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A section 987 aggregate partnership shall allocate the items of income, gain, deduction, or loss of each eligible QBU among its partners in accordance with each partner's distributive share of such income, gain, deduction, or loss as determined under subchapter K of the Internal Revenue Code. (iii) Allocation of items of income, gain, deduction, or loss of an eligible QBU. A section 987 aggregate partnership generally shall determine each item of income, gain, deduction, or loss reflected on the books and records of each of its eligible QBUs under § 1.987-2(b) in the functional currency of each such QBU. (ii) Determination of each item of income, gain, deduction, or loss in the eligible QBU's functional currency. Except as otherwise provided in this paragraph (b)(3), the taxable income or loss of a section 987 aggregate partnership, and the distributive share of any owner that is a partner in such partnership, shall be determined in accordance with the provisions of subchapter K of the Internal Revenue Code.
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(3) Determination in the case of a section 987 QBU owned through a section 987 aggregate partnership. Examples 1, 2 and 6 of paragraph (e) of this section illustrate the application of this paragraph (b)(2)(i). Except as otherwise provided in paragraphs (b)(2)(ii) and (b)(4) of this section, an item of income, gain, deduction, or loss that is denominated in (or determined by reference to) a nonfunctional currency (including the functional currency of the owner) shall be translated into the section 987 QBU's functional currency at the spot rate (as defined in § 1.987-1(c)(1)) on the date such item is properly taken into account, subject to the limitation under § 1.987-1(c)(1)(ii)(B) regarding the use of a spot rate convention. (2) Translation of items of income, gain, deduction, or loss that are denominated in a nonfunctional currency. Except as otherwise provided in this section, a section 987 QBU shall determine each item of income, gain, deduction, or loss of such section 987 QBU in its functional currency under Federal income tax principles. (b) Determination of each item of income, gain, deduction, or loss in the section 987 QBU's functional currency. Paragraph (e) of this section provides examples illustrating the application of the rules of this section.
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Paragraph (c) of this section provides rules for translating each item determined under paragraph (b) of this section into the functional currency of the owner of the section 987 QBU, if necessary. Paragraph (b) of this section provides rules for determining items of income, gain, deduction, and loss, which generally must be determined in the section 987 QBU's functional currency. This section provides rules for determining the taxable income or loss, or the earnings and profits, of an owner of a section 987 QBU (hereafter, section 987 taxable income or loss).
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§ 1.987-3 Determination of section 987 taxable income or loss of an owner of a section 987 QBU.