SECTION 3. REGULATIONS TO

BE ISSUED UNDER SECTION 70352 OF THE OBBBA ON THE ALLOCATION OF FOREIGN TAXES

.01 In General . The forthcoming proposed section 898 regulations would provide the rules described in this section 3.

.02 Definitions . For purposes of this section 3 and section 5 of this notice:

(1) Affected corporation . Affected corporation means a specified foreign corpo

ration (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. (2) First required year . First required year means a specified foreign corporation’s first taxable year beginning after November 30, 2025.

(3) Foreign net income tax . Foreign net income tax means a foreign income tax (as defined in §1.901-2(a)) that is computed based on items of income, gain, deduction, and loss that arise in a foreign taxable year.

(4) Specified foreign income tax . Specified foreign income tax means a foreign net income tax accrued by an affected corporation in its first required year for which the affected corporation is the taxpayer of the tax under §1.901-2(f) (section 901 taxpayer).

(5) Succeeding taxable year . Succeeding taxable year means a specified foreign corporation’s taxable year immediately following its first required year.

.03 Taxes Not Subject to Sections 3.04 Through 3.06 of This Notice . (1) Other foreign taxes taken into account by an affected corporation . The rules of sections 3.04 through 3.06 of this notice apply only to specified foreign income taxes. A foreign tax, other than a specified foreign income tax, that is taken into account by an affected corporation in its first required year or its succeeding taxable year continues to be taken into account in that taxable year. For example, an affected corporation’s distributive share of foreign income taxes paid or accrued by a partnership, withholding taxes described in section 901(k)(1)(B), and foreign income taxes accrued in the succeeding taxable year continue to be taken into account in the year in which they ordinarily would be taken into account for Federal income tax purposes. The rules do not apply to a distributive share of foreign income taxes paid or accrued by a partnership in its first required year because the affected corporation will take into account a distributive share of partnership income at the same time. See section 706(a) and §1.706-1(a). Similarly, withholding taxes are not taken into account because they generally accrue

close in time to the accrual of the income on which these taxes are imposed. Finally, 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 that tax to the first required year would exceed the benefits. In particular, such an allocation would be difficult to perform before the end of the succeeding taxable year, which, unless the succeeding taxable year is a short taxable year, will be after the due date of the majority U.S. shareholder’s income tax return for the taxable year with which the affected corporation’s first required year ends.

(2) Specified foreign corporations on the cash method . If a specified foreign corporation takes into account foreign taxes under the cash method of accounting and, pursuant to section 70352(c) of the OBBBA, changes its first taxable year beginning after November 30, 2025, any foreign tax taken into account by the specified foreign corporation in its first required year or its succeeding taxable year will continue to be taken into account in that year.

.04 Ordering Rule for the Allocation of Specified Foreign Income Taxes . A specified foreign income tax is 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 the following rules:

(1) First, specified foreign income taxes are determined.

(2) Second, §1.861-20, as modified by §1.960-1(d)(3)(ii)(B), is applied in the first required year to allocate and apportion any specified foreign income tax to the income groups described in §1.9601(d)(2) and any PTEP group treated as an income group under §1.960-1(d)(3)(ii) (B) in that year, except that the tentative gross tested income items described in §1.951A-2(c)(7)(ii) are treated as income groups instead of the tested income groups described in §1.960-1(d)(2)(ii) (C). Whether any item meets the high-tax exception to foreign base company income in §1.954-1(d) (high-tax exception) or the high-tax exclusion from tested income in §1.951A-2(c)(7) (high-tax exclusion) in

December 15, 2025 842 Bulletin No. 2025–51

either the first required year or the succeeding taxable year is determined under section 3.04(4)(a) of this notice. See section 3.07(3) (Example 3) of this notice.

(3) Third, the allocation rule in section 3.05 of this notice is applied to determine the amount of specified foreign income tax in each income group that is allocated to the first required year and the succeeding taxable year.

(4)(a) Fourth, except as provided in section 3.04(4)(b) of this notice, the amounts of a specified foreign income tax allocated under section 3.04(3) of this notice to the first required year and the succeeding taxable year are treated as accruing in each respective year (assigned to the income groups determined under section 3.04(2) of this notice) for all purposes of the Code, including for purposes of computing the affected corporation’s items of subpart F income and tested income (including whether any item meets the high-tax exception or the high-tax exclusion), earnings and profits, and taxes deemed paid under section 960(a), (b), or (d).

(b) The amount of specified foreign income tax allocated to the succeeding taxable year under section 3.04(3) of this notice is not treated as accruing in the succeeding taxable year for purposes of sections 905(c) and 986(a). Section 3.06 of this notice describes the treatment of a specified foreign income tax under those provisions.

.05 Allocation of Specified Foreign Income Tax Between the First Required Year and the Succeeding Taxable Year.

(1) Amounts allocated to the first required year .

(a) In general . Except as provided in section 3.05(1)(b) of this notice, the amount of a specified foreign income tax assigned to each income group determined under section 3.04(2) of this notice that is allocated to the first required year is determined by multiplying the specified foreign income tax assigned to that income group by the affected corporation’s allocation percentage for the specified foreign income tax. Except as provided in sections 3.05(1)(b) and 3.05(3) of this notice, the allocation percentage for each specified foreign income tax is equal to the portion of taxable income, as determined under foreign law, that is attributable under the principles of §1.1502-76(b) to the first

required year (numerator) 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 (denominator). The principles of §1.1502-76(b) allow taxpayers to use either a closing of the books method or a ratable allocation method in attributing the foreign tax base to these periods. This approach reduces the likelihood that foreign income taxes of a specified foreign corporation in the first required year could not be deemed paid as a consequence of the repeal of section 898(c)(2) by matching an amount of specified foreign income tax accrued in the first required year to associated income in that first required year while also considering administrability concerns similar to those discussed in section 3.03 of this notice.

(b) Tax assigned to a PTEP group and accompanying adjustments to the alloca- tion percentage . The amount of a specified foreign income tax assigned to any PTEP group under section 3.04(2) of this notice is allocated to the first required year. The foreign law taxable income corresponding to the amount of specified foreign income tax described in the preceding sentence is excluded in determining the allocation percentage under section 3.05(1)(a).

(2) Amount allocated to the succeeding taxable year . The amounts of the specified foreign income tax assigned to each income group remaining after the application of section 3.05(1) of this notice are allocated to the succeeding taxable year.

(3) Interaction with §1.901-2(f)(5) . If an affected corporation is the section 901 taxpayer of a portion of a specified foreign income tax due to the application of §1.901-2(f)(5) and the affected corporation’s period of ownership began on or before the beginning of the first required year, the denominator of the fraction used to compute the allocation percentage is the total taxable income attributable to the affected corporation’s period of ownership (as determined under §1.901-2(f)(5)). If the affected corporation is the section 901 taxpayer of a portion of a specified foreign income tax due to the application of §1.901-2(f)(5) and the affected corporation’s period of ownership began after the beginning of the first required year, the allocation percentage is deemed to be 100 percent.

.06 Application of Sections 905(c) and 986(a) to Specified Foreign Income Taxes . For purposes of sections 905(c) and 986(a), a specified foreign income tax accrues in the first required year, regardless of whether a portion of the specified foreign income tax is allocated to the succeeding taxable year under section 3.05 of this notice. Therefore, the first required year is the year to which the specified foreign income tax relates for purposes of sections 905(c)(1)(B) and 986(a). Any change in the liability for a specified foreign income tax results in the following: First, the amount of the specified foreign income tax accrued in the first required year is adjusted to reflect the change in liability. Second, the rules under sections 3.04(1), 3.04(2), and 3.04(3) of this notice are applied based upon the adjusted amount of the specified foreign income tax. Third, the amounts of specified foreign income tax that are treated as accruing in the first required year and the succeeding taxable year under section 3.04(4) of this notice are adjusted to reflect the reapplication of sections 3.04(1) through 3.04(3) of this notice. .07 Examples . The following examples illustrate the application of this section 3.

(1) Example 1 . Taxes subject to allocation . (a) Facts . (i) CFCX is a specified foreign corporation.

(ii) CFCX’s first required year is from December 1, 2025, to December 31, 2025. (iii) CFCX’s succeeding taxable year is from January 1, 2026, to December 31, 2026.

(iv) CFCX takes foreign income taxes into account under an accrual method of accounting.

(v) The functional currency of all qualified business units is the u, and all foreign income taxes are denominated in the u.

(vi) CFCX is subject to tax in Country X on the basis of its items of income, gain, deduction, and loss for its Country X taxable year, and the Country X tax is a foreign income tax within the meaning of §1.901-2(a). CFCX’s Country X taxable year is the calendar year. CFCX accrues Country X tax of 7,200u in its first required year. (vii) CFCX owns a 40 percent interest in the profits and capital of Partnership Y, an entity treated as a partnership for Federal income tax purposes that is organized and operated in Country Y. Partnership Y’s U.S. taxable year is the calendar year. Partnership Y is subject to tax in Country Y on the basis of its items of income, gain, deduction, and loss for its Country Y taxable year, and the Country Y tax is a foreign income tax within the meaning of §1.901-2(a). Partnership Y’s Country Y taxable year is the calendar year. For its U.S. taxable year ending December 31, 2025, Partnership Y accrues Country Y tax of 10,000u. CFCX’s distributive share of the Country Y tax is 4,000u.

Bulletin No. 2025–51 843 December 15, 2025

(viii) CFCX wholly owns DEZ, a disregarded entity that is organized and operated in Country Z. DEZ is subject to tax in Country Z on the basis of its items of income, gain, deduction, and loss for its Country Z taxable year, and the Country Z tax is a foreign income tax within the meaning of §1.9012(a). DEZ’s Country Z taxable year ends on March 31. CFCX accrues 5,000u of Country Z tax in its succeeding taxable year.

(b) Analysis . The 7,200u of Country X tax is a specified foreign income tax under section 3.02(4) of this notice because it is a foreign net income tax that accrued in CFCX’s first required year and CFCX is the section 901 taxpayer of the tax. As such, the 7,200u of Country X tax is subject to the rules in sections 3.04 through 3.06 of this notice. CFCX’s 4,000u distributive share of Country Y tax is not a specified foreign income tax because CFCX is not the section 901 taxpayer of the tax. CFCX is the section 901 taxpayer of the 5,000u of Country Z tax; however, because the tax accrues in the succeeding taxable year, it is not a specified foreign income tax. Because CFCX’s 4,000u distributive share of Country Y tax and the 5,000u of Country Z tax are not specified foreign income taxes, both taxes continue to be taken into account in the taxable year in which they are ordinarily taken into account for Federal income tax purposes under section 3.03(1) of this notice.

(2) Example 2 . Application of §1.861-20 and allocation of specified foreign income tax . (a) Facts . The facts are the same as in Example 1. In addition, CFCX’s total taxable income under Country X law for the 2025 calendar year is 45,000u. Applying the principles of §1.1502-76(b), 3,750u of this income is attributable to CFCX’s first required year. Under §1.861-20, the 7,200u of Country X tax is allocated and apportioned to the income groups described in section 3.04(2) of this notice as follows: 5,400u to general category tentative gross tested income attributable to the CFC tested unit (CFC income group) and 1,800u to the general category foreign base company services income group (FBCServ income group).

(b) Analysis . Pursuant to the ordering rules in section 3.04 of this notice, the 7,200u of Country X tax is allocated and apportioned to the income groups described in section 3.04(2) of this notice prior to the application of the allocation rule in section 3.05 of this notice. Under the rules of section 3.05 of this notice, the allocation percentage is then computed and applied to the amount of Country X tax in each income group. The amount of CFCX’s taxable income under County X law that is attributable to the first required year (3,750u) is divided by the total taxable income for the Country X taxable year (45,000u), which results in an allocation percentage of 8.33%. The amount of Country X tax in each income group that is allocated to the first required year is determined by applying the allocation percentage to the amount of the specified foreign income tax in each income group. Therefore, the following amounts of the Country X tax are allocated to the first required year: 450u, which is assigned to the CFC income group (8.33% of 5,400u); and 150u, which is assigned to the FBCServ income group (8.33% of 1,800u). The remaining amount of Country X tax in each income group is allo

cated to CFCX’s succeeding taxable year: 4,950u, assigned to the CFC income group (5,400u-450u) and 1,650u, assigned to the FBCServ income group (1,800u-150u).

(3) Example 3 . Treatment of allocated amounts of specified foreign income tax in the first required year for purposes of the high-tax exclusion . (a) Facts . The facts are the same as in Examples 1 and 2. In addition, an election under §1.951A-2(c)(7) (viii) is in effect with respect to CFCX for the first required year. Under §1.951A-2(c)(7)(ii), CFCX has two tentative gross tested income items: 3,000u in the CFC income group and 2,000u of general category tentative gross tested income attributable to the DEZ tested unit. CFCX accrues no expenses in its first required year other than the specified foreign income tax.

(b) Analysis . Pursuant to section 3.04(4) of this notice, the portion of the Country X tax allocated to the first required year is treated as the amount of Country X tax accrued in that taxable year for all purposes of the Code except sections 905(c) and 986(a). Therefore, in determining whether CFCX’s tentative gross tested income items are excluded from gross tested income under sections 954(b)(4) and 951A(c)(2)(A)(i)(III), 450u of Country X tax is treated as accrued in the first required year and allocated and apportioned to the CFC income group, the statutory grouping to which 3,000u of gross income is assigned. If an election under §1.951A-2(c)(7) (viii) is in effect with respect to CFCX for the succeeding taxable year, the 4,950u assigned to the CFC income group would be taken into account in the same manner in that year.