Treasury and the IRS on November 25 issued Notice 2025-72, announcing their intention to issue proposed regulations under Section 70352 of Public Law 119-21, commonly known as the One Big Beautiful Bill Act (OBBBA), which repeals Internal Revenue Code Section 898(c)(2).
Background
Section 898(c)(2) historically allowed certain specified foreign corporations (SFCs) to elect a tax year beginning one month earlier than their majority U.S. shareholder’s tax year. The OBBBA repealed this provision for tax years beginning after November 30, 2025. As a result, SFCs with a one-month deferral election will have a short tax year to align with their U.S. shareholder’s tax year.
Section 70352(c) of the OBBBA provides a transition rule for SFCs required to change their tax year because of the repeal of the one-month deferral election. The transition rule treats the change in tax year as initiated by the corporation and made with the secretary of the Treasury’s consent. Importantly, it directs the IRS to issue guidance on how to allocate foreign taxes paid or accrued during the short year and the succeeding year.
Allocating Foreign Taxes
The repeal of Section 898(c)(2) creates a short taxable year for affected SFCs, raising questions about how to allocate foreign income taxes to the short taxable year. Notice 2025-72 provides key allocation rules for specified foreign income taxes:
- First, specified foreign income taxes are determined
- Second, Reg. §1.861-20 is applied to allocate and apportion any specified foreign income tax to the income groups (and PTEP groups) set forth in Reg. §1.960-1(d).
- Third, taxes are allocated first to the short year and then to the succeeding year, based on the proportion of foreign taxable income attributable to each period. Taxpayers may use either a closing of the books or a ratable allocation method, consistent with Reg. §1.1502-76(b).
- Fourth, the amount of a specified foreign income tax allocated under this notice is treated as accruing in each respective year for all purposes of the Code except Section 905(c) and Section 986(a).
Specified foreign income taxes are foreign net income taxes accrued by an SFC in its first required year (the short year).
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This allocation ensures that foreign taxes are matched with the appropriate income for U.S. tax purposes, preventing either under- or over-crediting of foreign taxes in years affected by the repeal.
Accounting Period Change
An accounting period change is required to be made in order for a controlled foreign corporation that is an SFC to change from a one-month deferral tax year to its required tax year, which is the tax year of its majority U.S. shareholders. The accounting period change will have to be made for the first tax year beginning after November 30, 2025.
Existing guidance under Rev. Proc. 2006-45 sets out the procedure for an automatic accounting period change for C corporations and SFCs. An SFC should qualify to use the automatic change procedure when changing its accounting period to the required tax year under Section 898, or to a 52-53-week tax year that references the required tax year.
The one-month period between the end of the one-month deferral year and the end of the required year will be the short period for the accounting period change. Taxable income for the short period must be annualized and tax computed under Section 443(b) and Reg. §1.443-1(b). The controlling U.S. shareholders must file Form 5471 for the short period with the heading “Filed under Rev. Proc. 2006-45.” No Form 1128 is required to be filed. If there are other U.S. shareholders, the controlling U.S. shareholder must follow the notification requirements under Reg. §1.964-1(c)(3)(iii).
An SFC that is also filing Form 1120F should file the Form 1120F using the required tax year for the first year beginning after November 30, 2025, and attach a copy of the Form 5471 indicating that the SFC is making an automatic accounting period change.
Section 987 Guidance
Under the final 2024 Section 987 regulations, pretransition gain is generally net accumulated unrecognized Section 987 gain, while pretransition loss is suspended Section 987 loss subject to the loss-to-the-extent of gain rule. But if a current rate election is in effect, and the annual recognition is not, all pretransition amounts become net accumulated unrecognized pretransition gain or loss.
Regardless of this classification, a taxpayer may elect to amortize pretransition amounts ratably over a 10-year period beginning with the transition year. Notice 2025-72 announces that proposed regulations would change this election to spread recognition over a 120-month period, with special rules for short taxable years. For calendar-year taxpayers, the shift from 10 years to 120 months would generally produce the same result.
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