SECTION 2. BACKGROUND

.01 Section 898 and the One-Month Deferral Election.

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 (majority U.S. shareholder). ¹ See section 898(b).

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) 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).

.02 Repeal of One-Month Deferral Election and Statutory Transition Rule.

Section 70352 of the OBBBA repeals 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 onemonth deferral election in place will have a one-month short 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. 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 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. .03 Foreign Income Taxes Paid or Accrued by a CFC.

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, section 951A(a) generally requires a U.S. shareholder of a CFC to include in gross income the U.S. shareholder’s global intangible low-taxed income (GILTI inclusion amount). ³ A U.S. shareholder’s GILTI inclusion amount is determined by taking into account the U.S. shareholder’s pro rata share of tested items (as defined in §1.951A-1(f)(5)) of all CFCs in which the U.S. shareholder owns (within the meaning of section 958(a)) stock, including tested income and tested loss. 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(c)(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), 989(b)(3) and §1.951A-1(d)(1). 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

1 Section 898(c)(3)(B) (redesignated by section 70352(a) of the OBBBA as section 898(c)(2)(B)) defines the testing days as the first day of the corporation’s taxable year, or the days during a representative period that the Secretary may prescribe. No final regulations have been issued that prescribe such a representative period.

2 Unless otherwise indicated, all references to sections 951, 951A, and 960(d) in this notice are to the versions of those provisions as in effect before the amendments made by sections 70312 and 70354 of the OBBBA. Because the amendments to section 898(c) apply to taxable years of foreign corporations beginning after November 30, 2025, and the amendments to sections 951, 951A, and 960(d) apply to taxable years of foreign corporations beginning after December 31, 2025, the versions of sections 951, 951A, and 960(d) that apply to a foreign corporation’s first required year will depend on when that first required year begins.

3 Under the amendments made by the OBBBA, for taxable years beginning after December 31, 2025, the U.S. shareholder will include in gross income its net CFC tested income under section 951A. This inclusion is determined based on the U.S. shareholder’s pro rata share of a CFC’s tested income or tested loss.

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paid so much of the CFC’s foreign income taxes as are properly attributable to the item of income. Section 960(d) provides that when a domestic corporation includes in gross income an amount under section 951A, the domestic corporation is deemed to have paid 80 percent of the product of such domestic corporation’s inclusion percentage ⁴ multiplied by the aggregate tested foreign income taxes paid or accrued by its CFCs. ⁵ 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, 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 determining a GILTI inclusion amount included by the U.S. shareholder under section 951A.

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). 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 §1.9012(f)(4)(i). The person who is treated as owning the assets of a disregarded entity ⁶ 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). However, if a partnership, disregarded entity, or corporation undergoes one or more covered events ⁷ 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 among

the current owner or entity and predecessor entities or prior owners under §1.9012(f)(5). Section 1.861-20 provides rules for allocating and apportioning foreign income taxes to statutory and residual groupings. See also §1.861-8(f). These rules are needed for determining a CFC’s net items of subpart F income and tested income as well as for determining which taxes are attributable to the CFC’s income groups and PTEP groups (as defined in §1.960-1(b)) for purposes of section 960. See §§1.960-1(d), 1.960-2(b)(2), 1.9602(c)(4) and 1.960-3(d)(1)(i)(A). ⁸ Among other purposes, these rules are used for determining whether an item of CFC income is high-taxed for purposes of the high-tax exception to foreign base company income or the high-tax exclusion from tested income. See §§1.954-1(d) and 1.951A-2(c)(7). 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 to which the tax relates.

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 section 901 taxpayer’s foreign taxable year. See §1.905-1(d)(1) (i). For section 901 taxpayers who 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.

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. In such case, a U.S. shareholder would have no inclusion with respect to that income group under section 951(a)(1) or would take into account no tested income with respect to that income group under section 951A, and therefore, taxes attributable to that income group would not be deemed paid under section 960(a) or (d).

.04 Section 987 and the Recognition of Pretransition Gain or Loss .

Section 987 applies to taxpayers (including CFCs) that own a qualified business unit (QBU) with a functional currency other than the dollar. Under section 987(3), the owner of a QBU recognizes foreign currency gain or loss when the QBU makes a remittance. Section 989(c) provides that the Secretary shall prescribe regulations as may be necessary or appropriate to carry out the purposes of subpart

4 The domestic corporation’s inclusion percentage equals its GILTI inclusion amount divided by the domestic corporation’s aggregate pro rata shares of its CFCs’ tested income.

5 Under the amendments made by the OBBBA, for taxable years beginning after December 31, 2025, 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. Under the amendments made by the OBBBA, the domestic corporation’s inclusion percentage equals its net CFC tested income under section 951A(b) divided by the aggregate amount of its CFCs’ tested income.

6 A disregarded entity is an entity described in §301.7701-2(c)(2)(i).

7 ”Covered events” is defined in §1.901-2(f)(5)(ii). Covered events include the transfer of a disregarded entity or a change in entity classification under §301.7701-3.

8 Proposed amendments to regulations under sections 959 and 960 were published in the Federal Register on December 2, 2024 (89 FR 95362).

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J of subchapter N of Chapter 1 of Subtitle A of the Code (which includes section 987), including regulations limiting the recognition of foreign currency loss on certain remittances from QBUs.

On December 10, 2024, the Treasury Department and the IRS published Treasury Decision 10016, which contained final regulations under sections 861, 985, 987 through 989, and 1502 (the section 987 regulations), in the Federal Register (89 FR 100138). The section 987 regulations generally apply to taxable years beginning after December 31, 2024, but taxpayers can elect to apply the section 987 regulations to earlier taxable years ending after November 9, 2023. See §1.987-15.

The section 987 regulations provide, among other things, rules for calculating the amount of foreign currency gain or loss recognized by the owner of a QBU under section 987(3) (section 987 gain or loss) and transition rules that apply in the first taxable year in which the section 987 regulations are applicable. The transition rules, provided in §1.987-10, include rules for determining and recognizing section 987 gain or loss that arose before the section 987 regulations became applicable (pretransition gain or loss). In particular, §1.987-10(e)(5)(ii)(A) permits taxpayers to elect to recognize pretransition gain or loss ratably over the transition period (the amortization election). The transition period is a period of ten taxable years beginning with the first taxable year in which the section 987 regulations apply. Subject to special rules for transfers described in section 381(a), a taxpayer that makes the amortization election recognizes one tenth of its pretransition gain or loss in each taxable year of the transition period.