In August 2026, the Department of the Treasury and Internal Revenue Service (IRS) published two Notices of Proposed Rulemaking (NPRMs) providing guidance on certain international tax provisions enacted as part of the One Big Beautiful Bill Act (OBBBA). The proposed rules closely track the rules described in Notice 2025-72 (allocation of foreign income taxes resulting from repeal of section 898(c)(2)), Notice 2025-77 (foreign tax credit (FTC) disallowance in new section 960(d)(4)), and Notice 2025-78 (new exclusion from foreign-derived deduction-eligible income (FDDEI) for certain property sales), which we covered in December 2025. 

Taxpayers may rely on the proposed regulations before they are published as final regulations, subject to a consistency requirement. Treasury and the IRS intend to finalize each set of proposed regulations by January 4, 2027, which will allow the regulations to apply retroactively to the date of enactment of the OBBBA, under section 7805(b)(2).

Section 898(c)(2) Repeal (Elimination of One-Month Deferral)

Effective for taxable years of specified foreign corporations beginning after November 30, 2025, the OBBBA repealed section 898(c)(2), which previously permitted certain foreign corporations to elect a taxable year that closed one month earlier than their majority U.S. shareholder. Removing this election forced affected foreign corporations to conform their taxable year with their majority U.S. shareholder, resulting in a one-time short taxable year, referred to as the "first required year." 

Pursuant to section 70352(c) of the OBBBA, Notice 2025-72 provided transition rules to address the allocation of foreign taxes between that first required year and the succeeding taxable year. The rules described in Notice 2025-72 would apply only to "specified foreign income taxes" (foreign net income taxes accrued in the first required year for which the corporation is the section 901 taxpayer) and would apply principles from the consolidated return regulations in Treas. Reg. § 1.1502-76(b) to allocate specified foreign income taxes between the taxable years.

The proposed rules maintain the approach from Notice 2025-72 but offer four additional elections to mitigate the risk that the transition unfairly disrupts the ability of U.S. shareholders to credit certain foreign taxes.

1. Taxpayers may elect to treat "specified distributive shares" of creditable foreign tax expenditures (CFTEs) from an "affected partnership" as specified foreign income taxes. Notice 2025-72 would have excluded CFTEs from the definition of "specified foreign income tax." The election is only available for CFTEs of an "affected partnership" that was required to change its taxable year because one or more of its partners changed its taxable year due to the repeal of section 898(c)(2). 
2. Taxpayers may elect to compute separate allocation percentages for each income group, rather than a single allocation percentage for all income. This election may be advantageous when the mix of income by group differs significantly across the first required year and the succeeding year.
3. Taxpayers may elect to allocate "relevant succeeding year taxes" to the first required year. Under Notice 2025-72, taxes accrued in the succeeding taxable year could not be allocated.
4. Taxpayers may elect to forgo any allocation and instead apply current accrual rules. 

Except for the election to allocate succeeding year taxes, all of the elections may be revoked on an amended return. However, any change to an election must be made within 24 months of the unextended due date of the original return for the taxable year in which the first required year ends. Treasury and IRS request comments on the proposed election procedures. Comments are due September 17, 2026.

Section 960(d)(4) (10 Percent FTC Haircut on Section 951A PTEP Distributions)

New section 960(d)(4) disallows an FTC for 10 percent of the foreign taxes paid or accrued (or deemed paid under section 960(b)(1)) with respect to any amount excluded from gross income under section 959(a) by reason of a section 951A(a) inclusion, namely distributions of previously taxed earnings and profits (PTEP) attributable to a section 951A(a) inclusion.

Under the provisions contained in Notice 2025-77, the 10 percent haircut would only apply to foreign taxes paid or accrued on distributions of section 951A PTEP resulting from section 951A inclusions in a U.S. shareholder's taxable year ending after June 28, 2025, regardless of whether the underlying CFC's taxable year ended earlier. The notice divided PTEP into two groups: (i) PTEP stemming from section 951A inclusions in a U.S. shareholder's taxable year ending on or before June 28, 2025 (pre-06/29/25 section 951A PTEP) and (ii) PTEP attributable to 951A inclusions in a U.S. shareholder's taxable year ending after June 28, 2025 (post-06/28/25 PTEP). The 10 percent haircut would apply only to section 959(a) distributions of post-06/28/25 section 951A PTEP; allocation and apportionment rules under Treas. Reg. § 1.861-20 would apply.

The NPRM does not change any substantive aspect of the rules announced in Notice 2025-77. Treasury and the IRS intend to modify the 2024 PTEP proposed regulations to reflect the changes described in this NPRM. Comments are due September 17, 2026.

Section 250(b)(3)(A)(i)(VII) (Exclusion for Certain Property Sales)

As amended by the OBBBA, section 250 allows U.S. corporations to deduct 33.34 percent of FDDEI. FDDEI is deduction eligible income (DEI) derived from (i) property sold to a foreign person for foreign use or (ii) services provided to any person, or with respect to property, located outside the United States. DEI is a taxpayer's gross income, excluding certain categories, minus the expenses and deductions (other than interest expense and research or experimental expenditures) properly allocable to such gross income.

For transactions after June 16, 2025, the OBBBA added a seventh category of gross income excluded from DEI under section 250(b)(3)(A)(i)(VII). Specifically, DEI now excludes any income or gain from the sale or disposition of (i) intangible property or (ii) any other property "of a type" that is subject to depreciation, amortization, or depletion by the seller. Notice 2025-78 provided guidance on the scope of this new exclusion and the proposed regulations closely follow the Notice. The proposed rules clarify that property that has been fully depreciated retains its character as excluded property, provide detailed examples addressing the application of the exclusion to software transactions, and confirm how the intercompany transaction rules in the consolidated return regulations apply in this context. Comments are due October 4, 2026. Treasury and the IRS intend to address other amendments to section 250, including the changes to expense allocation, in separate guidance.

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

Emily J. Caputo, ecaputo@milchev.com, 202-626-5072

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.