Tax insight

Treasury releases guidance addressing the repeal of Section 898(c)(2) and the recognition of Section 987 pretransition gain or loss

Insight
10 minute read
November 26, 2025

What happened?

Treasury and the IRS on November 25, released Notice 2025-72 (Notice) which announces forthcoming regulations under the One Big Beautiful Bill Act (OBBBA). The Notice prescribes an ordering and allocation methodology for ‘specified foreign income taxes’ that certain specified foreign corporations will incur in the short tax year created by the repeal of Section 898(c)(2).

Notice 2025-72 also announces forthcoming modifications to the Section 987 regulations with respect to the election to recognize pretransition Section 987 gains or losses over a 10-year period, specifically adjusting how taxpayers recognize pretransition Section 987 gains or losses when short tax years occur, including short tax years resulting from the repeal of Section 898(c)(2).

Why is it relevant?

The repeal of Section 898(c)(2), which previously allowed specified foreign corporations (SFCs) to elect a taxable year that began one month earlier than their majority US shareholder's year, is effective for tax years beginning after November 30, 2025. The repeal creates a short tax year, which can cause foreign income taxes to be allocated to different tax years than the income on which they are imposed. Guidance for how affected controlled foreign corporations (CFCs) must allocate foreign income taxes between their short first required year and the succeeding tax year is critical to ensure that the taxes are not stranded.

The Notice also modifies the application of the amortization election available under Treas. Reg. §1.987-10(e)(5)(ii)(A) to recognize pretransition gain or loss ratably over 120 months and by treating short tax years prior to the application of the rules in the Notice as containing 12 months. These modifications may alter previously forecasted outcomes and may require restatement of internal models.

Actions to consider

Taxpayers with specified foreign corporations that elected a one-month deferral year and have a Section 987 a qualified business unit (QBU) should assess how these changes will impact year-end planning and potential tax liabilities. As taxpayers consider the election to amortize pretransition gain or loss under Reg. 1.987-10(e)(5)(ii)(A), they will need to assess how the new rules affect recognition timing—especially if an early short year was already taken into account.

Taxpayers should evaluate whether to rely on the interim guidance for tax years beginning after November 30, 2025, and before the forthcoming proposed Section 898 and Section 987 regulations are finalized. Taxpayers may rely on the Section 898 or 987 provisions of Notice 2025-72 only if that specific set of provisions is applied consistently and in full. Taxpayers are encouraged to submit feedback on the proposed allocation and amortization methods. Comments are requested by January 24, 2026.