On August 14, 2026, the Department of the Treasury and the Internal Revenue Service (IRS) released proposed regulations regarding foreign currency gains and losses under section 987. Consistent with the government's recent focus on reducing compliance burden, and as previewed in Notice 2026-17, the proposed rules would provide a new election under which certain controlled foreign corporations (CFCs) generally would not compute or recognize section 987 gain or loss on most remittances from qualified business units (QBUs). The proposed regulations would represent a meaningful simplification for multinational groups with CFC-owned branches, so long as they apply the proposed regulations consistently across their entire consolidated and section 987 electing groups as the proposed regulations require. Comments on these proposed regulations are due by November 12, 2026. 

Section 987 and Prior Guidance

By way of background, section 987 applies when a taxpayer (including a CFC) conducts activities through a QBU whose functional currency differs from that of its owner. Sections 987(1) and (2) provide rules for computing and translating taxable income or loss with respect to a QBU, and section 987(3) requires adjustments for transfers of property between QBUs of a taxpayer having different functional currencies. In addition, section 987(3) generally requires a taxpayer that owns a QBU to recognize foreign currency gain or loss, referred to as section 987 gain or loss, upon a remittance from a QBU. Section 987 has a long, fraught regulatory history. Treasury and the IRS first proposed regulations in 1991, replaced those rules with a new framework in 2006, finalized regulations in 2016, repeatedly deferred their applicability, and ultimately issued comprehensive final regulations in 2024, together with additional proposed regulations addressing specific operational issues. We previously covered the pre-OBBBA proposed and final regulations under section 987. Most recently, Treasury and the IRS provided transitional guidance under section 987 in Notice 2025-72, which in relevant part replaced the existing 10-taxable-year amortization period for pretransition section 987 gain or loss with a 120-month period to account for short taxable years. Our prior coverage of Notice 2025-72 can be found here. Additional guidance previewed in Notice 2026-17 and not included in the proposed regulations will be addressed in future rulemaking. 

2026 Proposed Regulations

Turning to the instant proposed regulations, the application of section 987 to CFCs raises unique issues. A CFC may use a functional currency other than the U.S. dollar, meaning that its income is not necessarily measured by changes in wealth expressed in U.S. dollars. Thus, the rationale for recognizing section 987 gain or loss on remittances from a CFC-owned QBU is less compelling than in the case of a U.S. taxpayer directly owning a QBU and receiving a remittance from the U.S.-owned QBU. Moreover, to the extent foreign currency fluctuations affect the value of a CFC's assets, those effects may ultimately be reflected elsewhere in the U.S. tax system, such as through gain or loss recognized on a disposition of CFC stock. In response to comments raising these considerations, the proposed regulations would provide an elective exemption from most section 987(3) gain or loss recognition for CFC-owned QBUs, while retaining special rules for certain inbound non-recognition transactions. 

CFC Exemption Election

The proposed regulations would provide a "CFC exemption election," applicable on a group basis, under which the CFCs of a group generally would not compute or recognize section 987 gain or loss with respect to its section 987 QBUs. Sections 987(1) and (2), however, would continue to apply for purposes of determining and translating section 987 taxable income or loss, including for purposes of computing taxable income and earnings and profits. Thus, while a taxpayer generally must determine and recognize section 987 gain or loss when a section 987 QBU makes a remittance to its owner, an exempt CFC ordinarily would not recognize section 987 gain or loss on such remittances. The proposed regulations also contain detailed rules for certain ownership structures including partnerships predominantly owned by exempt CFCs. Because the existing section 987 regulations generally leave the treatment of partnerships to reasonable methods applied by taxpayers, the proposed rules may require taxpayers to compute and recognize historic section 987 amounts in connection with partnership-held QBUs. Importantly, the CFC exemption election must be made on a group-wide basis pursuant to expanded consistency requirements as compared to the final regulations, including rules applicable to CFCs held through domestic partnerships and certain affiliated-but-not-consolidated domestic corporations. The proposal, in sum, offers a potentially significant compliance simplification for multinational groups with CFC-owned branches, but its benefits must be considered on a group-wide, and not CFC-by-CFC, basis. 

Inbound Non-recognition Transactions

One important limitation to the relief afforded by the new election involves certain inbound liquidations or reorganizations of exempt CFCs. For those types of transactions, the proposed regulations would require an exempt CFC to recognize section 987 gain immediately before the inbound transaction equal to its "section 987 asset basis," notwithstanding the CFC exemption election. Under proposed Treas. Reg. § 1.987-16, section 987 asset basis, which generally may be determined using either a lookback methodology or an excess asset basis methodology derived from Treas. Reg. § 1.367(b)-3(g), operates as a proxy for foreign currency gain that the government believes may otherwise escape taxation through imported excess asset basis into the United States. These concerns have historically been addressed in section 367(b) guidance (for example, as an answer to the so-called "Killer B" planning of prior decades). Consistent with the section 367(b) model, the proposed regulations do not provide a corresponding rule for recognizing foreign currency losses because Treasury and the IRS were concerned that taxpayers could selectively undertake inbound nonrecognition transactions to trigger foreign currency losses through otherwise exempt CFCs. Finally, the proposed regulations would include a de minimis rule, pursuant to which the section 987 asset basis rules would not apply if the transferor CFC's inside asset basis is less than $25 million.

Transition Rules

As foreshadowed in Notice 2025-72, the proposed regulations also include 120-month recognition periods for certain pretransition section 987 gain or loss, along with pre-election section 987 gain or loss, subject to certain exceptions for smaller QBUs. Broadly speaking, these rules are intended to preserve historic section 987 gain or loss that accrued before the applicability of a new regulatory regime or before a taxpayer elects the CFC exemption regime, thereby preventing a clean slate result under which built-in currency gains or losses would simply disappear. The move to a 120-month recognition period also addresses distortions that could arise under the prior 10-year amortization framework when a taxpayer had one or more short taxable years.

Applicability Dates

The proposed regulations would generally apply to taxable years ending on or after the date in which the regulations are finalized. The revised 120-month rule for pretransition gain or loss is proposed to apply to taxable years beginning after December 31, 2024, and ending on or after November 25, 2025. Taxpayers can rely on the proposed regulations for any taxable year beginning after December 31, 2024, and ending before the finalization date, provided they apply those rules consistently, both from year to year and across the relevant consolidated and section 987 electing groups. Stakeholders wishing to submit comments on these proposed regulations must do so by November 12, 2026.

For more information, please contact:

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

Chadwick Rowland, crowland@milchev.com, 202-626-1589

Tyler C. Jackson, tjackson@milchev.com, 202-626-5820

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