[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.989(c)-1]

[Page 636-637]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.989(c)-1  Transition rules for certain branches of United States 

persons using a net worth method of accounting for taxable years beginning 
before January 1, 1987.

    (a) Applicability--(1) In general. This section applies to qualified 
business units (QBU) branches of United States persons, whose functional 
currency (as defined in section 985 of the Code and regulations issued 
thereunder) is other than the United States dollar (dollar) and that 
used a net worth method of accounting for their last taxable year 
beginning before January 1, 1987. Generally, a net worth method of 
accounting is any method of accounting under

[[Page 637]]

which the taxpayer calculates the taxable income of a QBU branch based 
on the net change in the dollar value of the QBU branch's equity over 
the course of a taxable year, taking into account any remittance made 
during the year. QBU branch equity is the excess of QBU branch assets 
over QBU branch liabilities. For all taxable years beginning after 
December 31, 1986, such QBU branches must use the profit and loss method 
of accounting as described in section 987, except to the extent 
otherwise provided in regulations under section 985 or any other 
provision of the Code.
    (2) Insolvent QBU branches. A taxpayer may apply the principles of 
this section to a QBU branch that used a net worth method of accounting 
for its last taxable year beginning before January 1, 1987, whose $E 
pool (as defined in paragraph (d)(3)(i) of this section) is negative. 
For taxable years beginning on or after October 25, 1991, the principles 
of this section shall apply to insolvent QBU branches.
    (b) General rules. For the general rules, see Sec. 1.987-5(b).
    (c) Determining the pool(s) from which a remittance is made. To 
determine from which pool(s) a remittance is made, see Sec. 1.987-5(c).
    (d) Calculation of section 987 gain or loss--(1) In general. See 
Sec. 1.987-5(d)(1) for rules to make this calculation.
    (2) Step 1--Calculate the amount of the functional currency pools. 
For calculation of the amount of the functional currency pools, see 
Sec. 1.987-5(d)(2).
    (3) Step 2--Calculate the dollar basis pools--(i) Dollar basis of 
the EQ pool--(A) Beginning dollar basis. The beginning dollar basis of 
the EQ pool (hereinafter referred to as the $E pool) equals the final 
net worth of the QBU branch. Final net worth of the QBU branch equals 
the QBU branch's equity value (assets less liabilities) measured in 
dollars at the end of the taxpayer's last taxable year beginning before 
January 1, 1987, determined on the basis of the QBU branch's books and 
records as adjusted according to United States tax principles.
    (B) Adjusting the $E pool. For adjustments to be made to the $E 
pool, see Sec. 1.987-5(d)(3)(i)(B).
    (ii) Dollar basis of the post-86 profits pool. To calculate the 
dollar basis of the post-86 profits pool, see Sec. 1.987-5(d)(3)(ii).
    (iii) Dollar basis of the equity pool. To calculate the dollar basis 
of the equity pool, see Sec. 1.987-5(d)(3)(iii).
    (4) Step 3--Calculation of the dollar basis of a remittance. To 
calculate the dollar basis of the EQ remitted, see Sec. 1.987-5(d)(4).
    (5) Step 4--Calculation of the section 987 gain or loss on a 
remittance. To calculate 987 gain or loss determined on a remittance, 
see Sec. 1.987-5(d)(5).
    (e) Functional currency adjusted basis of QBU branch assets acquired 
in taxable years beginning before January 1, 1987. To determine the 
functional currency adjusted basis of QBU branch assets acquired in 
taxable years beginning before January 1, 1987, see Sec. 1.987-5(e).
    (f) Functional currency amount of QBU branch liabilities acquired in 
taxable years beginning before January 1, 1987. To determine the 
functional currency amount of QBU branch liabilities acquired in taxable 
years beginning before January 1, 1987, see Sec. 1.987-5(f).

[T.D. 8367, 56 FR 48437, Sept. 25, 1991]

                Domestic International Sales Corporations