SUPPLEMENTARY INFORMATION:

Authority

This document contains proposed additions and amendments to 26 CFR part 1 (proposed regulations) under sections 898(c) and 960(d)(4) and certain other provisions of the Internal Revenue Code (Code). The proposed regulations are issued pursuant to the express delegation of authority under section 70352(c) of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), which provides that the Secretary of the Treasury or the Secretary's delegate (Secretary) shall issue regulations providing for the allocation of foreign taxes of foreign corporations affected by the repeal of section 898(c)(2). The proposed regulations are also issued pursuant to the express delegation of authority under section 960(f), which provides the Secretary with authority to prescribe such regulations as may be necessary or appropriate to carry out the provisions of section 960. Additionally, the proposed regulations are issued pursuant to the express delegation of authority under section 7805(a).

Background

I. Repeal of Section 898(c)(2)

Section 898 provides rules for determining the required taxable year of any specified foreign corporation. A foreign corporation is a specified foreign corporation if it is treated as a controlled foreign corporation (CFC) for any purpose under subpart F of subchapter N of chapter 1 of subtitle A of the Code, and if any United States shareholder (as defined in section 951(b)) (U.S. shareholder) owns (determined by applying the ownership rules of section 958) more than 50 percent of the stock of the CFC by vote or value on each testing day ^[1] (majority U.S. shareholder).

Section 898(c)(1) generally requires a specified foreign corporation to have the same taxable year as the taxable year of its majority U.S. shareholder (the majority U.S. shareholder year). However, prior to the enactment of the OBBBA, section 898(c)(2) generally permitted a specified foreign corporation to elect a taxable year beginning one month earlier than the majority U.S. shareholder year (one-month deferral election), subject to the consent of the Secretary. Section 70352 of the OBBBA repealed the one-month deferral election for taxable years of specified foreign corporations beginning after November 30, 2025. Section 70352(c) of the OBBBA provides that if a corporation is a specified foreign corporation as of November 30, 2025, its first taxable year beginning after November 30, 2025, will end at the same time as the first required year (within the meaning of section 898(c)(1)) ending after such date (first required year). Thus, a specified foreign corporation with a one-month deferral election in place will have a one-month taxable year as its first required year.

Section 70352(c) of the OBBBA provides a transition rule for specified foreign corporations required to change their taxable years due to the repeal of the one-month deferral election (the transition rule). Under the transition rule, the change to the specified foreign corporation's taxable year will be treated as initiated by the corporation and as having been made with the consent of the Secretary. The transition rule also directs the Secretary to issue regulations or other guidance allocating foreign taxes paid or accrued in the specified foreign corporation's first required year and its succeeding taxable year among those taxable years in the manner the Secretary determines appropriate to carry out the purposes of section 70352 of the OBBBA.

On November 25, 2025, the Treasury Department and the IRS issued Notice 2025-72, 2025-51 I.R.B. 840, describing rules expected to be included in ( printed page 48795) forthcoming proposed regulations under: (1) section 70352 of the OBBBA regarding the transition rule, and (2) section 987 regarding the election to recognize pretransition section 987 gain or loss ratably over a transition period. The proposed regulations would contain the rules described in Notice 2025-72 related to the transition rule, with certain modifications discussed in this preamble, and other guidance but would not include the rules related to pretransition section 987 gain or loss. The Treasury Department and the IRS intend to issue a separate notice of proposed rulemaking in the near future relating to section 987 that includes proposed rules relating to the recognition of pretransition section 987 gain or loss.

II. Section 960(d)(4)

Section 901 generally provides that a taxpayer choosing to credit foreign income taxes is allowed a credit for certain foreign income taxes paid or accrued by the taxpayer plus, in the case of a domestic corporation, the taxes deemed to have been paid by the domestic corporation under section 960. Section 960(d) provides that, if any amount is includible in the gross income of a domestic corporation under section 951A (section 951A inclusion), the domestic corporation is deemed to have paid foreign income taxes with respect to the section 951A inclusion. Prior to the OBBBA, section 960(d)(1) provided that a domestic corporation that is a U.S. shareholder is deemed to have paid foreign income taxes in an amount equal to 80 percent of the product of the U.S. shareholder's inclusion percentage and the aggregate of the tested foreign income taxes paid or accrued by its CFCs. Thus, section 960(d)(1) (prior to the OBBBA) effectively reduced the amount of foreign income taxes deemed paid with respect to a section 951A inclusion by 20 percent.

Section 70312(a)(1) of the OBBBA increased the percentage in section 960(d)(1) from 80 percent to 90 percent, thereby decreasing the reduction in foreign income taxes deemed paid from 20 percent to 10 percent. Section 70312(b) of the OBBBA added section 960(d)(4) to the Code, which correspondingly disallows a foreign tax credit for 10 percent of the foreign income taxes paid or accrued (or deemed paid under section 960(b)(1)) with respect to a distribution of previously taxed earnings and profits (PTEP) resulting from a section 951A inclusion. Section 70312(c)(2) of the OBBBA provides that section 960(d)(4) applies to foreign income taxes paid or accrued (or deemed paid under section 960(b)(1)) with respect to any amount excluded from gross income under section 959(a) by reason of a section 951A inclusion after June 28, 2025.

On December 4, 2025, the Treasury Department and the IRS issued Notice 2025-77, 2025-52 I.R.B. 872, announcing the intent to issue proposed regulations regarding section 960(d)(4), including the application of the effective date of section 960(d)(4). Notice 2025-77 provides guidance for determining the amount of foreign income taxes paid or accrued (or deemed paid) with respect to PTEP distributions resulting from a section 951A inclusion that are subject to the foreign tax credit disallowance under section 960(d)(4). The proposed regulations contain the rules described in Notice 2025-77.

Explanation of Provisions

I. Proposed Regulations Implementing the Section 898(c) Transition Rule

A. Relevant Foreign Tax Credit Framework

In general, under section 951(a)(1),^[2] a U.S. shareholder of a CFC must include in gross income its pro rata share of the CFC's subpart F income for the year. Similarly, a U.S. shareholder's section 951A inclusion is based, in part, on its pro rata share of its CFC's tested income or tested loss for the taxable year. See § 1.951A-1(c). In computing a CFC's items of subpart F income and its tested income or tested loss, deductions (including taxes) properly allocable to such income are taken into account. See, e.g., sections 954(b)(5) and 951A(b)(2)(A)(ii). A CFC's items of subpart F income and its tested income or tested loss are computed in the functional currency of the CFC and translated into U.S. dollars as net amounts using the average exchange rate for the CFC's taxable year. See sections 986(b) and 989(b)(3) and § 1.951A-1(d)(1).

Generally, an income item of a CFC that would otherwise be subpart F income may be excluded, pursuant to an election, under the high-tax exception from foreign base company income (high-tax exception) if the item is subject to an effective rate of foreign tax that is greater than 90 percent of the maximum rate of tax specified in section 11. See § 1.954-1(d). A similar election excludes from tested income an item that would otherwise be tested income (high-tax exclusion) if the item is subject to an effective rate of foreign tax greater than 90 percent of the maximum rate of tax specified in section 11. See § 1.951A-2(c)(7).

Section 960(a) provides that when a domestic corporation includes in gross income any item of income under section 951(a)(1) with respect to a CFC, the domestic corporation is deemed to have paid so much of the CFC's foreign income taxes as are properly attributable to the item of income. Section 960(d)(1) provides that when a domestic corporation has a section 951A inclusion, the domestic corporation is deemed to have paid 90 percent of the product of such domestic corporation's inclusion percentage multiplied by the aggregate tested foreign income taxes paid or accrued by its CFCs. Section 960(d)(3) defines tested foreign income taxes as the foreign income taxes paid or accrued by a CFC which are properly attributable to the tested income of the CFC taken into account by the domestic corporation under section 951A. Therefore, in order for foreign income taxes paid or accrued by a CFC in a taxable year to be deemed paid by a U.S. shareholder, the related subpart F income of the CFC must be included in gross income by the U.S. shareholder under section 951(a)(1), or the related tested income of the CFC must be taken into account in the U.S. shareholder's section 951A inclusion. Section 960(b)(1) provides that a U.S. shareholder of a CFC is deemed to have paid the CFC's foreign income taxes that the U.S. shareholder has not been previously deemed to pay and that are properly attributable to a distribution from the CFC that the U.S. shareholder excludes from its gross income under section 959(a) (a section 959(a) distribution).

Section 1.861-20 provides rules for allocating and apportioning foreign income taxes to statutory and residual groupings for an operative Code section, except as modified under the rules for the operative section. See also § 1.861-8(f). These rules apply to attribute foreign income taxes paid or accrued by a CFC to items of income of the CFC in order to determine a CFC's net items of subpart F income and tested income, the effective rate of foreign tax for purposes of the high-tax exception and the high-tax exclusion, and the taxes attributable to the CFC's income groups and PTEP groups (as defined in § 1.960-1(b)). See §§ 1.960-1(d), 1.960-2(b)(2) and (c)(4), and 1.960-3(d). ( printed page 48796)

The foreign income taxes taken into account by a CFC in a taxable year are determined under the CFC's method of accounting. For CFCs that use an accrual method of accounting, foreign income taxes accrue in the taxable year in which all the events have occurred that establish the fact of the liability and the amount of the liability can be determined with reasonable accuracy. See §§ 1.446-1(c)(1)(ii)(A) and 1.461-4(g)(6)(iii)(B). A foreign income tax determined on the basis of items of income, gain, deduction, and loss that arise in a foreign taxable year (a foreign net income tax) becomes fixed and determinable at the close of the foreign taxable year. See § 1.905-1(d)(1)(i). For CFCs that use the cash method of accounting, foreign income taxes are taken into account when paid. See §§ 1.905-1(c)(1) and 1.446-1(c)(1)(i). Foreign income taxes are generally considered paid in the taxable year in which the taxes are remitted to the foreign country.

Section 1.901-2(f) provides rules for determining the person considered to have paid or accrued a foreign income tax for foreign tax credit purposes (the section 901 taxpayer). For instance, a partnership is considered the section 901 taxpayer of a foreign income tax imposed at the entity level on the income of the partnership. See § 1.901-2(f)(4)(i). Additionally, the person who is treated as owning the assets of a disregarded entity (as described in § 301.7701-2(c)(2)(i)) for Federal income tax purposes is considered the section 901 taxpayer of any foreign income tax imposed at the entity level on the income of the disregarded entity. See § 1.901-2(f)(4)(ii). If a partnership, disregarded entity, or corporation undergoes one or more covered events during its foreign taxable year that do not close the foreign taxable year, a foreign income tax, other than a withholding tax described in section 901(k)(1)(B), imposed with respect to that continuing foreign taxable year is allocated to and among the predecessor entities or prior owners under § 1.901-2(f)(5). Section 1.901-2(f)(5)(ii) defines a covered event as a partnership termination under section 708(b)(1), a transfer of a disregarded entity, or a change in entity classification of a disregarded entity or a corporation.

For purposes of determining the amount of the foreign tax credit, foreign income taxes are translated at the rate provided under section 986(a). If the section 901 taxpayer of the foreign income tax takes foreign income taxes into account when accrued, taxes are generally translated using the average exchange rate for the taxable year to which the taxes relate. See section 986(a)(1)(A). Section 986(a) provides certain exceptions to the general rule, including for foreign income taxes that are not paid within two years of the close of the U.S. taxable year to which they relate. See section 986(a)(1)(B). Section 905(c) provides that, among other things, a change in the amount of foreign income tax accrued and claimed as a credit requires a redetermination of the U.S. tax liability for the year or years affected.

B. Foreign Taxes Subject to Allocation

1. Specified Foreign Income Taxes

Section 3.03 of Notice 2025-72 provides that only specified foreign income taxes would be allocated between the first required year and the succeeding taxable year of a specified foreign corporation. Section 3.02(4) of Notice 2025-72 defines a “specified foreign income tax” as a foreign net income tax accrued by an affected corporation in its first required year for which the affected corporation is the section 901 taxpayer. Section 3.02 of Notice 2025-72 defines an affected corporation as a specified foreign corporation (as defined in section 898(b)) that takes into account foreign income taxes under an accrual method of accounting and that, pursuant to section 70352(c) of the OBBBA, is required to change its first taxable year beginning after November 30, 2025. No comments were received on these definitions, and, except as discussed in this part I.B of this Explanation of Provisions section, the proposed regulations would apply to specified foreign income taxes and would define a “specified foreign income tax” and an “affected corporation” consistently with Notice 2025-72. See proposed § 1.898(c)-1(b) (clarifying the definition of an affected corporation to require that the specified foreign corporation's first required year end pursuant to section 70352(c)(1) of the OBBBA on the date prescribed by that section) and § 1.898(c)-1(c) (expanding the definition of a specified foreign income tax to include specified distributive shares of creditable foreign tax expenditures if an election is made). Thus, except as discussed in this part I.B of this Explanation of Provisions section, any other foreign tax that is taken into account by a specified foreign corporation in its first required year or its succeeding taxable year would continue to be taken into account in that respective taxable year.

The proposed regulations would allocate specified foreign income taxes between an affected corporation's first required year and its succeeding taxable year to carry out the purposes of section 70352 of the OBBBA. Specified foreign income taxes would generally include foreign net income taxes, which accrue on the last day of a foreign taxable year. As a result of section 70352(c) of the OBBBA, a specified foreign corporation's foreign taxable year may close with or within the specified foreign corporation's first required year. In that case, the foreign net income tax, likely imposed with respect to a full taxable year of foreign law income, accrues in the first required year while only one month of income accrues in that year for Federal income tax purposes. Depending on the amount of the foreign net income tax imposed, this could result in the specified foreign corporation having a loss with respect to a particular income group for the first required year, resulting in foreign income taxes not being deemed paid by the affected corporation's U.S. shareholders under section 960(a) or (d). See part I.A of this Explanation of Provisions section.

As under Notice 2025-72, the definition of specified foreign income tax would exclude taxes that are likely to accrue close in time to the related income since any allocation of such tax between the first required year and the succeeding taxable year would create a needless separation of income and tax. For instance, a specified foreign income tax would not include a foreign withholding tax because such a tax accrues close in time to the income to which it relates. Similarly, a specified foreign corporation that uses the cash method of accounting would not be an affected corporation, and foreign net income taxes taken into account by such a specified foreign corporation would not be specified foreign income taxes. A cash-basis specified foreign corporation will generally be required to make monthly or quarterly estimated payments of its foreign income tax liability and, therefore, is unlikely to make a single payment of foreign income tax in its first required year that would result in a loss with respect to a particular income group.

2. Specified Distributive Shares of Creditable Foreign Tax Expenditures

Section 3.03(1) of Notice 2025-72 provides that an affected corporation's distributive share of foreign income taxes paid or accrued by a partnership (creditable foreign tax expenditures or CFTEs, as defined in § 1.704-1(b)(4)(viii)) are not specified foreign income taxes, and therefore, would not be allocated between the affected corporation's first required year and its ( printed page 48797) succeeding taxable year. Section 6 of Notice 2025-72 requested comments on whether an affected corporation's distributive share of CFTEs should be allocated between its first required year and succeeding taxable year when an affected corporation owns an interest in a partnership that is required to change its taxable year because the affected corporation changes its taxable year pursuant to section 70352 of the OBBBA. See section 706(b) and § 1.706-1(b). Several comments recommended that distributive shares of CFTEs of such partnerships be allocated between the affected corporation's first required year and succeeding taxable year.

As under Notice 2025-72, the proposed regulations would generally define a specified foreign income tax to exclude an affected corporation's distributive share of CFTEs. This exclusion prevents the separation of income and foreign income tax because the affected corporation will take into account its distributive share of other partnership items based on the partnership's full taxable year at the same time it takes into account its distributive share of CFTEs. See section 706(a) and § 1.706-1(a). However, when a partnership is required to change its taxable year because an affected corporation owning an interest in the partnership changes its taxable year pursuant to section 70352 of the OBBBA, the partnership would have a one-month taxable year with outcomes similar to those described in part I.B.1 of this Explanation of Provisions section. Accordingly, the proposed regulations would provide an election to treat all of an affected corporation's distributive shares of certain CFTEs of affected partnerships (specified distributive shares of CFTEs) as specified foreign income taxes. See proposed § 1.898(c)-1(c)(2); see also part I.E.2 of this Explanation of Provisions section regarding the procedural requirements for making the election.

3. Relevant Succeeding Year Taxes

Section 3.03(1) of Notice 2025-72 provides that foreign income taxes accrued by an affected corporation in its succeeding taxable year are not specified foreign income taxes and, therefore, would not be allocated between the affected corporation's first required year and its succeeding taxable year. Notice 2025-72 explains that while a foreign net income tax accrued in the succeeding taxable year may relate to income accrued in the first required year, the Treasury Department and the IRS expect that the administrative and compliance burdens of allocating a portion of the succeeding year tax to the first required year would exceed the benefits of allocation.

A comment noted that the repeal of section 898(c)(2) could result in a loss of foreign tax credits if the income accrued by an affected corporation in its first required year is different in type than the income accrued by the affected corporation in its succeeding taxable year. For instance, an affected corporation may have a first required year that ends December 31, 2025, and be subject to a foreign income tax with respect to a foreign taxable year that ends on March 31, 2026. The foreign income tax that accrues on March 31, 2026, could be imposed in part on the income that accrued for Federal income tax purposes in the affected corporation's first required year. If the affected corporation does not earn the same type of income in the succeeding taxable year, then a portion of the foreign income tax would not be deemed paid because the affected corporation will not have income in the relevant income group in the succeeding taxable year. The comment also noted that, in some cases, a taxpayer may have the necessary information to allocate the succeeding year taxes before the extended due date of the majority U.S. shareholder's Federal income tax return for the taxable year with which the affected corporation's first required year ends.

The Treasury Department and the IRS continue to be of the view that, in general, the administrative and compliance burdens of allocating a portion of the succeeding year tax to the first required year would exceed the benefits of allocation. Further, maintaining the full amount of foreign income taxes in the succeeding taxable year is appropriate because a full year's worth of foreign income taxes accrue with a full year of income. Accordingly, the proposed regulations would generally provide that foreign income taxes accrued by an affected corporation in its succeeding taxable year are not specified foreign income taxes.

However, the Treasury Department and the IRS agree with the comment that, in some cases, when an affected corporation's foreign taxable year (for example, a March 31 year end) does not align with its succeeding taxable year (for example, a December 31 year end), an allocation of an affected corporation's foreign income taxes accrued in the succeeding taxable year between its first required year and its succeeding taxable year is appropriate to address the concerns described in this part I.B.3 of this Explanation of Provisions section. Accordingly, to address these circumstances, the proposed regulations would provide an irrevocable election to allocate the affected corporation's relevant succeeding year taxes between the affected corporation's first required year and its succeeding taxable year. See proposed § 1.898(c)-1(f); see also part I.E.2 of this Explanation of Provisions section regarding the procedural requirements for making the election.

C. Ordering Rules

Section 3.04 of Notice 2025-72 provides that a specified foreign income tax would be allocated between the affected corporation's first required year and its succeeding taxable year and then taken into account in each respective taxable year under certain ordering rules. These ordering rules would coordinate statutory and regulatory provisions related to the computation of an affected corporation's income items under sections 951(a) and 951A and the computation of the foreign taxes deemed paid under section 960(a) and (d) with the allocation of foreign income taxes between the affected corporation's first required year and succeeding taxable year. No comments were received on these ordering rules, and the rules, therefore, are included in the proposed regulations. See proposed § 1.898(c)-1(d).

D. Allocation Method

1. Allocation Percentage

Section 3.05 of Notice 2025-72 provides that a specified foreign income tax would be allocated between an affected corporation's first required year and its succeeding taxable year by determining an allocation percentage for each specified foreign income tax. The allocation percentage would be equal to the portion of an affected corporation's taxable income, as determined under foreign law, that is attributable under the principles of § 1.1502-76(b) to the first required year, divided by the total taxable income, as determined under foreign law, for the foreign taxable year with respect to which the specified foreign income tax is imposed. A comment requested that the proposed regulations allow taxpayers to use any reasonable allocation method that aligns foreign taxes with the income to which those taxes relate, including an allocation of an affected corporation's foreign taxes to its taxable year preceding its first required year.

For the reasons described below, the proposed regulations would require the use of a single prescriptive allocation method to implement the transition rule. See proposed § 1.898(c)-1(e). The ( printed page 48798) allocation method would reduce the likelihood that foreign income taxes of a specified foreign corporation in the first required year would not be deemed paid as a consequence of the repeal of section 898(c)(2). Additionally, the allocation method would leverage an existing methodology that is familiar to taxpayers for allocating foreign income taxes, see, e.g., §§ 1.245A-5(e)(3)(i), 1.336-2(g)(3)(ii), 1.338-9(d), and 1.901-2(f)(5), and would use taxable income as determined under foreign law, which is an amount that taxpayers are already required to consider in applying § 1.861-20. Further, the allocation method would better accommodate affected corporations that may earn uneven amounts of income in the first required year, as compared to an allocation method that is based on a set ratio such as months or days. The allocation method would provide flexibility to taxpayers because the principles of § 1.1502-76(b) allow for either a closing of the books method or a ratable allocation method for purposes of determining the portion of taxable income attributable to the first required year. Finally, the method suggested by the comment would not comply with the requirement in section 70352(c) of the OBBBA to allocate foreign taxes between a specified foreign corporation's first taxable year and its succeeding taxable year, and not to an earlier taxable year.

2. Income Group Specific Allocation Percentage

Section 3.05 of Notice 2025-72 provides that a single allocation percentage based on an affected corporation's total taxable income, as determined under foreign law, for the foreign taxable year with respect to which the specified foreign income tax is imposed would apply to the amount of a specified foreign income tax assigned to each income group of the affected corporation. A comment stated that taxpayers generally have the information needed to compute a different allocation percentage for each income group, which may better match the tax allocated to the first required year to the income accrued in that year. By way of example, the comment described a situation in which an affected corporation (AC) with its first required year ending on December 31, 2025, and a foreign taxable year that ends on December 31, 2026, recognizes gain from the sale of stock on December 15, 2025. The gain is foreign personal holding company income described in section 954(c)(1)(B) within the passive category. Under § 1.861-20, as applied in the first required year, the Country X income tax attributable to the stock gain is allocated and apportioned to AC's relevant subpart F income group within the passive category. In its succeeding taxable year, however, AC does not recognize subpart F income in the relevant subpart F income group within the passive category. Any portion of Country X income tax assigned to that income group allocated to the succeeding taxable year under a single allocation percentage would not be deemed paid under section 960(a).

The Treasury Department and the IRS are of the view that, in most cases, determining a different allocation percentage for each income group would require taxpayers to undertake potentially burdensome analyses without providing benefits, and therefore, the proposed regulations would provide, as a general rule, a single allocation percentage that is used for all income groups. However, the Treasury Department and the IRS agree with the comment that in some cases a different allocation percentage for each income group may be appropriate. Accordingly, the proposed regulations would provide an election to apply a specific allocation percentage to the amount of a specified foreign income tax assigned to each income group of an affected corporation. See proposed § 1.898(c)-1(e)(3); see also part I.E.2 of this Explanation of Provisions section regarding the procedural requirements of the election. The proposed regulations would also provide that the income group specific allocation method is required for allocating a relevant succeeding year tax between an affected corporation's first required year and its succeeding taxable year. See proposed § 1.898(c)-1(f)(3). An income group specific allocation percentage is computed by applying the principles of § 1.1502-76(b), using the closing of the books method, separately for each income group to which foreign law income is assigned under § 1.861-20.

3. Election to Not Allocate

Section 3.04 of Notice 2025-72 provides that a specified foreign income tax would be allocated between an affected corporation's first required year and its succeeding taxable year and then would be taken into account in each respective taxable year. A comment requested an election to forgo the allocation rule set forth in the notice and instead apply current accrual rules to specified foreign income taxes in order to allow an affected corporation's controlling domestic shareholders to determine whether these existing rules better serve their interests.

The proposed regulations adopt this comment because the Treasury Department and the IRS believe it would reduce compliance burdens. The proposed regulations would provide an election to not allocate an affected corporation's specified foreign income taxes. If the election is made, the specified foreign income taxes would be taken into account in the affected corporation's first required year. See proposed § 1.898(c)-1(e)(4); see also part I.E of this Explanation of Provisions section regarding other procedural requirements for making the election. This election would apply to all specified foreign income taxes of an affected corporation. If the election is made, the affected corporation's relevant succeeding year taxes may not be allocated between its first required year and its succeeding taxable year.

E. Other Issues

1. Sections 905(c) and 986(a)

Section 3.06 of Notice 2025-72 provides that, for purposes of sections 905(c) and 986(a), a specified foreign income tax would accrue in the first required year, regardless of whether a portion of the specified foreign income tax is allocated to the succeeding taxable year. No comments were received on the application of these provisions to specified foreign income taxes, and the proposed regulations would provide that, for purposes of sections 905(c) and 986(a), the first required year is the year to which a specified foreign income tax relates. The proposed regulations would provide similar treatment to relevant succeeding year taxes for purposes of sections 905(c) and 986(a). See proposed § 1.898(c)-1(g).

2. Election Procedures

In general, the proposed regulations would provide that the elections described in parts I.B.2 (specified distributive shares of CFTEs), I.B.3 (relevant succeeding year taxes), I.D.2 (income group specific allocation percentage), and I.D.3 (election to not allocate) of this Explanation of Provisions section would be made by an affected corporation's controlling domestic shareholders for its first required year by attaching a statement to their timely filed (including extensions) Federal income tax returns for the years in which or with which the first required year and the succeeding taxable year end. See proposed § 1.898(c)-1(h). The election to allocate relevant succeeding year taxes would be irrevocable. See proposed § 1.898(c)-1(h)(1). ( printed page 48799)

The proposed regulations would provide that the elections to treat specified distributive shares as specified foreign income taxes and to use the income group specific allocation percentage may be made on an amended Federal income tax return, and except for the election for allocating relevant succeeding year taxes, all of the elections may be revoked on an amended Federal income tax return. An amended Federal income tax return containing an election or revocation must be duly filed within 24 months of the due date (without regard to extensions) of the original Federal income tax return for the year in which or with which the first required year ends. An amended Federal income tax return for the taxable year in which or with which the affected corporation's succeeding taxable year ends must also be filed if needed to reflect a change in election. Permitting a change in election outside of this period could result in changes in amounts of tax due for taxable years that are no longer open for assessment under section 6501 and would increase the administrative burden of the elections. The Treasury Department and the IRS request comments on these election procedures, including the application of this 24-month limitation.

3. Covered Events

Section 3.05(3) of Notice 2025-72 provides rules that would coordinate the allocation of a specified foreign income tax with the covered event rules in § 1.901-2(f)(5) when an affected corporation is the section 901 taxpayer of a portion of the tax due to the application of those rules. See part I.A of this Explanation of Provisions section for a description of the covered event rules. A comment requested additional guidance coordinating the covered event rules with the allocation of specified foreign income taxes. Specifically, the comment recommended that the portion of a specified foreign income tax allocated to the succeeding taxable year be further allocated among persons based on the principles of the covered event rules. The comment suggested that the principles of the covered event rules would apply by treating the income earned in the succeeding taxable year as the income to which the specified foreign income tax relates. The comment described cases with respect to which its recommendation would apply.

The Treasury Department and the IRS are of the view that some of the cases discussed in the comment do not involve specified foreign corporations subject to the transition rule and therefore would exceed the authority granted under section 70352(c) of the OBBBA. In other cases, the mismatch of income and foreign income tax was not caused by the repeal of section 898(c)(2) and would likewise be beyond the scope of the transition rule. Finally, the Treasury Department and the IRS do not consider it appropriate to allocate a section 901 taxpayer's foreign income tax to another person. Thus, the proposed regulations do not adopt this comment and would clarify that a specified foreign corporation is an affected corporation if its first taxable year beginning after November 30, 2025, ends pursuant to section 70352(c) of the OBBBA on the date prescribed by that section, which is the last day of the first required year (within the meaning of section 898(c)(1)) ending after November 30, 2025. See proposed § 1.898(c)-1(b) (defining affected corporation).

4. Conforming Amendments

The proposed regulations would include conforming amendments to Treasury regulations that refer to the availability of the one-month deferral election or provide special rules when the one-month deferral election is in effect. See proposed §§ 1.163(j)-7(k)(29)(i)(B), 1.441-1(b)(2)(ii)(C), 1.442-2(b)(1)(i), and 1.987-11(c)(3)(ii).

II. Proposed Regulations Implementing the Section 960(d)(4) Foreign Tax Credit Disallowance

Section 3.01(2) of Notice 2025-77 provides that section 960(d)(4) would apply to foreign income taxes paid or accrued (or deemed paid under section 960(b)(1)) with respect to a section 959(a) distribution to the extent the PTEP results from a section 951A inclusion of a U.S. shareholder in a taxable year ending after June 28, 2025. Section 3.01(3) of Notice 2025-77 provides that the “section 951A PTEP” group set forth in § 1.960-3(c)(2)(viii) would be divided into two groups: (1) PTEP resulting from section 951A inclusions in taxable years of a U.S. shareholder ending on or before June 28, 2025 (pre-06/29/25 section 951A PTEP), and (2) PTEP resulting from section 951A inclusions in taxable years of a U.S. shareholder ending after June 28, 2025 (post-06/28/25 section 951A PTEP). Section 3.01(4) of Notice 2025-77 provides that no credit under section 901 would be allowed for 10 percent of any foreign income taxes paid or accrued (or deemed paid under section 960(b)(1)) with respect to a section 959(a) distribution of post-06/28/25 section 951A PTEP, and those taxes would be allocated and apportioned to post-06/28/25 section 951A PTEP under § 1.861-20. Section 3.01(5) of Notice 2025-77 provides that similar rules would apply to the “reclassified section 951A PTEP” group set forth in § 1.960-3(c)(2)(iv).

No comments were received on Notice 2025-77, and accordingly, the proposed regulations would include these rules. See proposed § 1.960-3(b)(6), (c)(2)(iv) and (v), and (c)(2)(ix) and (x). The Treasury Department and the IRS intend to modify the proposed regulations related to PTEP that were published in the Federal Register on December 2, 2024, (89 FR 95362) to be consistent with these proposed regulations.

III. Applicability Dates and Reliance

The Treasury Department and the IRS expect to finalize the proposed regulations by January 4, 2027. Under section 7805(b)(2), proposed § 1.898(c)-1 is proposed to apply to taxable years of specified foreign corporations beginning after November 30, 2025. See proposed § 1.898(c)-1(j). A taxpayer may rely on the proposed regulations regarding section 898(c) for foreign taxes paid or accrued before the date the proposed regulations are published as final regulations in the Federal Register , provided the taxpayer applies the proposed regulations regarding section 898(c) in their entirety and in a consistent manner to the first required year and succeeding taxable year of a specified foreign corporation.

Under section 7805(b)(2), proposed § 1.960-3(b)(6) is proposed to apply to foreign income taxes paid or accrued (or deemed paid under section 960(b)(1)) with respect to an amount excluded from gross income under section 959(a) by reason of a section 951A inclusion, to the extent the inclusion occurs in a taxable year of a U.S. shareholder ending after June 28, 2025. The corresponding updates to PTEP groups made by proposed § 1.960-3(c)(2) are proposed to apply to taxable years of foreign corporations ending with or within taxable years of U.S. shareholders ending after June 28, 2025. See proposed § 1.960-7(c). A taxpayer may rely on the proposed regulations regarding section 960(d)(4) for taxable years of U.S. shareholders beginning before the date the proposed regulations are published as final regulations in the Federal Register , provided the taxpayer follows the proposed regulations regarding section 960(d)(4) in their entirety and in a consistent manner for all applicable taxable years. ( printed page 48800)

Special Analyses

I. Regulatory Planning and Review—Economic Analysis

The Office of Management and Budget's Office of Information and Regulatory Analysis has determined that this proposed regulation is not significant and is not subject to review under section 6(b) of Executive Order 12866. Therefore, a regulatory impact assessment is not required.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995, 44 U.S.C. 3501-3520 (PRA), generally requires that a Federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the OMB.

The collections of information in the proposed regulations include reporting, third-party disclosures, and recordkeeping requirements that are necessary for certain individuals and corporations to determine their foreign tax credit under section 901 and related provisions. These collections will be used by IRS for tax compliance purposes.

With respect to section 898(c), the collections in proposed § 1.898(c)-1(h) would provide procedures for making the elections described in parts I.B.2 (specified distributive shares of CFTEs), I.B.3 (relevant succeeding year taxes), I.D.2 (income group specific allocation percentage), and I.D.3 (election to not allocate) of this Explanation of Provisions section. The respondents would be persons who are controlling domestic shareholders of an affected corporation. Pursuant to proposed § 1.898(c)-1(h), respondents would be required to: (1) attach an election statement to an original or amended Federal income tax return (a reporting requirement), and (2) provide any notices required under § 1.964-1(c)(3)(iii) to the persons known to be domestic shareholders of the affected corporation in its first required year and succeeding taxable year (third-party disclosure and recordkeeping requirements).

For purposes of the PRA, the reporting burden associated with proposed § 1.898(c)-1(h) collection requirements will be reflected in the instructions for Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” This revision will be included within the OMB Control Number 1545-0123 for business filers and will be approved by OMB in accordance with the PRA procedures under 5 CFR 1320.10.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA), it is hereby certified that the proposed regulations will not have a significant economic impact on a substantial number of small entities. In general, the proposed regulations would affect U.S. shareholders of foreign corporations, and with respect to proposed § 1.898(c)-1, would affect only U.S. shareholders of foreign corporations that have made the one-month deferral election. The Treasury Department and the IRS do not have adequate data readily available to assess the number of small entities potentially affected by the proposed regulations.

The Treasury Department and the IRS have determined that the proposed regulations will not have a significant economic impact on domestic small business entities. Proposed § 1.898(c)-1 would allow taxpayers to not allocate taxes ( see part I.D.3 of this Explanation of Provisions section), and therefore, generally would impose neither new requirements nor additional costs on small entities. The only additional costs imposed on a small business entity making an election under proposed § 1.898(c)-1(c)(4) are those associated with the collection of information requirements imposed under proposed § 1.898(c)-1(h). The Treasury Department and the IRS have estimated that the average burden of this collection of information is 1.5 hours per response. The IRS's Research, Applied Analytics, and Statistics division estimates that the appropriate wage rate for taxpayers with less than $25,000,000 in total positive income is between $113.16 and $58.60. Thus, the annual burden from each collection of information requirement for small business entities is at most $169.74, which is a de minimis amount. The proposed regulations regarding section 960(d)(4) would not impose new requirements on small entities but rather would implement the statute by specifying the foreign income taxes with respect to which the foreign tax credit disallowance applies. Accordingly, the proposed regulations are not expected to have a significant economic impact on a substantial number of small entities, and a regulatory flexibility analysis is not required. Notwithstanding this certification, the Treasury Department and the IRS welcome comments on the impact of the proposed regulations on small entities, including the number of small entities that may be impacted and whether that impact would be economically significant.

IV. Submission to the Small Business Administration

Pursuant to section 7805(f), the proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

V. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the ADDRESSES heading. In addition to the comments specifically requested in the Explanation of Provisions section, the Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any comments submitted will be made available at https://www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who ( printed page 48801) submits electronic or written comments. Requests for a public hearing are encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register .

Statement of Availability of IRS Documents

Any IRS Revenue Procedures, Revenue Rulings, Notices, or other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

The principal authors of these regulations are Le Chen and Hayley Rassuchine, Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

Paragraph 1. The authority citation for part 1 is amended by adding an entry for § 1.898(c)-1 in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.898(c)-1 also issued under Sec. 70352(c), Pub. L. 119-21, 139 Stat. 72.

Par. 2. Section 1.163(j)-7 is amended by revising paragraph (k)(29)(i)(B) to read as follows:

Par. 3. Section 1.441-1 is amended by revising paragraph (b)(2)(ii)(C) to read as follows:

Par. 4. Section 1.441-2 is amended by revising the fourth sentence of paragraph (b)(1)(i) to read as follows:

Par. 5. Add § 1.898(c)-1 under the undesignated center heading “ Miscellaneous Provisions” to read as follows:

Par. 6. Section 1.901-1 is amended by revising paragraph (b) to read as follows:

Par. 7. Section 1.960-3 is amended by:

1. Revising the section heading;

2. Revising the first sentence of paragraph (a);

3. Revising the heading of paragraph (b) and the second sentence of paragraph (b)(1);

4. Adding paragraph (b)(6);

5. In paragraph (c)(2)(iii)(B), removing the language “paragraphs (c)(2)(vi) through (ix)” and adding “paragraphs (c)(2)(vii) through (xi)” in its place;

6. Revising paragraph (c)(2)(iv);

7. Redesignating paragraphs (c)(2)(v), (c)(2)(vi), (c)(2)(vii), (c)(2)(viii), (c)(2)(ix), and (c)(2)(x) as paragraphs (c)(2)(vi), (c)(2)(vii), (c)(2)(viii), (c)(2)(ix), (c)(2)(xi), and (c)(2)(xii), respectively, and adding new paragraph (c)(2)(v);

8. In newly redesignated paragraph (c)(2)(vi), removing the language “paragraphs (c)(2)(v)(A)” and adding “paragraphs (c)(2)(vi)(A)” in its place;

9. Revising newly redesignated paragraph (c)(2)(ix);

10. Adding new paragraph (c)(2)(x);

11. In newly redesignated paragraph (c)(2)(xi), removing the language “paragraphs (c)(2)(ix)(A)” and adding “paragraphs (c)(2)(xi)(A)” in its place;

12. In newly redesignated paragraph (c)(2)(xii), removing the language “paragraph (c)(2)(vi) through (ix)” and adding “paragraph (c)(2)(vii) through (xi)” in its place;

13. In paragraph (e)(2), removing the language “section 951A PTEP” wherever it appears and adding “pre-06/29/25 section 951A PTEP” in its place; and

14. Adding paragraphs (e)(3) and (4).

The revisions and additions read as follows:

Par. 8. Section 1.960-7 is amended by:

1. In paragraph (a), removing the language “paragraph (b)” and adding “paragraphs (b) and (c)” in its place; and

2. Adding paragraph (c).

The addition reads as follows:

Par. 9. Section 1.987-11 is amended by revising paragraph (c)(3)(ii) to read as follows:

91 FR 48794