In Notice 2025-72 (the Notice, released November 25, 2025), the US Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) announced they will propose regulations to address the possible mismatch of income with the related foreign taxes, and the disproportionate recognition of certain foreign currency gains and losses, in short tax years caused by the One, Big, Beautiful Bill Act (OBBBA). Specifically, the OBBBA repealed the election under former IRC Section 898(c)(2). For affected taxpayers, the regulations would allocate foreign taxes between the OBBBA-created short tax year and the succeeding tax year. In addition, certain foreign currency gains and losses under IRC Section 987 would be recognized ratably for any OBBBA-created short tax year based on the number of months in the year.

The forthcoming proposed regulations under IRC Section 898 would apply to tax years of specified foreign corporations¹ (SFCs) beginning after November 30, 2025. Taxpayers may rely on the rules in the Notice for allocating foreign taxes in SFC's tax years beginning after that date and ending before proposed regulations are published in the Federal Register, so long as they apply the rules consistently and in their entirety.

The forthcoming proposed regulations under IRC Section 987 would apply to tax years beginning after December 31, 2024, and ending on or after November 25, 2025. Taxpayers may likewise rely on the rules in the Notice on the revised amortization election for any tax year to which the IRC Section 987 regulations apply (generally tax years beginning after December 31, 2024) and before the new proposed regulations are published in the Federal Register, provided the rules are applied in full and in a consistent manner for each IRC Section 987 qualified business unit (QBU), original deferral QBU and outbound loss QBU (each of which is described below).

Comments on the Notice are due January 24, 2026.

Background

Before the OBBBA, an SFC could elect under IRC Section 898(c)(2) to begin its tax year one month earlier than its majority US shareholder's year (the one-month deferral election). For example, an SFC could elect to begin its tax year on December 1, instead of January 1, if the majority US shareholder used a calendar tax year.

The OBBBA repealed that election, effective for SFC tax years beginning after November 30, 2025. As a result, any corporation that is an SFC as of November 30, 2025, will have a one-month short tax year. For example, a SFC with a tax year ending November 30 under IRC Section 898(c)(2) would have a short year beginning December 1, 2025, and ending December 31, 2025.

Depending on the SFC's foreign tax year, an SFC could accrue 12 months of taxes within that one-month short tax year, with only one month of corresponding income. For example, an SFC with a calendar foreign tax year would accrue foreign net income taxes on December 31. As a result, the SFC could have foreign income taxes in the short year that exceed the income to which those taxes are allocable, which would preclude the CFC's US shareholders from claiming foreign tax credits on the foreign taxes that would otherwise be deemed paid under IRC Section 960(a) or (d).

The one-month short tax year would also affect taxpayers that had foreign currency gains and losses before tax year 2025 (pretransition gains or losses) and elected to recognize them ratably over 10 years (amortization election). When combined with a one-month short tax year, the amortization election would generally cause taxpayers to recognize one tenth of their pretransition gain or loss in the short tax year.

To address the possible over-accrual of foreign taxes resulting from repeal of the one-month deferral election, the OBBBA instructed the Treasury to issue regulations for allocating foreign taxes that are paid or accrued in that one-month short tax year between that short tax year and the succeeding tax year.

Notice 2025-72

Forthcoming regulations on allocating foreign taxes under Section 70352 of the OBBBA

The Notice outlines forthcoming proposed IRC Section 898 regulations that would allocate "specified foreign income taxes" (defined later) of SFCs affected by the repeal of the one-month deferral election. These rules would apply only to a SFC that takes foreign income taxes into account under the accrual method of accounting and is required to change its first tax year beginning after November 30, 2025 (its first required year).

The allocation rules would also apply only to "specified foreign income taxes," defined as foreign net income taxes accrued in the affected corporation's one-month short tax year caused by the repeal of IRC Section 898(c)(2) and for which the SFC is the IRC Section 901 taxpayer. Accordingly, the Notice does not apply to withholding taxes, foreign taxes for which a partnership is the IRC Section 901 taxpayer or foreign taxes that accrue in the succeeding tax year. Nonetheless, Treasury requests comments on whether the allocation framework described in the Notice should extend to foreign taxes other than the specified foreign income taxes, such as an affected corporation's distributive share of foreign income taxes paid or accrued by a partnership.

The Notice describes the following allocation methodology for specified foreign income taxes:

1. Determine the SFC's specified foreign income taxes.
2. Allocate and apportion, using existing rules, the SFC's specified foreign income taxes that accrued in the first required year to income groups (i.e., subpart F income groups, tested income groups, PTEP groups and the residual income group).
3. Allocate specified foreign income tax in each income group to the first required year and the succeeding tax year by applying an allocation percentage to the specified foreign income tax in each income group.
• Calculate the allocation percentage by dividing the SFC's foreign taxable income that is attributable to the first required year under the principles of Treas. Reg. Section 1.1502-76(b) by the total foreign taxable income for the foreign tax year to which the specified foreign income tax relates.
• Attribute foreign taxable income to the first required year using either a closing-of-the-books method or a ratable allocation method, in accordance with the principles of Treas. Reg. Section 1.1502-76(b).
• Allocate any specified foreign tax assigned to a PTEP group under these rules to the first required year and exclude the related foreign taxable income in determining the allocation percentage.
• Allocate any specified foreign tax remaining after the allocation to the first required year to the succeeding tax year.
4. Treat specified foreign income taxes allocated to the first required year and the succeeding tax year as accruing in that year for all purposes of the Code (e.g., for determining subpart F income, tested income, E&P, and IRC Section 960 deemed paid taxes, as well as for testing the subpart F high-tax exception and the NCTI high-tax exclusion).

However, for purposes of IRC Section 905(c) (redetermination of US tax liability due to change in foreign tax liability) and IRC Section 986(a) (translation of foreign income taxes into US dollars), treat the entire specified foreign income tax as initially accruing in the first required year and apply the allocation rules based on the adjusted specified foreign income tax liability.

Implications. The rules for allocating specified foreign income taxes to an SFC's one-month tax year should minimize the mismatches and distortions otherwise caused by an over-accrual of foreign taxes in the short tax year. However, the allocation methodology is likely to create similar, albeit less drastic, mismatches and distortions in the succeeding tax year by allocating to that succeeding tax year a large proportion of the SFC's specified foreign income taxes that would have otherwise accrued in the one-month tax year.

Rather than a mismatch of 12 months of foreign taxes accruing in a one-month short tax year, the Notice's allocation methodology treats an SFC as accruing 23 months of foreign taxes in its 12-month succeeding tax year, comprising 11 months of foreign taxes allocated under the Notice's methodology and then the 12 months of foreign taxes that would ordinarily accrue during the succeeding tax year. Although perhaps less likely, this mismatch could similarly create losses in subpart F or tested income groups, thereby causing taxes to be stranded, or could create distortions in effective tax rate computations for subpart F or NCTI high-tax determinations.

Notwithstanding potential lingering concerns about mismatches of income and taxes in the succeeding tax year, taxpayers are likely to welcome relief from the accrual of 12 months of taxes in a one-month short period, which would otherwise occur absent an allocation as prescribed in the Notice. Taxpayers that own SFCs for which one-month deferral elections were in effect before the OBBBA should consider modeling the impact of the Notice's allocation methodology to understand whether it could alleviate (or create) losses in income groups or create unexpected subpart F or NCTI high-tax results. Under the Notice, taxpayers have some degree of flexibility in determining the percentage of foreign taxable income earned in the short period, with the option to choose between a closing-of-the-books method or a ratable allocation.

Forthcoming regulations under IRC Section 987

The forthcoming proposed IRC Section 987 regulations would modify how the amortization election applies to short tax years, including those created by the repeal of former IRC Section 898(c)(2). Absent these regulations, the amortization election would generally cause taxpayers to recognize one tenth of their pretransition gain or loss in the short tax year in accordance with the 10-year transition period. Until the forthcoming regulations are published, taxpayers generally may rely on the rules in the Notice for tax years to which the current IRC Section 987 regulations apply.

Under the rules in the Notice, taxpayers that have made the amortization election would recognize pretransition gain or loss ratably over 120 months beginning with the first day of the first tax year in which the IRC Section 987 regulations apply. In effect, pretransition gain or loss would be amortized ratably to a short tax year within the Notice's scope based on the months in the short tax year, rather than strictly a one-tenth allocation. For any tax year (including a short tax year) ending before November 25, 2025, the Notice explains, the tax year will be treated as 12 months for purposes of the amortization election.

Implications. The rules and forthcoming regulations described in the Notice are intended to prevent currency gains or losses from being disproportionately recognized in a short tax year, particularly a one-month tax year caused by the repeal of former IRC Section 898(c)(2). The Notice also serves as helpful and necessary guidance on the application of the amortization election to taxpayers as the existing regulations did not have specific rules on applying the election to short tax years.