Treasury defers applicability dates for foreign currency guidance: PwC

In brief

Treasury and the IRS issued Notice 2022-34 (the Notice) on August 15. The Notice states that Treasury and the IRS plan to defer the applicability date of certain final Section 987 regulations and certain related regulations by an additional year, now to tax years beginning after December 7, 2023. These regulations previously had been deferred under prior Notices, including most recently under Notice 2021-59.

The Notice provides that several of the 2016 final regulations (Secs. 1.861-9T, 1.985-5, 1.987-11, 1.988-1, 1.988-4, and 1.989(a)-1), along with related 2019 final regulations (Secs. 1.987-2 and 1.987-4), will apply to tax years beginning after December 7, 2023. Thus, under the Notice, for calendar-year taxpayers the 2016 final regulations and the related 2019 final regulations would apply to the tax year beginning on January 1, 2024.

Observation: Prior to the new applicability date, taxpayers should comply with the Section 987 statute using a reasonable method, consistently applied, and consider the impact of Treas. Reg. sec. 1.987-12, which is final and effective, on transfers and terminations of Section 987 qualified business units (QBUs).

Background

Generally, Section 987 applies to operations being conducted by a branch, disregarded entity, or partnership that has a functional currency different from that of its owner.

On December 7, 2016, Treasury and the IRS issued a complex set of temporary Section 987 regulations (the 2016 Temporary Regulations), proposed regulations (the 2016 Proposed Regulations), and final but not effective regulations (the 2016 Final Regulations). The 2016 Final Regulations relate to the determination of the taxable income of a taxpayer with respect to a qualified business unit (QBU) that is a Section 987 QBU and the determination of Section 987 foreign currency gain or loss. The 2016 Temporary Regulations provided related rules, including certain anti-abuse provisions under Temp. Treas. Reg. sec. 1.987-12T.

On October 16, 2017, Treasury and the IRS published Notice 2017-57, which deferred the applicability date of the 2016 Final Regulations and certain temporary regulations by one year to January 1, 2019 for calendar-year taxpayers.

On June 13, 2018, Treasury and the IRS published Notice 2018-57, which deferred the applicability date of the 2016 Final Regulations and certain temporary regulations by one year to January 1, 2020 for calendar-year taxpayers.

On May 13, 2019, Treasury and the IRS published Final Regulations (2019 Final Regulations) that finalized former Temp. Treas. Reg. sec. 1.987-12T providing anti-abuse rules to defer Section 987 gain or loss arising from certain transactions, and former Temp. Treas. Reg. secs. 1.987-2T and -4T, regarding combinations and separations of Section 987 QBUs. The 2019 Final Regulations also withdraw guidance under Temp. Treas. Reg. sec. 1.987-7T with respect to the liquidation value percentage methodology for allocating assets and liabilities in the context of Section 987 aggregate partnerships.

On December 6, 2019, Treasury and the IRS published Notice 2019-65, which deferred the applicability date of the 2016 Final Regulations and certain related final and temporary regulations by one year to January 1, 2021 for calendar-year taxpayers.

On September 17, 2020, Treasury and the IRS published Notice 2020-73, which deferred the applicability date of the 2016 Final Regulations and certain related final regulations by one year to January 1, 2022 for calendar-year taxpayers.

On October 12, 2021, Treasury and the IRS published Notice 2021-59, which deferred the applicability date of the 2016 Final Regulations and certain related 2019 Final Regulations until tax years beginning after December 7, 2022.

Notice 2022-34

Most recently, Notice 2022-34 issued August 15, states that Treasury and the IRS intend to defer the applicability date of certain final Section 987 regulations and certain related regulations by an additional year, now to tax years beginning after December 7, 2023. These regulations previously had been deferred under prior Notices, as described above, including most recently under Notice 2021-59.

The new Notice provides that several of the 2016 final regulations (Secs. 1.861-9T, 1.985-5, 1.987-11, 1.988-1, 1.988-4, and 1.989(a)-1), along with related 2019 final regulations (Secs. 1.987-2 and 1.987-4), will apply to tax years beginning after December 7, 2023. Thus, under the Notice, for calendar-year taxpayers the 2016 final regulations and the related 2019 final regulations will apply to tax years beginning on January 1, 2024.

The Notice does not impact the applicability date of Treas. Reg. sec. 1.987-12. See Treas. Reg. sec. 1.987-12(j).

The Notice states that a taxpayer may choose to apply the 2016 final regulations, Temp. Reg. sec. 1.987-7T (until revoked on May 13, 2019), certain related temporary regulations (even after expiration on December 6, 2019, as applicable) (Temp. Reg. sec.1.987-1T (other than Temp. Reg. secs. 1.987-1T(g)(2)(i)(B) and (g)(3)(i)(H)) through secs. 1.987-4T, 1.987- 6T, 1.988-1T, and 1.988-2T(i)), and the related 2019 final regulations (beginning on May 13, 2019) (Treas. Reg. secs. 1.987-2(c)(9) and 1.987-4(c)(2) and (f)) to tax years beginning after December 7, 2016 and before December 7, 2023, provided the taxpayer consistently applies those regulations to such tax years and certain conditions are met.

In addition, a taxpayer may rely on Prop. Reg. secs. 1.987-1(g)(2)(i)(B) and (g)(3)(i)(H) and 1.987-8, provided that the taxpayer and its related parties consistently follow such proposed regulations in their entirety.

Further, taxpayers may rely on Prop. Reg. sec. 1.988-2(b)(16) (an anti-abuse rule that may defer, but not disallow, Section 988 loss arising from FX-denominated loans payable with related parties) provided the taxpayer and its related parties consistently follow this section.