Sec. 1.988-4 Source of gain or loss realized on a section 988 transfer.
(a) In general. Except as otherwise provided in section 1.988-5 and this section, the source of exchange gain or loss shall be determined by reference to the residence of the taxpayer. This rule applies even if the taxpayer has made an election under section 1.988-3(b) to characterize exchange gain or loss as capital gain or loss. This section takes precedence over section 865.
(b) Qualified business unit.
(1) In general. The source of exchange gain or loss shall be determined by reference to the residence of the qualified business unit of the taxpayer on whose books the asset, liability, or item of income or expense giving rise to such gain or loss is properly reflected.
(2) Proper reflection on the books of the taxpayer or qualified business unit.
(i) In general. For purposes of paragraph (b)(1) of this section, the principles of §1.987-2(b) shall apply in determining whether an asset, liability, or item of income or expense is reflected on the books and records of a qualified business unit.
(ii) Effective/applicability date. Generally, paragraph (b)(2)(i) of this section shall apply to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016. If pursuant to §1.987-11(b) a taxpayer applies §§1.987-1 through 1.987-11 beginning in a taxable year prior to the earliest taxable year described in §1.987-11(a), then paragraph (b)(2)(i) of this section shall apply to taxable years of the taxpayer beginning on or after the first day of such prior taxable year.
(c) Effectively connected exchange gain or loss. Notwithstanding paragraphs (a) and (b) of this section, exchange gain or loss that under principles similar to those set forth in section 1.864-4(c) arises from the conduct of a United States trade or business shall be sourced in the United States and such gain or loss shall be treated as effectively connected to the conduct of a United States trade or business for purposes of sections 871(b) and 882(a)(1).
(d) Residence.
(1) In general. Except as otherwise provided in this paragraph (d), for purposes of sections 985 through 989, the residence of any person shall be --
(i) In the case of an individual, the country in which such individual's tax home (as defined in section 911(d)(3)) is located;
(ii) In the case of a corporation, partnership, trust or estate which is a United States person (as defined in section 7701(a)(30)), the United States; and
(iii) In the case of a corporation, partnership, trust or estate which is not a United States person, a country other than the United States.
If an individual does not have a tax home (as defined in section 911(d)(3)), the residence of such individual shall be the United States if such individual is a United States citizen or a resident alien and shall be a country other than the United States if such individual is not a United States citizen or resident alien. If the taxpayer is a U.S. person and has no principal place of business outside the United States, the residence of the taxpayer is the United States. Notwithstanding paragraph (d)(1)(ii) of this section, if a partnership is formed or availed of to avoid tax by altering the source of exchange gain or loss, the source of such gain or loss shall be determined by reference to the residence of the partners rather than the partnership.
(2) Exception. In the case of a qualified business unit of any taxpayer (including an individual), the residence of such unit shall be the country in which the principal place of business of such qualified business unit is located.
(3) Partner in a partnership not engaged in a U.S. trade or business under section 864(b)(2). The determination of residence shall be made at the partner level (without regard to whether the partnership is a qualified business unit of the partners) in the case of partners in a partnership that are not engaged in a U.S. trade or business by reason of section 864(b)(2).
(e) Special rule for certain related party loans.
(1) In general. In the case of a loan by a United States person or a related person to a 10 percent owned foreign corporation, or a corporation that meets the 80 percent foreign business requirements test of section 861(c)(1), other than a corporation subject to section 1.861-11T(e)(2)(i), which is denominated in, or determined by reference to, a currency other than the U.S. dollar and bears interest at a rate at least 10 percentage points higher than the Federal mid-term rate (as determined under section 1274(d)) at the time such loan is entered into, the following rules shall apply--
(i) For purposes of section 904 only, such loan shall be marked to market annually on the earlier of the last business day of the United States person's (or related person's) taxable year or the date the loan matures; and
(ii) Any interest income earned with respect to such loan for the taxable year shall be treated as income from sources within the United States to the extent of any notional loss attributable to such loan under paragraph (d)(1)(i) of this section.
(2) United States person. For purposes of this paragraph (e), the term "United States person" means a person described in section 7701(a)(30).
(3) Loans by related foreign persons.
(i) In general. [Reserved]
(ii) Definition of related person. For purposes of this paragraph (e), the term "related person" has the meaning given such term by section 954(d)(3) except that such section shall be applied by substituting "United States person" for "controlled foreign corporation" each place such term appears.
(4) 10 percent owned foreign corporation. For purposes of this paragraph (e), the term "10 percent owned foreign corporation" means any foreign corporation in which the United States person owns directly or indirectly (within the meaning of section 318(a)) at least 10 percent of the voting stock.
(f) Exchange gain or loss treated as interest under section 1.988-3. Notwithstanding the provisions of this section, any gain or loss realized on a section 988 transaction that is treated as interest income or expense under section 1.988-3(c)(1) shall be sourced or allocated and apportioned pursuant to section 861(a)(1), 862(a)(1), or 864(e) as the case may be.
(g) Exchange gain or loss allocated in the same manner as interest under section 1.861-9T. The allocation and apportionment of exchange gain or loss under section 1.861-9T shall not affect the source of exchange gain or loss for purposes of sections 871(a), 881, 1441, 1442 and 6049.
(h) Effective date. This section shall be effective for taxable years beginning after December 31, 1986. Thus, any payments made or received with respect to a section 988 transaction in taxable years beginning after December 31, 1986, are subject to this section.
[T.D. 8400, 57 FR 9172-9209, Mar. 17, 1992; amended by T.D. 9794, 81 FR 88806-88852, Dec. 8, 2016.]
