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TAX CLINIC

recreation, and other nonprofitable related elections and special rules. The allocation of assets and liabilities of
purposes.” This revocation underscores proposed regulations cross-referenced certain partnerships for purposes of
the need for careful planning to ensure the temporary regulations. Sec. 987).
that an organization is both organized The 2016 final regulations’ Previous deferrals of the ap-
and operated exclusively for tax-exempt prescribed approach for comput- plicability date: The 2016 final
charitable purposes before applying ing taxable income or loss and Sec. regulations originally applied to tax years
for IRS recognition of Sec. 501(c)(3) 987 gain or loss of a Sec. 987 QBU beginning on or after one year after the
tax-exempt status or otherwise claiming differs entirely from that used by first day of the first tax year beginning
that status. most taxpayers for more than 30 after Dec. 7, 2016 (e.g., to 2018 for
From Stephen M. Clarke, J.D., Wash- years. The regulations also impose calendar-year taxpayers). The applicabil-
ington, D.C.; Melanie A. McPeak, CPA, substantial recordkeeping and compli- ity date of the 2016 final regulations,
Tampa, Fla.; Cal Hoke, Raleigh, N.C.; ance requirements. however, has been deferred every year
and Morgan Moran, E.A., Pittsburgh 2019 final regulations: In T.D. since they were released.
9857, effective May 13, 2019, Treasury
and the IRS finalized certain provi- Notice 2022-34
Foreign Income & Taxpayers sions of the 2016 temporary regula- Notice 2022-34 announces intended
tions. Specifically, Temp. Regs. Secs. amendments to further delay the
Sec. 987 foreign currency 1.987-2T and -4T (on combinations applicability date of the 2016 final
regulations applicability date and separations of Sec. 987 QBUs) regulations and certain related provi-
extended again and Temp. Regs. Sec. 1.987-12T (ad- sions of the 2019 final regulations by
On Aug. 15, 2022, the IRS announced dressing recognition and deferral of one additional year. Consequently,
(Notice 2022-34) that it intends to defer Sec. 987 gain and loss upon certain these regulations will now apply to
by one more year the applicability date Sec. 987 QBU terminations and tax years beginning after Dec. 7, 2023
of certain foreign currency regulations certain other transactions involving (e.g., to 2024 for calendar-year taxpay-
under Sec. 987. The affected regulations partnerships) were finalized with ers). The applicability date of Regs.
will be amended to apply to tax years be- certain clarifications. In addition, Sec. 1.987-12 was not changed, so the
ginning after Dec. 7, 2023 (e.g., to 2024 Treasury and the IRS withdrew Temp. deferral-event and outbound-loss-event
for calendar-year taxpayers). Regs. Sec. 1.987-7T (regarding the rules of Regs. Sec. 1.987-12 generally
Background
2016 final, temporary, and pro-
posed regulations: On Dec. 8, 2016,
Treasury and the IRS published final
(T.D. 9794), temporary (T.D. 9795),
and proposed (REG-128276-12) regu-
lations under Sec. 987. The 2016 final
regulations provide guidance to corpo-
rations and individuals on determining
taxable income or loss of a qualified
business unit (QBU) whose functional
currency differs from that of its owner
(a Sec. 987 QBU). They also provide
guidance on the timing, amount, char-
acter, and source of any Sec. 987 gain
or loss arising from such a QBU. The
temporary regulations, some of which
were finalized in T.D. 9857, provided PHOTO BY TRAVELER1116/GETTY IMAGES
rules for deferring Sec. 987 gain or loss
in connection with certain Sec. 987
QBU terminations and transactions
involving partnerships, as well as other

16 January 2023 The Tax Adviser