CFC Section 987 Election Relief

The U.S. Department of the Treasury and the IRS issued proposed regulations that would allow a controlling U.S. shareholder to elect to exempt its CFCs from having to compute or recognize Section 987 gain or loss on ordinary remittances received from a QBU. The CFC exemption election first was previewed in Notice 2026-17. Comments and hearing requests are due by Nov. 12, 2026.

Background

Section 987, which generally requires recognition of gain or loss on foreign currency exchanges, applies to QBUs with a functional currency that differs from its owner’s. Section 987(1) and (2) govern the determination and translation of QBU taxable income or loss. Section 987(3) generally requires recognition of foreign currency gain or loss for transfers, including remittances, between QBUs with different functional currencies.

The 2024 final regulations generally apply Section 987(3) to CFCs with respect to their QBUs. The preamble to the 2024 regulations discusses comments questioning whether a rule requiring full remittance recognition is even necessary given that many CFCs use nondollar functional currencies. In response to these comments, Notice 2026-17 previewed an election to exempt CFCs from Section 987(3). The notice also included other rules to simplify the 2024 final regulations, including an equity and basis pool method, narrowed loss suspension rules, modified successor definitions, and expanded hedging relief.

Highlights of the proposed regulations

The proposed regulations only implement the CFC exemption election previewed in Notice 2026-17. The proposed regulations do not address the other Section 987 issues raised in the notice.

The CFC exemption election generally would prevent a CFC subject to the election (exempt CFC) from computing or recognizing Section 987 gain or loss while the election is in effect, including gains or losses triggered by ordinary remittances from the QBU to the CFC or QBU terminations. Sections 987(1) and (2) would continue to apply to CFCs for taxable income, earnings, and profits purposes in translating their QBUs’ taxable income and loss. The proposed regulations would treat a current rate election as in effect, which treats most balance sheet items as marked items translated at current exchange rates, thereby reducing the need to track historical exchange rates and related calculations.

Crowe observation

The CFC group election reduces complexity and recordkeeping associated with Section 987 computations.

The election would trigger strict consistency rules, including rules requiring the following:

• Affiliated domestic corporations described in Treasury Regulation Section 1.904(i)-1(b) generally would be treated as a single U.S. person
• CFC stock held through a domestic partnership would be subject to a look-through rule
• Related-party anti-avoidance rules to prevent transactions designed to avoid or manipulate election status

For taxable years beginning after Dec. 31, 2024, and ending on or before Dec. 31, 2026, the election is made on an original, timely filed return (including extension) of the controlling U.S. shareholder of the CFC. For the 2025 tax year, the election can be made on the controlling U.S. shareholder’s amended return filed on or before Oct. 15, 2027. For taxable years ending in 2027, the election also would need to be filed on or before Oct. 15, 2027.

Once made, the CFC exemption election cannot be revoked without consent. If the election is revoked, each QBU owned by the CFC is treated as a newly formed entity on the first day of the taxable year in which the revocation occurs. As a result, all QBU assets and liabilities establish a fresh exchange rate baseline as of that date. Historical rates on acquisition dates would not be needed. If the election is revoked within the first 60 months, remaining pre-election losses generally would become suspended, while pre-election gains would continue to be recognized.

Crowe observation

Because the election is made on a groupwide basis rather than a QBU-by-QBU basis, taxpayers should evaluate Section 987 positions, ownership changes, and expected restructurings across the group to determine whether to make the election.

The election would not eliminate Section 987 gain or loss that arose before the election became effective. For the first year the election is effective, an exempt CFC generally would combine net unrecognized gain or loss, outstanding deferred amounts, and cumulative suspended losses and recognize the result ratably over 120 months unless the Section 987 transition rules provide rules for treatment of these items. For a QBU with three-year average assets below $50 million on a U.S. GAAP balance sheet, deferred Section 987 gain or loss and suspended Section 987 losses are treated as zero. Assets of same-country QBUs are aggregated to determine whether assets meet the $50 million threshold. The exemption also would apply to certain QBUs owned by or through partnerships, including those held by partnerships at least 80% owned by exempt CFCs in the same controlled group.

The exempt CFC would be required to recognize Section 987 gain arising immediately before certain inbound Section 332 liquidations or Section 368(a)(1) asset reorganizations if the election applied for a tax year ending within 72 months of the liquidation or reorganization. The gain would equal the CFC’s Section 987 asset basis, which approximates basis increases attributable to exchange rate movements and would be calculated using either a lookback over the preceding 72 months or the Section 367(b) excess asset basis method. No loss would be recognized, and the gain would not increase the U.S. acquirer’s basis. A de minimis exception generally would apply if the CFC’s inside asset basis is less than $25 million.

Crowe observation

Inbound restructuring diligence would need to include a separate Section 987 workstream because Section 987 gain could arise even though the transaction itself otherwise qualifies for nonrecognition treatment.

The proposed regulations also would refine the mechanics of the pre-transition gain or loss amortization election under Treasury Regulation 1.987-10(e)(5)(ii). Pre-transition gain or loss is unrecognized Section 987 gain or loss that accrued generally through tax years beginning before Jan. 1, 2025. The proposed rule would require recognition on a ratable 120-calendar-month basis rather than a 10-year basis as required under Treasury Regulation 1.987-10(e)(5)(ii). As a result, under the proposed regulations a QBU owner with a one-month short taxable year would recognize only 1/120 of its accrued pre-transition position for that period rather than 1/10 under the current regulations.

Crowe observation

Making the election after the 2025 tax year could require taxpayers to track both pre-transition and pre-election amortization schedules.

Generally, the regulations are proposed to apply to tax years ending on or after the date they are finalized. The 120-month pre-transition gain or loss amortization rule is proposed to apply to taxable years beginning after Dec. 31, 2024, and ending on or after Nov. 25, 2025. Taxpayers can rely on the proposed regulations to make the election for tax years beginning after Dec. 31, 2024, and before the regulations are finalized as long as the taxpayer and all consolidated and Section 987 electing group members apply the rules consistently.

Looking ahead

Taxpayers should consult their tax advisers to determine how the proposed rules might affect the currency gain or loss under Section 987 associated with their CFCs. Additionally, Treasury and the IRS have indicated that separate proposed regulations will address the remaining Notice 2026-17 items. Therefore, taxpayers should consult their tax advisers to keep up to date on the latest developments.