On August 25, 2026, the Department of the Treasury and the Internal Revenue Service (IRS) released proposed regulations under sections 951(a) and 951A(a) that would implement key changes from the One Big Beautiful Bill Act (OBBBA), regarding the determination of a U.S. shareholder's pro rata share of subpart F income, tested income, and tested loss of a controlled foreign corporation (CFC). The statutory changes generally apply to taxable years of foreign corporations beginning after December 31, 2025, with a transition rule for certain dividends paid by foreign corporations during the period between OBBBA's enactment and the effective date of its changes. The proposed regulations also include guidance on the transition rule that was initially described in Notice 2025-75 (part of a series of notices related to OBBBA's international provisions). See here for prior coverage of Notice 2025-75 and the other notices. The proposed regulations would also update the guidance in Treas. Reg. § 1.951A-1 to reflect the OBBBA changes. Finally, the statutory changes render select regulations issued under prior law obsolete, namely the extraordinary reduction rules of Treas. Reg. § 1.245A-5 and Treas. Reg. § 1.1502-80(j), each of which the guidance proposes to phase out for taxable years beginning after December 31, 2025. On balance, the proposed regulations provide needed guidance integrating OBBBA's international tax changes into the existing regulatory framework. The guidance also phases out regulations rendered obsolete by the statutory amendments, providing greater certainty for taxpayers with cross-border operations while signaling that additional conforming guidance may be forthcoming.

Background

To refresh on the recent statutory changes, under prior law, a U.S. shareholder's pro rata share of subpart F income, tested income, or tested loss was determined under a hypothetical-distribution model, with reductions if the foreign corporation was not a CFC throughout the taxable year or if former section 951(a)(2)(B) applied. The "hot potato" rule of prior law generally required only a U.S. shareholder that owned stock of a CFC on the last day of the CFC's taxable year on which it was a CFC to take an inclusion under the subpart F rules. To account for ownership changes during the taxable year, former section 951(a)(2)(B) reduced a U.S. shareholder's inclusion amount for dividends received earlier in the year by other shareholders with respect to the same stock. This rule originally prevented duplicative inclusions by different shareholders on the same stock (for example, under section 1248(a) for a seller and section 951(a) for a buyer) but the enactment of section 245A by the Tax Cuts and Jobs Act (TCJA) changed the role and function of section 951(a)(2)(B). Post-TCJA guidance, therefore, sought to curtail applications of section 951(a)(2)(B) to which the government objected, with Treas. Reg. § 1.245A-5(b), (e), and (f), and Treas. Reg. § 1.1502-80(j) as prime examples. For taxable years of foreign corporations beginning after December 31, 2025, the OBBBA replaces this framework with a time-and-ownership model that aligns a U.S. shareholder's inclusion to the period of ownership during which the shareholder owned the stock, was a U.S. shareholder, and the foreign corporation was a CFC. If these conditions are met on any day during the taxable year, a U.S. shareholder must take into account its pro rata share of the CFC's subpart F income or tested income or tested loss for its taxable year, even if that shareholder does not own the stock on the last day of the year on which the foreign corporation was a CFC. Section 951(a)(1)(B), however, retains the last-day paradigm for inclusions occurring by reason of section 956. 

Pro Rata Share Determination

The proposed regulations would primarily address the determination of a U.S. shareholder's pro rata share of a CFC's subpart F income, tested income, or tested loss, and would model the rules on long-standing rules under section 1248(a) for attributing earnings and profits to CFC (or former CFC) stock. The regulations would distinguish between cases with no ownership change during the CFC's taxable year and cases involving an ownership change, with additional rules for significant ownership changes. In simple cases, proposed Treas. Reg. § 1.951-1(e)(2) would use a daily-proration method, applied separately to particular blocks of stock (referred to as CFC year blocks), based on the number of days in the year during which a U.S. shareholder owned the stock while it was a CFC. For a CFC with multiple classes of stock outstanding during the year, the proposed regulations would retain a hypothetical distribution model to allocate relevant items among the classes before applying daily proration. Finally, if the outstanding shares of a foreign corporation fluctuate during the year, for example, through a stock redemption or issuance, the proposed regulations would use a weighted average share count equal to the sum of the shares outstanding on each day of the CFC year divided by the number of days in the CFC year, similar to Treas. Reg. § 1.1248-3(c)(2). By generally aligning the section 951(a) and section 1248 computations, the proposed regulations would create computational symmetry for cross-border CFC earnings-and-profits determinations. 

Certain Ownership Changes that Close the Taxable Year

The proposed regulations also provide special rules for significant ownership changes. First, proposed Treas. Reg. § 1.951-1(d)(1) would require a foreign corporation to close its taxable year at the end of the day on which a "status change event" occurs. A status change event occurs when a foreign corporation becomes or ceases to be a CFC. For this purpose, CFC status is determined by applying an aggregate approach to ownership through domestic partnerships and without regard to constructive ownership through option attribution. Next, proposed Treas. Reg. § 1.951-1(d)(2) would permit certain U.S. shareholders to elect to close a foreign corporation's taxable year when a "significant ownership variance" occurs. This generally occurs when one or more "specified transfers" during the taxable year reduce, in the aggregate, the percentage of a CFC's outstanding stock owned by section 958(a) U.S. shareholders by more than 50 percentage points, compared with their ownership immediately before the first transfer. A "specified transfer" generally includes a sale, exchange, or other disposition of stock of a foreign corporation or a partnership interest by the same person on the same date, including a stock redemption, or an issuance of shares or a partnership interest. For purposes of measuring a significant ownership variance, the proposed regulations generally disregard increases in ownership by related U.S. persons and certain reorganizations described in section 368(a)(1)(F). To make the election, which closes the CFC's taxable year for all purposes and as to all shareholders, the relevant U.S. shareholders generally must enter into a binding agreement consenting to the election. 

While the proposed regulations generally apply to foreign-controlled foreign corporations (FCFC) and foreign-controlled U.S. shareholders by reason of section 951B, the election in proposed Treas. Reg. § 1.951-1(d)(2) would be unavailable with respect to an FCFC because the requisite ownership threshold would not be met; otherwise, section 951B would not apply. An FCFC becoming a CFC, or a CFC becoming an FCFC, would, however, be a status change event requiring the foreign corporation to close its taxable year. 

The proposed regulations also address the allocation of foreign taxes among short U.S. taxable years that arise from mandatory or elective closing of a foreign corporation's taxable year under these rules. In these cases, the proposed regulations would allocate foreign income taxes accruing in the CFC's U.S. taxable year following the closing date to the U.S. taxable year ending with the closing, based on foreign taxable income allocated to that period using the closing-of-the-books method in Treas. Reg. § 1.1502-76(b). This approach mirrors rules addressing a similar problem by reason of section 898(c)(2) repeal.

Applicability Dates and Next Steps

The preamble states that the government expects to finalize the regulations by January 4, 2027, which would permit reliance on the section 7805(b)(2) exception for retroactive regulations implementing statutory changes. The transition rule in proposed Treas. Reg. § 1.951-4(i) applies to a foreign corporation's taxable years that either include June 28, 2025, or begin after June 28, 2025, but before the foreign corporation's first taxable year beginning after December 31, 2025. Treas. Reg. § 1.245A-5(b)(2)(ii), (e), and (f) and Treas. Reg. § 1.1502-80(j) would cease to apply for taxable years of foreign corporations beginning after December 31, 2025. Taxpayers may rely on all aspects of the proposed regulations before finalization, provided a taxpayer and its related parties apply the rules consistently and in their entirety. Additional coordination questions, however, remain open. Treasury and the IRS request comments on all aspects of the proposed regulations, including the extent to which revisions to the section 1248 regulations are needed to coordinate with the proposed regulations under sections 951 and 951A. More generally, the government is studying the section 1248 regulations and may propose revisions in a separate guidance project, and also plans to update aspects of the proposed previously taxed earnings and profits regulations (89 FR 95362) to address aspects made obsolete by the OBBBA. Comments are due by October 26, 2026. The proposed regulations provide taxpayers with much-needed guidance as they prepare for the transition to OBBBA's revised international tax framework, while also foreshadowing additional developments in related areas. 

For more information, please contact:

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

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

Chadwick Rowland, crowland@milchev.com, 202-626-1589

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