Notice 2026-17: Key Changes and Major Simplifications to the Section 987 Regulations

On February 25, 2026, the IRS and Treasury Department released Notice 2026-17 (the “Notice”), announcing their intention to modify certain provisions of the 2024 Section 987 (Sec. 987) final regulations¹ and provide additional elections to simplify the application of Sec. 987. The Notice previews forthcoming proposed regulations that would introduce a new equity and basis pool method election, an election for CFCs to forego Sec. 987 gain/loss recognition, and several other targeted changes to the loss suspension, deferral, and hedging rules. The Notice also signals that separate guidance is still to come on the treatment of frequently recurring disregarded transactions and net investment hedges for purposes of Sec. 987. Taxpayers may rely on all provisions of the Notice (other than the CFC election) beginning with the first tax year to which the 2024 final regulations apply.

30 Second Summary of Notice 2026-17:

1. New election to use an equity and basis pool method based on the 1991 proposed regulations, providing a simplified alternative to the FEEP method for calculating Sec. 987 gain or loss.
2. Forthcoming CFC election under which CFCs would generally not compute or recognize Sec. 987 gain or loss under Sec. 987(3). Taxpayers cannot yet rely on the Notice for this election, but the election is expected to be available for the 2025 tax year, pending issuance of proposed regulations by the IRS.
3. Loss suspension rule narrowed with new thresholds (loss suspension triggered only if remittance proportion exceeds 5% or loss exceeds $5 million) measured on a QBU-by-QBU basis.
4. Simplified recognition groupings for purposes of the loss-to-the-extent-of-gain rule: single grouping for U.S. owners and four groupings for CFC owners.
5. Successor deferral QBU definition tightened to require a “significant portion” of terminated QBU assets, reducing the scope of the deferral rules.
6. Expanded definition of Sec. 987 hedging transactions, making the GAAP cumulative translation adjustment requirement optional.

The forthcoming proposed regulations, when finalized, are expected to apply to tax years ending on or after the date final regulations are published in the Federal Register. For any tax year to which the 2024 final regulations apply that ends before the proposed regulations are published, taxpayers may rely on all provisions of the Notice, except the CFC election, provided that the taxpayer and all members of its Sec. 987 electing group apply the rules in their entirety and consistently.² Written comments on the Notice are due by April 26, 2026.

1. Equity and Basis Pool Method Election

The Notice introduces an election to use an equity and basis pool method that is substantially similar to the methodology in the 1991 proposed regulations.³

Under this method, the owner of a Sec. 987 QBU maintains an equity pool in the QBU’s functional currency and a basis pool in the owner’s functional currency. The pools are adjusted annually for income/loss, transfers, and (in the case of the basis pool) for Sec. 987 gain or loss recognized or suspended in the prior year. Net unrecognized Sec. 987 gain or loss equals the ending equity pool (translated at the year-end spot rate) minus the ending basis pool.

Unlike the daily netting convention in the 1991 proposed regulations, the equity and basis pool method uses a single annual computation of the net remittance, thereby reducing the compliance burden. The remittance proportion is determined by dividing the remittance amount by the sum of the equity pool, liabilities (expressed as a positive number), and the remittance amount.⁴

Key election mechanics:

• The election is available only in a tax year in which a current rate election (CRE) is in effect.⁵
• If elected, this method would supersede the alternative QBU net value calculation currently provided under Reg. §1.987-4(e)(2)(iii).
• An authorized person may make this election by attaching the required statement to a timely filed original return (including extensions) for the relevant tax year, and no prior approval from the Commissioner is required.⁶ This is a notable departure from other Sec. 987 elections, which generally require the Commissioner’s consent under Reg. §1.987-1(g)(3)(ii)(A).
• The election is subject to the same consistency requirements as other Sec. 987 elections, including the requirement applicable to all members of a Sec. 987 electing group.
• The election is not available for partnerships or S corporations. However, a method consistent with the equity and basis pool method is treated as a reasonable application of Sec. 987 for these entities.⁷
• All other provisions of the 2024 final regulations generally continue to apply, including pretransition gain/loss calculations and other elections.

While the Notice is silent on whether the election may be revoked, the fact that Commissioner consent is waived only for purposes of making the election suggests that revoking the election would still require such consent.

The equity and basis pool method is likely to be practical for taxpayers who can track all transfers to and from their QBUs. In conjunction with the recurring transfer group election of Prop. Reg. §1.987-2(f) [2024], ordinary-course transactions made in connection with sales of inventory, payments for services, or rent or royalty transactions must still be tracked, but are translated at the yearly average exchange rate. All other transactions not included in the recurring transfer group (e.g., dividends, contributions, payments on intercompany loans) must still be translated at spot rates. Taxpayers who may have difficulty tracking all QBU transfers but who can prepare tax basis balance sheets for their QBUs should evaluate whether another method under the 2024 final regulations is better suited to their facts (e.g., recurring transfer group election plus alternative remittance calculation of Reg. §1.987-5(c)(2)).

Taxpayers who previously applied the 1991 method should note that their historic equity and basis pools may not carry over directly as opening balances under the new election, because the opening balance is determined by the QBU’s tax basis net value at the relevant date.⁸

2. CFC Election (Forthcoming Guidance)

Treasury has signaled its intent to issue separate guidance establishing an election that would broadly exempt CFCs from computing or recognizing foreign currency gains or losses under Sec. 987(3) (the “CFC election”).⁹ However, Sec. 987 would still apply for purposes of computing the QBU’s taxable income and the CFC’s E&P.

Key features of the anticipated CFC election:

• A taxpayer would need to attach the election to its timely-filed return (with extensions) for the relevant year, and, once made, revocation would require the Commissioner’s approval.
• The election must be applied consistently for all CFCs controlled by the taxpayer and its related parties.
• Under the anticipated transition framework, any Sec. 987 gain or loss that accrued before the CFC election takes effect would be recognized ratably over a 120-month period, starting with the first month of the tax year in which the election becomes effective.
• Inbound transaction rules would address the Sec. 987 basis increase — the net amount by which a CFC’s asset bases increased due to currency fluctuations (resulting in net unrecognized Sec. 987 gain) while the CFC election was in effect. Treasury is considering several proxies for computing this amount, including a simplified 10-year lookback, the excess asset basis calculation under the Sec. 367(b) regulations, and the cumulative translation adjustment under U.S. GAAP. The Notice also identifies three options for how the Sec. 987 basis increase would be taken into account at the time of the inbound transaction (Section 5.06): (1) immediate recognition as Sec. 987 gain by the transferor CFC; (2) reduction of the domestic acquirer’s asset basis; or (3) an adjustment to the successor Sec. 987 QBU’s unrecognized gain, allowing deferral and recognition under the general rules.¹⁰

It is important to note that taxpayers cannot rely on the current Notice to make the CFC election.¹¹ Separate future guidance will be needed. Treasury has indicated it intends to issue this guidance in the near future, providing sufficient time for taxpayers to evaluate the election for the 2025 tax year.

 3. Narrower Loss Suspension Rules

The Notice narrows the CRE loss suspension rule (Reg. §1.987-11(c)(1)) and the partnership loss suspension rule (Reg. §1.987-7(d)(1)(ii)). Under the proposed changes, the loss suspension rules would only apply in a tax year with respect to a Sec. 987 QBU if either:¹²

• The Sec. 987 QBU or successor deferral QBU has a remittance proportion that is greater than five percent for the tax year; or
• The aggregate net unrecognized Sec. 987 loss or deferred Sec. 987 loss with respect to that QBU that would otherwise become suspended loss is more than $5 million.

An important distinction from the existing de minimis exception in the 2024 final regulations is that these new thresholds apply at the individual QBU level, not on a consolidated controlled group basis. As a result, taxpayers with currency losses distributed across several QBUs may find that more of those losses escape suspension and can be currently recognized.

4. Simplified Recognition Groupings

The Notice simplifies the recognition groupings used for the loss-to-the-extent-of-gain rule under Reg. §1.987-11(e).¹³ Under the proposed changes:

• A U.S. owner would aggregate all of its Sec. 987 gain or loss into one recognition grouping, without regard to source or Sec. 904 category distinctions.
• Where the QBU owner is a CFC, the gain or loss would instead be sorted into four broader buckets: tentative tested income, subpart F income groups (aggregated across Sec. 904 categories), ECI excluded from subpart F under Sec. 952(b), and a residual “other income” category.

This is a significant simplification from the current rules, which subdivide recognition groupings by source and Sec. 904 category (and, for CFCs, further subdivided by income subcategory). It is important to note that this streamlined grouping applies solely to the loss-to-the-extent-of-gain mechanism and does not alter the subpart F group to which a particular loss is allocated. As a practical matter, this means that even though a Sec. 987 loss assigned to one subpart F group may become unsuspended because of Sec. 987 gain in a different subpart F group, the taxpayer will not benefit from that loss unless it has enough income in the subpart F group where the loss sits.

5. Successor Deferral QBU Definition

Previously, under the 2024 final regulations, deferral of Sec. 987 gain or loss upon a QBU termination was triggered whenever any of the terminated QBU’s assets appeared on the books and records of another Sec. 987 QBU in the controlled group. The Notice would tighten this by requiring that a “significant portion” of the terminated QBU’s assets be reflected on the books and records of the potential successor deferral QBU immediately after the termination.¹⁴

As a result of this higher bar, fewer QBU terminations are likely to qualify for deferral treatment, which in turn means that more Sec. 987 gains or losses will be recognized at the time of the termination event.

6. Expanded Definition of Sec. 987 Hedging Transaction

Under the proposed changes, the current requirement that a Sec. 987 hedging transaction’s foreign currency gain or loss be reflected as a cumulative foreign currency translation adjustment in shareholders’ equity under U.S. GAAP (the “GAAP hedging requirement”) would no longer be a mandatory condition for qualification.¹⁵ A hedge may qualify either (a) by continuing to meet the GAAP hedging requirement as before, or (b) without meeting the GAAP requirement, if it is entered into primarily to manage exchange rate risk with respect to an interest in the Sec. 987 QBU that would be treated as debt or stock if the QBU were a separate corporation.

For hedges that were entered into before April 26, 2026, and that do not satisfy the GAAP hedging requirement, a transition rule treats the hedge as timely identified as a Sec. 987 hedging transaction so long as it is identified before that date and the owner designates all of its hedges substantially for the relevant QBU as Sec. 987 hedging transactions.

Action Items

With Notice 2026-17 now released, taxpayers should consider the following:

1. Evaluate the equity and basis pool method election. Taxpayers currently applying the 2024 final regulations (particularly those that previously used the 1991 proposed regulations as their pretransition method) should assess whether the equity and basis pool method would reduce compliance burden and whether a CRE is or should be in effect. Note that the CRE must be in effect before the equity and basis pool method election can be made.
2. Monitor CFC election developments. Taxpayers with CFC structures involving Sec. 987 QBUs should prepare for the forthcoming CFC election guidance. While the election cannot be relied on under the current Notice, Treasury has indicated its intent to issue guidance in time for the 2025 tax year. Taxpayers should begin modeling the impact of forgoing Sec. 987(3) gain/loss recognition at the CFC level, including the 120-month transition amortization and the potential Sec. 987 basis increase upon inbound transactions.
3. Reassess loss suspension exposure. The new QBU-by-QBU de minimis thresholds (5% remittance proportion or $5 million) are more favorable than the existing controlled-group-level thresholds. Taxpayers should reassess which QBUs may now fall below the thresholds, enabling current-year loss recognition.
4. Review hedging arrangements. The expanded definition of Sec. 987 hedging transactions, particularly the removal of the mandatory GAAP hedging requirement, may allow additional hedges to qualify. Taxpayers should review existing hedging positions and ensure proper identification before April 26, 2026, for hedges that do not meet the GAAP requirement but otherwise qualify under the new alternative standard.
5. Consider the impact on QBU terminations. The tighter “significant portion” standard for successor deferral QBUs means that some terminations that previously qualified for deferral may no longer do so. Taxpayers should evaluate planned or anticipated restructurings in light of this change.
6. Submit comments by April 26, 2026. Treasury has requested comments on several open issues, including the use of the cumulative translation adjustment as a proxy for the Sec. 987 basis increase, interaction with Sec. 362(e)(1) and 367(b), the appropriate de minimis threshold, and the application of the CFC election to partnerships with CFC partners. Treasury also requests comments on whether lower-tier CFC stock should be treated as an asset of the transferor CFC for purposes of the de minimis rule, and whether and how the hedging rules of §1.987-14 should apply if the CFC election is in effect.

Footnotes

¹T.D. 10016, 89 F.R. 100138 (Dec. 11, 2024).
²Notice 2026-17, Section 6.
³Notice 2026-17, Section 3.
⁴Notice 2026-17, Section 3.10(1).
⁵Notice 2026-17, Section 3.02(1).
⁶Notice 2026-17, Section 3.02(2); cf. Reg. §1.987-1(g)(3)(ii)(A).
⁷Notice 2026-17, Section 3.02(1); Reg. §1.987-7(b).
⁸Notice 2026-17, Sections 3.08 and 3.09.
⁹Notice 2026-17, Section 5.
¹⁰Notice 2026-17, Section 5.05.
¹¹Notice 2026-17, Section 6.
¹²Notice 2026-17, Section 4.02.
¹³Notice 2026-17, Section 4.03.
¹⁴Notice 2026-17, Section 4.04.
¹⁵Notice 2026-17, Section 4.05.