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Title 26 — Internal Revenue CodeRelease 119-73

§987 Branch Transactions

Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter N— Tax Based on Income From Sources Within or Without the United States › Part III— INCOME FROM SOURCES WITHOUT THE UNITED STATES › Subpart J— Foreign Currency Transactions › § 987

Last updated Apr 6, 2026|Official source

Summary

If you have business units that keep their books in a currency other than the U.S. dollar, you figure your taxable income in three steps. First, compute each unit's income or loss separately in its own currency. Second, translate that result into dollars at the appropriate exchange rate. Third, make adjustments for property moved between units that use different currencies. Money sent home from a unit after 1986 is treated as coming proportionally out of its post-1986 earnings, and any gain or loss from these adjustments is ordinary income or loss, sourced based on the income that produced those earnings.

Full Legal Text

Title 26, §987

Internal Revenue Code — Source: USLM XML via OLRC

In the case of any taxpayer having 1 or more qualified business units with a functional currency other than the dollar, taxable income of such taxpayer shall be determined—
(1)by computing the taxable income or loss separately for each such unit in its functional currency,
(2)by translating the income or loss separately computed under paragraph (1) at the appropriate exchange rate, and
(3)by making proper adjustments (as prescribed by the Secretary) for transfers of property between qualified business units of the taxpayer having different functional currencies, including—
(A)treating post-1986 remittances from each such unit as made on a pro rata basis out of post-1986 accumulated earnings, and
(B)treating gain or loss determined under this paragraph as ordinary income or loss, respectively, and sourcing such gain or loss by reference to the source of the income giving rise to post-1986 accumulated earnings.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

Amendments

1988—Par. (4). Pub. L. 100–647 struck out par. (4) which provided for translation of foreign income taxes paid by each qualified business unit of the taxpayer in the same manner as provided under section 986(b).

Statutory Notes and Related Subsidiaries

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1261(e) of Pub. L. 99–514, set out as a note under section 985 of this title.

Reference

Citations & Metadata

Citation

26 U.S.C. § 987

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73