Prop Regs Allow Election to Exempt CFCs from 987 Gains and Losses on Remittances from QBUs

On Thursday, August 13th, the Treasury released proposed regulations under section 987 (the “Prop Regs”) that would permit CFCs to elect out of section 987 (a “CFC Exemption Election” and, once elected, an “Exempt CFC”) as it applies to determine gains and losses on remittances from the CFC’s qualified business units (“QBUs”), except for in certain inbound liquidations and reorganizations.[1]

The Prop Regs provide far more detail than the rules as forecast in Notice 2026-17 and would generally allow taxpayers to rely upon them for taxable years beginning after December 31, 2024 and before the date that such regulations are finalized, provided that certain consistency requirements are met. For example:

• The Prop Regs provide rules that exempt certain partnerships and/or the QBUs owned by those partnerships when 80% of the capital and/or profits are owned by Exempt CFCs in the same controlled group.
• Taxpayers making a CFC Exemption Election must generally recognize any pre-election section 987 gain or loss that hasn’t already been recognized under the transition rules in the 2024 final section 987 regulations over 120 months.
  • A de minimis exception is provided from the recognition of pre-election section 987 gain or loss for certain QBUs with less than $50 million (under US GAAP principles) in assets, averaged over the three years preceding the CFC Exemption Election. For this purpose, all QBUs that have their principal places of business in the same country are treated as a single QBU.
• Importantly, the rules provide coordination between the rules for transition to the final 2024 section 987 regulations and the Prop Regs and amortization of pre-transition and pre-election section 987 gains and losses.
  • For example, taxpayers would generally be deemed to make the election to amortize pretransition section 987 gains and losses over 120 months if their CFC Exemption Election is for their first taxable year beginning on their transition date to the final 2024 section 987 regulations. This may be of import to those taxpayers that did not elect to amortize their CFC’s pretransition section 987 gain or loss under the 2024 final section 987 regulations or those that elected to amortize over 10 taxable years.
• The Prop Regs provide rules for making the election, consistency requirements for groups and dispositions as well as provides some anti-abuse rules for transfers of Exempt CFCs with pre-election losses.
• Notably, section 987 still applies to Exempt CFCs if and when they are involved in inbound liquidations and certain inbound reorganizations. The manner of computing the section 987 gain (but not loss) recognized by reason of such events is highly complex and provides two options to do so as well as a de minimis rule.
• Perhaps most importantly, while the rules will ultimately require a CFC Exemption Election to be made before the start of the taxable year to which the CFC Exemption Election applies, for years beginning after December 31, 2024 and ending on or before December 31, 2027, the CFC Exemption Election can be made on an amended return filed or before October 15, 2027. Once the CFC Exemption Election is made, however, it generally cannot be revoked without the consent of the Secretary.

Depending upon your facts, there may be significant planning opportunities presented by the choice and timing of a CFC Exemption Election. Please contact Mike Harper (mharper@kbfadvisory.com) if you would like to discuss.

Please note further that we will be offering a webcast to explore the Prop Regs as well as other provisions of Notice 2026-17 that may simplify your TYE 2025 filing requirements (and/or improve your results) with regard to the computation and recognition of section 987 gains and losses. Please stay tuned as we work to finalize a date for the webcast in mid-September. If you are interested in ensuring you will receive an invitation as soon as the date is set, please email Keisha Pena at kpena@kbfadvisory.com to let her know to put you on the list.

 

 

 

[1] Federal Register :: Foreign Currency Gain or Loss of Controlled Foreign Corporations (the Prop Regs were released on August 13, 2026 and published in the Federal Register on August 14, 2026).