Proposed regs tighten election on foreign currency gain or loss

The IRS has released proposed regulations (REG-111629-23) regarding the time for making and revoking certain elections relating to foreign currency gain or loss under the current Section 954 and Section 988 regulations.

Section 954(c)(1)(D) generally treats the excess of foreign currency gains over foreign currency losses attributable to any Section 988 transactions as foreign personal holding company income (FPHCI). Treas. Reg. Sec. 1.954-2(g)(3) provides an election to include foreign currency gains or losses in the computation of another category of Subpart F income. Treas. Reg. Sec. 1.954-2(g)(4) provides an alternative election to treat any net foreign currency gain or loss as FPHCI.

The proposed regulations align the time for making an election under Treas. Reg. Sec. 1.954-2(g) with other filing requirements with respect to controlled foreign corporations (CFCs), which generally must be filed by U.S. shareholders for the taxable year of a CFC that ends with or within the taxable year of the U.S. shareholders. In addition, the proposed regulations provide that controlling U.S. shareholders would be precluded from revoking a Treas. Reg. Sec. 1.954-2(g) election made on behalf of a CFC until the sixth taxable year following the year in which the election was made. Once revoked, the shareholders would not be permitted to make a new Treas. Reg. Sec. 1.954-2(g) election on behalf of the CFC until the sixth taxable year following the year in which the previous election was revoked.

Furthermore, the proposed regulations revise the rules for making and revoking a mark-to-market election under Prop. Treas. Reg. Sec. 1.988-7. To defer selectively recognizing losses, the IRS believes that the timing for making and revoking this election should accord with the time for a Section 475 election, which generally requires taxpayers to make the election on a tax return for the year immediately preceding the year to which the election applies and revoke it only with the consent of the Commissioner.

These proposed regulations are generally proposed to apply to taxable years ending on or after the date of publication of final regulations in the Federal Register. For taxable years ending before the finalization date, taxpayer may reply on the proposed regulations in making and revoking the elections provided that the proposed regulations are consistently applied to such taxable years. However, as of Aug. 20, 2024, taxpayers may no longer reply on Prop. Treas. Regs. Secs. 1.954-2(g)(3)(iii), 1.954-2 (g)(4)(iii), 1.988-7(c) and 1.988-7(d), which were included in 2017 proposed regulations.

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