15. Section 1.987-7C is added to read as follows:
(a) In general. This section provides rules for when a partnership becomes or ceases to be a section 987 aggregate partnership. Paragraph (b) of this section provides transition rules regarding partnerships that cease to be section 987 aggregate partnerships but continue to be partnerships. Paragraph (c) of this section provides transition rules regarding partnerships that were not section 987 aggregate partnerships but become section 987 aggregate partnerships. See § 1.987-1(h) for the definition of a section 987 aggregate partnership.
(b) Partnership ceases to be a section 987 aggregate partnership —(1) In general. Solely for purposes of section 987, when a partnership ceases to be a section 987 aggregate partnership but continues to be a partnership, each eligible QBU ( pre-termination QBU ) of a partner owned indirectly through the section 987 aggregate partnership is deemed to terminate and transfer all its assets and liabilities to the partnership (the deemed termination ) and the partnership is then treated as forming each of its eligible QBUs (each, a post-termination QBU ) and transferring to each post-termination QBU the assets and liabilities of the post-termination QBU (including those assets and liabilities that were assets and liabilities of a pre-termination QBU).
(2) Section 987 gain or loss with respect to pre-termination QBU. Notwithstanding the deemed termination described in paragraph (b)(1) of this section, if, immediately before the deemed termination, a partner had any net unrecognized section 987 gain or loss or suspended section 987 loss with respect to a pre-termination QBU that was a section 987 QBU, and after the deemed termination, the assets and liabilities of the pre-termination QBU are assets and liabilities of a post-termination QBU, then either paragraph (b)(2)(i) or (ii) of this section applies.
(i) Post-termination QBU is a section 987 QBU. If the post-termination QBU is a section 987 QBU, then—
(A) Section 1.987-12 (deferral of section 987 gain and loss) does not apply to the deemed termination; and
(B) The partner's net unrecognized section 987 gain or loss or suspended section 987 loss with respect to the pre-termination QBU is not recognized and instead becomes net unrecognized section 987 gain or loss or suspended section 987 loss with respect to the post-termination QBU that is treated as having been allocated to the partner by the partnership.
(ii) Post-termination QBU is not a section 987 QBU. If paragraph (b)(2)(i) of this section does not apply, then § 1.987-13 (rules relating to suspended section 987 loss upon termination) is applied to the transactions described in paragraph (b)(1) of this section as if the partner had transferred the assets and liabilities of the pre-termination QBU to the partnership. Thus, if the partner had suspended section 987 loss with respect to the pre-termination QBU, § 1.987-13(b) may apply to the deemed transfer and the post-termination QBU may be a successor suspended loss QBU. See §§ 1.987-5, 1.987-8, 1.987-11, and 1.987-13 for rules regarding when section 987 gain or loss is recognized on terminations.
(3) Successor deferral QBUs and successor suspended loss QBUs. If a section 987 aggregate partnership ceases to be a section 987 aggregate partnership (the transition )—
(i) If any pre-termination QBU was a successor deferral QBU before the transition, the successor deferral QBU is treated as transferring its assets and liabilities to the post-termination QBU that holds the assets and liabilities after the transition for purposes of §§ 1.987-12 and 1.987-13. See § 1.987-12(c)(2).
(ii) If any pre-termination QBU was a successor suspended loss QBU before the transition, the successor suspended loss QBU is treated as transferring its assets and liabilities to the post-termination QBU that hold the assets and liabilities after the transition for purposes of § 1.987-13. See § 1.987-13(c).
(4) Timing. If a partnership ceases to be a section 987 aggregate partnership within the meaning of § 1.987-1(h), the partnership continues to be treated as a section 987 aggregate partnership until this paragraph (b) is applied. This paragraph (b) is applied immediately after the transaction (or series of transactions) or event (or series of events) that causes the partnership to cease to be a section 987 aggregate partnership (the transition ). Thus, for example, if person acquires an interest in a section 987 aggregate partnership from a partner, and the person is not related to the other partners within the meaning of section 267(b) or 707(b), first the section 987 regulations (such as § 1.987-2(c)(5)) are applied to the transition as if the partnership continued to be a section 987 aggregate partnership; then this paragraph (b) applies to the partnership and its partners (including the acquiring partner) and the partnership ceases to be a section 987 aggregate partnership.
(c) Partnership becomes a section 987 aggregate partnership —(1) In general. Solely for purposes of section 987, when a partnership that was not a section 987 aggregate partnership becomes a section 987 aggregate partnership, each eligible QBU ( pre-termination QBU ) of the partnership is deemed to terminate and transfer all of its assets and liabilities to the partnership (the deemed termination ) and the partnership is treated as forming each eligible QBU ( post-termination QBU ) that is indirectly owned by a partner (the partner-owner ) and transferring to each post-termination QBU the partner-owner's share of the assets and liabilities of the partnership's eligible QBU .
(2) Section 987 gain or loss with respect to pre-termination QBU. Notwithstanding the deemed termination described in paragraph (c)(1) of this section, if a partner-owner had any net unrecognized section 987 gain or loss or suspended section 987 loss with respect to a pre-termination QBU that was a section 987 QBU, then either paragraph (c)(2)(i) or (ii) of this section applies.
(i) Post-termination QBU is a section 987 QBU. If, after the deemed termination, the partner-owner's indirectly owned post-termination QBU that relates to its share of the assets and liabilities of the pre-termination QBU is a section 987 QBU of the partner-owner, then—
(A) Section 1.987-12 does not apply to the deemed termination of the pre-termination QBU; and
(B) The partner-owner's net unrecognized section 987 gain or loss or suspended section 987 loss with respect to the pre-termination QBU is not recognized and instead becomes net unrecognized section 987 gain or loss or suspended section 987 loss with respect to the post-termination QBU.
(ii) Post-termination QBU is not a section 987 QBU. If paragraph (c)(2)(i) of this section does not apply, then paragraphs (c)(2)(ii)(A) and (B) of this section are applied sequentially.
(A) First, paragraph (c)(2)(i) of this section is applied as if the post-termination QBU was a section 987 QBU (the deemed section 987 QBU ) after the deemed termination.
(B) Second, the section 987 regulations are applied as if the deemed section 987 QBU had transferred its assets and liabilities to the post-termination QBU. Thus, if the partner-owner had suspended section 987 loss with respect to the pre-termination QBU, § 1.987-13(b) may apply to the deemed transfer and the post-termination QBU may be a successor suspended loss QBU. See §§ 1.987-5, 1.987-8, 1.987-11, and 1.987-13 for rules regarding when section 987 gain or loss is recognized on terminations.
(3) Successor deferral QBUs and successor suspended loss QBUs. If a partnership that was not a section 987 aggregate partnership becomes a section 987 aggregate partnership (the transition )—
(i) If the partnership owned any successor deferral QBUs before the transition, each successor deferral QBU is treated as transferring its assets and liabilities to the indirectly owned QBUs that hold the assets and liabilities after the transition for purposes of §§ 1.987-12 and 1.987-13. See § 1.987-12(c)(2).
(ii) If the partnership owned any successor suspended loss QBUs before the transition, each successor suspended loss QBU is treated as transferring its assets and liabilities to the indirectly owned QBUs that hold the assets and liabilities after the transition for purposes of § 1.987-13. See § 1.987-13(c).
(iii) If the partnership was an original deferral QBU owner with respect to a successor deferral QBU before the transition, each partner that has deferred section 987 gain or loss with respect to the successor deferral QBU becomes an original deferral QBU owner with respect to the successor deferral QBU for purposes of § 1.987-12.
(iv) If the partnership was an original suspended loss QBU owner with respect to a successor suspended loss QBU before the transition, each partner that has suspended section 987 loss with respect to the successor suspended loss QBU becomes an original suspended loss QBU owner with respect to the successor suspended loss QBU.
(4) Timing. If a partnership that was not a section 987 aggregate partnership becomes a section 987 aggregate partnership within the meaning of § 1.987-1(h), the partnership is not treated as a section 987 aggregate partnership until this paragraph (c) is applied. This paragraph (c) is applied immediately after the transaction (or series of transactions) or event (or series of events) that causes the partnership to become a section 987 aggregate partnership (the transition ). Thus, for example, if a person acquires an interest in a partnership that is not a section 987 aggregate partnership from a partner, and as a result of the acquisition, all of the partners are related within the meaning of section 267(b) or 707(b), first the section 987 regulations (such as § 1.987-7A(e)) are applied to the transition as if the partnership was not a section 987 aggregate partnership; then this paragraph (c) applies to the partnership and its partners (including the acquiring partner) and the partnership becomes a section 987 aggregate partnership.