Par. 2. Section 1.987-2 is amended by adding paragraph (f) to read as follows:
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(f) Recurring transfer group election—(1) In general. For a taxable year in which a current rate election is in effect, the owner of a section 987 QBU may elect to use the yearly average exchange rate to translate all assets that are transferred to or from the section 987 QBU in a taxable year as part of a recurring transfer group (a recurring transfer group election). The rules of this paragraph (f) apply to all transfers that are part of a recurring transfer group in any taxable year to which the recurring transfer group election applies (regardless of whether transfers of the same kind occurred in the first year to which the election applied).
(2) Recurring transfer group. A recurring transfer group is a group of frequently recurring transfers made between a section 987 QBU and its owner (or another eligible QBU of the owner) in a taxable year that meet the requirements of paragraphs (f)(2)(i) through (iii) of this section.
(i) Ordinary course transfers. The transfers must be made in the ordinary course of a trade or business.
(ii) Specified transactions. The transfers must be made as part of one or more disregarded transactions described in paragraphs (f)(2)(ii)(A) through (C) of this section between the section 987 QBU and its owner (or another eligible QBU of the owner), the compensation for which would satisfy the principles of the arm's length standard (within the meaning of § 1.482-1(b)) if the section 987 QBU were treated as a separate corporation. Transfers made in connection with different disregarded transactions described in paragraphs (f)(2)(ii)(A) through (C) of this section in the same taxable year are treated as part of a single recurring transfer group.
(A) Sales of inventory;
(B) Payments for services;
(C) Rents or royalties.
(iii) Distributions and contributions excluded. A transfer is not included in a recurring transfer group if the transfer (or any portion of the transfer) would be treated as a distribution with respect to stock, or an exchange for stock (or a contribution to capital), if the section 987 QBU were treated as a separate corporation.
(3) Consistency requirement. The determination as to which transfers are included in a recurring transfer group must be made consistently from year to year. However, this determination may change from one year to the next based on changes in the nature and timing of the relevant transfers.
(4) Effect of recurring transfer group election. Except as provided in paragraph (f)(6) of this section, in a taxable year in which a recurring transfer group election is in effect, assets that are transferred to or from a section 987 QBU in a taxable year as part of a recurring transfer group ( grouped assets ) are translated under paragraph (d) of this section and §§ 1.987-4(d)(2) and 1.987-5(f) by deeming the spot rate applicable on the date of each transfer to be equal to the yearly average exchange rate for the taxable year. However, if the Commissioner determines that the use of the yearly average exchange rate to translate grouped assets in a taxable year does not clearly reflect income, the Commissioner may require some or all transfers of the grouped assets to be excluded from the recurring transfer group or may prescribe the use of a different exchange rate to translate the grouped assets.
(5) Accounting for a disregarded transfer group in determining unrecognized section 987 gain or loss for the taxable year —(i) In general. Except as provided in paragraph (f)(5)(ii) or (f)(6) of this section, in a taxable year in which a recurring transfer group election is in effect, transfers of grouped assets are disregarded for purposes of § 1.987-4(d)(2) and (3) (steps 2 and 3).
(ii) Exception. Paragraph (f)(5)(i) of this section does not apply to a section 987 QBU in a taxable year in which the owner determines QBU net value with respect to the section 987 QBU under the steps provided in § 1.987-4(e)(2)(iii) (alternative formula for determining QBU net value without preparing an adjusted balance sheet).
(6) Exception for taxable years in which a disproportionate amount of grouped assets is transferred in one or more quarters of the taxable year —(i) In general. Paragraphs (f)(4) and (5) of this section do not apply to a section 987 QBU in a taxable year in which—
(A) More than 50 percent of the total amount of grouped assets transferred to or from the section 987 QBU during the taxable year is transferred during one quarter of the taxable year; or
(B) More than 80 percent of the total amount of grouped assets transferred to or from the section 987 QBU during the taxable year is transferred during two quarters of the taxable year.
(ii) Amount of grouped assets transferred. For the purpose of applying paragraph (f)(6)(i) of this section, the amount of grouped assets transferred to or from a section 987 QBU in a taxable year and in each quarter of the taxable year is determined in the functional currency of the section 987 QBU by reference to the aggregate of the amount of functional currency transferred and the basis of the other assets transferred (taking into account the total gross amount of both the transfers from the section 987 QBU to the owner or another eligible QBU of the owner and the transfers from the owner or another eligible QBU of the owner to the section 987 QBU). For this purpose, amounts transferred from the owner (or another eligible QBU of the owner) to the section 987 QBU are translated into the section 987 QBU's functional currency at the yearly average exchange rate.
(iii) Short taxable year. For purposes of applying this paragraph (f)(6) in a short taxable year, each quarter comprises a number of days equal to one fourth of the total number of days in the taxable year. If a section 987 QBU did not exist for the full taxable year of the owner, this paragraph (f)(6) is applied with respect to the section 987 QBU by treating the taxable year as comprising the portion of the taxable year in which the section 987 QBU existed.
(7) Examples. The following examples illustrate the application of this paragraph (f). For purposes of the examples, DC1 is a domestic corporation that owns Business A, a section 987 QBU that has the euro as its functional currency. In year 1, DC1's home office provides services to Business A in exchange for arm's length cash payments (within the meaning of § 1.482-1(b)). The payments are made in the ordinary course of the Business A trade or business. A current rate election and a recurring transfer group election are in effect for year 1. DC1 does not determine QBU net value with respect to Business A under the steps provided in § 1.987-4(e)(2)(iii).
(i) Example 1: Transfers treated as part of a recurring transfer group —(A) Facts. In year 1, Business A made 50 payments for services to DC1's home office, totaling €30,000x. Of this amount, Business A paid €5,000x in the first quarter of year 1, €7,500x in the second quarter of year 1, €10,000x in the third quarter of year 1, and €7,500x in the fourth quarter of year 1. No other transfers were made between Business A and DC1 for year 1.
(B) Analysis —( 1 ) Recurring transfer group. Under paragraph (c)(2) of this section, each payment for services is treated as a transfer of assets from Business A to DC1. These transfers qualify as a recurring transfer group under paragraph (f)(2) of this section because they are frequently recurring payments for services made in the ordinary course of the Business A trade or business that would satisfy the principles of the arm's length standard (within the meaning of § 1.482-1(b)) if Business A were treated as a separate corporation. In addition, the exception in paragraph (f)(6) of this section does not apply because Business A did not transfer more than 50 percent of the total amount of grouped assets transferred in year 1 in any one quarter, and Business A did not transfer more than 80 percent of the total amount of grouped assets transferred in year 1 in any two quarters.
( 2 ) Effect of recurring transfer group election. Under paragraph (f)(4) of this section, because Business A's transfers to DC1 comprise a recurring transfer group, DC1 applies § 1.987-5(f) by deeming the spot rate applicable on the date of each transfer to be equal to the yearly average exchange rate for year 1. As a result, DC1 determines its basis in the euros received from Business A by translating the total amount of euros transferred in year 1 at the yearly average exchange rate for year 1. In addition, under paragraph (f)(5) of this section, the transfers are disregarded for purposes of determining unrecognized section 987 gain or loss for year 1 under § 1.987-4(d)(2).
(ii) Example 2: Disproportionate transfers —(A) Facts. The facts are the same as in paragraph (f)(7)(i) of this section ( Example 1 ), except that most of the payments are made in the fourth quarter of year 1 to compensate DC1's home office for additional services provided at the end of year 1. Specifically, of the €30,000 paid by Business A for services in year 1, €18,000x is transferred in the fourth quarter of year 1, and €4,000x is transferred in each of the first three quarters of year 1.
(B) Analysis. The amount of grouped assets transferred in the fourth quarter (€18,000x) exceeds 50 percent of the total amount of grouped assets transferred in year 1 (€30,000x). Therefore, under paragraph (f)(6) of this section, paragraphs (f)(4) and (5) of this section do not apply. As a result, DC1 determines its basis in the euros received from Business A by translating each transfer at the applicable spot rate under § 1.987-5(f), and DC1 must take each transfer into account for purposes of determining unrecognized section 987 gain or loss for year 1 under § 1.987-4(d)(2).
(iii) Example 3: Determination of the transfers including in a recurring transfer group over multiple taxable years —(A) Facts. The facts in year 1 are the same as in paragraph (f)(7)(i) of this section ( Example 1 ). The recurring transfer group election remains in effect in years 2 and 3. In year 2, DC1's home office continues to provide services to Business A in exchange for arm's length cash payments made in the ordinary course of the Business A trade or business. Additionally, in year 2, Business A begins to sell Product X inventory to Business B, an eligible QBU of DC1 that is not a section 987 QBU, in exchange for arm's length cash payments. In year 3, DC1's home office no longer provides services to Business A, but Business A continues to sell Product X inventory to Business B in exchange for arm's length cash payments. Additionally, in year 3, Business A begins to sell Product Y inventory to Business B in exchange for arm's length cash payments. In each of years 1, 2, and 3, the transfers to and from Business A are made on a frequent basis in the ordinary course of the Business A trade or business.
(B) Analysis. In year 1, the cash payments for services made by Business A to DC1's home office are part of a recurring transfer group. In year 2, the recurring transfer group includes the cash payments for services made by Business A to DC1's home office, the transfers of Product X inventory from Business A to Business B, and the cash payments made by Business B to Business A in connection with the inventory sales. In year 3, the recurring transfer group includes the transfers of Product X inventory and Product Y inventory from Business A to Business B and the cash payments made by Business B to Business A in connection with the inventory sales. Therefore, in each of years 1, 2, and 3, unless the exception in paragraph (f)(6) of this section applies, the grouped assets are translated at the yearly average exchange under paragraph (f)(4) of this section, and the transfers of the grouped assets are disregarded for purposes of determining unrecognized section 987 gain or loss under § 1.987-4(d)(2) and (3).
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