC 1 and CFC 2 are controlled foreign corporations within the meaning of section 957(a). In Year 1, a CFC exemption election is in effect with respect to CFC 1 but not CFC 2. On July 1, Year 1, US 1 sells all of the stock of CFC 1 to US 2 with a principal purpose of causing a deemed revocation of the CFC exemption election with respect to CFC 1. (ii) Analysis —(A) Application of the general consistency requirement. Before July 1, Year 1, US 1 and CFC 1 are members of a section 987 electing group within the meaning of § 1.987-1(g)(2) because US 1 owns more than 50 percent of the stock of CFC1. Similarly, because US 2 owns more than 50 percent of the stock of CFC2, US 2 and CFC 2 are members of a section 987 electing group. US 1 and US 2 are not members of the same section 987 electing group because they are not affiliates within the meaning of § 1.904(i)-1(b). However, US 1 and US 2 are members of the same controlled group as defined in § 1.987-1(h). As a result of US 2's acquisition of the stock of CFC 1, CFC 1 becomes a member of the US 2 section 987 electing group. Therefore, unless the anti-avoidance rule in paragraph (c)(3) of this section applies, the CFC exemption election would be deemed to be revoked with respect to CFC 1 as of January 1, Year 1. See § 1.987-1(g)(2). (B) Anti-avoidance rule. US 2 acquired the stock of CFC 1 from US 1 with a principal purpose of causing a deemed revocation of the CFC exemption election with respect to CFC 1. Accordingly, under paragraph (c)(3)(i)(A) of this section, the CFC exemption election with respect to CFC 1 remains in effect for Year 1. In addition, under paragraph (c)(3)(ii) of this section, US 2 is deemed to make a CFC exemption election with respect to CFC 2 beginning in Year 1.