Par. 5. Section 1.987-7 is amended by: 1. Revising paragraph (b); 2. In paragraph (c)(2)(i), removing the language “1.987-15” and adding the language “1.987-17” in its place; and 3. Adding paragraphs (c)(2)(iv) and (d)(2)(iv). The revisions and additions read as follows:
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(b) Section 987 regulations generally do not apply to partnerships —(1) In general. Except as otherwise provided in this section, the section 987 regulations do not apply to a partnership, and the section 987 regulations do not apply to an eligible QBU if a partnership is the direct owner of the eligible QBU.
(2) Application of section 987 and section 989(a). In general, a taxpayer must apply sections 987 and 989(a) to partnerships and eligible QBUs directly owned by partnerships in a reasonable manner. However, in the case of an exempt partnership QBU, section 987(3) applies only to the extent provided in §§ 1.987-15 and 1.987-16.
(i) Consistency. In applying sections 987 and 989(a) with respect to a partnership or an eligible QBU directly owned by a partnership, taxpayers must use the same method consistently from year to year with respect to a particular partnership or eligible QBU. In addition, all members of the same controlled group must apply the same method consistently with respect to a particular partnership or eligible QBU.
(ii) Tiered partnerships. For purposes of the section 987 regulations, a taxpayer that owns an interest in a partnership ( lower-tier partnership ) indirectly through one or more other partnerships is treated as a partner in the lower-tier partnership.
(iii) Exempt partnership QBU. For purposes of the section 987 regulations, an exempt partnership QBU is a partnership (or an interest in the partnership) or an eligible QBU directly owned by a partnership, if the taxpayer applies sections 987 and 989(a) using a method under which—
(A) The partnership, interest in the partnership, or eligible QBU is a section 987 QBU; and
(B) The owner of the section 987 QBU is either an exempt CFC or an exempt partnership.
(iv) Exempt partnership. For purposes of the section 987 regulations, an exempt partnership is a partnership in which at least 80 percent of the capital or profits interests are owned (directly or indirectly through other partnerships) by exempt CFCs that are members of the same controlled group on the last day of the partnership's taxable year.
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(iv) Rules relating to the CFC exemption election —(A) In general. Sections 1.987-15 and 1.987-16 apply to an exempt partnership QBU.
(B) Certain rules not applicable to exempt partnership QBUs. Notwithstanding paragraphs (c)(2)(i) and (ii) of this section, §§ 1.987-6 and 1.987-11 through 1.987-13 do not apply to an exempt partnership QBU (except to the extent provided in §§ 1.987-15 and 1.987-16), and an annual recognition election does not apply to an exempt partnership QBU.
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(iv) Exempt partnership QBU. Paragraph (d)(1)(ii) of this section does not apply to an exempt partnership QBU.
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