In furtherance of its efforts to provide guidance related to the implementation of tax law changes that are part of the One Big Beautiful Bill Act of 2025 (OBBBA), on November 25, 2025, the IRS issued Notice 2025-72 (Notice). The Notice previews proposed regulations that will provide guidance on how taxes paid by foreign corporations that are impacted by the repeal of the one-month deferral election under section 898(c)(2) of the Internal Revenue Code (Code) should be allocated for foreign tax credit purposes. Additional proposed regulations will modify a transition rule under existing section 987 regulations to mitigate the impact of the repeal of the one-month deferral election.
The IRS and Department of the Treasury (Treasury) intend to issue proposed regulations under sections 898 and 987 regarding the rules described in the Notice.
Background
Prior to the OBBBA, a controlled foreign corporation (CFC) with a US shareholder who owned more than 50 percent of the CFC by vote or value (specified foreign corporation or SFC) was permitted to elect a taxable year beginning one month earlier than its majority US shareholder’s taxable year (one-month deferral election).1 Section 70352 of the OBBBA repealed the one-month deferral election for SFC beginning after November 30, 2025, meaning that, going forward, the CFC’s taxable year must conform to the taxable year of its majority US shareholder.
The OBBBA includes a transition rule, which provides that in the case of any SFC with a one-month deferral election in place as of November 30, 2025, its first taxable year beginning after such date shall end at the same time as the first required year (within the meaning of section 898(c)(1) of the Code) ending after such date. In other words, the SFC will have a one-month short taxable year as its first required year.
A SFC’s taxable year for foreign tax purposes may (and in most cases will) close with or within the SFC’s first required year for US federal income tax purposes. Consequently, foreign net income tax, which is typically imposed on a full taxable year of income (as determined under foreign law), may accrue in the first required year, while only one month of income accrues in that same year for US federal income tax purposes.
The Notice provides rules to address the potential distortion that could result from having a full year’s worth of foreign income tax accrued in the first required year, which is only a one-month period.2
Allocation of Foreign Income Taxes Pursuant to Notice 2025-72
To address the potential for distortion, the Notice generally describes that forthcoming proposed regulations under section 898 will provide that:
- Foreign net income taxes that accrue during the first required year are first allocated and apportioned to the relevant income groups and previously taxed earnings and profits (PTEP) group using the rules of Treasury Regulation § 1.861-20;
- Any foreign income tax that is assigned to a PTEP group will remain with the PTEP group in the first required year;
- A portion of the other foreign net income taxes is allocated to the first required year in proportion to the relevant net income for foreign tax purposes that accrued during the first required year compared to the entire foreign taxable year to which the taxes relate, using the principles of Treas. Reg. § 1.1502-76(b).3
- The remainder of the foreign net income taxes that accrue during the first taxable year are assigned to the next succeeding taxable year of the SFC (i.e., to the taxable year beginning after the foreign tax year to which the taxes relate).
- The amounts of a foreign net income tax allocated to the first required year or to the succeeding year are treated as accruing in the relevant year for all tax purposes, except for purposes of section 905(c) and section 986(a).4 Thus, foreign net income taxes that are allocated to the succeeding taxable year generally are treated as having been paid in such year.
The Notice includes helpful illustrations of the application of such proposed rules.
Modification of Section 987 Transition Rule
The Notice also provides guidance regarding the treatment of short taxable years, including as a result of the amendments to section 898(c)(2), for taxpayers that elected to amortize pre-transition gain or loss over a 10-year period under the final section 987 regulations. Forthcoming proposed section 987 regulations would revise the 10-year transition period to be a 120-month transition period, thus relieving electing taxpayers from taking into account a disproportionate amount of pre-transition gain or loss in a short taxable year. A conforming adjustment would be allowed in cases where a transition period taxable year already ended prior to the issuance of the Notice.
Effective Dates
The Notice anticipates that the proposed regulations will apply to taxable years of SFCs beginning after November 30, 2025. Taxpayers are permitted to rely on the rules in the Notice for foreign taxes paid or accrued in taxable years of SFCs beginning after November 30, 2025, and ending before the forthcoming proposed section 898 regulations are published in the Federal Register, provided that taxpayers apply the rules in their entirety and in a consistent manner for the first required year and succeeding taxable years.
Forthcoming proposed section 987 regulations would apply to taxable years beginning after December 31, 2024, and ending on or after November 25, 2025. Taxpayers are permitted to rely on the rules in the Notice before such regulations are published in the Federal Register, provided the taxpayer applies the rules in their entirety and in a consistent manner with respect to each section 987 QBU, original deferral QBU, and outbound loss QBU for that taxable year and each subsequent taxable year.
1 See section 898(c)(2).
2 Depending on the amount of the foreign net income tax imposed, it is possible that the SFC could recognize a loss in this short period, which would have implications for inclusions under section 951A, as well as the ability to claim credits for such foreign taxes.
3 Income related to foreign income taxes on PTEP is excluded in determining the allocation percentages.
4 Section 905(c) generally provides rules for adjustments to accrued taxes, and section 986(a) provides rules for purposes of translating foreign taxes into functional currency.
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