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Section 987 Regulations: Implementation Delay

Posted 5:00 AM by



The Internal Revenue Service (IRS) recently announced in Notice 2017-57 that it will defer the effective date of the final Treasury Regulations related to Section 987 by one year (effective for tax years beginning Jan. 1, 2019). This is pursuant to the Executive Order that President Trump gave to the Treasury in April 2017 to identify and reduce tax regulatory burdens. 

Section 987 final regulations were widely criticized as being administratively burdensome and difficult to apply. As a result, the IRS has announced that it intends to change and/or amend the final regulations that were issued in order to allow taxpayers to elect to apply alternative transition rules and alternative calculation rules for determining foreign currency exchange gain or loss under Section 987.

Background

The final Section 987 regulations address how to calculate foreign exchange gains or losses on remittances from a foreign branch that has a different functional currency than its tax parent.

Section 987 has been a part of the Internal Revenue Code for more than 30 years, with the first set of proposed regulations issued in 1991. However, those regulations were never finalized, and were withdrawn in 2006 for another set of proposed regulations that were also never finalized.

In December 2016, final Treasury regulations were issued. These regulations mirrored the proposed 2006 regulations with some minor changes in order to make the regulations less administratively burdensome. However, in April 2017, President Donald Trump issued an Executive Order to the Treasury asking the Treasury to review these regulations and the administrative burden that they pose to taxpayers. 

Planning

Even if these regulations are changed or modified, it is important to remember that Section 987 has been in existence for a long time and continuing to do nothing could be risky. If taxpayers are not complying with some reasonable method around Section 987, they should be considering their exposure. Taxpayers may elect under Treasury Regulation 1.987-11(b) to apply the final regulations and related temporary regulations early. Please reach out to your KSM advisor if you have any questions or concerns around Section 987.  

About the Author
Ryan Miller is a partner in Katz, Sapper & Miller’s Tax Services Group. Ryan provides consulting services on a variety of technical tax matters, with an emphasis on international tax. He also oversees tax compliance and handles tax controversies. 

 

About the Author
Katherine Malarsky is a director in Katz, Sapper & Miller's Tax Services Group. Katherine provides consulting services on technical tax matters. She has experience in cost allocation methodologies, export incentive calculations, and international earnings and profits. Connect with her on LinkedIn.

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