# Prop. Treas. Reg. § 1.987-7A: Partnerships and S corporations that own section 987 QBUs. Proposed regulation, not in force. REG-132422-17, 88 FR 78134, published 2023-11-14 . Interprets 26 U.S.C. § 987. 13. Section 1.987-7A is added to read as follows: (a) Scope and special rule —(1) In general. This section provides rules applicable to partnerships (other than section 987 aggregate partnerships) and S corporations that own section 987 QBUs and their partners and shareholders. Paragraph (b) of this section provides the general rule that partnerships are treated as owners of section 987 QBUs. Paragraph (c) of this section provides special rules that apply to section 987 QBUs owned by partnerships and their partners. Paragraph (d) of this section provides rules for adjusting the partner's basis in its partnership interest for its section 987 gain or loss allocated from the partnership. Paragraph (e) of this section is reserved for rules regarding the treatment of section 987 gain or loss when a partner transfers or otherwise reduces its interest in a partnership. Paragraph (f) of this section is reserved for special rules regarding the source and character of section 987 gain and loss of a partner with respect to a section 987 QBU owned by a partnership that would apply in addition to § 1.987-6. Paragraph (g) of this section provides that S corporations are treated in the same manner as partnerships for purposes of the section 987 regulations. Paragraph (h) of this section provides examples. (2) References to partnerships are to non-section 987 aggregate partnerships. For purposes of the section 987 regulations, references to “partnerships” are treated as references to partnerships that are not section 987 aggregate partnerships, except where the context otherwise requires. (b) Partnerships treated as owners of section 987 QBUs. Except as otherwise provided, the section 987 regulations apply to a partnership that is the owner of a section 987 QBU in the same manner as they apply to other owners of section 987 QBUs. See paragraph (c) of this section and § 1.987-1(b)(1)(ii) (de minimis rule), providing special rules for partnerships that are owners of a section 987 QBU. Thus, for example, if a partnership owns an eligible QBU with a functional currency that is different from the functional currency of the partnership, the eligible QBU is a section 987 QBU, the partnership is its owner, and the unrecognized section 987 gain or loss of the section 987 QBU for a taxable year is determined under § 1.987-4(d) by reference to the functional currency of the partnership and the section 987 QBU. (c) Section 987 QBUs owned by partnerships —(1) Annual allocation of a partnership's unrecognized section 987 gain or loss to its partners —(i) In general. This paragraph (c)(1) applies to each taxable year of a partnership and with respect to each section 987 QBU of the partnership. A partnership determines its unrecognized section 987 gain or loss for a taxable year under § 1.987-4(d) with respect to each section 987 QBU. The partnership allocates to each partner the partner's share of the unrecognized section 987 gain or loss for a taxable year with respect to each section 987 QBU. The partnership determines each partner's share of unrecognized section 987 gain or loss for a taxable year under paragraph (c)(1)(ii) of this section. Each partner translates its share of unrecognized section 987 gain or loss for a taxable year into the partner's functional currency, if necessary, at the yearly average exchange rate for the partnership's taxable year. (ii) Determination of partner's share of unrecognized section 987 gain or loss. A partnership determines a partner's share of any unrecognized section 987 gain or loss for the taxable year with respect to a section 987 QBU based on the partner's distributive share of profits or losses with respect to the section 987 QBU for the taxable year, as determined by the partnership agreement. The principles of section 706(d) apply to this determination. (iii) Partner-level attribute. Net unrecognized section 987 gain or loss, deferred section 987 gain or loss, and suspended section 987 loss of a partner that are attributable to a partnership are attributes of the partner (not the partnership). As a result, the section 987 gain or loss cannot be used by the partnership or any other partner, including any person that acquires the partner's partnership interest (other than in a transaction described in section 381(a)). (2) Net unrecognized section 987 gain or loss with respect to a section 987 QBU is determined at the partner level. A partner determines its net unrecognized section 987 gain or loss with respect to a section 987 QBU owned by a partnership under § 1.987-4(b) and (c) at the partner level by taking into account the partner's share of unrecognized section 987 gain or loss with respect to the section 987 QBU owned by a partnership. (3) Recognition (or suspension) of net unrecognized section 987 gain or loss upon remittance. With respect to a section 987 QBU owned by a partnership, a person that is a partner on the last day of the partnership's taxable year determines the amount of its net unrecognized section 987 gain or loss that is recognized under § 1.987-5(a) by reference to its net unrecognized section 987 gain or loss with respect to the section 987 QBU (after taking into account the adjustments under paragraphs (c)(1) and (4) of this section) and the partnership's remittance proportion, as determined under § 1.987-5(a)(2). (4) Deferred section 987 gain or loss and suspended section 987 loss —(i) Loss to the extent of gain rule applied at the partner level. The amount of suspended section 987 loss recognized and taken into account by a partner under § 1.987-11(e) (loss to the extent of gain rule) is determined by reference to section 987 gain recognized by the partner, without regard to whether the section 987 gain is attributable to a section 987 QBU owned by a partnership. (ii) Partner- and partnership-level application of §§ 1.987-11 through 1.987-13 —(A) Partner owns an interest in the partnership. During the time in which a partner or its controlled group owns an interest in a partnership from which it was allocated unrecognized section 987 gain or loss, §§ 1.987-11 through 1.987-13 are applied by treating the partnership as the owner, original deferral QBU owner, or original suspended loss QBU owner, as appropriate, and treating the partner's net unrecognized section 987 gain or loss as deferred section 987 gain or loss or suspended section 987 loss, as appropriate. (B) Termination of partner's interest in the partnership. If the partner ceases to own an interest in a partnership from which it was allocated unrecognized section 987 gain or loss, then each successor deferral QBU or successor suspended loss QBU of the partnership is retested under § 1.987-12(b) or 1.987-13(c) and treated as if the partner had transferred the eligible QBU to its actual owner immediately after the partner ceased to own an interest in the partnership. Accordingly, if the owner of the eligible QBU is not a member of the partner's controlled group, the partner may recognize its deferred section 987 gain or loss or suspended section 987 loss to the extent provided in § 1.987-12(b) or 1.987-13(c). (5) Section 987 elections —(i) Elections made by the partnership. Except as provided in paragraph (c)(6)(ii) of this section, section 987 elections are made by the partnership and apply to the partnership and section 987 gain or loss attributable to the partnership. See section 703(b); see also § 1.987-1(g) (additional rules regarding section 987 elections). (ii) Elections made by partner —(A) Annual recognition election in certain cases. If a person ceases to be a partner in a partnership and becomes an original deferral QBU owner or original suspended loss QBU owner, that person (and not the partnership) may make the annual recognition election under § 1.987-5(b)(2) with respect to its deferred section 987 gain or loss or suspended section 987 loss that was originally attributable to a section 987 QBU of the partnership. (B) Election to recognize pretransition section 987 gain or loss ratably. The election to recognize pretransition section 987 gain or loss ratably over the transition period under § 1.987-10(e)(5)(ii) is made by a partner, and not the partnership. (d) Basis adjustments —(1) In general. When, and to the extent that, a partner recognizes section 987 gain or loss, defers section 987 gain or loss, or suspends section 987 loss attributable to the partnership, the partner's adjusted basis in the partnership is adjusted under the principles of section 705 as if the item of income or loss was part of the partner's distributive share of partnership items. (2) Tiered-partnership structures. If a partner (upper-tier partner) that adjusts its basis in a partnership under paragraph (d)(1) of this section owns the partnership indirectly through one or more other partnerships, the partner adjusts its basis in the partnership in which it owns a direct interest, and that partnership adjusts its basis in the partnership in which it owns a direct interest, with similar rules applying to each successive partnership through which the upper-tier partner owns its interest in the lower-tier partnership to which the section 987 gain or loss was attributable. The adjustment with respect to an interest in a lower-tier partnership constitutes a basis adjustment solely with respect to the partner that adjusts its basis in the upper-tier partnership under paragraph (d)(1) of this section. (e) through (f) [Reserved] (g) S corporations treated as partnerships. For purposes of the section 987 regulations, S corporations are treated in the same manner as partnerships and shareholders of S corporations are treated in the same manner as partners of partnerships. Thus, for example, if an S corporation is the owner of a section 987 QBU, the unrecognized section 987 gain or loss of the section 987 QBU would be allocated annually to its shareholders. (h) Examples. The following examples illustrate the principles of this section. For purposes of these examples, DC1 and DC2 are domestic corporations, FC1 and FC2 are controlled foreign corporations that use the euro as their functional currency, DE1 and DE2 are disregarded entities, Business A is an eligible QBU that has the euro as its functional currency, and Business B is an eligible QBU that has the pound as its functional currency. Each person is a calendar year taxpayer. Except as otherwise indicated, no section 987 elections are in effect during any of the periods described in the examples. Exchange rates used in these examples are selected for the purpose of illustrating the principles of this section and no inference is intended by their use. (1) Example 1 —(i) Facts. DC1 wholly owns FC1 and DC2 wholly owns FC2. FC1 and FC2 are not related within the meaning of section 267(b) or 707(b). FC1 and FC2 each own a 50 percent interest in P, a foreign partnership. P owns 100 percent of DE1, which owns Business A. P also owns 100 percent of DE2, which owns Business B. The partnership agreement provides that FC1 and FC2 will each be allocated 50 percent of the profits and losses from both Business A and Business B. P's functional currency is the euro. (ii) Analysis. Because P's two partners, FC1 and FC2, are not related within the meaning of section 267(b) or 707(b), P is not treated as a section 987 aggregate partnership under § 1.987-1(h). As a result, pursuant to § 1.987-1(b)(5), P is the owner of Business A and Business B because it has direct ownership of Business A and Business B, each of which is an eligible QBU. Because Business A is an eligible QBU with the same functional currency as its owner, P, Business A is not a section 987 QBU § 1.987-1(b)(3)(i). However, Business B is an eligible QBU with a functional currency that is different from the functional currency of its owner, P. As a result, Business B is a section 987 QBU under § 1.987-1(b)(3)(i), and P is its owner under § 1.987-1(b)(5) and paragraph (b) of this section. (2) Example 2 —(i) Facts. The facts are the same as in paragraph (h)(1) of this section ( Example 1 ). In year 1, P has unrecognized section 987 gain (determined under § 1.987-4(d)) with respect to Business B of €100. In year 2, P has unrecognized section 987 loss with respect to Business B of €60. In year 3, P has unrecognized section 987 loss with respect to Business B of €120. In year 3, Business B transfers €50 to P on December 31. Following the transfer, its gross assets are €450. There are no other transfers between Business B and P in year 3. (ii) Analysis —(A) Partner's net unrecognized section 987 gain or loss. Pursuant to paragraph (c)(1) of this section, in each of years 1, 2, and 3, P allocates to FC1 and FC2 their respective shares of the unrecognized section 987 gain or loss for the P taxable year with respect to its section 987 QBU, Business B. FC1 and FC2's share of the unrecognized section 987 gain or loss in each taxable year is based on their distributive share of the profits or losses with respect to Business B. Accordingly, in year 1, P allocates unrecognized section 987 gain of €50 to each of FC1 and FC2; in year 2, P allocates unrecognized section 987 loss of €30 to each of FC1 and FC2; and in year 3, P allocates unrecognized section 987 loss of €60 to each of FC1 and FC2. As a result, in year 3, before taking into account any amount recognized under § 1.987-5, FC1 and FC2 each have net unrecognized section 987 loss with respect to Business B of €40 (€50−€30−€60) under § 1.987-4(b) and paragraphs (c)(1) and (2) of this section. (B) Recognition of section 987 loss. Because Business A distributed €50 to P in year 3, P's remittance proportion is 10 percent (€50 over the sum of €450 and €50) under § 1.987-5(b). As a result, each partner, FC1 and FC2, recognizes 10 percent of its net unrecognized section 987 loss with respect to Business B under § 1.987-5(a) and paragraph (c)(3) of this section. Accordingly, FC1 and FC2 each recognize €4 (€40 × 10 percent) section 987 loss in year 3 and have net accumulated unrecognized section 987 loss of €36 (€40−€4) in year 4. FC1's adjusted basis in its partnership interest is reduced by €4 and FC2's adjusted basis in its partnership interest is reduced by €4 under the principles of section 705, under paragraph (d)(1) of this section. (3) Example 3 —(i) The facts are the same as in paragraph (h)(2) of this section ( Example 2 ), except that in years 1 through 3, FC1 has a current rate election in effect and FC2 has an annual recognition election in effect. (ii) Analysis. The analysis is the same as in paragraph (h)(2) of this section ( Example 2 ). Because P does not have a current rate election in effect, FC1 can recognize the section 987 loss of €4 in year 3 without limitation under § 1.987-11(e) pursuant to paragraph (c)(5)(i) of this section. Similarly, because P does not have an annual recognition election in effect, while FC2 is a partner in P, FC2 does not recognize its section 987 gain or loss with respect to Business B on an annual basis pursuant to paragraphs (c)(5)(i) and (c)(5)(ii)(A) of this section. (4) Example 4 —(i) Facts. The facts are the same as in paragraph (h)(2) of this section ( Example 2 ), except that FC2 has the Japanese yen as its functional currency during all relevant time periods. The yearly average exchange rate is €1 = ¥150 in year 1; €1 = ¥175 in year 2; and €1 = ¥125 in year 3. (ii) Analysis. Each year, FC2 converts its share of P's unrecognized section 987 gain or loss into yen at the yearly average exchange rate pursuant to paragraph (c)(1)(i) of this section. As a result, in year 1, FC2's share of the unrecognized section 987 gain with respect to Business B is ¥7,500 (€50 section 987 gain converted to yen at the yearly average exchange rate of €1 = ¥150); in year 2, FC2's share of the unrecognized section 987 loss with respect to Business B is ¥5,250 (€30 section 987 loss converted to yen at the yearly average exchange rate of €1 = ¥175); and in year 3, FC2's share of the unrecognized section 987 loss with respect to Business B is ¥7,500 (€60 section 987 loss converted to yen at the yearly average exchange rate of €1 = ¥125). In year 3, FC2's net unrecognized section 987 loss with respect to Business B is ¥5,250 (¥7,500−¥5,250−¥7,500). As explained in paragraph (h)(2)(i)(B) of this section ( Example 2 ), P's remittance proportion with respect to Business B is 10 percent. Therefore, FC2 recognizes section 987 loss of ¥525 under § 1.987-5(a) and paragraph (c)(3) of this section. FC2's net accumulated unrecognized section 987 loss with respect to Business B in year 4 is ¥4,725 (¥5250−¥525). FC2's adjusted basis in its partnership interest is reduced by ¥525 under the principles of section 705, under paragraph (d)(1) of this section.